Analysis: Robinhood protected from lawsuits by user agreement, Congress • Hacker News Board

Re: Analysis: Robinhood protected from lawsuits by user agreement, Congress

#191

Post by likpok » Sat, Jan 30, 2021, 8:29 PM UTC

un-devmox wrote: post #149

tptacek wrote: post #120

Earlier quoted context omitted.

Your claim that RH restricted users by choice seems false. RH is required by NSCC/DTCC rules to post collateral for trades in the process of settlement. As a result of volatility, the collateral requirements for meme stocks shot up from something like single digits to something perhaps approaching 100%. Robinhood was apparently forced to draw down a $600MM line of credit just to cover the trades it had already allowe…

Why did the collateral requirements shoot?

The traditional explanation of clearing is that it’s to solve the problem where I buy a share of Microsoft from you for $100. The trade won’t complete for a couple days so there’s a risk that either I don’t show up with the money or you don’t show up with the share.

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.

Re: Analysis: Robinhood protected from lawsuits by user agreement, Congress

#192

Post by tzs » Sat, Jan 30, 2021, 8:31 PM UTC

lucasyvas wrote: post #18

Can anyone with Robinhood confirm what kind of agreement this is? Is it just a EULA? Obviously IANAL, but I cannot see how such agreements are legally binding if they don't even require a signature. In a theoretical world where I had to sign a EULA, I'd never sign any of them and I imagine most people wouldn't either.

If it were Robinhood suing users users over their terms or user agreement, then arguing that there is no contract might be a good defense.

This is the other way around. It is the users suing Robinhood claiming that Robinhood violated the contract by not making the trades. If the users established that there is no contract, they would destroy the foundations of their own case.

Re: Analysis: Robinhood protected from lawsuits by user agreement, Congress

#193

Post by _trampeltier » Sat, Jan 30, 2021, 8:33 PM UTC

LatteLazy wrote: post #135

8ytecoder wrote: post #98

This thread is full of people who have no idea how the exchanges, brokers, clearing firms and clearing houses operate. https://www.bloomberg.com/opinion/articles/2021-01-29/reddit...

It's very disappointing. I don't expect people to know these things. But on HN, I'd expect them to ask or listen or read about it. Instead people just post about how it's a big finance conspiracy and how they're going to sue everyone...

I don't trade stocks at all, I just played a bit around with crypto for some years. For me it seems, as traditional stock exchanges looks like in stone age compared to the crypto world, when I really need days to make the deal in the background. Also then I don't understand how it needs one one side days to make the deal and on the other side there exist HF traders, who do many, some say as many as 1000 trades per second, maybe, I don't know .., but how does this work.

I remember some years ago, a normal banc transfer needed always 3 working days (so 5 over the weekend). Then came the crypto hype and the time dropped to less than a hour, even for normal people. I wonder if we see something similar here in future.

Also some crypto trading platforms, started to trade with stocks in different forms. I wonder how this will play out in future. I think traditional exchanges have to move forward fast now.

Re: Analysis: Robinhood protected from lawsuits by user agreement, Congress

#194

Post by [deleted] » Sat, Jan 30, 2021, 8:35 PM UTC

dang wrote: post #173

jedberg wrote: post #12

I'm not sure why this article talks about reddit at all. I'm not aware of anyone suing reddit or even considering it (unless the hedge funds plan to do so?). It seems like they just wanted an excuse to write an article about Section 230, or had already written it when it was a big topic earlier in the month and wanted to use what they wrote elsewhere. :)

Ok, we've deredditized (unreddited?) the title above. Good catch.

[deleted]

Re: Analysis: Robinhood protected from lawsuits by user agreement, Congress

#195

Post by Jommi » Sat, Jan 30, 2021, 8:41 PM UTC

gruez wrote: post #83

ummonk wrote: post #70

Earlier quoted context omitted.

The harm is more particularized for those whose stock was auto-sold at the dip for a margin call because they had bought the stock in an instant account.

Is there proof of this? This gets repeated a lot and the best "proof" I've seen was a wsb post claiming they got sold "without [their] permission", but stopped short of saying whether they were using margin or not.

If you use the "instant deposit" feature (its ON by default) on Robinhood, you are using margin. Its one of the weird things people never really though about.

Re: Analysis: Robinhood protected from lawsuits by user agreement, Congress

#196

Post by LatteLazy » Sat, Jan 30, 2021, 8:44 PM UTC

_trampeltier wrote: post #193

LatteLazy wrote: post #135

Earlier quoted context omitted.

It's very disappointing. I don't expect people to know these things. But on HN, I'd expect them to ask or listen or read about it. Instead people just post about how it's a big finance conspiracy and how they're going to sue everyone...

I don't trade stocks at all, I just played a bit around with crypto for some years. For me it seems, as traditional stock exchanges looks like in stone age compared to the crypto world, when I really need days to make the deal in the background. Also then I don't understand how it needs one one side days to make the deal and on the other side there exist HF traders, who do many, some say as many as 1000 trades per se…

I agree broadly. I think it's just institutional momentum. We could do settlement within minutes for 99% of trades. The only reason we haven't is because 100+ years ago people though 2 days (T+2) was quick and we haven't updated it.

The EU is gradually forcing its members to do T+1 and eventually (I think decades in the future) wants same day for most products. That reduces risk and it makes the market fairer (RobinHood have had cash flow problems they wouldn't have had with T+0 settlement and the big boys don't have to worry about that).

I guess we have to wait. Some of these places are still using COBOL, a language first introduced in 1959!? That's how complex, legacy, under invested etc many back office setups are.

Re: Analysis: Robinhood protected from lawsuits by user agreement, Congress

#197

Post by hundreddaysoff » Sat, Jan 30, 2021, 8:49 PM UTC

tempsy wrote: post #66

The fact that they’ve not only limited trading in GME but low volatility name like Starbucks to 1 share is ridiculous. If the only outcome out of this is collective realization about issues with Section 230 or forced arbitration that is a positive whether this class action becomes anything or not.

A second collective realization I'd like to see is that the SEC is still using the same faulty Value-at-Risk model they were using before the 2008 crash to estimate clearing funds. They should probably not use this model to do this any more.

See https://www.sec.gov/rules/sro/nscc-an/2018/34-82631.pdf and explanation at https://twitter.com/MKM_Abdul/status/1355310540235579395

Re: Analysis: Robinhood protected from lawsuits by user agreement, Congress

#198

Post by [deleted] » Sat, Jan 30, 2021, 8:54 PM UTC

quercusa wrote: post #121

ditonal wrote: post #104

Earlier quoted context omitted.

Totally right, and furthermore, Robinhood is facing some serious solvency issues. Their PR releases claiming this was clearing house related was already highly dubious, and is self-contradicting because they are blaming it on a liquidity issue while saying it's not a liquidity issue. But this is happening at the same time was mass account withdrawals/closures, and we're now learning this not only threatens their gene…

FDIC is for banks. SIPC (of which RH is a member) is for brokerage houses. https://www.sipc.org/about-sipc/

[deleted]

Re: Analysis: Robinhood protected from lawsuits by user agreement, Congress

#199

Post by toast0 » Sat, Jan 30, 2021, 8:58 PM UTC

ditonal wrote: post #104

codesternews wrote: post #74

Earlier quoted context omitted.

This time it is different. Previously they had glitches etc. This time they by choice restricted users which lead their users loose. 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.

Totally right, and furthermore, Robinhood is facing some serious solvency issues. Their PR releases claiming this was clearing house related was already highly dubious, and is self-contradicting because they are blaming it on a liquidity issue while saying it's not a liquidity issue. But this is happening at the same time was mass account withdrawals/closures, and we're now learning this not only threatens their gene…

> Healthy companies don't need to emergency borrow a billion dollars.

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.

Re: Analysis: Robinhood protected from lawsuits by user agreement, Congress

#200

Post by peterthehacker » Sat, Jan 30, 2021, 9:00 PM UTC

austhrow743 wrote: post #183

abotsis wrote: post #51

Why? Surely them blocking buys for any individual (or even small group of them) is within their rights per their customer agreement. But blocking them en masse is market manipulation, and their tos isn’t going to protect them from that.

Market manipulation requires intent to artificially change the stock price. It isn't everything that changes the stock price otherwise any large organisation or person with clout would be constantly market manipulating all day long.

The argument that Reddit/WSB users manipulated the market is a more difficult one to make vs. the argument that RH manipulated the market when they restricted their users to only sell GME. If they stopped both buying and selling then GME would not have dropped the way it did.

RH CEO’s denial said they made the move to protect the firm and their customers, but blocking buying and selling would’ve given them the protections without the risk of causing a change in the price. So it’s hard to believe that RH’s intent was anything but pushing the price of GME down to cover their customer’s short position.