From the article: I thought this excerpt from an interview on Yahoo finance that was quoted on Marginal Revolution was interesting as well: And:
From the article:
Facing a backlash from investors and lawmakers, Robinhood later explained that the market turbulence created financial pressures. That's because whenever investors buy stocks, brokerages like Robinhood must make a deposit first at a clearing house. To protect investors, regulators require brokerages to keep a certain amount of capital on hand.
These cash requirements can go up, sometimes dramatically, during times of market stress and heavy trading.
"To prudently manage the risk and the deposit requirements, we had to restrict buying in these 13 stocks," Vlad Tenev, Robinhood's co-CEO, told CNN's Chris Cuomo Thursday evening. "We're in a historic situation where there's a lot of activity and a lot of buying concentrated in a relatively small number of symbols that are going viral on social media. We haven't really seen anything like this before."
Let’s bring in the CEO of Webull, Anthony Denier. And Anthony, your platform also among those that’s restricted trade for the likes of AMC, as well as GameStop. We were talking about Alexandria Ocasio-Cortez now jumping in on the debate, saying that she would be for a hearing in this if it’s necessary. Why restrict the trade, and what led to that action?
ANTHONY DENIER: Well, it wasn’t our choice. Our clearing firm gave us a call and said we’re going to have to stop allowing new opening positions in the three names, AMC, GME, and KOSS. Highly volatile, and what happens is this is not a political decision. And unfortunately, it got political. I think, you know, I think it was once said that don’t let any good crisis go to waste. And that’s clearly what’s happening here.
And we’re seeing politicians jump on the bandwagon so they can get– so they can start trending on Twitter. But in reality, what’s going on is that there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days. And because of the volatility of stocks, DTC has made the cost of the collateral of the two-day holding period extremely expensive.
And we just can’t afford– well, we’re not a clearing firm, but our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can’t afford the cost of that trade clearance. That is the reason why these stocks are coming off. It has nothing to do with the decision or some sort of closed room cigar– smoke-filled cigar room of Wall Street firms getting together to the dismay of the retail trader. This has to do with settlement mechanics of the market.
And:
ANTHONY DENIER: …There is no way that a customer would not be able to sell a position they hold. We are simply stopping opening of new positions. Liquidations can happen at any time. This is general market mechanics. We have customer protections in place. We would never stop a customer from being able to get out of a position. But currently, we are stopping customers from getting into a new position. And that has to do with it possibly.
Honestly, the FUD yesterday over Robinhood's purported class warfare might have been a blessing in disguise for them since it hid the fact that they were disturbingly close to insolvency...
Honestly, the FUD yesterday over Robinhood's purported class warfare might have been a blessing in disguise for them since it hid the fact that they were disturbingly close to insolvency yesterday, something which should make you very nervous if you have any significant amount of money in the platform.
I don't know much about it, but to me it doesn't sound like they were close to insolvency? They had a big temporary cash-flow problem coming up if they kept taking orders, but that's different...
I don't know much about it, but to me it doesn't sound like they were close to insolvency? They had a big temporary cash-flow problem coming up if they kept taking orders, but that's different from insolvency.
It seems they suddenly needed a big pile of money because their customers were buying a lot of stock, and they aren't allowed to take the customer's money for a trade until the trade settles. They need another source of money to cover those few days. They had credit lines as backup, but they ran out.
By not taking any more buy orders, they stopped needing more money. Then all they need to do is wait for the trades to settle, and then the cash-flow problem is over. But they raised more money so that they can start taking orders again before the trades settle.
It seems like this extra demand for cash and the restricted trading are due to regulations that ensure that no matter what happens, the customers don't lose money due to problems at the brokerage, and the people that their customers are buying stock from will definitely get their money even if Robinhood's customers somehow don't pay.
When a stock trading platform goes insolvent, what happens to people’s shares? Are they owned in the person’s own name, or by Robinhood on behalf of the person? Does the bankruptcy court seize all...
When a stock trading platform goes insolvent, what happens to people’s shares? Are they owned in the person’s own name, or by Robinhood on behalf of the person? Does the bankruptcy court seize all the shares and redistribute them to the affected parties?
The customer's assets are held by a custodian (usually a bank). Robinhood's bankruptcy would not affect the assets of their retail customers. If anything happens during the failure of a broker,...
The customer's assets are held by a custodian (usually a bank). Robinhood's bankruptcy would not affect the assets of their retail customers. If anything happens during the failure of a broker, the SIPC provides insurance for up to $500,000 of assets.
I believe at that point the SIPC will step in and do their best to ensure that customers retain the same number of shares at a different broker up to a certain limit (I think it's 250k?)
I believe at that point the SIPC will step in and do their best to ensure that customers retain the same number of shares at a different broker up to a certain limit (I think it's 250k?)
You’d probably be right but there is plenty of precedent for an event like this, a shorted stock getting squeezed. It’s something average investors have taken advantage of before but just not at...
You’d probably be right but there is plenty of precedent for an event like this, a shorted stock getting squeezed. It’s something average investors have taken advantage of before but just not at this scale.
There will be losers, a lot of them. Also an unprecedented amount of winners and not just the big firms. That’s the stock market for ya.
My understanding is that they are legally unable to take a customer's cash out of their account immediately to fund a transaction. It goes through a clearinghouse and takes 2 days to process,...
My understanding is that they are legally unable to take a customer's cash out of their account immediately to fund a transaction. It goes through a clearinghouse and takes 2 days to process, regardless of whether you purchased with cash.
Here’s a blog post from them talking about their in-house clearing system. I’m pretty sure their clearing house is under a subsidiary Robinhood Securities LLC. It’s all bullshit.
Buying shares increases the cash risk while selling does not. The reason clearing firms have deposit requirements is because 2 days letter, when the trades settle, if more people sold stocks than...
Buying shares increases the cash risk while selling does not. The reason clearing firms have deposit requirements is because 2 days letter, when the trades settle, if more people sold stocks than bought stocks, then Robinhood needs to give the clearing firm money in exchange for stocks, and vice versa.
The deposit requirement is Deposit = min( 99% 2d VaR + Gap Risk Measure, Deposit Floor Calc), buys will increase 99% 2d VaR while sells will not.
The volatility
component is designed to capture the market price risk associated with each Member’s
portfolio at a 99th percentile level of confidence. The VaR Charge is the volatility
component applicable to most Net Unsettled Positions,13 and usually comprises the
largest portion of a Member’s Required Deposit.```
https://www.sec.gov/rules/sro/nscc-an/2018/34-82631.pdf
They do, it's Robinhood Securities. Just because it's "their" clearing firm doesn't change anything. Robinhood Securities is a registered NTCC member and must abide by NTCC regulations. Whether or...
They do, it's Robinhood Securities. Just because it's "their" clearing firm doesn't change anything. Robinhood Securities is a registered NTCC member and must abide by NTCC regulations. Whether or not Robinhood owns the clearing firm is irrelevant.
The deposit requirement equation is set by the NTCC. No ands or buts on Robinhood's side if they can't meet them - they are legally not allowed to submit those transactions by the SEC.
I can't imagine how. This happened industry-wide. Other brokers, like WeBull, M1 Finance, Public, E-Trade all disabled buys on their platform. They did not all use Robinhood Securities lol....
I can't imagine how. This happened industry-wide. Other brokers, like WeBull, M1 Finance, Public, E-Trade all disabled buys on their platform. They did not all use Robinhood Securities lol. Additionally, perhaps you might notice that apart from E-Trade, they're all fairly young companies - and likely poorer companies (or at least with an inferior cash float because they're focused on growth).
From the article:
I thought this excerpt from an interview on Yahoo finance that was quoted on Marginal Revolution was interesting as well:
And:
Honestly, the FUD yesterday over Robinhood's purported class warfare might have been a blessing in disguise for them since it hid the fact that they were disturbingly close to insolvency yesterday, something which should make you very nervous if you have any significant amount of money in the platform.
I don't know much about it, but to me it doesn't sound like they were close to insolvency? They had a big temporary cash-flow problem coming up if they kept taking orders, but that's different from insolvency.
It seems they suddenly needed a big pile of money because their customers were buying a lot of stock, and they aren't allowed to take the customer's money for a trade until the trade settles. They need another source of money to cover those few days. They had credit lines as backup, but they ran out.
By not taking any more buy orders, they stopped needing more money. Then all they need to do is wait for the trades to settle, and then the cash-flow problem is over. But they raised more money so that they can start taking orders again before the trades settle.
It seems like this extra demand for cash and the restricted trading are due to regulations that ensure that no matter what happens, the customers don't lose money due to problems at the brokerage, and the people that their customers are buying stock from will definitely get their money even if Robinhood's customers somehow don't pay.
When a stock trading platform goes insolvent, what happens to people’s shares? Are they owned in the person’s own name, or by Robinhood on behalf of the person? Does the bankruptcy court seize all the shares and redistribute them to the affected parties?
The customer's assets are held by a custodian (usually a bank). Robinhood's bankruptcy would not affect the assets of their retail customers. If anything happens during the failure of a broker, the SIPC provides insurance for up to $500,000 of assets.
I believe at that point the SIPC will step in and do their best to ensure that customers retain the same number of shares at a different broker up to a certain limit (I think it's 250k?)
You’d probably be right but there is plenty of precedent for an event like this, a shorted stock getting squeezed. It’s something average investors have taken advantage of before but just not at this scale.
There will be losers, a lot of them. Also an unprecedented amount of winners and not just the big firms. That’s the stock market for ya.
I still haven’t seen how this explains them stopping buying only even for people that were purchasing with cash in their accounts.
My understanding is that they are legally unable to take a customer's cash out of their account immediately to fund a transaction. It goes through a clearinghouse and takes 2 days to process, regardless of whether you purchased with cash.
RH doesn’t use a clearing house, they clear themselves IIRC.
This RH blog post says transactions are sent to a clearinghouse.
Here’s a blog post from them talking about their in-house clearing system.
I’m pretty sure their clearing house is under a subsidiary Robinhood Securities LLC.
It’s all bullshit.
Interesting. So it’s an RH clearinghouse, but the 2-day rule still applies of course.
Buying shares increases the cash risk while selling does not. The reason clearing firms have deposit requirements is because 2 days letter, when the trades settle, if more people sold stocks than bought stocks, then Robinhood needs to give the clearing firm money in exchange for stocks, and vice versa.
The deposit requirement is
Deposit = min( 99% 2d VaR + Gap Risk Measure, Deposit Floor Calc), buys will increase 99% 2d VaR while sells will not.As stated RH doesn’t use a clearing firm. It’s all in their system.
If they only stopped margin trading I would understand.
They do, it's Robinhood Securities. Just because it's "their" clearing firm doesn't change anything. Robinhood Securities is a registered NTCC member and must abide by NTCC regulations. Whether or not Robinhood owns the clearing firm is irrelevant.
The deposit requirement equation is set by the NTCC. No ands or buts on Robinhood's side if they can't meet them - they are legally not allowed to submit those transactions by the SEC.
I think it’s pretty damn relevant. We’ll see what happens to RH when the dust settles.
I can't imagine how. This happened industry-wide. Other brokers, like WeBull, M1 Finance, Public, E-Trade all disabled buys on their platform. They did not all use Robinhood Securities lol. Additionally, perhaps you might notice that apart from E-Trade, they're all fairly young companies - and likely poorer companies (or at least with an inferior cash float because they're focused on growth).
Occam's razor.
How so?