Robinhood, in Need of Cash, Raises $1B from Its Investors • Hacker News Board

Re: Robinhood, in Need of Cash, Raises $1B from Its Investors

#451

Post by jiofih » Fri, Jan 29, 2021, 7:34 PM UTC

hcknwscommenter wrote: post #441

franklampard wrote: post #421

Earlier quoted context omitted.

You have many misunderstandings and I am happy to clear them. 1. No, not all Robinhood accounts are margin accounts, a simple google search tells you that: https://robinhood.com/us/en/support/articles/robinhood-accou... 2. Yesterday, all Cash accounts were disabled from trading GME, that’s a fact and please defend that again. 3. Trading with a margin accounts and trading on margin is different. I can have a margin ac…

You are papering over the fact that even cash accounts require Robinhood to have sufficient cash to cover amounts liable until the trade is actually settled. There is an entire web of relationships between DTCC, robinhood, bank LOCs, etc. that make robinhood's capital requirements explode when GME stock explodes 1000% up and becomes the most traded share in the entire universe of stocks.

GME’s market cap is still in the low billions after the bubble, it’s not even .1% of the market.

Re: Robinhood, in Need of Cash, Raises $1B from Its Investors

#452

Post by vkou » Fri, Jan 29, 2021, 7:55 PM UTC

exclusiv wrote: post #377

vkou wrote: post #53

Earlier quoted context omitted.

As I understand it, even for executing regular buys, the settlement houses require RH to maintain a large deposit of dollars as collateral. This collateral requirement goes up when a stock becomes heavily traded, or more volatile. Because of the insane volume & volatility of GME, RH's cushion of collateral was exhausted (And they've now replenished it, by borrowing & raising money.) The reason that sells were permitt…

So this seems like a pretty easy way to stop a stock - change the collateral requirements. From what I heard from the WeBull CEO, what you described sounds right. And he said the whole market could not function. So in order for other stocks to trade (which have much lower requirements) they had to shut down several stocks. So I'm sure the big shorts would know that if they get super screwed (price going higher and hi…

No, the risk is that Robinhood's users won't be able to pay, which would put Robinhood on the hook. The settlement house will only trust Robinhood as far as Robinhood has collateral.

This is not a problem for most stocks, because they have a balanced flow of orders (for every one of RH's customers buying, there's another one selling, which raises and then lowers their collateral requirement.) This is not a problem for bigger brokerages, who have larger cash reserves, to keep as collateral.

The tl;dr is that if you're going to do an uncoordinated mob short squeeze, with unprecedented volume and volatility, don't use a discount broker to do it.

Re: Robinhood, in Need of Cash, Raises $1B from Its Investors

#453

Post by sangnoir » Fri, Jan 29, 2021, 8:07 PM UTC

jiofih wrote: post #451

hcknwscommenter wrote: post #441

Earlier quoted context omitted.

You are papering over the fact that even cash accounts require Robinhood to have sufficient cash to cover amounts liable until the trade is actually settled. There is an entire web of relationships between DTCC, robinhood, bank LOCs, etc. that make robinhood's capital requirements explode when GME stock explodes 1000% up and becomes the most traded share in the entire universe of stocks.

GME’s market cap is still in the low billions after the bubble, it’s not even .1% of the market.

In a volatile market - a single share may trade many times a day - and Robinhood has to have enough to cover each trade (not share) - so the market cap is not a ceiling. It's likely RH didn't have enough money to adequately cover the levels of volatility (or they projected they wouldn't, soon).

Re: Robinhood, in Need of Cash, Raises $1B from Its Investors

#454

Post by sangnoir » Fri, Jan 29, 2021, 8:13 PM UTC

billmalarky wrote: post #428

jasonhoch wrote: post #427

Earlier quoted context omitted.

If you're a buy and hold investor... why in god's name would you use Robinhood?

Serious question, why would you not? It's designed to be incredibly convenient and the trades are zero commission. Why not use Robinhood to buy and hold, if you're just making simple plays (buying ETFs etc) and don't need high performance (ie executed immediately etc) trades?

> Serious question, why would you not?

My gut feeling is that RH is designed to maximize the number of trades people make, as a core "engagement" metric. A few examples: 1) The UI is designed to induce in the user the feeling that something is happening, always - the graphs are not to scale, so small swings in price appear bigger than they really are. 2) The "Top 10" and community trends feed will trigger FOMO, and again will likely result in more day-trading.

In all, RH has too much "clutter" and noisy notifications for a buy and hold investor. Most platforms are now commission-free.

Re: Robinhood, in Need of Cash, Raises $1B from Its Investors

#455

Post by billylindeman » Fri, Jan 29, 2021, 8:35 PM UTC

ajsharp wrote: post #24

"To continue operating, it drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin, or lending, requirements from its central clearing facility for stock trades, known as the Depository Trust & Clearing Corporation." Non-zero chance had they not haulted trading on those symbols they would've been insolvent by close of trading today, depending on the size of the…

I pulled my settled cash out yesterday and will be pulling out the rest of my cash ASAP.

They lost my trust yesterday.

Re: Robinhood, in Need of Cash, Raises $1B from Its Investors

#456

Post by beagle3 » Fri, Jan 29, 2021, 8:40 PM UTC

sidibe wrote: post #445

beagle3 wrote: post #433

Earlier quoted context omitted.

CNBC reported Melvin Capital closed the shorts, and then it turned out they didn’t. This is very likely criminal market manipulation, but I’d be surprised if it ends up with more than a slap on the wrist to anyone. And ... at the time I wrote that, si/float was still more than 100%, so - no, they most definitely not. (Am on phone now, will check later)

The idea that the shorts are for sure going to pay a higher price is super misleading and is the fuel for this ponzi. Everyone already knows the value of Gamestop is a tiny fraction of its price, so even if some shorts have to close, others will open short positions. To the people who believe they won't be the bag holders because of high short interest, this basically means the stock will always go up, and when enoug…

Yes, but that’s not more ponzi than e.g. Snapchat which expected to never make money in its filing. When you buy it, you expect to sell it to a bigger fool, or for a miracle. GameStop is the same; they are both doomed, and will be worth 0 sooner or later unless a miracle happens.

The only reasonable valuation for either is (assets-liabilities), or liquidation value. All other value is based on a belief something will happen. In GameStop, it’s the belief that there are buyers of last resort who would pay almost any price - which is likely true for some of the shorts. Whether it is 1% or 10% or 100% is what these people are betting on.

And the call from industry to pause trading to regroup against Reddit indicates it’s likely a lot more than 1%

Re: Robinhood, in Need of Cash, Raises $1B from Its Investors

#457

Post by lovehashbrowns » Fri, Jan 29, 2021, 9:02 PM UTC

nikanj wrote: post #429

lovehashbrowns wrote: post #301

Earlier quoted context omitted.

So apparently, a buy trade takes two days to clear. It just looks instant on the app. During the time it takes for your cash to go to rh to dtc to the other end, robinhood has to put up a collateral for some guarantee that the cash for the transaction will exist. Usually this collateral is between 1-3%. Because of how volatile gme is at the moment, dtc upped the percentage to 100%. So for every buy, rh has to put up…

So in left pocket RH has $200 from me, cash. And RH can't make a buy order for $200, because they need $200 in right pocket as collateral? Why not just use my cash as the cash collateral? I still don't see how they need a billion-dollar cash hoard for non-margin buyers.

Lots of things can happen to the cash in your account between the time you hit buy and when that cash finishes transferring to DTC. DTC is trying to guarantee that the person selling the stock that you are buying is going to get their money. DTC does that by telling Robinhood to have collateral in case something happens to the cash that you are using to buy the stock. Something like Robinhood going bankrupt, for example.

Because what happens if Robinhood can't, for whatever reason, put up the cash for the buy transaction? Some one still has to pay up. The problem is that eventually these failures start piling up moving up the system until eventually the government has to step in and hand out bailouts again. Collateral is a way of trying to prevent that. If Robinhood goes bankrupt, and they're dealing with this highly volatile stock, well at least they have enough collateral to cover transactions and the failure stops with Robinhood instead of moving up the system.

This is all info I've gathered from reading around and I'm not an expert. Please anyone feel free to correct anything I'm saying.

Also you kinda saw a hint of this when there was that Robinhood bug with infinite leverage. People turned $5,000 into tens of thousands via the glitch, and at the end of it all, Robinhood was one the that had to pay up for these glitches. Then they had to start hunting people down to try and recover the debt.

Someone, at the end of the day, is going to pay for any of these transactions. DTC is just trying to ensure that the bag holder stops with Robinhood.

Re: Robinhood, in Need of Cash, Raises $1B from Its Investors

#458

Post by fire7000 » Fri, Jan 29, 2021, 9:10 PM UTC

sangnoir wrote: post #454

billmalarky wrote: post #428

Earlier quoted context omitted.

Serious question, why would you not? It's designed to be incredibly convenient and the trades are zero commission. Why not use Robinhood to buy and hold, if you're just making simple plays (buying ETFs etc) and don't need high performance (ie executed immediately etc) trades?

> Serious question, why would you not? My gut feeling is that RH is designed to maximize the number of trades people make, as a core "engagement" metric. A few examples: 1) The UI is designed to induce in the user the feeling that something is happening, always - the graphs are not to scale, so small swings in price appear bigger than they really are. 2) The "Top 10" and community trends feed will trigger FOMO, and a…

They also offer 2.5% on margin which is a pretty decent rate

Re: Robinhood, in Need of Cash, Raises $1B from Its Investors

#459

Post by infinite8s » Fri, Jan 29, 2021, 9:14 PM UTC

franklampard wrote: post #411

nrmitchi wrote: post #401

Earlier quoted context omitted.

Being prevented from being able to buy a stock if the brokerage can not afford to legally sell it to you is the expected outcome. If you want to argue that Robinhood should have been bigger, and thus had more flexibility and been able to handle this, sure. Why not. But then you're complaining that the company you're dealing with isn't big enough to float your risky position. Would you have preferred the alternative w…

> float your risky position Nobody is complaining Robinhood disabled naked calls/puts on volatile stocks. How is not illegal for Robinhood to disable cash accounts from buying stocks? Your cash is transferred and deposited. If the stock price crashed, it crashed, investors still own the stocks with their cash paid.

Dodd-Frank and rules around trade settlement - in particular brokers have to post collateral based on complicated calculation to the clearance firm (DTCC) until the trade clears (usually T+2). Unfortunately it looks like DTCC increased that percentage to 100% for a few names (like GME) - https://twitter.com/KralcTrebor/status/1355172567242469377

Re: Robinhood, in Need of Cash, Raises $1B from Its Investors

#460

Post by infinite8s » Fri, Jan 29, 2021, 9:17 PM UTC

jiofih wrote: post #450

nrmitchi wrote: post #440

Earlier quoted context omitted.

I'm not spending the time to watch some Youtube video you're posting, especially if you don't link to a specific timestamp/context. I highly suspect that the link you're saying is that a broker would be responsible to cover loses on trades they made if the clearing house does not; not that the brokerage is required to accept unlimited risk just because someone wants them too. > But that is Robinhood's liquidity issue…

> services that they may not be able to actually cover. That’s exactly the point the parent commenter is making: there is nothing to cover for stock purchases on accounts with a balance. No liquidity issues can arise from that. You can say it’s easier to just turn off everything at once, but there is no actual reason to prevent stock purchases without margin, the buyer bears all risk.

Except for rules put into place by Dodd-Frank make that a legal requirement for all brokers (to remove systemic risk from DTCC). You can argue that it doesn't make sense for fully covered cash accounts - but it's not a decision Robinhood could make on their own - they are mandated by law to post that collateral from their own operating capital, and not use client assets (like the cash in their account).