What happened this week
blog.robinhood.com
What happened this week
1–10 of 18 posts
Re: What happened this week
#2> 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?
Re: What happened this week
#3I'm no trading expert, but why allow sales then? Wouldn't it have had similar implications?
Re: What happened this week
#4> 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. H…
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.
Re: What happened this week
#5I'm no trading expert, but why allow sales then? Wouldn't it have had similar implications?
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.
Re: What happened this week
#6> 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. H…
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 collater…
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?
Re: What happened this week
#7Earlier quoted context omitted.
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 collater…
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?
Yes, I believe they would.
Re: What happened this week
#8> 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. H…
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 collater…
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.
Re: What happened this week
#9Re: What happened this week
#10Earlier quoted context omitted.
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 collater…
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 processe…
I see people who are knowledgeable about the financial system overwhelmingly agreeing that this is true. Here is a source from Money Stuff, which I think most people would consider very credible: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... (the "Why did Robinhood stop them?" section)
I definitely agree that this could use reform, but I don't know enough to say exactly what should be changed. The ideal solution would be to make clearing instant instead of T+2, but who knows if that will actually happen.