Down goes the Dow

One thing for sure is the entertainment value. It is clearly over the top. What happens if Robinhood goes belly up?

agip wrote:

Ghost of Igloi wrote:

Share limits at Robinhood imply some serious issues at this brokerage firm:

https://robinhood.com/us/en/support/articles/changes-due-to-recent-market-volatility/

someone said today that stock trading has become a video game and I think there's something to that...the entertainment factor, the team factor, bleeps and blurps and satisfying kills.

we'll see what it does. the textbook suggests it sparks a mania and then crashes.

Igy would say the mania is already here...I'd probably say it's not here yet.

So I am wondering, on Robinhood, taking Gamestop as an example, when it says " the maximum number of shares ... to which you can increase your positions" is 1 share, does that mean you can only buy 1 share at a time, or does it mean that the investor is only allowed a additional 1 share in totality above what they currently own at the issuance of the notice?

Either way, it's a real wrench in the works of anyone trying to navigate the markets. But i can see that in the case of only buying one share at a time, it would slow down the volatility and the wild swings.

I would assume the risk for Robinhood is the size of speculative positions balanced against margin debt calls and client asset wipeout. The firm gets a margin call on large number of clients where equity goes negative, or account values fall, leads to widespread liquidations, where clients simply walk away. It would be interesting to know the terms of the lines of credit extended to the broker.

During the Tech Bubble I got an account from a client where his brokerage firm failed. His positions were frozen via SIPC insurance, and eventually transferred in. However, there was some panic on part of the client.

Ghost of Igloi wrote:

I would assume the risk for Robinhood is the size of speculative positions balanced against margin debt calls and client asset wipeout. The firm gets a margin call on large number of clients where equity goes negative, or account values fall, leads to widespread liquidations, where clients simply walk away. It would be interesting to know the terms of the lines of credit extended to the broker.

During the Tech Bubble I got an account from a client where his brokerage firm failed. His positions were frozen via SIPC insurance, and eventually transferred in. However, there was some panic on part of the client.

okay i read it more carefully and it is in aggregrate, not per order:

"Yes. The table below shows the maximum number of shares and options contracts to which you can increase your positions. Please note that these are aggregate limits for each security and not per-order limits, and include shares and options contracts that you already hold. These limits may be subject to change throughout the day."

Funny but i would think they could limit how much an investor bought or held on margin, not in a non-margin account. That's rough for non-margin investors.

Ghost of Igloi wrote:

I would assume the risk for Robinhood is the size of speculative positions balanced against margin debt calls and client asset wipeout. The firm gets a margin call on large number of clients where equity goes negative, or account values fall, leads to widespread liquidations, where clients simply walk away. It would be interesting to know the terms of the lines of credit extended to the broker.

During the Tech Bubble I got an account from a client where his brokerage firm failed. His positions were frozen via SIPC insurance, and eventually transferred in. However, there was some panic on part of the client.

I may be saying the same thing as you are, but my understanding of the reason Robin Hood has to reduce trading is that they have to float the money for a day or two until the trade settles. They are too small to afford that kind of float, so they borrowed money and restricted trading.

The big boys - schwab,merrill etc...can afford that float no problem so they don't have to restrict trading.

Morgan Stanley was within days of going under in the fall of 2008; in the period after Lehman went under. Much of it related to counter party risk. I had several clients transfer out or liquidate. Events have a life of their own, and much of it happening behind the scenes.

Makes sense. Do they even have cash settlement/same day anymore? You did in the past, where you would put the trade as cash/same day. The other party had to agree to the terms.

Hussman back up 1.02%.

I posted an explanation just now on the GME thread. Yes, you're correct. It's basically DTCC reqs, not market manipulation.

Schwab, Merrill, and TD are tied to actual huge banks - pretty easy to have the collateral on hand then.

Also, heard of some funny stories where people where buying ITM calls on GME on Robinhood and exercising them immediately to basically buy 100 shares as a loophole.

Ghost of Igloi wrote:

agip wrote:

I may be saying the same thing as you are, but my understanding of the reason Robin Hood has to reduce trading is that they have to float the money for a day or two until the trade settles. They are too small to afford that kind of float, so they borrowed money and restricted trading.

The big boys - schwab,merrill etc...can afford that float no problem so they don't have to restrict trading.

Makes sense. Do they even have cash settlement/same day anymore? You did in the past, where you would put the trade as cash/same day. The other party had to agree to the terms.

A lot of futures contracts are cash settled because the leverage is so high on them

Ghost of Igloi wrote:

agip wrote:

I may be saying the same thing as you are, but my understanding of the reason Robin Hood has to reduce trading is that they have to float the money for a day or two until the trade settles. They are too small to afford that kind of float, so they borrowed money and restricted trading.

The big boys - schwab,merrill etc...can afford that float no problem so they don't have to restrict trading.

Makes sense. Do they even have cash settlement/same day anymore? You did in the past, where you would put the trade as cash/same day. The other party had to agree to the terms.

This is standard protocol. I ran into it all the time in my brokerage non-margin accounts. It takes a couple of days for a trade to clear under most circumstances and the cask is restricted during that time, meaning it can't be withdrawn and the ability to trade with it may be restricted until it clears. If you tried to trade with it before it cleared, and you didn't have sufficient cash reserve to back it up at the time, they would give you two warnings within a certain timeframe, and then you would loose the right to do so again for a period of like 12 months. One work around was to have a margin account.

Seattle and Racket are spot on.

In the T plus 3 days I would use cash same day settlement when someone was in need of liquidity. The trades were never automatic, might take an hour or more for a fill. Several months before retirement I had a client with a similar need, but same day cash settlement did not appear to be an option on our system. So I suppose some settlement practices changed with new rules.

Somewhat different from what agip was referring to. If you have enough cash, money market, or settled cash in the account it is not an issue. Easy to makes this error since even settled cash will take time to sweep into money market. The problem arises when you have multiple unsettled trades which creates a Good Faith violation. I had certificates deposited for a Canadian gold miner that took weeks to clear. The funds were restricted until the certificate cleared the transfer agent. The same issue could happen if a client deposits a check or does an ACH transfer of funds that is not honored. In any of these cases the risk is to fulfillment of the trade, and the abnormal volatility and volume increases that risk.

Business Insider:

"We pulled those credit lines so that we could maximize, within reason, the funds we have to deposit at the clearing houses," he added, referring to regulations that require brokerage firms like Robinhood to have a minimum amount of money deposited with financial clearinghouses at all times.

Ghost of Igloi wrote:

Business Insider:

"We pulled those credit lines so that we could maximize, within reason, the funds we have to deposit at the clearing houses," he added, referring to regulations that require brokerage firms like Robinhood to have a minimum amount of money deposited with financial clearinghouses at all times.

Also should be noted, I think I saw (I think) that Robinhood's user base has grown by like 50% in the past 2 weeks

How many clients and assets I wonder?

Ghost of Igloi wrote:

In the T plus 3 days I would use cash same day settlement when someone was in need of liquidity. The trades were never automatic, might take an hour or more for a fill. Several months before retirement I had a client with a similar need, but same day cash settlement did not appear to be an option on our system. So I suppose some settlement practices changed with new rules.

Been that way for awhile actually.

Sept. 5, 2017, so a little over three years beforeI retired.