What happened this week

https://blog.robinhood.com/news/2021/1/29/what-happened-this-week

by millimeterman • 5 years ago

30 16 5 years ago

blog.robinhood.com

bhk4• 5 years ago

It was not because we wanted to stop people from buying these stocks. We did this because the required amount we had to deposit with the clearinghouse was so large—with individual volatile securities accounting for hundreds of millions of dollars in deposit requirements—that we had to take steps to limit buying in those volatile securities to ensure we could comfortably meet our requirements.

This doesn't add up. How could the requried amount to deposit with the clearing house exceed the cost of the security being purchased? If it does not exceed the cost of the security, then why do they need to prevent purchases of stock from cash accounts?

millimeterman7• 5 years ago

My understanding is that brokers are not legally allowed to use money in customers' accounts to put up collateral to the clearing house. So the broker must instead pull from their own cash reserves until the trade settles 2 days later, even if the customer has deposited enough money to cover the trade.

I think what Robinhood is trying to avoid saying is that they simply didn't have enough money to cover that collateral. Hence why they have tapped into credit lines and have done an emergency funding round. If they had allowed GME to trade the past two days, it seems likely that they would have run out of money and instantly gone out of business.

platz• 5 years ago

If you actually had a cash-only designated account, would the broker still have to pull from their own cash reserves to make the trade?

bhk4• 5 years ago

Either (a) this is not true, or (b) this is an opportunity for reform.

From the customer's perspective, the cash is provided up front and is tied up after the trade is made. The type of collateral requirement you are describing -- above and beyond and separate from what the customer has already provided -- seems to serve no purpose, and is being used against the customer.

I know there are a lot of antiquated processes and rules involved in the financial system, like waiting several days for a "wire transfer" to go through, so I'm not too skeptical that things are actually this broken.

RikNieu• 5 years ago

I'm no trading expert, but why allow sales then? Wouldn't it have had similar implications?

millimeterman7• 5 years ago

I am also no expert, so speculation ahead.

- I have heard that the DTCC does not require collateral (or perhaps not as much collateral) for the party selling the stock. This would mean that allowing selling would pose little to no risk to brokers.

- If that's not true, I wonder if Robinhood decided that preventing people from closing positions was an unacceptable risk. If GME tanked and people couldn't sell, the outrage would be insane. So perhaps they did the math, realized that their available cash wasn't enough to support both buying and selling, and decided that only allowing sells was the least bad option available.

fat_pikachu• 5 years ago

No, GME stock had a higher capitalization requirement than cash.

acjohnson55• 5 years ago

What's missing in this is any acknowledgement of their failure to educate their users on when they might fail. They make trading feel frictionless and instantaneous, except that they can't actually meet this expectation when it counts.

At this point, any rational user should simply assume that RH will fail them at the most critical times, without warning. They have proved it again and again.

And maybe we should all ask ourselves whether the appearance of frictionless trading is even a good thing to begin with.

What happened this week

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