Robinhood Is Said To Draw On Bank Credit Lines Amid Tumult (bloomberg.com) 95
An anonymous reader quotes a report from Bloomberg: Robinhood, the trading app that's popular with investors behind this month's wildest stock swings, has drawn down some of its credit lines with banks, according to people with knowledge of the matter. The firm has tapped at least several hundred million dollars. The company's lenders include JPMorgan Chase and Goldman Sachs, according to data compiled by Bloomberg.
"As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits," Robinhood said in a blog post Thursday. "Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today." In an interview late Thursday on CNBC, Robinhood Chief Executive Officer Vlad Tenev said the deposit requirements govern how much leeway the firm can give to customers who are buying stocks.
"We pulled those credit lines so that we could maximize within reason the funds we have to deposit at the clearinghouses," Tenev said. The extreme volatility "generated substantial risk" for brokerages, resulting in the need for stricter requirements on those firms, according to the Depositary Trust & Clearing Corp. "When volatility increases, portfolio margin requirements increase too," Wall Street clearinghouse DTCC said in an emailed statement.
"As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits," Robinhood said in a blog post Thursday. "Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today." In an interview late Thursday on CNBC, Robinhood Chief Executive Officer Vlad Tenev said the deposit requirements govern how much leeway the firm can give to customers who are buying stocks.
"We pulled those credit lines so that we could maximize within reason the funds we have to deposit at the clearinghouses," Tenev said. The extreme volatility "generated substantial risk" for brokerages, resulting in the need for stricter requirements on those firms, according to the Depositary Trust & Clearing Corp. "When volatility increases, portfolio margin requirements increase too," Wall Street clearinghouse DTCC said in an emailed statement.
great, how can that be used? (Score:3)
Robin hood has shown itself to be acting in bad faith, how can their taking out credit be used to destroy them? It's no more than they deserve.
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If I understand their (probably deliberately) complex language, they've recalled money they were owed (and/or stopped offering to lend it) so that they can put up enough "float" in the clearing houses they use. This, I think, makes it harder for some people to use RH because they rely on credit to do so (otherwise those other people would have to pre-pay a float to RH in order to trade - that's money they either don't have, or don't want to use because it means they have less to trade with).
In short, I thin
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If I understand their (probably deliberately) complex language, they've recalled money they were owed (and/or stopped offering to lend it
A credit line is a standing offer to lend a certain amount of money. You draw down the credit line by accepting the offer.
Bank B offers a $10m credit line to Company C. C says 'thanks, we don't need the funds now but knowing that they're available reduces our financial risks and makes other things we're doing easier as a result'. C probably pays B a nominal sum for making this facility available.
C needs cash, so they go to B and say 'About that $10m? We need $5m of it now.'
B hands over $5m and C now starts
I don't understand all the tricks (Score:3, Insightful)
This normally isn't a problem since stocks don't go up and down as much as Gamestop, AMC, Tootsie Roll, etc. It all washes out. But now it is a problem.
If this is correct than Robinhood could argue they're blocking tradin
Just to claify (Score:2)
I do see your point about Robinhood being at risk though. What I don't get is why they don't just say "We're cutting these guys off because it's a risk to us". Are they really just that bad at messaging?
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It's unlikely that your parents have their retirement money in a hedge fund.
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*Individual* investors rarely choose a hedge fund directly in their 401K.
The largest class of investors in hedge funds is large pension funds, such most state retirement systems. I don't have recent numbers handy, but a few years ago 8.7% of public pension funds were invested in hedge funds.
The reason for that is right there in the name "hedge fund". The teachers and firefighters retirement system needs to be able to pay out regardless of whether the market is up or down. Hedge funds, as the name suggests
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Interesting.
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Best way to go bankrupt: Tell people you're about to go bankrupt.
Creditors will all pull their money out of you and nobody will lend to you again for a very long time.
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Indeed that is what happens. They try to bundle up as many trades as possible to reduce fees, while charging all their customers the fees individually. It's a way to skim a profit off but carries risks that are normally averaged out over time, except when Gamestop goes nuts and they are suddenly faced with huge losses.
Re:I don't understand all the tricks (Score:5, Informative)
What *does* happen is that, if for some reason you don't pay RobinHood, they still have to pay the counter-party. They would, under normal circumstances, sell the stock you just bought, use those proceeds to make the payment and bill you for the difference
But if you buy the stock and it goes to zero and the you don't pay RobinHood, they have no recourse. Because of this, the clearing house makes them keep some amount of money on deposit. That amount is now higher so that, if this does happen, the clearing house makes sure they get paid even if RobinHood were to get bankrupted by it.
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They'll avoid saying that at all cost. Admitting their financial position is shaky would be a recipe for disaster for Robinhood. That's how bank runs start.
Shows they are acting in not going out of business (Score:1)
The Redditors are doing what's called "buying in margin".
That means they using $1,000 of their money to buy $10,000 with of stock. They are borrowing the other $9,000 from the brokerage.
With lots of customers borrowing a lot of money from them, Robinhood ran out of cash to lend and had to borrow themselves.
What you call "acting in bad faith" is Robinhood saying "we can't loan you any more money to buy GameStop with". Because they didn't have any more money to loan out.
Worse, the price of GameStop stock wi
Re:Shows they are acting in not going out of busin (Score:4, Insightful)
> Well enough to exploit those irrational positions and make a lot of money off them
They're buying a $15 stock for $300. They aren't making money from that.
Who is making money is people who owned GameStop before this started. Both those shorts who failed to backstop their losses with a call option and the Redditors are losing.
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Some of them bought at over $400.
Most at over $340.
It's currently below $300 and headed to about $15 within two weeks. They're still holding.
You don't make money buying at $340 and selling at $240, or wherever they end up selling.
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> Because unless you have some kind of supernatural power, you can't possibly know the price the WSB traders bought GME a
I have the power to read Reddit. It appears you have the same power, since you're reading Slashdot. You can head over and see what they are doing in real time if you want to.
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What makes you say the r/wallstreetbets customers of Robinhood don't understand the game? Seems to me those guys understand the game quite well. Well enough to recognize that some big players in the market had made some very irrational bets, leaving themselves vulnerable.
Some of them are. People getting in now, buying a hugely overvalued stock because they think it might spike higher are playing with fire.
There is a point when it stops being a smart spot that hedge funds are overextended and more like a pump and dump scam. That's not the fault of the people who came up with the original idea.
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There is a point when it stops being a smart spot that hedge funds are overextended and more like a pump and dump scam.
That point was around 2pm on Wednesday. Maybe sooner - I don't think there was a sensible point any time on Wednesday to buy, and holding existing investments after that point made sense only if you genuinely thought you could break a hedge fund and were willing to lose your own cash to achieve that.
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The Redditors are doing what's called "buying in margin".
That's foolish of them, but it's also bewildering that Robinhood would support this.
That creates a massive exposure for Robinhood even in normal times, and an entirely unnecessary one. "Add funds to your account. Ok, you can now trade as you wish with those available funds" is a pretty easy message for customers.
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Loaning money isn't *necessary*, but it makes a lot of money.
It's also expected of a brokerage, just like you'd expect a retail bank to handle car loans.
Good thing or bad thing? (Score:1)
Since RH was portrayed as more evil than Darth Vader yesterday, I'm guessing bad.
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You could argue that they acted to stop trades to protect their financial position, but they do seem to have had it covered the whole time. I suppose to be fair if they hadn't acted it could have continued to get worse until they were unable to meet their obligations.
What's the law on this? Would they have been obligated to prevent that happening?
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What's the law on this? Would they have been obligated to prevent that happening?
I'm pretty sure the SEC has to make that call.
Re:Good thing or bad thing? (Score:5, Insightful)
I still think fairness in the market place dictates all traders should be able to purchase a long position in cash or a fully cash secured short like a short PUT. What these brokers and clearing houses did yesterday should be prevented in the future.
I totally get not allowing tickers to with tiny floats, thin trading, highly usual options interest, and heavy short positions to trade on margin (ie require 100% equity).
I can also get suspending access to short instruments like directly shorting the stock or selling short CALLs without them being covered by actual owned shares. Even doing what RH is supposedly doing and offering these with 300% margin requirements poses some risk to them. I don't think fairness can require one party to take another parties credit risk.
Shorting has an important function in the market to help drive asses allocation, and credit is fundamentally required for some shorting activities; but we don't need to force the availability of credit, to enable that. Having 100% of the float tied up in short interest isnt needed for the market place to function. If brokers dont like the risk profile traders and funds should just be out of luck.
The problem is the clearing house gang could potential default on the brokerage houses even if long positions. Of course that gets down clearing tades before the delivery of the shares is truly certain. We could go back to shifting actual paper tokens around or some kind of block chain implementation to replace it but the HFT boys would no like having to wait whole seconds to find out if a trade will clear. I kinda don't see a real problem there either.
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I suppose the problem is that stocks change price rapidly so if there was a delay to wait for the payment to be processed by the time the buy could be made the original price would be long gone. Even if you deposited cash with them it wouldn't be fast enough for what sites like Robinhood offer.
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Re:Good thing or bad thing? (Score:4, Interesting)
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Individuals who use brokerages are protected because the brokerage has SIPC insurance. Your trades go through a clearing house which charges the users fees and the clearing house has large cash reserves to deal with in case somebody does default. Finally, the exchanges themselves have their own insurance and cash reserve
look for cheap, you get cheap (Score:5, Insightful)
real brokers would have had enough funds put away so as not to keep you from trading while they run out to beg for cash on the street corner
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They don't, that's the problem. That's one of the reasons for the 2008 financial crash. Periodic "stress tests" keep showing that institutions still don't have enough capital to avoid going under.
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Periodic "stress tests" keep showing that institutions still don't have enough capital to avoid going under.
Citation needed for clarification. European banks may be a bit wobbly, but America's big banks seem to be steady. [economist.com]
Article may be paywalled, so to pulling out a few relevant bits:
So are too-big-to-fail banks really safer? The latest stress tests conducted by the Federal Reserve suggest the answer in America is “yes”. ... This year’s scenario implies cumulative losses on loans of about 10%, above the 7% loss rate actually experienced during the subprime crisis.
Happily, the Fed concludes, in this u-shape scenario the banking system’s total core-capital ratio would fall from the present 12% to a still-passable 8%. Some banks might have to limit the dividends they pay their shareholders in order to bolster their capital positions—indeed, on June 29th Wells Fargo said it would have to cut its payout. But this is a small price to pay.
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I think the bail out of the banking industry by Obama administration shows that once the banksters are allowed to gamble in the market along with the rubes that normal assumptions about stability go out the window.
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https://en.wikipedia.org/wiki/... [wikipedia.org]
I guess this is not routine for RobinHood, (or even whether they can borrow in that market), but how uncommon is it for them to borrow from banks? Can't tell if this narrative of it being a crisis brought on by them betraying their users is true, or if it's just being presented as such.
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Re:look for cheap, you get cheap (Score:4, Informative)
Banks borrow money (from consumer deposits, issuing bonds, the federal reserve, et cetera) and then they lend it out at higher rates. If somebody doesn't pay the bank, they still have to pay their own creditors. A bank is insolvent when enough borrowers don't pay that the bank now has less assets than it owes
In order to avoid this banks have "capital reserve ratios" usually around 10%. So if I had US$1M and want to start a bank, I keep my US $1M aside in case something bad happens and I borrow US$10M which I then lend out. As long as about 90% of my loans "perform" (I get paid back), the bank is solvent. If less than that pay back (say during a huge financial crisis), suddenly, I may have $200k in bad loans out, $800k in good loans and now the bank is insolvent.
Of course if I can *pretend* that the 200k of bad loans are "performing" and continue to do business. Maybe I'll make enough profit to get back into the black. But if the FDIC finds out, they will shut down my bank immediately to ensure the problem doesn't get worse
Increasing the capital reserve requirements to 20% would make it harder for this to happen but would also mean I can only lend out $5M and make half the profit. So I would then want to charge higher interest rates and less consumers/businesses could get loans which would have a negative economic impact. So it's a careful balancing act
The other challenge is that I don't want my US$1M just sitting there but I have to "reserve it" so I would normally buy something "safe" like say US government bonds with it. Or maybe something "very safe" like the collateralized bonds of sub-prime mortgages. The latter may turn out to be a mistake. Another part of the discussion is how "safe" things have to be for the money to be considered "reserved."
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In this case, I can't think of anything "safer" than cash in a fucking safe.
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Periodic stress tests are good.
But having cash to cover all contingencies is actually bad. Yes, so called "six sigma events" will happen, but holding cash for all possibilities is wasteful.
You need to personally have an "emergency fund". And many suggest not even paying debt before filling your stash. But let's take it to the extreme. You can have an accident that insurance will not cover, your 401k can go bust, you can be unemployed more than short term disability will pay, social security can go insolvent
What does this mean, exactly? (Score:4, Interesting)
I'm pretty ignorant about the logistical operations of the financial world. My basic understanding of brokerage is that a broker just buys and sells on behalf of a client, then takes a small fee off the transaction for business costs. Why does a brokerage firm need capital if they're not using any of their own during trading?
To dive deeper into the question, I found this article on the NYT this morning [nytimes.com] that says the following line: "[High volume trading] has put a strain on Robinhood, which has to pay customers who are owed money from trades while posting additional cash to its clearing facility to insulate its trading partners from potential losses." What's a clearing facility, and what does "insulate its trading partners from potential losses" mean? How can they take a loss when they're not supposed to be financially involved in the investment?
Re:What does this mean, exactly? (Score:5, Informative)
Payments are not instant but they want trades to be as fast as possible. So when a trade is made it doesn't get paid immediately, the payment probably gets bundled up with a bunch of others and takes a while to clear.
The clearing house has to have capital in case a payment fails for some reason. They can't say to the person who sold the shares "sorry our guy didn't pay, they stole your stuff", they have to pay from their own money and then chase the buyer. So when the volume of trades is very large they need a very large amount of capital to cover a large proportion of them going unpaid.
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I would not be surprised if their user agreement didn't explain something to that effect.
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That is the way it works.
But it is not the way it should work.
With modern technology, transactions should be able to clear in seconds, not days.
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these organizations use modern tech, it's just impossible to do real time trading and send real dollars between banks in real time
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No one is carrying suitcases of $100 bills from one bank to another, it's all photons on the fiber. There is no reason why trades can't be processed in seconds except for ossified processes. All of the big banks have their "private banking" operations which launder money for the rich and powerful, a single deposit can set off a cascade of automated transactions that splits up the money and transfers it through a dozen banks in eight countries in half an hour.
Re:What does this mean, exactly? (Score:5, Informative)
OTOH, there is no reason to allow failure to deliver anymore as the shares can be immediately deposited at the clearinghouse. The cash on the other hand is harder.
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Re:What does this mean, exactly? (Score:5, Informative)
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I deposit $100 at Robin Hood (say via an ACH transaction). Robin Hood does *not* get paid immediately.
No. In the UK that takes anything up to 12 seconds. Settlement at Robin Hood's bank happens three times a day.
But let's assume you're not using FPS or SEPA. Let's assume you deposited $100k and needed a SWIFT transaction, or use CHAPS or BACS.
Well, SWIFT will use the CHAPS RTGS system so you've got real-time payment and settlement on both of those.
BACS transfers are the only one with any delay, and who the fuck is using BACS for anything like this?
But then, you're in the US and have primitive payment system
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I don't use Robin Hood. I just looked at their web site and they don't accept SWIFT payments. They are expensive and inconvenient to process.
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Robin Hood can decline to make purchases using uncleared funds, and should if that's creating an exposure they don't want.
The US doesn't have anything equivalent to FPS? Weird.
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There are private companies that do instant transfers (including square cash which is, shockingly, free) for smaller amounts of money.
So you have to trust your money to a non-bank service that doesn't provide you with adequate protections because your banking system lacks basic banking capabilities? That actually adds delay to getting cash into your bank?
Interesting.
Here's how it works in sensible places: You tell your bank "please transfer these funds to that person". 12 seconds later that person can access those funds and do with them whatever they choose.
Fraud? Of course there's fraud. However..
https://www.statista.com/stati... [statista.com]
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So they're still doing batch processing, like in the 1970s? Somehow that doesn't surprise me.
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It's significantly cheaper
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If payments to clearing houses were instant, it would exacerbate Robin Hood's dilemma. The risk to brokerages is that they execute a transaction on behalf of a client and then don't get paid. Since most deposits are now
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Or a bigger problem is someone shorted and for whatever reason can no longer obtain the shares. You bought 100 shares of GME for $X from them and they aint got, so now house has to go obtain them from somebody else for $Y...
The whole thing is really fixable two ways. Neither of which will happen because the HFT guys have to much influence.
We could trade on a clock. Orders get entered, every Xmin parties are paired with counter parties orders are settled are either canceled if there is no counter party or
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Re:What does this mean, exactly? (Score:4, Informative)
the clearinghouses guarantee the transactions that they are responsible for. to do that they charge member institutions fees and require that they have escrow funds deposited to guarantee the trades that their customers make. trades happen during the day but the money is paid at night. bad things can happen if institutions won't pay each other
These guys are dirty (Score:5, Insightful)
Something big is going to be exposed soon, I can just feel it coming. It would have worked if not for those meddling kids.
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Slashdot has now set that comment so you can only downvote, not upvote. This is to protect their float.
RH corporate policy (Score:2)
Put stock choices in the hands of the fickle masses and get foreknowledge on market chaos. Basically a viral influencer and crowd sourced pump-n-dump.
Re: RH corporate policy (Score:1)
Yes but this time it was the hedge fund big money guys who got burned instead of the opposite which is the traditional norm.
Fuck em if they don't like it when the tables are turned.
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Who owns Robinhood? (Score:3, Interesting)
Either way the elites are taking it in the shorts and are going to try to make this go away as quickly and quietly as possible. It tickles my joy button that the press decided this is sexist and racist. Proof that it hit someone important where it hurts. In conclusion, memory hole in 3... 2...
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we need to know who owns the platform and what their conflicts of interest are.
Hmm. It's more complex than that.
I could 100% own a company and change that company's behaviour entirely and only because someone else makes me an offer I want to accept.
That offer could be financial, in-kind, related to the company and its operations, personal in nature, and/or in the form of '..and bad thing won't happen'.
I still own the company, but the company's direction just changed and no, I'm not going to tell you where that $400m in my bank account came from.
How you would name it... (Score:3)
If something is called Robin Hood, it has to rob the rich people and give money away to the poor.
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If something is called Robin Hood, it has to rob the rich people and give money away to the poor.
And your point? I'm pretty sure there are a lot of "rich people" hedge fund managers that can confirm the shit out of your statement right about now...
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it has to
Nonsense, there are a lot of things named the opposite of what they actually are, like Lucky cigarettes and Whopper burgers.
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If something is called Robin Hood, it has to rob the rich people and give money away to the poor.
How do you explain Robin Hood flour [robinhood.ca]?
they are owned by big investors (Score:2)
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Robin Hood needs to put up more cash because so many people are using it to buy the highly-volatile GameStop stock. They didn't have the cash. Now they do and they've deposited that cash at the clearing house and are now in a financial position to facilitate those transactions.
Sure its possible that those additional cash requirements were influenced by those with a vested interest in seeing GameStop stock decline. But that's indirect pressure on Robin Hood, not a conspiracy of co
someone did an oopsie (Score:2)