https://finance.zacks.com/tax-rules-use-proceeds-stock-sales...
https://www.fidelity.com/learning-center/trading-investing/t...
My understanding is that you couldn't do day trading without a margin account.
But the chance of an eventual margin call is almost certain in the long run (as has happened here).
It’s time to talk ethics in tech, this was a design decision to not unwind this once the user was embedded or otherwise clarify this upfront.
Margin call risk totally must be disclosed and is legally required (in Australia where I am) to be disclosed by any investment professional you paid to setup this sort of arrangement. I’d be fairly confident the same applies to US investment advisers.
It’s totally the sort of ‘feature’ that the user could have been advised of around say the 30 day mark. “We’ve set you up a margin account that’s valid for your first $1000, please now confirm if you’d like to continue to carry a margin call risk otherwise were converting you to a standard account.”
It’s also super common for margin facilities to allow investors carrying the risk, 24-48 hours to contribute to retain the position, auto-selling out is a last resort.
All that is exchanged during the day are IOUs (debt) and if one player in the chain goes bankrupt during the day the central bank might cover its debt up to some limit.
We haven't had any major crisis since those instant pay apps were put into place. So those aren't really battle tested systems and I guess we'll only effectively discover how resilient they are during the next crisis...
And we're actually half a decade behind most of Asia and Europe.
If the investment dropped far enough.. say to $12,000, the margin call facility works like this.
It considers the remaining money is always the lenders, so now the lender is exposed for $10,000/$12,000 eg 83% of the exposure is theirs.
They then ask you to top back up your contribution so they are less exposed (within 24-48hrs), or they auto-sell stock to ensure they are not exposed further.
In the case of Robinhood, the margin lending arrangement is always fully backed once the cash is processed. Which I’m guessing is always reliably a few days after it’s deposited.
So it’s crazy to trigger margin calls as all the debt is quickly fully backed.
It would be expected that Robinhood would have negotiated an instrument that never left them with margin calls on cash contributions like this. This is totally on them.
The difference between the credit risk and the margin loan is that in the vast majority (say > 99%) of times the credit risk does not become a loan. You don't need to punish all the people acting in good faith for the action of a few. The regulation on free riding comes from a money supply perspective. You are not allowed to create money without taking out a loan.
Fortunately they make it easy to create new accounts and transfer from one to another. Now my banned account is empty and I'm more careful.
My husband once accidentally messed up his transfer to Vanguard and it didn't go thru and he already purchased mutual funds with that money he meant to transfer. It told him he had a trading violation and the lady on the phone said having just a single trading violation didn't matter.
The US moved to what's called T+2 settlement (trade + 2 days) in 2017, over 2 years ago. Zacks still talks about T+3. In contrast, your Fidelity link gets it right.
Someone might say "so what!", but Zacks purports to be a financial advice website. They should know better. It makes me question the accuracy of the rest of their website.
https://en.wikipedia.org/wiki/T%2B2 https://www.sec.gov/news/press-release/2017-68-0
Directly from the link:
"In 2017, the SEC amended the T+3 settlement cycle to a T+2 settlement cycle, effectively shortening the three-day rule to a two-day rule."
I clearly see the following. Directly from the link of the poster I responded to:
https://finance.zacks.com/tax-rules-use-proceeds-stock-sales... Tax Rules on How to Use Proceeds of Stock Sales to Buy New Stocks
...
For example, imagine that on Monday you have nothing in your brokerage account except shares of a specific stock, which you sell that morning for $10,000. The trade will settle on Thursday.
They just described T+3 not T+2!
(Looks like a more direct link would be https://finance.zacks.com/wait-three-days-sell-stock-11114.h...)
Consider a scenario where you have a cash account with say 100 dollars and you buy 1 share of stock X for 100 dollars. That's it, you can no longer trade for two days. Because trades take two days to complete, if you have a cash account you need to wait that full two days before you technically own the shares and can sell it. Until that two day elapses, your account has 0 dollars in it.
This is known as free riding:
https://en.wikipedia.org/wiki/Free_riding_(stock_market)
Now if you have 100 dollars in your account and you buy stock A for 30 dollars, then your account will have 70 dollars left that you can use to trade with, but this is an incredibly inefficient and impractical way of trading.
My understanding is that if you had $100 and you purchased stock for $100 and it went up in few hours to $120 and you decided to sell it, so you can purchase something else. You can't you have to wait 2 days.
Of course if you have enough money you will have buffer to account for that, but it makes it harder to do day trading when everything is delayed by 2 days.
The "you can't part" here is what's not clear. My understanding of non-margin trading is that you would be able to sell for $120. What you would not be able to do is then purchase something else with that $120 until T+2 when it settles and the money is in your account again. You technically don't have that $120 until the settlement.
If you can't sell the stock that you bought on the same day that you bought it, then by definition you can not day trade.
Deposit $1000, wait 3 days, buy and sell $100 of the same stock in the same day. You still have $900 to trade with.
It may be “less efficient”, but it also reduces your risk, and risk management is fundamentally what successful trading is about.
Some people don’t want to depend on the bank for margin or leverage, and are happy to trade with cash only. Increased efficiency brings increased risk and decreased ability to deal with short term shocks.
Whether or not you can "day trade" on a cash account would probably just be equivocating about what "day trading" is. It definitely does limit your ability to very quickly enter/exit positions.
In a cash account when you sell, the funds must settle for 2-3days... meaning you can't use those funds for purchases.
It keeps people who are cash short out of the market, rather than in... that's the main difference for small accounts.
I checked back through my email archives and found the announcement email “Introducing Robinhood Instant” from Feb. 23, 2016.
From the small print terms at the bottom of the email:
“Robinhood Instant is implemented as a limited margin account designed to allow customers to purchase with unsettled funds. Robinhood Instant is free, which means customers will not be charged interest. Further, Robinhood Instant accounts will not be able to purchase securities with more than the account cash amount (leverage) or engage in short selling.”
And I mean if you want, ask RH and they'll downgrade to to a cash account... just be ready for T+2 and no options trading
https://robinhood.com/us/en/support/articles/options-investi...
> NOTE: If you start options trading in your Cash account, we’ll automatically upgrade you to an Instant account.
If Robinhood only had covered options you'd be right back to: not supporting the way people are using it to enable all this.
-
In fact, imagine if they didn't do this, all the new people who tried to enter GME would have had to wait 2 days to enter, and much fewer people would have had access to options
Ironically I actually think it might have stopped this dead in its tracks by damping the influx of cash
You can do options trading on a cash account. You can only do covered options, but honestly that's probably a good restriction for most.
https://robinhood.com/us/en/support/articles/options-investi...
> NOTE: If you start options trading in your Cash account, we’ll automatically upgrade you to an Instant account.
Maybe if you've downgraded they won't upgrade you, but it's neither here nor there, covered options aren't what have allowed this to happen
If Robinhood only had covered options you'd be right back where I said it'd be: not supporting the way people are using it to enable all this.
HAHA oh my god this is terrifyingly predatory. It says "automatically", but I hope that there is a notice at least. Even if someone went to the effort to make sure that they understood their account type, it would just... change out from under them.
This is sort of like accidently using a premium feature in some SaaS platform, and being automatically upgraded into a free trial without knowing.
You start with Robinhood Instant if your account was made any time in the last 5? or so years?
And things people know RH for won't work without it (like instant deposits and not waiting for settlement)
So options trading was actually added after most accounts had already if not all accounts were Instant
-
Really the only reason people ever go to Robinhood Cash these days is trying to get around PDT restrictions... but they inevitably realize the entire experience they've been introduced to ran on margin
But you're right that it could just be legacy wording.
And the discussion is about Robinhood. Any reasonable person reading your comment would rightfully assume you're talking about Robinhood.
Retail investors shouldn't be restricted from having such capabilities, but that doesn't mean it should be the default
Incidently, this is no different to the experience of a big bank or hedge fund trader. Settlement risk is real, and institutions have entire risk management departments devoted to it (banks even need to capitalise for it, to cover precisely these types of scenarios)
What errors would occur if all the rules for transfer of assets were encoded on-chain? Crypto is already moving hundreds of billions of dollars worth of tokens 24/7 every single day. There's no central bank entities or clearing houses. The collateral for loans is completely tracked on-chain and fully auditable on the ledger. Tell me why that's not superior.
Errors occur because humans are humans and fat finger trade details.
That aside, as I mentioned in original comment, instantaneous settlement has other problems, e.g netting is important in managing liquidity.
And to your point about crypto managing billions of dollars of tokens - it's an absolutely trivial amount compared to what's moved in the markets every day. Blockchains are incredibly inefficient and transaction rates orders of magnitude lower than what'd be needed.
[1] https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...
But just like most players in the space have magically discovered the need for KYC if they want any real mainstream adoption, I expect that they'll also spend the next few years discovering why chargebacks and fraud protection are a thing.
As for KYC, crypto is well aware of it. Any centralized exchange you deal with in US has it in place already.
As for fraud protection and chargebacks, that is really just an insurance problem. And that's got solutions in the works.
Edit: I just deposited more money into robinhood, and the screen says "your funds will be transfered in next several days... in meantime, we'll give you access to $X while you wait for the funds to clear"
Also, the UI separates your cleared money, from the instant deposit money as 2 line items.
It says that its not your money in the UI.
"Instant" means instant to most folks. Not, "we're going to lend you the money for several days and can then force sell your stocks whenever we want".
RH app even pretends the money is actually in your account. There's a lot of deception that went into designing the app.
If they reflected it accurately they'd be showing a negative balance until the funds arrived and some users would think they lost all their funds.
The real mistake is that they're extending margin to uninformed and unsophisticated users. ... but pointing that out just brings accusations that it's gatekeeping or limiting access to people who aren't rich.
aka, RH is between a rock and a hard place - either the clueless user suicides due to poor understanding, and causing bad PR, or they do what they're doing now.
I was a user when they had that suicide situation and RH did do a better job of explaining your actual balance when you entered a somewhat complex trade that caused you to have a negative balance. Still a user, who didn't know what he was doing, entered a complex trade, saw something he didn't understand and ended his life. In response Robinhood could have:
1. Made the UI "easier" to understand (i.e. lie) for 99% of situations
2. Raise the entry requirements to ensure people knew what they were doing (Gatekeep)
They chose (and continue to choose) 1, and I don't envy them - how would ever explain all the ways a margin account can put you in trouble on a 4 inch screen? Most users only care about "instant deposits" and will never get into trouble 99% of time. It took 2 "black swan" events (IIRC, the first suicide issue was during the first COVID market crash) for these issues to come to light.
They brought this onto themselves by optimizing for growth over healthy and sustainable markets.
The marketing push for options by calling it "instant trading" is pretty BS too.
And note that "borrowing money" does not imply "have margin" for people either. They might realize they're borrowing money, but not realize that has further implications they might not expect, like the broker being able to sell your stock without your approval. If they actually use the word "margin", people could at least look up what it means and likely realize it's a nontrivial topic. But just saying we'll make $X available to you makes it so much harder for them to understand there are non-obvious implications.
They specifically positioned as the “everyman trading platform”, and so even from the drawing board they knew that the majority of app users would be people with little or no experience.
All they had to do to win was to say “Hey, I know this balance looks bad, but it’s actually not the final number and here’s why”, and similarly: to be explicit about why they automatically make margin accounts, and then to again mention that when people purchase stocks.
I fielded a question from a friend who was furious that his broker wouldn't let him exercise a call yesterday ... a call that he was _short_. But he understood his position enough to understand exercising the call would be very profitable for him. Part of the reason that he thought he could excercise it was because there were notices about call exercise (presumably that it was still available for people who were already long the calls).
It's extremely hard to anticipate all the ways someone might become confused and adding additional material to resolve a potential confusion risks introducing other new and novel confusion. There is a constant trade-off and probably the only universal fix is the ready availability of competent human support, which doesn't exactly fit inside the normal "app" business model.
I think the goal of an actual "everyman trading platform" is essentially achieved by the sorts of interfaces offered on 401k accounts-- geared around not-more-than-daily trades of highly liquid securities (and if not outright curated, at least focusing on diverse relatively safe funds). What RH is doing might be marketed as an everyman trading platform but for many (most?) users it's just a casino.
> ...
> It's extremely hard to anticipate all the ways someone might become confused and adding additional material to resolve a potential confusion risks introducing other new and novel confusion.
I actually support this argument. I also concede that it’s easy to point out the information in hindsight. But I will still argue that a vital part of building a company of RH’s size and branding is about taking the time to think deeply about the customer experience. To be the experts. To distill that expertise carefully when designing each service and each app screen.
Just based on how RH potentially “sold shares out from under people”, and how the accounts are automatically margin accounts as apparently stated on some part of the user agreement; RH was specifically aware of how this would violate user expectation and they chose not to address it. It’s very difficult, I feel, for someone to argue on the basis of “well yes, of course they were margin accounts, it’s obvious to anyone who knows about how stock accounts work because <blank>” because RH was specifically designing their platform around people who don’t know how stock accounts work.
A true cash account has quite a few restrictions:
https://www.fidelity.com/learning-center/trading-investing/t...
Although it's been a long time, I spent the first decade with a trading account without margin just fine.
https://www.fidelity.com/learning-center/trading-investing/t...
Not always, see situation #3 https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_ca...
You need margin to engage in day-trading, but you can sell a settled stock & immediately use the funds to buy something else just fine as long as you then hold onto that purchase for 2 days.
You can’t blame people for their ignorance when you present them a fiction. If your cute little abstraction leaks then don’t do it.
It's like this in most parts of the world. It's only the perversity of the American banking system where money transfers in this day and age routinely take 2-3 days and no one thinks there's anything bizarre about that.
That's actually a lot more complicated. The Banks take loan with one another to make this happen as well from what I read.
E.g. if a scammer steals all of your money, it would be good to have a day to try to cancel that...
If an account allows those, it is a margin account.
There's good reasons the traditional brokerages have so many rules...
The facts seem to be RH saw a opportunity to prey on uninformed individuals by making investing seem "cool" and "stupid easy".
RH deliberately did not do a good job of A) Putting limits on newbies (like no margin!) so they do not get themselves into trouble and B) Explaining the more complicated concepts behind what RH was allowing literally any mirror-fogging human being to do.
People are always going to be uninformed about some things, yes we should minimize that but we shouldn't make services available only to the rich because of it.
Definitely not a good comparison.
But someone who has initiated a money transfer and then used that pending money to buy stock, technically on margin, is not getting themselves into margin-related trouble. There is no good reason for there to be limits here.
Margin accounts have a different legal definition and regulations.
Robin Hood is actually pretty unique in that its cash accounts are always restricted to settled funds; instead they decided to optimize for margin accounts that don't allow for increased leverage. Which is not something other brokers optimize for that I've seen.
https://www.fintechfutures.com/2013/03/moscow-exchange-adopt...
Also, you may still be able to pay for stocks with checks at some places, so the cash isn't always available.
The US banking system is arcane and archaic. It's cheaper not to modernize to be sure. Forgive me for being frustrated at banks cheaping out on this when they average quarter of a trillion dollars in profit every year over the last few years.
I routinely pay street vendors directly from my bank account to theirs for 10¢ transactions .
Which IMO you should have before you do anything "complex" like invest real money.
What my perception was, was that you were being loaned money against the transfer you were sending in. It was not clear at all to me that it was a generic margin account. Because, among other things, I consider margin trading to be a higher risk activity than I care to engage in; if I had known that I was signing up for a margin account, I would have not signed up at all.
That said, I've definitely been edu-ma-cated on this, and I"ll be reading brokerage ToS more carefully from now on.
The “dangerous” part of margin trading is taking a loan for more than you have equivalent cash collateral of.
That is margin trading though. It sounds like you thought only some trading on a loan counts as margin per definition but you knew you weren't trading with your actual money but a loan which is the important part.
margin trading overwhelmingly refers to paying a percentage as a collateral, not a stop-gap loan to cover ACH transfer delays. Yes you have to have a margin account to trade with immediately deposited funds (thanks ACH), but that's not the typical usage of the phrase and as such isn't what you'll find being described when you look up the term.
Particularly since you can trade with unsettled funds using a cash account in some circumstances, see situation #3 here: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_ca...
It's one thing to loan me $100 when we have shaken hands and contractually already agreed that $100 is on its way. It's another thing to assume control of that $100 when the $100 already agreed to is on its way.
The contract with you says that if it settles, you get that money. The contract on the stock market says that it is supposed to settle. But a non-negligible percentage of the time, participants in the stock market do not make good on their contracts. Maybe they are a day late. Or the trade is reversed and the money or stock for your side comes back to you. You will get whatever happens while executing the trade, but it might not be what you expected to get.
In a cash account, the broker takes your money/stock and you live with the inconvenience. In a margin account, the broker is effectively lending you money to cover unsettled trades and is taking on that inconvenience instead. Given the high volume of trades going through a brokerage relative to the wealth of the brokerage, that inconvenience can become a real operational risk.
How real? Well, Robinhood just had to get an emergency loan for a billion dollars to cover trades that are open and have not settled. Why? Your ability to execute the trades that you made depends on various counterparties all doing what they said that they would, when they said that they would do it. But if they don't, and you prove unable, Robinhood is still legally obligated to make sure that they are able to settle all of their contracts on the stock market which they took on on your behalf.
that, heh, has been made apparent. Fortunately not at a loss to me.
To be honest, it's probable that I should adjust my risk tolerance to 5% ultra-low risk assets and 5% ultra-high risk; the current state of asset allocation is overly correlated with US large cap corporations.
Settlement is complicated business.
Complicated enough that it took the invention of Bitcoin to take it out of the bankers hands and move it to the digital realm.
And even then, it was not instantaneous (10mn) until layer two solutions appeared.
Thinking that "money can be transferred instantaneously because digital" is not a reasonable assumption.
If you tell people your car has AutoPilot, what would a reasonable person assume? It can drive itself! And they did, and people have died.
When RH tells Average Joe that the funds are "Instantly" available... that does indeed mean instant to most people.
"Autopilot" comes from airplanes, where all it has done historically is "keep the plane going in a straight line".
In contrast, Tesla's AutoPilot can do much more.
Notably as well with autopilot in airplanes is that the pilot should always be in the cockpit, ready to take over... just like in a Tesla.
To Average Joe, "Autopilot" means it flies/drives itself.
Do you really think Average Joe also thinks that planes entirely fly themselves and that pilots are just window-dressing?
Yes, in general, people are ignorant of what pilots do and what AutoPilot can and cannot do.
This is made even more confusing by recent progress in autopilot with some large jets getting auto-landing features.
And yes... a pilot can program the FMS with waypoints, altitudes, etc, get into the air, push a button... and the plane will indeed fly itself. Modern jets even have automatic throttle/power control too.
A better name for Tesla's system is what it actually is... Driver Asist. But that's not sexy... and we're far off into the weeds.
"Instant" means instant. There is no way to paint it differently.
It's disingenuous to call an ACH transfer "instant" instead of "It'll take several days during which time we'll lend you money", like RH did here.
I have heard it is complicated, but can someone elaborate the "computing cost" of a regular (non-coin) digital transfer?
Btw, transfers within 15 minutes are being done all over the world without the fancy blockchain and coin. I do understand the need for some transfers to be delayed , say liquidating all of one's investment to take a few days just for security reasons.
Well there's - for starters - :
That's not at all what bitcoin does or helps with.
Settlement is not complicated. ACH is complicated, but ACH isn't just settlement. Bank to bank wire transfers are just settlement, and are regularly same-day (even same-hour) with immediate fund availability.
Hell, FedWire has been doing real-time near-instant moving of money between accounts since 1920 https://en.wikipedia.org/wiki/Fedwire
FedWire works because those banks work very hard to trust each other.
[0] non-exhaustive list
Banking plumbing is notoriously harder than most folks realize, and I wouldn't be surprised if there wasn't very hard (and very small) limits to how big of an amount / how many TPS you can actually execute with this system.
I might be wrong, but I'd be surprised if you could move 10M pounds instantaneously with this.
The instant SEPA transfers have a 100k limit.
U.S. banks are very much lagging in technology
btc transfers are pretty far from instant, by design.
It's atomic, it either completes 100% or it fails, there's no partial state where the money gets stuck in one of the middle-nodes.
It was bound to blow up eventually, but I disagree with your assumption that this is obviously "market manipulation".
If they had to take this action to save themselves, the alternative was worse. Robinhood would have [edit: potentially] gone under while holding all of their customer's stock, and I guess SPIC would have figured it out eventually? No one would have had the option to sell, and Robinhood going under would likely have had a much larger impact on the price of specific securities. I have *absolutely* no idea what would have happened if Robinhood wasn't able to settle trades that it had already made. I assume it would have been an absolute catastrophy. By that logic, Robinhood "manipulated the market" in a way that prevented GME stock from tanking.
I would be very concerned here if Robinhood ends up going under for "market manipulation", with no reference to the extremely poor and predatory product decisions that set this up in the first place. We'll just have the next company pop up, promise to do "nothing illegal", and then set up the same house of cards.
> Robinhood's entire product is built on a manipulative and predatory premise that making people feel comfortable "trading stocks", whether they fully understand what is happening under the hood, is a net positive.
I think that people generally understand that when they buy stocks, those stocks may go up or down. There is no guarantee of making money. You take your chances.
What they don't understand is that the brokerage can sell what they bought at the day's low price, because the account they funded with cold hard cash was termed a margin account. What they don't understand is that their brokerage might arbitrarily decide to prevent them from trading particular issues on a given day. What they don't understand is that, due to their broker's lack of financial prudence, that their broker may need to manipulate the market to their individual disadvantage "for the greater good".
The things you mention are things that people should probably understand. The fact that customers en-masse did not understand these things is *definitely Robinhood's fault*.
> the account they funded with cold hard cash was termed a margin account
Until it was actually funded and settled though, it is on margin (after which it's still a margin account, it's just covered, and you can not use margin). This is again something that customers should be educated on. Robinhood could have made the user wait 2-3 days (while waiting for the funds to settle) before they could buy any stock. Robinhood prioritized user engagement. Robinhood could make users wait 2-3 days between selling a stock and buying a new one. Again, Robinhood chose to prioritize user engagement instead.
> due to the broker's lack of financial prudence
Robinhood was not even close to the only broker who was impacted by this, so can we stop pretending that they were?
> may need to manipulate the market to their individual disadvantage
Again, I disagree that Robinhood following the actual policy of the accounts the users were using, in order to be compliant with financial regulations, is "manipulating the market".
> Robinhood was not even close to the only broker who was impacted by this, so can we stop pretending that they were?
I wasn't pretending that they were the only ones. I don't think it's a valid excuse to point to other offenders.
And regarding "manipulating the market", IB's CEO was pretty clear that his intention was to protect large market players:
"... we are concerned about the financial viability of intermediaries and the clearing house."
It's hard to tell what RH's real reason was. They initially claimed that it had nothing to do with liquidity.
> the financial viability of intermediaries and the clearing house
These are not the "big players" that WSB seems to think they are screweing. IB doesn't give a shit about a couple of hedge funds (who most likely are not in the game any more anyways). They likely don't care much about any market makers who have found themselves in a bind (I doubt many of these exist though).
Intermediaries and clearing houses are the people who's job it is to ensure smooth operations in the market and make sure that trades eventually settle. Ie, if I sell you something (lets say, 1 GME) for $400, that doesn't happen instantaneously, even though we like to pretend it does. If GME goes to $20, it's possible that the person who bought the thing from me just... never shows up with that $400 (maybe their broker went insolvent, who knows, it doesn't really matter). But it's still owed to me, and now someone in the middle is on the hook. And really, this is a correlated risk. If it happens with 1 share of GME, it's much more likely to happen for millions of GME. So now your clearing house is out hundreds of millions -> billions of dollars[0], and are left holding a couple M in GME stock that they can't sell.
There is a difference between trying to protect a specific player or group of players in the game, and making an attempt to protect the infrastructure that makes the game possible.
[0] And if the clearing house can't handle this, then it falls to your broker, who also probably can't handle it[1]. So then if you don't get the money for what you sold, any sort of faith in the financial system evaporates. Which triggers a bank run. Which triggers a financial crisis way beyond anything seen in 2008 because all of the infrastructure was totally destroyed and now we have to start from scratch.
[1] This is especially true in the case of Robinhood, who I am certain (without evidence) has an extremely disproprotional and correlated exposure to specific high risk tickers (GME, AMC, BB, NAKD, etc)
I think Hanlon's Razor applies here:
"never attribute to malice that which is adequately explained by stupidity"
The more I see with this fiasco, the more I feel like RH management just made a platform with a bunch of shortcuts and didn't realize what the unintended consequences of a trading platform with zero friction margin accounts would be.
Not absolving them of responsibility, and I've definitely see some places where their choices favor themselves over their users. But the situation is largely out of their control at this point and they are just trying to do damage control.
I am getting tired of seeing companies and other major entities weaponizing Hanlon's razor. I refuse to believe that such a massive entity with so much resources at it's disposal has a think-tank consisting of two interns and a comatose member of middle-management. I've seen this sequence of events multiple times:
1. Entity X does thing that directly harms/angers people.
2. Entity X 'apologizes' and says some variation of "oopsies, didn't mean to, just a miscommunication gone awry, we'll definitely look into improving our internal processes in the future :)".
3. Entity X faces no real repercussions.
At what point does this become a violation of Occam's Razor? That all of these decisions that somehow always leave the entity unharmed/better off at the expense of others were not made with intentionality and/or any remote understanding of their consequences? When do they wear away the benefit of the doubt?
Robinhood just had to borrow a billion dollars. Having to get a billion dollar emergency bail out is not the sign of a sinister plot, it's the sign of a colossal fuck up.
> I refuse to believe that such a massive entity with so much resources at it's disposal has a think-tank consisting of two interns and a comatose member of middle-management.
There are a fair number of signs that Robinhood is a mess. This isn't the first time the company has run afoul of their own success and wound up screwing over investors.
> Entity X faces no real repercussions.
I didn't say they shouldn't be responsible for the consequences of their mistake. My point was that it's more likely this is a screw up than some sinister plan on their part.
We're on the same page as far as this last bit goes for sure. Regardless of whether it was a screw up or malice, they should be the ones paying the price (though sadly I suspect we both know they won't).
What about a sinister plot that fucked up? Being bailed out is consistent both with being dumb and short-sighted, or being deliberately negligent and short-sighted. Failure is possible in both cases if not more likely in the latter (this failure wouldn't be possible if Robinhood didn't decide to facilitate liquidity out of its advertised risk class, but would be tempting to ignore if you precluded the possibility of retail colluding on its own. The benefit for Robinhood would be greater order volume over time which means i.e. higher quarterly revenues).
In addition, if you are willing to claim bailouts are evidence that deliberate negligence/"sinister plans" aren't present, you would have to claim the 2008 subprime mortgage crisis didn't feature deliberate negligence, which isn't true.
I don't think RH intended this situation. That is all.
I'm not suggesting there was no negligence. In fact I think there was. Negligence is essentially criminally screwing up.
This isn't entirely true. Margin accounts don't have an unlimited bottom. If you put $1000 in a margin account, you can buy more than $1000 worth of securities. As soon as the value of those securities drops below $1000, those shares are liquidated. Typically, you are never on the hook for more than your initial $1000.
From Investopedia: > " The Federal Reserve has a 50% initial margin requirement, meaning you must front at least half the cash for a stock purchase. > This requirement gives you the ability to purchase up to $20,000 worth of stock, effectively doubling your purchasing power."
It is very risky to invest in volatile stocks with a margin account because you can hit a margin call fast. Suppose you put $2000 into RH and get $2000 worth of GME. If GME drops 50% in a day (highly possible), you get a margin call and poof your $2000 is worth zero.
> Many customers think they're betting £1000, they don't realise they're actually betting their house.
This isn't true on either part. To see why, take a peek at RH's FAQ on margin: "Access to margin is not automatic to everyone, and requires you to upgrade to Gold."
In other words. To make leveraged purchases, you have to deliberately upgrade your account to gold and have $2000 in your account. The whole reason people upgrade to gold is to get access to margin.
It is possible to put yourself out there quite a bit further than you want and lose everything you invest, but it's pretty hard to lose more than you invest. (I'm not even sure it's possible).
The funds they put up at the clearinghouse are to manage settlement of customer trades. They had to stop allowing customers to open new positions because they needed to deposit more settlement margin at the clearinghouse. The margin required depends on the volatility of the stock symbol, and in this case clearinghouse increased the margin requirement for GME to 100%, on top of the higher demand for shares by customers.
As for paying the price, I’m pretty sure no broker is ever liable for theoretical profits missed out on.
It was an unplanned loan so they could continue operating effectively. If you want to pick nits and say it's not a bail-out... whatever. It's not business as usual.
Here's another bug in RobinHood that allowed people to use unlimited margin.
This one is incredible because he put all of that money into Apple puts two days before they released their earnings report. He lost everything.
Yes and the corollary to that maxim is that these "stupid people should never be in a position to take any decision..."
There is plenty of malfeasance as well, as things have gone off in ways they didn't anticipate, RH and the other exchanges are making sure their big money clients are protected as best as possible from the WSB craziness at the expense of retail investors.
But the last bit wasn't planned which is what I was getting at.
Corporations do not have the benefit of the doubt because groups of people can deny any intent whatsoever (“it was the majority”).
Don't get me wrong, there are definitely people in the 65+ club who understand tech. But frequently older people don't, even older people who were near tech. And in particular many of them don't get communities like Reddit.
I don't think a lot of people could have predicted that tens of thousands of retail investors would flash mob an out of favor stock to bust a hedge fund's short position. The chances that a 65 year old lawyer would see that coming? Seems pretty unlikely.
RH has fucked up a bunch here, but there are some folks who are going to make a killing on this (maybe already have). It's quite possible there are a few front-runners on WSB who are talking GME up like mad even as they quietly sell off shares for a big profit. The front runners have big profits on this deal.
Hi, looking for the video - the ones I saw were two from Georgia, both showing regular ballot boxes being counted. Could you provide a link?4.5) Because of their insane overuse of margin to ease onboarding, their depository obligations begin bleeding beyond their ability to triage, putting the accounts of both their investors and clients at risk.
5) RH then "margin calls" all of the people who had money transfers pending at the time of GME purchase (in order to reduce the overall risk profile of the robinhood brokerage and to scrape back as much money as possible to cover their depository obligations which they, goto 1, screwed up themselves by offering way too much margin to clients who didn't know they were getting margin (or what it even is))
Over the past two days, Robinhood royally fucked it up, beyond anyone's wildest fears. If they were Chase or BofA or someone, I'd say they're systemic and will get by to survive another day. They're not.
Robinhood is finished. If they somehow manage to meet their depository and net capital obligations over the next few trading days, and if they somehow manage to survive the large downturn in users the platform will experience after their actions this week, and if they survive the inevitable congressional hearing, they'll still have the SEC investigation to look forward to.
Haven't they been number one in the app store all week: https://www.appannie.com/en/apps/ios/top/
Is there any evidence of this? The article seems to only say that some people got margin called, but didn't say whether those people were using "real" margin or was using the "instant deposit" margin.
For people playing the gme lotto (no wrong making—-actually wish I had time to join the party), settling any way other than margin is effectively Russian roulette!
An ACH transaction is literally FTP and text files. If you can find a way to get rid of millions of lines of COBOL you can probably disrupt this.
Heck I've had to fix one of these things where it suddenly started failing the overnight transfers and when I went to check why it was because a fricking musician had named their song to include the delimiter used in one of those...
Paul McCartney’s “Pipes of Peace”?
They just have very little incentive to change things. In the meantime, they're earning interest on funds.
> Force the banks to honor the requests in order they are received (not in the order they choose that is most lucrative to the bank).
Didn't this already happen?
They're just making sure they can avoid needing to pay their computers overtime when they get worker's rights. /s
> A phone support person tried to tell me that a human still approves the transactions.
This is true in some cases. They do at least have to audit some of them manually and possibly close your account, file SARs, etc, if they don't like you enough.
What services banks and brokerages offer on top of that, can be more limited of course, but that's the state of the system.
I have seen a snail move through my garden at a faster pace. If it were 1992, and all we had were 9600kbps, then I could understand the burst all transactions after hours and then do the settle up over night. Suggesting that they are going to have 3 windows each day for settlement windows is a 1999 solution. That also sounds counter intuitive in that at each of those windows their systems will get slammed with orders to process. If they just let each one settle as they come in, then they would spread the load.
I'm really dumbfounded at how either I'm an idiot and just cannot understand the issue, or at how the rest of the world has been snowed over into believing it is terribly complex and takes decades to make incremental changes.
It's only America's payment system that's woefully behind.
Normally you want option writers to be able to provide liquidity by going naked short when selling calls. Obviously that fails when involving small companies with high short interest and hordes of "4chan found a Bloomberg Terminal" investors.
I looked a little at GME during the week and I saw that the option market makers had significantly reduced their participation. I bet that they're also big losers. But that's what they do for a living, it's their own fault if they blew up selling calls naked. They knew the risks. Delta hedging doesn't work when a stock can move 100% in a single day.
Wait, what? That is the first that I'm hearing of this. That's crazy. Even without doing all of this, Robinhood having the ability to unpredictably/arbitrarily decide when to disable/enable actions on stocks is extremely bad for the market. They disguise this as protecting their users, but you cannot expect to have freedom as an investor if you don't know when or if you will be able to make a trade because a stock "isn't allowed right now".
Part of the problem is that Robinhood treats their user-base like children. Nobody wants to be protected from risky decisions or from themselves and you can't just do that to people. It is an insult and an unfair withholding of the right of risk and the means to make money from the little guy. That's the dumbest thing I have ever heard. Risk should be a right. Nobody should be able to force you to not take a risk.
I understand that talking to someone off a bridge is a wonderful thing, but at the end of the day, that person is never withheld the right to jump.
People need to see instant updates so that's what every app shows them
What mechanism are there in place to insure that ETF will not deviate from the underlying stocks it should represent?
I found it difficult to understand the intricacies related to this question.
Here is one example: Suppose I was holding ETF with GME stock in it, the ETF issuer might have decided he knows better and sell the stock expecting its price to drop in the future. Meanwhile the issue will attempt to "follow" the stock by other means. Ultimately is there a way to be sure the issuer will not fail, if GME beats all anticipated expectation the issue might fail to reflect the new GME price...
What mechanism are there in place to insure that ETF will not deviate from the underlying stock?
About how you can lose money on trading bonds, what is clearing and volatility, how taxes are paid and so, and so. The fact is, you certainly could lose money trading stock, and broker certainly can sell your shares without your permission (in my country).
Especially if you are poor. But that is common knowledge. And people losing money on stock exchange, on forex, wherever is nothing interesting or new. Is this predatory behavior? Maybe. Almost no retail investor makes money doing risky trades on stock exchange. That is what those people did.
Edit:spelling
It was one of the many reasons I used them. (I don’t anymore for other reasons)
Running a brokerage is low margin business.
UX in financial application is tough , I wouldn't want ever to be handling ux for such applications
Instant deposit is not trading on margin, it's trading on deposits that you make that are instantly available in Robinhood but take a day or two to clear ACH. That's all made clear up front on the screens about Instant Deposit, not buried in T&C.
"When you sign up for a new account, you’ll automatically start with a Robinhood Instant account, *which is a margin account*."
> it's trading on deposits that you make that are instantly available
If it's made instantly available, it is being loaned to you from Robinhood, but that is... still margin. It may be interest free margin, but it's still margin. It is money that has not settled into your account yet. If it's not on margin, you can't use it until it's settled.
Hell if you sell a stock and then immediately buy a new one, that is also margin, because, again, the funds have not settled into your account yet.
If you want a Cash account (a non-margin account), you can downgrade, and "You won’t have access to instant deposits or instant settlements".
The fact that you have to do this manually however is, in my opinion, predatory, and setting up a house of cards that will eventually fall over, because users won't understand what is actually happening.
But the fact that it's predatory doesn't make it not true.
Except the collateral hasn't settled yet, so you can't guarantee what could happen.
> It's like if you handed your broker a check and said you wanted to make buy a stock for the value of the check.
There are tons of things that could happen here. The check could bounce. Your bank could go under. The check could be fake. You could have stolen the check from someone else, and when they see it clear, they'll call their bank and the funds will be withdrawn.
> Would the trade clear before the check? Sure. Is that margin?
Yes, it is. The broker may choose to loan you the money short term with the assumption that the check will clear, but they don't have to. They could just refuse to make the trade until the funds clear.
If they did choose to buy the stock for you, they would be accepting that risk. If your money doesn't clear, they will be stuck with the stock.
If this was a share of VTI, with low volatility, they'd likely be fine with it. Even if the check didn't clear, they could just re-sell the stock. It's super unlikely to drastically check in value in the 2 days before the check clears.
If this was a share of GME today, they are buying it for you for $350. There is a change that your check doesn't clear. There is a chance that tomorrow GME is worth $50. If both of those things happen, your broker would have paid $350 for a stock that they didn't want, and can only sell for $50, and be stuck holding a $300 loss.
Ie, they have loaned you money (even if it's short term and with no interest), but if the account doesn't actually get funded, or a previous trade doesn't actually settle[0], they are left holding the bag, the same as if it was "traditional" margin.
[0] This is unlikely, but it could happen for a variety of reasons. I believe this would correlate with much larger issues with the state of the financial system, and in that case would just start compounding issues (because if your trade doesn't settle, then chances are a whole bunch of trades don't settle, and your broker will be left holding the bag for all of them)
People right now are complaining because they are (reportedly) being margin-called, largely yelling on the internet that they are being margin called but weren't using margin therefore Robinhood is conspiring with George Soros or some shit, even though they technically were trading with Robinhoods money.
Should Robinhood be allowed to treat something as a trade on margin when the fact that it is on margin is papered over and the user clearly doesn't understand what they're doing? Probably not.
But this isn't Robinhood "manipulating the market to support Hedge Funds (or whoever the new enemy is today[0]); this is Robinhood having a gold-plated pile of dog-shit that they've been selling as solid gold for the last couple of years, and now the cracks are showing.
[0] I heard this morning that the new enemy who is trying to manipulate the market is the DTCC. Which is just... comical in my opinion, but hey, the internet is gunna internet I guess
If you buy a $10 stock on margin, and it raises to $15, you owe Robinhood $10, and that is secured by a $15 stock. This is extremely unlikely to get margin called. Even if it does, you're up.
If you buy a $10 stock on margin, and it drops to $5 (even if just temporarily), you owe Robinhood $10 secured by a $5 stock, which puts them in a riskier position, and may margin-call to cut their losses. You get the $5 from the sale, but still owe Robinhood the initial $10.
I'm sure you can see how this can compound to amplify drops if a large number of people have bought the same thing, all on margin, and it starts dropping for whatever reason.
Edit: Follow-on
This is particularly "bad" if your goal was to "own the stock" (at pretty much any price) just so that someone else can't buy it.
Robinhood's FAQ on the subject was ostensibly written by someone who doesn't understand that "margin" is a word with specific meaning in the context of a highly regulated brokerage business. It's an account where you take risk with only partial equity, with the institution putting up the balance.
From FINRA:
"The term 'margin' means the amount of equity to be maintained on a security position held or carried in an account."
Elsewhere on Robinhood's site, I was happy to find some acknowledgment of the regulatory requirements:
"To purchase a security on margin, we require that you have at least $2,000 or 100 percent of the security’s purchase price (whichever value is less) deposited into your account. This is called the "margin minimum." If you are designated a pattern day trader, you must have $25,000 in portfolio value (minus any cryptocurrency positions) before you continue day trading.
Note: If you are borrowing on margin and fall under $2k portfolio value, you are at risk of a margin call and potential liquidation"
People here are downvoting you because they don't know the rules and they believe Robinhood's website when it says that Robinhood Instant is margin.
This should be a BIG RED FLAG that you are the product and not the customer. In general, if you aren't paying, they have no interest in keeping you happy.
1) RH automatically makes every account a Margin account.
2) RH doesn't make this clear to their customers (buried in the TOS where they know newbie investors won't look, which makes up probably 99% of their customers).
3) RH allows people to initiate money transfers into RH, but also allows purchasing of stock immediately (on Margin) without informing the customer.
4) Investors believe they've outright purchased stock, because RH app shows the stock in their account, and money now gone (even though it's still pending the transfer).
5) RH then "margin calls" all of the people who had money transfers pending at the time of GME purchase.
Ya... that seems pretty predatory in my opinion. Downright shady business... How can this not be construed as market manipulation, even if RH had to do this to save themselves yesterday. RH got themselves into this position in the first place...