"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.
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.