Robinhood Almost Imploded During the GameStop Meme Stock Chaos (techcrunch.com) 75
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
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
Meme Stock (Score:5, Insightful)
Re:Meme Stock (Score:4, Insightful)
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?
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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)
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Well yes, except these meme stocks are millions of people. They're still the elite, just the elite of reddit, 4chan, or wherever. They've got disposable money to spend, they've got access to computers, they've got skills to use those computers, and they've got a director leading them in synch. In short, they are not the masses.
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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.
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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
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"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.
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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)
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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.
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" 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.
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allowing some small set of people regulate everything
Yeah, like not committing fraud, or market manipulation, and other financial crimes. That's something we have to rediscover and reinvent the wheel over and over again.
NEVER learn from the past. Always make the same mistakes over and over.
curvature of bananas
You right wingers keep showing how fucking gullible you are. You believe any old shit they make up just to get you to vote for them.
Huh? (Score:5, Insightful)
Re:Huh? (Score:4, Informative)
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curvature of bananas
You right wingers keep showing how fucking gullible you are. You believe any old shit they make up just to get you to vote for them.
Yes, totally made up [europa.eu]. I'm guessing eur-lex.europa.eu is a fake news site, eh? Fucking leftard liars.
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This standard defines the quality requirements to be met by unripened green bananas after preparation and packaging.
This is what YOU said:
to the curvature of bananas you're allowed to eat
You're the liar here. Nothing in that legislation is legislating who is allowed to eat what. You're LITERALLY fucking lying about the regulation.
And do you know WHY they regulate the preparation and packaging?
B. Packaging The bananas must be packed in such a way as to protect the produce properly.
Turns out, if you package bananas that results in an "abnormal curvature", the produce is damaged and can be a health hazard. Or at the very least, lead to a lot of product wastage.
Your inability to read is exactly what I'm calling out. You
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This is what the legislation says:
This standard defines the quality requirements to be met by unripened green bananas after preparation and packaging.
This is what YOU said:
to the curvature of bananas you're allowed to eat
You're the liar here. Nothing in that legislation is legislating who is allowed to eat what. You're LITERALLY fucking lying about the regulation.
Ah, so your argument here is that it's not justified to say EU regulated the shape of bananas you're allowed to eat because they "only" regulated imports and sales? ROTFL. Because banana tourism is such a perfectly reasonable and viable alternative, and in fact, millions of Europeans each year travel to Columbia just to eat bent bananas. Not to mention all the millions of Norwegians growing bent bananas in their gardens for private consumption. Is that your argument? ROTFL again.
Sorry but bullshit. You bel
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The only fraud, market manipulation, and financial crimes here were committed by your pride-flag waving billionaire hedge fund friends. The ones that counterfeited so many GME shares that there were twice as many being traded as actually existed, and who flat out bribed the Secretary of the Treasure with millions of dollars to let them get away with doing everything from one-sided shutdowns of trading to outright stealing and forcibly selling off people's shares of GME for their own profit.
Re: Regulations (Score:2)
They also determine if the tiny razor tooth leprechauns are put in your underwear drawer. If you have not been bitten, then you are conforming to "The Man".
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Pump and dump is an old scam. Whether it's old school penny stocks, a reddit subforum playing a game with a dying company, or a modern NFT where you give your Discord bros a heads-up on a new release so they can start churning the price.
Re:the only failure (Score:4, Interesting)
They weren't really in danger of failing.
What the head was a lack of collateral for the money they were loaning for people to buy GME on margin (margin = buy with borrowed money)
When they ran out of collateral to back GME trades they had to either: A) Stop self clearing the trades or B) Stop letting people buy GME. They chose B. Primarily because they didn't have a relationship with another bank to clear trades and would have taken a week for option A to be viable.
It is mostly just a risk of using a small bank. Most small banks pay one of the big banks to guarantee their trades. Robinhood is one of the only old school small banks left.
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Regulate away. Meme stocks shouldn't even be a thing. If people want to play a greater fool gambling game with their money, that's what cryptocurrency is for.
Re: Big Surprise (Score:3, Insightful)
Except you aren't in charge and that parental tone is misplaced amongst your *PEERS* of which you do not regulate.
"almost" imploded (Score:2)
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.
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Yet nothing you wrote contradicts what I wrote.
I am under no impression that Fidelity it free of guilt. But that has no bearing on how I trade.
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> 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.
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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
It should have (Score:2)
Had there not been all sorts of illegal shenanigans going on, they'd have crashed and burned.
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Because you're an illiterate shut in who doesn't have the mental wherewithal to research the things you attempt to blather about.
Bye!
Re: No financial professionals here (Score:1)
Smokescreen?Why is collateral required? What risk? (Score:1)
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)
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.
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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
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"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
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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
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That's a fun way to say that you don't understand in the least
What is the risk here? (Score:1)
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I wonder how much... (Score:1)
money that Waters and her compatriots lost.
Well obviously (Score:3)
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)
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)
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)"
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Well there you go - There are to many rules, and the SEC has far to much rule making authority. If the rules were actually followed they'd do more harm than good.
Only way this situation is corrected is if people see the harm. Otherwise what you have is arbitrary and lawless. If you have enough lawyers and money you can do whatever you want. If you don't you get a scary letter and have to shut down your business.
Its time for a lot fewer rules and lot more ridged enforcement if you ask me. We should have a s
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Survived Because the Rules Were Changed (Score:4, Insightful)
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.
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Question (Score:2)
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.
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