Indeed, it's been educational about which brokers are using other clearing houses (sorry if I get the terminology wrong), and which are direct.
But then badly behaved businesses like Godaddy don't seem to suffer or go out of business, so I suspect Robinhood won't have too many long term problems.
Yet their userbase grows and their users come back. They'll be fine.
Whole concept they broke. If any investor still uses robinhood they are stupid. Your money and stock is not safe with Robinhood. They can restrict you any time.
But this is happening at the same time was mass account withdrawals/closures, and we're now learning this not only threatens their general solvency but ability to execute trades. This could easily cause a feedback loop that empties their accounts, at which point people are going to be unable to withdraw their cash which is goign to cause a bank run and drill the nails into their coffin even further. Healthy companies don't need to emergency borrow a billion dollars. If you have less than $250,000 on Robinhood, your account is FDIC insured so you'll eventually get your money back...but I think most people would prefer not to go through that process.
Robinhood is on a death spiral and prudent financial advice is to move any assets you have off of it as soon as possible.
FDIC guarantees funds to the bank. If the bank fails FDIC ensures YOU continue to access your account. If this means taking the bank into receivership and changing owners so be it. You can go to the FDIC website to see what banks have failed. Many do over the course of a year but the account owners are never at risk outside of the insurance amount on a single deposit account.
I hope you don’t keep more than 250,000 in an fdic insured account without additional insurance (which is silly because you could just open another account at the institution for additional coverage)
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?
They have quarterly reporting obligations, and you can review those reports to see how they're doing. If you don't like what you see, you can sell the funds and/or file a shareholders' lawsuit and/or file a SEC complaint.
If you don't like that, the good news is with zero comissions as the norm, and fractional shares at many brokerages, you could build up your portfolio to match an index of your choice, without significant monetary transaction costs. It would take a lot of time to setup and when you made contributions, and dividend processing effort could be significant.
Sure, move your holdings out of RH. I don't have an account there, and never had, and probably won't ever.
But, regardless of RH's health or lack thereof, most companies don't have a sudden change in collateral requirements.
If what I understand from forum posts and twitter threads and youtube interviews or CEOs on speakerphone is accurate,
On thursday morning, DTCC changed requirements so that net buy orders for GME pending settlement would need to have 100% of the value of the shares posted as collateral (marked to market at end of day). I don't know what the requirement was on Wednesday, apparently 1-2% is common, but I'd hope it was already elevated earlier in the week.
And that colateral has to be owned by the clearing firm (which is RH for RH), and apparently can't be formed from clients' money, possibly including settled cash from the clients who made the buy?
This isn't a long term cash need, it's only while there's a large amount of net buys in volatile stocks awaiting settlement. Assuming either clients stop buying so much (because some are selling, or it gets borint) after a while or the price stops moving so quickly, collateral requirements should go back down and RH can return the money. As long as their clients don't stiff them on the buys anyway.
That they were able to quickly get a billion dollars hints toward fine enough health (or crazy lenders).
More worrisome is that they apparently didn't have a plan for managing trading in stocks with high collateral requirements (some established brokerages had enough collateral to do nothing, others limited trading to settled cash and similar trades with reduced credit risk for the brokerage). I don't necessarily expect an upstart brokerage to have unlimited collateral, but planning and managing around insufficient collateral should have been done; and more transparency would be nice. Maybe they had done some planning though, I certainly wouldn't be able to get a $1 B loan in a single day, although who knows what it cost them.
Gonna be interesting to see what gets to replace Robinhood for easy and reliable trades in the future.
Why didn't they just restrict buying like they did in Friday instead of halting it completely? By halting it completely they caused a panic which caused lots of people to sell.
Why didn't they halt or restrict buying of any other stocks? Why only the meme stocks? It should have affected their financial responsibilities to the clearinghouse the same ways, no?
Why did they give no warning and explanation for what was about to come? The abruptness of it was obviously going to contribute to the panic.
The standard expiration date for meme stock options was the day after they halted buying. This caused their own customers holding those contracts to lose money. Why did they claim they were doing this "to protect their customers" when it was their customers who got screwed by this?
Why did they give no warning? I don't know, I think they're a clownfire.
The clearinghouse collateral requirements in part protect the clearinghouse from things that can go wrong at the brokerage, like if Robinhood had a vulnerability that let people place huge orders without paying for them, and they were, like, put out of business overnight.
I don’t think it has anything to do with margin vs non-margin accounts for instance. It’s just a formula where you split up the outstanding shares by the VaR as I’d get a capital requirement.
B) your shares trading immediately is a fiction. It takes days for those trades to settle. And any subsequent trades you make with those funds are all subject to credit risk. The central clearing house collateral rules are about risk management around that multi day float.
I think but am not an expert on this that the DTCC times explicitly require the capital to come from the brokerage not the clients. I don’t know why but can guess that it’s because it’s the brokerages taking on the risk not the individuals.
The comment upthread argues that Robinhood "chose" to retrict trading in meme stocks. That argument appears to be false. Robinhood did not have a choice whether or not to restrict trading; it simply didn't have the money to cover the clearing for those trades.
To be clear, I agree with this assessment, but they’re being anything but clear about it, which as a user, has me even more worried.
This might happen because I went bankrupt, or MS starts trading for 1000 and you’d rather not give up the share, or whatever. To solve this，there are clearing houses that have collateral requirements to help ensure that the trade is executed as it was supposed to.
Most stocks don’t change that rapidly, so there’s relatively low risk that someone blows up. But GME has both extremely high volatility and is highly overvalued, which makes the risk of someone trying to walk away from it can’t meet their obligations much higher.
Fidelity was unaffected.
Some did not, mostly since their clientele wasn’t buying these anyhow.
What are you even arguing here? That the purpose of a brokerage is to take customers money and play weird games with it to maximize profits and is allowed to just not have enough money to cover all cash purchases?
That is like if a bank just didn't let customers withdraw their money, and kept operating like nothing was wrong. Clearly illegal.
I don't think this is at all like a bank that won't let you withdraw your money. I think it's like a brokerage that has to post 100% collateral --- out of their money --- for every share of GME that you ask it to buy, doesn't have the money to post that collateral, and thus can't buy any more GME for you.
"I think it's like a brokerage that has to post 100% collateral --- out of their money"
How is this not the customers money? You deposited 100% of the collateral with RH. Banks can take your money and make loans with it so the bank can make profit, but only so long as they have your money for you when you want to use it.
I'm pretty sure everyone retained their ability to get cash out of Robinhood, for whatever that's worth.
This is what r/wallstreetbets was after. Forcing people to buy at $1000+. Robinhood should've had collateral for people buying stock in all cash. If they don't they are basically a busted bank, and they cheated all GME holders.
When they bought the stock they had absolutely no reason to think the brokerages would stop selling shares.
They were selling call options that are in the money at $500, while simultaneously not actually allowing GME to go to $500. That is outrageous.
Right before robin hood shut down GME they closed people's positions out at a price of over $2000 per share. The holders literally broke through the sells and were forcing the short squeeze to happen. Robin hood then forced GME into the floor. That is absurd and should absolutely be illegal. It is a crooked casino. They should've been forced to close out everyone's position at the ask price, but they didn't want to so they cheated.
Your only real job is to operate fair and unbiased bid/ask spreads and execute trades fairly. If you aren't going to do that then you are running a scam on your customers.
How is this fundamentally different then you placing a bet at a roulette table and the casino changing the rules mid-spin to make sure you will lose?
Similarly if you sell shares in 1 symbol and buy shares in another in less of a time frame than a few days you aren’t using cash. You are using credit (because it takes days for sales to settle).
All of that credit risk is all currently legislated to go through a few bottlenecks who have the power to enforce their own credit rules.
Analogies are dumb but it would be like if Amex called all the casinos and said “everyone has 90% less credit than they did 2 minutes ago”. If you had a roulette ball running based on your previous credit line at Amex you can bet the Casino would grab that ball. Especially if it had 200k Amex lendees in their pits.
That is not what I'm talking about though. I'm talking about 100% cash.
If you are trading on margin you can get margin called. If you aren't though your broker has no right to do this kind of stuff.
You are suggesting the casino would grab the ball for people who were not using amex. Deeply illegal.
I suppose you could make that argument and if you wanted to encode that as law I wouldn’t vote against it, but recognize it’s going to manifest in brokerage behavior where you can’t trade as fast or you have to keep more cash in your brokerage account.
[edit] I’d also love for you to cite what law a casino would be breaking by shutting down a game mid roll because I have no direct experience there but my mental model is that Casinos have wide latitude on allowing the games to run or not.
I don't understand your argument. RH either has the money to put up collateral or they don't. They didn't this week. That seems like the end of the story. They can't just "choose" to have more cash on hand than they actually have.
There is no restriction from SEC. Its money in app not privacy issue me/people would compromise.
Correct, the restriction is from the DTCC.
RH was essentially letting their users pay full price for a stock, then lending that stock to hedge funds so they could use it against the actual stock owner by selling it short. Since the borrowed stock has already been resold (the stock the HF didn't own to begin with), now the question is if the HF can even afford to buy them all back. This is why the entire market dropped the other day, because HFs were selling off other positions to come up with the money. Sell offs could get a lot worse considering $GME is still currently shorted over 100%.
If the govt steps in to save the hedge funds at the expense of millions of average Joe's, or if the hedge funds pull some sort of bankruptcy loophole card resulting in the average Joe's holding the bag while they continue on, we could see people revolt against the entire financial system as we know it.
Wait what? Is there a list somewhere? AFAIK interactive brokers (which doesn't engage in PFOF) also shut down trading.
As to the other point, I belive the issue was in settlement, not clearing, ie with DTCC collateral reqs.
A bunch of others had a problem when Apex Holdings told them to restrict trading (or something along those lines).
[1]: https://investorjunkie.com/stock-brokers/broker-clearing-fir...
Citadel is an execution broker. Their job is to match buyers and sellers.
Apex (in these conversations) is a clearing broker. Robinhood is its own clearing broker. Clearing brokers are responsible for ensuring that money and stock actually changes hands (this takes 2 days, but all of these firms work together to create the illusion, using credit, that it's instant; those credit arrangements are why brokerages post collateral).
Clearing brokers are members of clearinghouses. The relevant one here is (I think) NSCC, which is owned by DTCC. Policy set at DTCC determines how much collateral needs to be posted to cover any particular set of trades.
DTCC drastically ratcheted up the amount of collateral required to cover trades in meme stocks, which had the effect of 10x'ing the amount of cash Robinhood was required to post to insure that it would not go out of business before its current set of in-flight trades cleared. It made the same requirement of Apex, which passed restrictions down to its customers. These companies are contractually required to make good on collateral requirements, so there isn't much choice involved.
Also, Robin Hood - the irony. They are clearly for the rich against the poor. More like the sheriff of nottingham!
Maybe because there's already a high barrier to trading US stocks (or stocks in general), so there wasn't enough people piling on to strain the brokerage's balance sheets?
If you are/were a Robinhood user: https://www.finra.org/arbitration-mediation/initiate-arbitra...
just do a web search for "arbitration backfired"
you'll find this and other interesting cases :)
I thought it is arbitration (which is less effort than a court case)
I’d even contribute financially to have such an app built, because if FINRA and the SEC won't act (no surprise!), citizens can and should.
In the US there is Webull, which went against their clients initially and then reversed. As an European - where should I go to? Binance/Kraken seems the only reasonable option at this point, however crypto has ties to the real world only on macro-economic scale (although very relevant) and you cannot use your "capital" to influence the world around you in a good way.
P.S. I know that Fidelity and other well-reputed vendors didn't turn coats, but I am not sure it is an option here. P.P.S. This reminded me of https://www.investopedia.com/terms/t/tina-there-no-alternati....
There's Bux in The Netherlands. Haven't used them, though.
They’ve said their financial position is stable, yet they’re stopping trades because of the volume moving through their clearance system (if I’ve understood what Vlad was saying to Bloomberg correctly, they no longer use an external clearing house).
If it walks like a duck, and it quacks like a duck, then it’s probably a duck. And it’s probably good that it’s walking as it doesn’t sound like there’s a whole lot of liquidity left to swim in.
I worry about this for other massive firms, even leaving the current circus aside. As unlikely as it might seem, what happens if a Schwab or a Fidelity or a Vanguard gets into trouble from some as-yet-unseen event?
The collateral can be thought of as more like “server capacity”. Their customers’ demand for usage of the collateral exceeded what was available and they had to reject new trades with, continuing the analogy, an HTTP 429. That doesn’t mean that they’re suddenly insolvent.
Their business requires them to perform this function, and if they can’t do that because they’ve run out of their own money with which to underwrite these trades until settlement, then that’s very much a crisis of liquidity however you slice it (which you can’t because, you know, liquid. Badum-tisch).
Do we need to add barista's to the list?
I would imagine most users care more about money and convenience than principles. I doubt they lose many users in the long run.
If the bubble or market crashes though they will lose a large user base for a long period of time.
On Thursday and Friday was when the publicity turned negative.
They basically said they were deeply sorry, didn't try to cover up and blamed their bank and clearinghouse.
Worth noting that Webull, a robinhood competitor, is the #2 app in the play store. They initially restricted stocks but later allowed people to freely buy and sell.
Edit: upon looking at some aggregate data via OCC, appears I overestimated savings.
And some of them (Fidelity, Vanguard etc.) didn’t pull trading when it got volatile. They also have far more stable platforms.
The brokers you’ve listed have more complicated user interfaces than the casual trader would care to learn about. Fidelity and Vanguard also probably care way more about their reputations than to gamify their platform like RH does.
https://www.google.com/amp/s/www.cnbc.com/amp/2020/08/13/how...
It’s free right up until the point they decide to charge you 100% of your money.
Even if they just weren’t prepared and everything they did was legitimately the right thing to do, that ship has sailed. I know people I didn’t even know had a Robinhood account ask me if I was shutting my account down too.
This will be fascinating to watch. Can the repair the brand damage? I’m skeptical.
Is there any similar scenario that has occurred at another brokerage firm in the past that might leave clues to examine to understand potential user actions here?