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vkou Jan 29, 2021 | on: Class Action Lawsuit Filed Against Robinhood | context
I'm not entirely sure if I'm the idiot, or if the talking lady on television is, but what she is saying sounds like complete nonsense. It sounds like nonsense, because what she's describing is not Robinhood's problem. The shorts are predominantly being done by hedge funds (with only a few retail investors here and there). Hedge funds aren't trading on retail platforms, like Robinhood. It's not Robinhood's problem that the hedge funds are being eaten alive on margins, or if the hedge funds are having problems with the clearing houses. If margins, and the Robinhood/clearing house relationship were the problem, then Robinhood would stop people from opening new margin positions on GME. But that's not the case, here. They are preventing people from entering non-margin long positions. Do you have a different take on this? Edit: https://news.ycombinator.com/item?id=25951475 seems to be a different take on this. One that makes a lot more sense then the lady on television. The tl;dr of it is that even for a simple, non-margin stock trade, RobinHood needs to put dollars up as collateral... And they ran out of dollars. |
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shcheklein Jan 29, 2021 | on: Robinhood, in Need of Cash, Raises $1B from Its Investors | context
I think this is a good thread that answers some of those questions - https://news.ycombinator.com/item?id=25951475 . Also curious if there were other ways though. |
The Depository Trust & Clearing Corporation settles most listed securities transactions in America; in 2011, it did $1.7 quadrillion [1]. You've never heard of it unless you're a professional trader, but it's actually quite fascinating to read up on.
Trading looks instantaneous. But settlement takes a few days. In between are a series of credit agreements. From your broker to you. From the clearinghouse to the brokers. DTCC is the clearinghouse. Robinhood is the broker.
There are rules and contracts between DTCC and its members, including Robinhood [2]. Those contracts ensure that when you buy shares through your broker from a Robinhood customer, if Robinhood falls down two days later, there is collateral sufficient to make you whole. Those collateral requirements change in reference to, amongst other things, the volatility of the security. (If a broker falls down, the clearinghouse liquidates their collateral and makes their counterparty whole. More volatility means more chance the collateral will be insufficient.)
In this case, collateral requirements on GME went up. Because of its volatility. So while before Robinhood had to pony up collateral for a few shares of GME for every hundred it traded, it now had to, at close of business, pony up one hundred shares' worth of collateral for every hundred it traded. That creates a cash crunch. One that exacerbates itself with every additional trade in the security. If Robinhood fails to satisfy those collateral calls, they go out of business overnight. Into receivership. Done.
Most brokers have policies for these situations. Higher brokerage fees for securities on a schedule. Not making shares and cash from trades available until the trade settles, sort of like what banks do for large cheques. But I don't know if Robinhood is able to do that quickly. So instead they pulled the plug.
[1] https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...
[2] https://www.dtcclearning.com/products-and-services/settlemen...