GME trading in Robinhood
Jan. 30th, 2021 02:30 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
dennisgorelikRobinhood restricts their users from buying GME stock.
There are couple of conspiracy theories explaining this restriction:
Conspiracy theory #1
Biden administration prohibits GME trading:
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https://stockhouse.com/companies/bullboard/lmnl/liminal-biosciences-inc?postid=32416027
One Reddit user, Odin19199, claiming to be an employee of Robinhood, stated that the company was pressured to halt GameStop trading by Sequoia Capital and the White House. These allegations have not been independently confirmed by Breaking911.
In the post, he alleges that he overheard that “Vladimir, yes founder Vladimir [Tenev], and the C-Suite, received calls from Sequoia Capital and the White House that pressured into closing trading on GME.”
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Conspiracy theory #2
Citadel (Robinhood's stock trading execution partner) wants to penalize GME - to suppress GME price - in order to help Melvin's fund with their GME short position:
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https://news.ycombinator.com/item?id=25945512
beachwood23
Robinhood doesn't actually execute any trades. They sell user's trade orders to Citadel, a trade executor. Citadel then buys the shares on the market, and sells them to Robinhood for a slight markup. It's how Robinhood offers trades for $0 fees. You pay pennies more per share, but don't have to spend $5 per trade.
Citadel, and other trade executors, are refusing to buy shares for retail traders. Coincidentally, Citadel also bailed out Melvin fund for their short position in GME. So, Citadel has an interest in not letting the price go up any further. And citadel controls trade execution for dozens of firms.
This is definitely illegal. But Citadel is betting that the resulting SEC fines from this illegal manipulation will be less than the loss they would get if they didn't suppress the price.
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Actual explanation
Robinhood restricts buying GME because Robinhood has problems with liquidity.
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https://news.ycombinator.com/item?id=25963215
karmicthreat
Because if RH were to collapse the clearing house would be left holding the bag. And clearing houses don't have that kind of money. So DTCC (the main clearing house) going under would stop pretty much all trading in the US.
So the clearing house requires 100% collateral for some stocks now instead of up to 5%. RH can't afford that and GME has been eating up 50% of RH daily trades.
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See also
CNN interviews Robinhood CEO
https://www.towleroad.com/2021/01/chris-cuomo-vlad-tenev/
Vlad Tenev claims that Robinhood has no liquidity problems.
When financial institution publicly claims that they have no liquidity problems - there is a good chance that this financial institution, actually, has liquidity problems.
~~~~~~~~~~~~~~
https://news.ycombinator.com/item?id=25962378
PragmaticPulp
Reading between the lines, they ran out of capital to post the required collateral for the trades.
They've been dancing around the subject because they don't want to trigger a bank run, but this is likely why they had to suddenly raise $1 billion and draw down their credit lines yesterday.
It appears they reached a point where they simply couldn't afford to support the buy orders on the volatile stocks any more. They likely had 2 options:
1) Shut down the entire platform until they could raise enough additional capital to post the required collateral. It's difficult to retain users and raise another round if you literally have to turn your service off on the hottest trading day every.
2) Shut down buy orders on the few stocks that were driving the capital requirements over the limit, at least allowing users to continue to sell.
~~~~~~~~~~~~~~
More explanation: Why Robinhood Disabled Buys but not Sells (Discussion on HN)
There are couple of conspiracy theories explaining this restriction:
Conspiracy theory #1
Biden administration prohibits GME trading:
~~~~~~~~~~~~
https://stockhouse.com/companies/bullboard/lmnl/liminal-biosciences-inc?postid=32416027
One Reddit user, Odin19199, claiming to be an employee of Robinhood, stated that the company was pressured to halt GameStop trading by Sequoia Capital and the White House. These allegations have not been independently confirmed by Breaking911.
In the post, he alleges that he overheard that “Vladimir, yes founder Vladimir [Tenev], and the C-Suite, received calls from Sequoia Capital and the White House that pressured into closing trading on GME.”
~~~~~~~~~~~~
Conspiracy theory #2
Citadel (Robinhood's stock trading execution partner) wants to penalize GME - to suppress GME price - in order to help Melvin's fund with their GME short position:
===
https://news.ycombinator.com/item?id=25945512
beachwood23
Robinhood doesn't actually execute any trades. They sell user's trade orders to Citadel, a trade executor. Citadel then buys the shares on the market, and sells them to Robinhood for a slight markup. It's how Robinhood offers trades for $0 fees. You pay pennies more per share, but don't have to spend $5 per trade.
Citadel, and other trade executors, are refusing to buy shares for retail traders. Coincidentally, Citadel also bailed out Melvin fund for their short position in GME. So, Citadel has an interest in not letting the price go up any further. And citadel controls trade execution for dozens of firms.
This is definitely illegal. But Citadel is betting that the resulting SEC fines from this illegal manipulation will be less than the loss they would get if they didn't suppress the price.
===
Actual explanation
Robinhood restricts buying GME because Robinhood has problems with liquidity.
-------
https://news.ycombinator.com/item?id=25963215
karmicthreat
Because if RH were to collapse the clearing house would be left holding the bag. And clearing houses don't have that kind of money. So DTCC (the main clearing house) going under would stop pretty much all trading in the US.
So the clearing house requires 100% collateral for some stocks now instead of up to 5%. RH can't afford that and GME has been eating up 50% of RH daily trades.
-------
See also
CNN interviews Robinhood CEO
https://www.towleroad.com/2021/01/chris-cuomo-vlad-tenev/
Vlad Tenev claims that Robinhood has no liquidity problems.
When financial institution publicly claims that they have no liquidity problems - there is a good chance that this financial institution, actually, has liquidity problems.
~~~~~~~~~~~~~~
https://news.ycombinator.com/item?id=25962378
PragmaticPulp
Reading between the lines, they ran out of capital to post the required collateral for the trades.
They've been dancing around the subject because they don't want to trigger a bank run, but this is likely why they had to suddenly raise $1 billion and draw down their credit lines yesterday.
It appears they reached a point where they simply couldn't afford to support the buy orders on the volatile stocks any more. They likely had 2 options:
1) Shut down the entire platform until they could raise enough additional capital to post the required collateral. It's difficult to retain users and raise another round if you literally have to turn your service off on the hottest trading day every.
2) Shut down buy orders on the few stocks that were driving the capital requirements over the limit, at least allowing users to continue to sell.
~~~~~~~~~~~~~~
More explanation: Why Robinhood Disabled Buys but not Sells (Discussion on HN)
no subject
Date: 2021-01-30 08:45 pm (UTC)no subject
Date: 2021-01-30 09:16 pm (UTC)Because Robinhood customers operate on margin.
> Did it short GME too?
No.
> Did its client short GME and can't provide the collateral now?
Most likely some of Robinhood clients are in such position now.
They bought GME on margin for too high and now GME dropped.
So the clearing house requires 100% collateral for GME.
100% collateral for GME - is a reasonable requirement, considering that GME price is about 60x overpriced/pumped.
no subject
Date: 2021-01-30 09:36 pm (UTC)Do they? How do you know? Anyway, even if they do operate on margin, if they stock they've bought on margin goes up, there is no liquidity problem.
Note also that buying on margin requires other securities to be held in the account as a collateral.
The only problem would be if they shorted</> GME.
> They bought GME on margin for too high and now GME dropped.
GME dropped after and as a result of RH's restrictions. And why would that make RH want to drive GME price further down?
> So the clearing house requires 100% collateral for GME.
It's not what they did. They stopped all the purchases of GME. Apparently, including the cash accounts.
Robinhood customers operate on margin
Date: 2021-01-30 09:57 pm (UTC)Yes.
> How do you know?
~~~~~~~~~~
https://news.ycombinator.com/item?id=25953780
PragmaticPulp
One of Robinhood’s innovations was that they gave everyone a margin account, but hid the details.
When you transfer money in, Robinhood doesn’t actually get that money until a couple days later. They allow you to buy stock immediately, but that happens (transparently) on margin. Robinhood is loaning you the money to make it happen.
Likewise, when you buy or sell a stock, the trade doesn’t settle for t+2 days. Robinhood again transparently loans you the money while waiting for the stock trade to settle.
If Robinhood exceeds the SEC-mandated limits for margin they can extend, or their creditors decide it’s too risky to continue loaning them the money, the whole show grinds to a halt. They chose to press the pause button on the primary meme stocks driving them toward this cliff. I imagine the only alternative was to hit the pause button on the entire platform until the credit issue was resolved, but it’s much harder to get additional credit when your service has ground to a halt.
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> Anyway, even if they do operate on margin, if they stock they've bought on margin goes up, there is no liquidity problem.
Even if stock does not go down today - it can can go down tomorrow.
So the clearing house requires a collateral for significantly overpriced stocks - in order to cover their risks.
By the way, GME already went down yesterday. So there were margin calls and losses.
There will be more losses from falling GME in the following days.
> The only problem would be if they shorted GME.
You simply do not see other risks. But they exist.
For example, buying GME on margin when GME is high -- allows Robinhood customer to lose more than they have [when GME will fall].
> GME dropped after
Yes.
> and as a result of RH's restrictions.
How do you know that?
Robinhood does not force GME sale if customer's account does not have margin call.
> They stopped all the purchases of GME.
Yes, because Robinhood does not have enough liquidity to support GME trading.
> Apparently, including the cash accounts.
Even "cash accounts" need margin for 2 days, because stock trades are not settled for 2 days.
Re: Robinhood customers operate on margin
Date: 2021-02-01 04:42 am (UTC)> So the clearing house requires a collateral for significantly overpriced stocks - in order to cover their risks.
And the broker passes it through to the clients.
> For example, buying GME on margin when GME is high -- allows Robinhood customer to lose more than they have [when GME will fall].
No, it doesn't. They can't lose more than they've already paid. Short selling is a different matter, there you lose as much as the difference between what you received and the current price, which can be theoretically unlimited.
>> GME dropped after and as a result of RH's restrictions.
> How do you know that?
Becuae they changed the balance of buying and selling. And guess what, next day it went up again.
> Even "cash accounts" need margin for 2 days, because stock trades are not settled for 2 days.
That's exactly why they DON'T need margin.
Re: Robinhood customers operate on margin
Date: 2021-02-01 04:06 pm (UTC)If they just bought stock - yes.
But if they paid for the stock more than they have in their account -- then brokerage may lose money on that.
If new customer sent $10,000 check, bought GME at $300 and then next week GME is at $30 -- then there will be $9000 loss.
If original $10,000 check did not clear -- then $9000 will become brokerage's loss.
Re: Robinhood customers operate on margin
Date: 2021-02-05 07:30 am (UTC)Re: Robinhood customers operate on margin
Date: 2021-02-05 08:25 am (UTC)Yes. They check what is possible to check in a few minutes.
Then they hope that customer will not lose that amount before their check will fully clear.
Trading GME makes it more likely to lose that amount.
> that's a one-time event
... multiplied by thousands of customers that registered on Robinhood in order to buy GME.
Re: Robinhood customers operate on margin
Date: 2021-02-05 08:39 pm (UTC)Re: Robinhood customers operate on margin
Date: 2021-02-05 10:30 pm (UTC)If Robinhood could plan that GME pump-and-dump trading event ahead of time with benefits of hindsight -- then yes -- they would prepare and carefully issue restrictions only to the risky accounts.
But liquidity issues came quite unexpectedly for Robinhood.
Forgive the debt?
Date: 2021-01-30 09:19 pm (UTC)When the client is already in debt -- it is too late.
How would you collect that debt from a student that wasted borrowed money on a pump-and-dump scheme?
Re: Forgive the debt?
Date: 2021-01-30 09:40 pm (UTC)Also, I don't think you understand what a pump-and-dump scheme is. To do that you have to hold the short positions, ideally opened at the top. In the current situation, the pump-and-dumpers got screwed.
Re: Forgive the debt?
Date: 2021-01-30 10:01 pm (UTC)I don't. But Robinhood - does (in form of issuing margin accounts to new users).
> you can always sell customer's stock if the collateral becomes insufficient
If Robinhood customer bought GME for $300/share and 5 days later GME dropped back to $6/share -- what exactly is Robinhood going to sell in order to cover customer's debt they accumulated.
Re: Forgive the debt?
Date: 2021-02-01 04:44 am (UTC)All their GME shares and all their other shares that were used as collateral, in the amount sufficient to cover the losses.
Re: Forgive the debt?
Date: 2021-02-01 09:10 am (UTC)Re: Forgive the debt?
Date: 2021-02-05 07:32 am (UTC)Re: Forgive the debt?
Date: 2021-02-05 08:20 am (UTC)GME was likely to collapse suddenly and massively.
GME fell 2x per day.
Re: Forgive the debt?
Date: 2021-02-05 08:43 pm (UTC)Re: Forgive the debt?
Date: 2021-02-05 10:26 pm (UTC)Pump-and-dump scheme
Date: 2021-01-30 10:04 pm (UTC)~~~~~~~~~~
https://www.investopedia.com/terms/p/pumpanddump.asp
Pump-and-dump is a scheme that attempts to boost the price of a stock through recommendations based on false, misleading, or greatly exaggerated statements.
The perpetrators of this scheme already have an established position in the company's stock and sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.
~~~~~~~~~~
Please note that this definition says nothing about "short positions".
Re: Pump-and-dump scheme
Date: 2021-02-01 04:45 am (UTC)Re: Pump-and-dump scheme
Date: 2021-02-01 05:46 am (UTC)Robinhood did not disable selling GME.
Robinhood only prevented buying GME (when there is a high chance that stock price will drop a lot.
Re: Pump-and-dump scheme
Date: 2021-02-01 06:32 am (UTC)Robinhood GME restriction on buying
Date: 2021-02-01 09:07 am (UTC)But that is besides the point.
Robinhood wants to allow GME buying, but struggles with the liquidity.
Re: Robinhood GME restriction on buying
Date: 2021-02-05 07:33 am (UTC)Re: Robinhood GME restriction on buying
Date: 2021-02-05 08:14 am (UTC)Code that deals with such situations - and differentiates what customers can and what customers do not need collateral -- takes time to write.
When Robinhood faced liquidity issues -- they needed quick solution.
So they temporarily disabled GME buying.
Re: Robinhood GME restriction on buying
Date: 2021-02-05 08:42 pm (UTC)Re: Robinhood GME restriction on buying
Date: 2021-02-05 10:28 pm (UTC)No.
It it brokerage that gets money at settlement.
But customers who sold stock - sees money on his account - immediately (at brokerage expense).
Re: Robinhood GME restriction on buying
Date: 2021-02-06 12:18 am (UTC)Re: Robinhood GME restriction on buying
Date: 2021-02-06 02:02 am (UTC)You cannot extract money [until after settlement], but you can waste money on GME purchase.