It’s Time for Real Time Settlement

It's possible I was confused.. I thought you were complaining about the inequality between high speed traders and mere humans clicking on web pages..

I'm asserting that given how volatility and RH's overall situation was going, it wasn't unforseen. RH let itself become a counterparty risk, and therefore the clearinghouse stepping in was far from unforseen.

And since they had to negotiate down their deposit by half, raise money, liquidate client positions, and still halt buying, it's pretty clear that they were in way, way, way too deep.

> It's not obvious to me that Robinhood over-leveraged itself though. If you are seeing some reporting on this that says otherwise, I would love to see it.

They had to negotiate down their deposit from $3B to $1.4B and still had to liquidate client positions to meet that deposit and avoid going into receivership. That's a classic consequence of being over-leveraged.

Since these were deposits, this means that RH literally didn’t have the cash on hand to settle all their customer’s trades in GME alone, and (I presume) counting on sells to happen within the settlement window. That’s the definition of over-leveraged.

> I'm just not sure how you can be so confident that the proportion of margin trading to non-margin trading was high enough that we can attribute most of the problem to the margin trading.

Great point. I'm assuming that it's much higher for RH because of both who they attracted, and because they make it very easy to get a margin account. I'd love to see real numbers though.

> That's exactly my point. If the margin trading was the primary source of problems, it seems like RH would have just limited margin trading instead of limiting all buys (whether on margin or not). Doesn't the fact that they didn't make this distinction suggest that the margin trading wasn't a disproportionate factor?

Once your clearinghouse is demanding a deposit greater than your liquid reserves, limiting margin trading is not enough anymore. Eliminating margin before that would have reduced the outlay in general (as I mentioned previously), and might have also done a lot to reduce market volatility and calm DTC. But they waited long enough that it did not matter.

Robinhood Made Nearly $700 Million By Selling User Data To Hedge Funds

RobinHood is the Facebook of investing. There’s a reason it doesn’t charge you for trades. It sells information about your trades instead. It’s far more lucrative and explains why it’s willing to stop you from trading since you’re not really a customer-just a user/data point

Robinhood has long branded itself as an accessible platform that provides free financial services for its users. Its mission statement includes a pledge to “democratize finance for all.” But the company makes money by selling its order flow — information about user transactions — to third party clients who actually enact trades with access to user data.

Trades may be commission free for Robinhood users but they are actually sold to “market makers” that often used their position as the middle man to generate profit, according to the Financial Times. Most of these “market makers” are hedge funds or other institutional investors that financially benefit from more trade and market volatility.

It’s big customer, by the way—the one it cares about more than you—that’s Citadel, which pays for Robinhood’s order flow. It also happens to be the biggest investor in the hedge fund that just got bankrupted by the Game Stop short squeeze on RobinHood.

Robinhood was fined $65 million by the Securities and Exchange Commission (SEC) in December for “misleading statements and omissions” regarding its payment for order flow process. The SEC concluded that Robinhood “deprived” users of $34.1 million after providing their order flow to clients that prioritized higher revenue over providing the best price for customers.

Robinhood’s largest clients for order flow are all hedge funds and other institutional investors according to an SEC filing from 2020. More than half of the company’s market orders were purchased by Citadel Securities — an affiliate of the hedge fund Citadel LLC.

According to SEC filings from 2020, other institutional investors that purchased Robinhood’s order flow included hedge funds G1X Execution Services LLC and Two Sigma Securities LLC along with brokerage firms Wolverine Securities LLC and Virtu Americas LLC.

Robinhood’s terms of service notes that certain content “is furnished by third parties” and specifies that neither the company nor third party provides are liable for damages. The company’s user agreement also requires investors using the app to “authorize or allow third parties” to gain access to services including market data and account information.