Follow Slashdot blog updates by subscribing to our blog RSS feed

 


Forgot your password?
Close
typodupeerror
×
Bitcoin

Robinhood Almost Imploded During the GameStop Meme Stock Chaos (techcrunch.com) 75

Posted by BeauHD from the behind-the-scenes dept.
An anonymous reader quotes a report from TechCrunch: The House Committee on Financial Services released a report late last week offering a harrowing glimpse inside Robinhood during the frenzy around Gamestop stock early last year. The stock trading and investing app was blindsided by the surge in interest from the first big "meme stock" after Redditors and other retail investors rallied around $GME and sent its price into the stratosphere. For Robinhood, which offers individual investors a relatively frictionless way to dive into the stock market, the saga was simultaneously a massive windfall of new users and brand interest and an existential threat that almost did the company in.

House Financial Services Committee Chairwoman Maxine Waters (D-CA) called for a deep dive into what happened behind closed doors, and the new report, "Game Stopped: How the Meme Stock Market Event Exposed Troubling Business Practices, Inadequate Risk Management, and the Need for Regulatory and Legislative Reform," collects the committee's findings. The report, embedded below, is culled from a number of hearings, 95,000 pages of documents and 50 interviews. "My Committee's investigation into the matter showed we need better market regulation to address the troubling business practices that were uncovered during our investigation," Waters said. "Payment for order flow and gamification make it profitable for a new generation of trading apps to push retail investors to make as many trades as possible, making the markets more volatile than ever."

The committee described Robinhood's business as "troubling," citing its preference for aggressive growth without adequate risk management. The report also found that the majority of financial firms the committee examined don't have any plans in place to prepare for another risky phase of "extreme" market volatility. According to the report: "On the morning of January 28, 2021, Robinhood had approximately $696 million in collateral already on deposit with the NSCC, leaving it with a collateral deficit of approximately $3 billion, which it was required to post to satisfy the NSCC's clearing fund requirement or risk being in violation of the NSCC's rules and potentially losing the ability to clear trades for their customers altogether. [President and Chief Operating Officer for Robinhood's clearing operation] Swartwout confirmed that this amount came as a surprise to Robinhood and explained to Committee staff that they had anticipated and prepared for the $1.4 billion of collateral deposit requirements that represent 'core' charges, but because they did not model for Excess Capital Premium charges, Robinhood therefore did not expect and had not arranged adequate funding for the additional $2.2 billion Excess Capital Premium charge. On the morning of January 28, 2021, Jim Swartwout texted Gretchen Howard at 6:29 a.m. EST, writing 'Huge liquidity issue.'" "Ultimately, the company secured a waiver for its collateral requirements, paused some trades and averted disaster but there's no guarantee that history won't repeat itself and shake out a different way," concludes the report. "In light of the report, Waters called for 'significant' legislative reforms to prevent another Robinhood-style near-meltdown."

Further reading: FTX Exploring a Deal To Buy Robinhood
This discussion has been archived. No new comments can be posted.

Robinhood Almost Imploded During the GameStop Meme Stock Chaos More

Robinhood Almost Imploded During the GameStop Meme Stock Chaos

Comments Filter:

  • Meme Stock (Score:5, Insightful)

    by Iamthecheese ( 1264298 ) on Monday June 27, 2022 @11:49PM (#62656274)
    That's how we say "A stock the little people are trading in ways that we consider irresponsible." We can't have that sort of thing in the modern economy. It takes old money to know how to move money. If you let them trade as a group with big money they start to think they're people.

    • Re:Meme Stock (Score:4, Insightful)

      by Powercntrl ( 458442 ) on Tuesday June 28, 2022 @12:29AM (#62656320) Homepage

      That's how we say "A stock the little people are trading in ways that we consider irresponsible."

      The problem is that any market manipulation you allow the little people to get away with, someone with a ton of money at their disposal can do the same thing far more effectively. As a substitute for meme stonks, we'll just use cryptocurrency because they're basically subject to the same market principles.

      Imagine you're you and you're sitting on a truckload of worthless Dogecoin. You'll have to sell it for the current market value.

      Now imagine you're Elon Musk and you're sitting on a cybertruckload of worthless Dogecoin. You can send a few tweets, run some ads, and wash trade (granted that's illegal with stonks, but in the deregulated world of crypto it's fair game) some of your own holdings to create the perception that the coin really is on the rise. You then get to sell your holdings at a significant profit.

      See how that works, now?

      • That's how we say "A stock the little people are trading in ways that we consider irresponsible."

        The problem is that any market manipulation you allow the little people to get away with, someone with a ton of money at their disposal can do the same thing far more effectively. As a substitute for meme stonks, we'll just use cryptocurrency because they're basically subject to the same market principles.

        Imagine you're you and you're sitting on a truckload of worthless Dogecoin. You'll have to sell it for the current market value.

        Now imagine you're Elon Musk and you're sitting on a cybertruckload of worthless Dogecoin. You can send a few tweets, run some ads, and wash trade (granted that's illegal with stonks, but in the deregulated world of crypto it's fair game) some of your own holdings to create the perception that the coin really is on the rise. You then get to sell your holdings at a significant profit.

        See how that works, now?

        LOL. Like pump and dump is a new thing, that only started with Robin Hood and Dogecoin. No, the only new thing here is that now it's not only old money doing it.

      • Re:Meme Stock (Score:5, Insightful)

        by K. S. Kyosuke ( 729550 ) on Tuesday June 28, 2022 @06:17AM (#62656690)
        If millions of "little people" behave in a certain way, calling it "market manipulation" makes about as much sense to me as calling democracy "a dictatorship". (Yes, yes, I'm aware of the "dictatorship of the proletariat". Think classically.)
      • Well, one of those things is an openly organized movement to make legal purchases, the other is a private scheme to defraud the public. Those look like legally distinguishable acts to me.

      • Wash sales of stocks aren't illegal, they just have tax consequences: you can't realize the loss on the sale, the cost basis is adjusted for the loss instead, and the holding period is reset.

        Not properly declaring a wash sale to the IRS (assuming your broker doesn't detect it) and trying to realize a capital loss, OTOH, would be illegal.

    • Re: (Score:3)

      by jandrese ( 485 )
      It depends what you see a stock as. If you think it is a distributed measure of the value a company can bring to an economy then meme investors are wrecking your engine of economic growth. However, if you think stocks are a way for people to make money without having to produce a product or service themselves, then this is just average joes butting in on a rich person game.

    • Re: (Score:2)

      by DrXym ( 126579 )
      It wasn't some vast conspiracy. The "little people" borrowed so much money and it was Robin Hood effectively buying the stock and taking the risk that their books were fucked. So quite obviously they locked it down. The platform's major sin was in trivialising risk & stock market knowledge and not having transparent mechanisms in place to lock things down more quickly.

      • Re: (Score:2)

        by DarkOx ( 621550 )

        Old saying to the effect of - If I owe the bank one hundred thousand dollars I have a problem, if I owe the bank 100 million dollars they have problem.

        In this case RH allowed thousands of people to effectively owe thousands each all leveraged against a handful of the same assets. Their whole business model is basically data gathering off order flows - they certainly could have seen this problem coming. They did not though - and that just makes the bad at what they do!

        You know what is supposed to happen to

      • It was none of these things. TFS states the challenge specifically. Stocks are settled through clearing houses. The clearing house guarantees the transaction even if one party defaults. i.e. if I have paper GME shares that I sell and then never deliver the certificates, the clearing house will ensure that the buyer actually gets their shares. If RobinHood is my brokerage, in the worst case, the clearing house would go buy the shares on the market and demand payment from RobinHood or whatever brokerage.

    • "A stock the little people are trading in ways that we consider irresponsible."

      No, they're stocks that the large players are trading in ways that are irresponsible.

      The little people think they are in on the con, i.e. they are the true marks.

    • from Oxford Languages [oup.com]:

      meme
      /mm/
      noun
      an element of a culture or system of behavior that may be considered to be passed from one individual to another by nongenetic means, especially imitation.
      a humorous image, video, piece of text, etc., that is copied (often with slight variations) and spread rapidly by internet users.

      A bunch of folks banding together to pump-up a stock's value well in excess of what the business fundamentals of the company suggest most definitely does fit the definition of a "meme."

      You aren't noble heroes of the working man. You're just hipsters trying to prove how cool you are.

  • Regulations (Score:4, Insightful)

    by The Evil Atheist ( 2484676 ) on Monday June 27, 2022 @11:50PM (#62656276)
    It's as if letting people who don't know what they're doing rediscover all the mistakes of the past few centuries of stock trading was a bad idea.

    • It's as if letting people who don't know what they're doing rediscover all the mistakes of the past few centuries of stock trading was a bad idea.

      People are just bad at estimating their likelihood of becoming a bag holder. It's like that poll where most people believe their driving skills are better than average.

      • " It's like that poll where most people believe their driving skills are better than average."

        Not only driving, it's the Dunning-Kruger effect.

    • Comment removed based on user account deletion

  • They didn't implode.
    Almost imploding is as good a not coming close to imploding.
    It sounds like they threaded that needle rather well.

    I made a bit of meme stock money at the time, trading it on Fidelity. There isn't a law that you must play meme stocks on Robinhood.

    • They couldn't meet their collateral requirements. In the worst case, they could have been booted from clearing houses and, in that case, wouldn't be able to do business.

      • > In the worst case, they could have been booted from clearing houses
        But they were not. Crisis averted. That is generally thought of a a good thing, unless you're in the business of trying to portray drama in a not very dramatic situation.

        • It's better to not have a crisis than to avert a crisis! Especially since it's not all under RobinHood's control whether or not they would get a waiver. It's not a good way to run a business to find out you are millions of dollars short on required collateral and don't have a plan. However, I agree that the article is way too sensational

          • Having been in a few startups, there always seems to be a strong element of fake-it-till-you-make-it, since capital is at a premium and success is often contingent on showing success. RH's was very public for all the reasons that swirled around at the time, which isn't great because the dirty-laundry got exposed and leads to the sloppy media sensationalisation.

            Where they screwed up I think is that they didn't make it at all clear where the dividing line is between your equity and borrowed money. If you have

  • Had there not been all sorts of illegal shenanigans going on, they'd have crashed and burned.

  • This commentary makes no trading or economic sense. Unless Robinhood was somehow short gamestop shares what risk does it as a broker intermediary have passing trade orders to others? Or is this a smoke screen to assuage hedge funds who were caught in a short squeeze? Really! Can you explain the risk to Robinhood of increased order flow and therefore revenue?

    • Re:Smokescreen?Why is collateral required? What ri (Score:5, Informative)

      by micheas ( 231635 ) on Tuesday June 28, 2022 @02:58AM (#62656466) Homepage Journal

      Because Robinhood was loaning money to traders so that they could buy GME. Deposit $10,000 and you can buy $20,000 in GME

      Because GME was spiking the Fed determined that there was a high likelihood that GME might fall and wipe out a bunch of investors, so they demanded Robinhood have more capital reserves in case investors defaulted on their loans to buy GME stock.

      Robinhood failed to model the increased capital requirements and a shit show ensued.

      • Re: (Score:3, Insightful)

        by vbdasc ( 146051 )

        Yes, exactly. Robinhood had no means to comply with this demand so it did the only sensible thing possible - stopped dealing with GME stock. Of course, some people then started whining that RH deprived them of the golden opportunity to become billionaires, but they forget that RH was merely a service provider whose service had gone out of control, and was threatening the very survival of the company, so they simply suspended that service. Did RH prevent anyone from trading GME stock? No, they only prevented

        • "Robinhood had no means to comply with this demand so it did the only sensible thing possible - stopped dealing with GME stock."

          a) It was no one's responsibility bur Robinhood to explain this, and they didn't. Of course had they admitted this then their business would look like it was badly run, but that is not a reason not not explain themselves.

          b) Halting trades of GME was not the only means of recapitalizing. E.g. if the problem was enabling the margin buying by people who were over exposed they could ha

      • Re: (Score:1)

        by Anonymous Coward
        So, the list of things in this comment that aren't true:

        1) "Deposit $10,000 and you can buy $20,000 in GME." RH offered $1K of a deposit for trading after the deposit request was accepted by the originating bank, but before the ACH transaction was fully cleared. Yes, a depositor could screw them by claiming a fraudulent transaction, which, in subjecting the depositor to a possible felony conviction, seems hardly worth trying to claw back money that was the depositor's in the first place.
        2) "the Fed deter

      • Re: (Score:2)

        by DRJlaw ( 946416 )

        Because Robinhood was loaning money to traders so that they could buy GME. Deposit $10,000 and you can buy $20,000 in GME

        Because GME was spiking the Fed determined that there was a high likelihood that GME might fall and wipe out a bunch of investors, so they demanded Robinhood have more capital reserves in case investors defaulted on their loans to buy GME stock.

        Robinhood failed to model the increased capital requirements and a shit show ensued.

        That's a fun way to say that you don't understand in the least

  • Most "markets" are not subject to the risk of market volatility. They are just middlemen taking a small cut of every transaction. As "trading platforms", they should not be allowed to take a position in the betting, to begin with. So what happened to Robinhood here?

    • Re: (Score:2)

      by micheas ( 231635 )
      They were loaning money to investors so that they could buy more stock. Deposit $10,000 and you can buy up to $20,000 in stock.

  • money that Waters and her compatriots lost.

  • Well obviously (Score:3)

    by DrXym ( 126579 ) on Tuesday June 28, 2022 @04:13AM (#62656552)
    I remember calling BS on all the conspiracies going around at the time that Robinhood was somehow in cahoots with short sellers or something. The answer was more mundane - their books were massively out of balance from all the margin borrowing and order flow trading and made worse by the volatility & volume of stocks being sold. Same goes for other brokers who put their own restrictions on trading.

    Of course RH *is* to blame for simplifying stock trading and trivialising the risks of borrowing to the extent that it resembled a casual phone game - no transaction fees because of order flow trading, and encouraging people to borrow on margin. The lack of some kind of automatic emergency brake system also meant people filled in the blanks in their knowledge of how brokerages work with their own insane ideas.

  • I'm an idiot, but... (Score:3)

    by ThomasBHardy ( 827616 ) on Tuesday June 28, 2022 @08:54AM (#62656876)

    isn't the comment
    "profitable for a new generation of trading apps to push retail investors to make as many trades as possible, making the markets more volatile than ever"
    rather odd in the age of high frequency trading?

  • Why regulations suck (Score:4, Interesting)

    by DarkOx ( 621550 ) on Tuesday June 28, 2022 @09:22AM (#62656920) Journal

    Ultimately, the company secured a waiver for its collateral requirements, paused some trades

    So ultimately the issue the regulations were not enforced, and the proposed solution is; wait for it more regulation.

    The answer isnt more rules - its to stop making exceptions all the damn time. RH should have been suspended. The account holder should have been told to name another custodian to have their assets transferred to, the NAV of the assets RH did not actually have should have been determined at the instant of the freeze and RH should have been required to make the investors whole in terms of cash value or declare bankruptcy.

    That would have sent an actual message to the rest of Wall Street that rules must be followed, or you actually might find yourself being liquidated. RH was not TBTF, but actually seeing one of their own for-real-eezs lose everything is the only way these guys will ever start to play as if the rules matter - otherwise its always going to be they play as if the rules don't mater and then when they find themselves outside of capital/reserve/compliance requirements its always going to be "so sorry, give us pass this time - won't do it again honest (fingers crossed behind their backs)"

    • Providing a waiver when it makes sense is a reasonable enforcement of regulations. The collateral requirements were based on order volume. However, RobinHood is a bit different than older brokerages in that they aren't letting you buy with uncollected money and they don't work with paper stock certificates. Given those two things, the collateral requirements were likely too high. RH suspended trading in GME when they found their new collateral requirements and worked to get in compliance via various mec

  • Survived Because the Rules Were Changed (Score:4, Insightful)

    by crunchygranola ( 1954152 ) on Tuesday June 28, 2022 @09:51AM (#62656970)

    Ultimately, the company secured a waiver for its collateral requirements, paused some trades and averted disaster...

    Disaster averted because they were let off the hook for being insolvent. Not having to play by the rules is always a huge advantage.

    • Not being able to put up a collateral deposit to a clearinghouse is not insolvent. Its a liquidity issue not a solvency issue. They were given a waiver because their business is less risky (for RobinHood and to counter-parties) than most brokerages so the collateral requirements were non-sensically high. Which is why waivers exist.

  • I would like to know if there were any backroom deals that caused that collateral waiver to be contingent on RobinHood blocking new purchases of $GME.

    I get very suspicious when people break a free market like that.

    • The waiver was likely contingent on RobinHood demonstrating that unlike "full service" brokerages, they don't allow trades with non-collected funds and they don't offer paper certificates only electronic. Both of those significantly reduce their counter-party risk.

Slashdot Top Deals

Friction is a drag.

Close