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Matt Taibbi's avatar

The Robinhood story was about Robinhood taking advantage of their customers, and about the issues involved with selling deal flow. I wasn't being critical of more people entering the stock markets. If anything this episode - in which Robinhood abruptly halted trading with the equivalent of a post-it note left on the fridge - underscores some of the issues with those platforms.

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Post-Industrial Barbarian's avatar

You seem to have a dedicated following of people dead set on finding and pointing out any perceived hypocrisy they can find in your writing.

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Hmanx's avatar

And, more often than not (from what I see), getting the complete wrong end of the stick... I've noticed the trend too and it absolutely baffles me because it's not as though the message in that "Pandemic Villains: Robinhood" piece, for example, was difficult to take in.

So you're paying a monthly subscription to either wilfully misinterpret or totally miss the point of these articles and then whine back about them. Very odd.

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Martin Vandepas's avatar

Yeah I don't get why those people are here. Maybe some of them signed up for a year because someone recommended it, but they actually don't like Matt's writing and they can't get a refund. So they troll the comments. That theory sounds pretty farfetched now that I write it out.....I'm not sure why there are so many commenters on every story trying to prove Matt wrong or prove he messed up.

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Koshmarov's avatar

see e.pierce's comment above

i'm not setting MT up as some Infallible Golden God, but there are clearly commentities here who have some vested interest in trying to make him look bad. that makes for fun reading; trolling techniques perfected on twitter don't work so well here because of the smaller audience and necessarily longer attention span

i mean, if i, a normal person, subscribed to someone's newsletter and decided it was terrible, i would shrug, eat the loss, and move on. but why subscribe in the first place when many free examples are available? why indeed

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Stxbuck's avatar

I think some commenters are uncomfortable with MattтАЩs stories on media wokeness at the expense of what they expect is a traditional Rolling Stone lefty/partisan D perspective. If mainstream Ds (and their focus on wokeness as internal party discipline) are the new social power brokers, a lot of people are uncomfortable thinking on the social margins. ItтАЩs why Hilldog accused Tulsi Gabbard of being a Russian agent-power slapping back.

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Koshmarov's avatar

also William Lee's

not only am i always late to the party, nobody wanted me there in the first place

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M of the L's avatar

Matt, you only respond to the trolls of your articles and not the inquisitive, idea-spitballing supporters...

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ih8edjfkjr's avatar

Don't we all? Trolling's a thing because it works.

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Indecisive decider's avatar

Matt, did you watch the interview with the CEO of WeBull yesterday attempt to explain the mechanics of what's happening and how trading firms allowed sells and not buys? It made no sense to me even after his deep dive explanation. If you had a chance to listen to it, can you with in on is accuracy? It sounded as though he didn't answer the question.

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Matty's avatar

He didn't.

It's the same problem RH has - you can explain margin calls by volatility, you can even explain not offering options by claiming the market makers are overwhelmed temporarily (though their prices can easily rise to reflect that).

You can't explain a blanket prohibition on buys and not on sales, especially not by saying effectively you think prices are wrong because they're speculative. Price discovery is the supposed value the stock market offers.

Either this was blatant manipulation for their main client, Citadel, or the market AS A WHOLE was minutes from a liquidity crisis. Either way transparency and regulators should be here.

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Trollificus's avatar

ESPECIALLY when the fund most affected was propped up by your biggest investor (Citadel) and THEN you took action that kept your own customers from cashing in on that loss.

BTW, besides RobinHood and that fund that was shorting the stocks, you know who else Citadel owns? Janet Yellen. They've paid her more than she will make in four years of "public service". AND, good news for Citadel, SHE is the person who is explaining the whole affair to Joe Biden.

Man, I guess it's all above board, Citadel is just really lucky and wealth inequality remains inexplicable.

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Wazoomann's avatar

We should "circle back" on that later.

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Stxbuck's avatar

Yellen has received 800K in speaking fees from Citadel over the past several years.

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Matt F's avatar

The market makers are not overwhelmed they are just pricing the call options wrong. Probably done by an algorithm that doesnтАЩt include the sheer disgust and hatred people have for Ivy League elites, vulture capitalists, and Wall Street thugs in its pricing model.

How do you price in spite and contempt into your Black Scholes model?

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HBI's avatar

"How do you price in spite and contempt into your Black Scholes model?" should win the internet today.

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ih8edjfkjr's avatar

It's pretty straightforward. When you buy securities, your broker executes the trade and submits the trade for clearance to the NSCC. NSCC multilaterally nets down buys and sells from all the different NSCC participants, reducing settlement costs and settlement risk. Since NSCC doesn't just net down, but also novates all of these transactions, they require collateral between T and T+2 from the participant with the net settlement obligation. Brokers have to fund that themselves. Even if the customer has cash in their account siufficient to pay for the securities, the broker can't use that cash (it's sitting the customer reserve account) until after settlement date. NSCC calculates required collateral on a VAR basis. If all of a sudden you have a bunch of one-sided buys in stocks showing high levels of vol, NSCC is going to require higher collateral from the brokers submitting the one-sided orders in those names. Some brokers, particularly less well capitalized ones like Robinhood, may have difficulty satisfying those requirements, so they did the right and conservative thing of curtailing trades to ensure they wouldn't be hit with NSCC collateral requirements they couldn't satisfy.

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Indecisive decider's avatar

Appreciate you walking through this. It's helpful to understand. I'm still confused by the ban on buying but green light to sell. If I sold 1000 shares of GME yesterday, the ban prevented anyone from buying it. So what happened to the shares being sold?

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ih8edjfkjr's avatar

If your broker has 1MM shares of net purchases that are somewhere between T and T+2, a sell order will reduce the NSCC collateral requirement, since NSCC novates all these transactions and calculates VAR on your rolling net purchase or delivery obligation. An additional buy order will increase it.

If every NSC participant was unwilling to take additional buy orders, you are right that Robinhood permitting customers to sell wouldn't work because there would be no purchasers. But that isn't the case. Most BDs did not restrict purchases or sales, just the ones that had NSCC collateral issues (and a few that didn't but were seeking to limit headline risk of letting retail do something stupid). If you wanted to execute buy orders clearing Pershing, Instinet, NFS or JPMSI yesterday, you had no issue.

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Steve's avatar

Does that mean it's possible RH users can find themselves unable to close positions in stocks where RH is submitting one-sided sell orders?

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ih8edjfkjr's avatar

No. First of all, no broker-dealer is going to tell customers they can't close positions. Second, there isn't an economic reason to even want to do that. Ridiculously, RH doesn't accept short sales (like, ever), so the positions RH customers have are long positions. RH's collateral requirements go down for long sales. They would welcome that.

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Steve's avatar

So the risk they are trying to limit is a broker refusing to honor the "rewritten" sales contracts where everything is grouped together? Sorry if this question doesn't make sense, it's based on googling "novate".

I guess another way to ask is what is the risk to NSCC? Since the money in the customer reserve account is no longer accessible by the client, isn't it guaranteed to be available whenever the trade is cleared?

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ih8edjfkjr's avatar

Yes, NSCC, is trying to limit the likelihood that an NSCC participant (ie, a broker-dealer) defaults on its obligations to NSCC.

The NSCC has no visibility into what the customer of its member broker does or does not have in their account. Frankly, the NSCC doesnтАЩt even distinguish between broker trades on behalf of customers and breaker prop trades. It would be the same NSCC requirement either way.

As Mike Macchiaroli of the SEC humorously and accurately stated after Dodd Frank forced derivatives into central counterparty clearing, clearing houses donтАЩt so much solve liquidity crises as radiate them outward.

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Steve's avatar

If m reading this article right:

https://finance.yahoo.com/news/robinhood-ceo-refutes-game-stop-hedge-fund-conspiracy-theory-and-reveals-what-actually-happened-234600703.html

With RH having their clearing system in-house, they shouldтАЩve been able to use customer funds as collaterall?

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Steve's avatar

тАЬ It was an interesting move, Denier notes, considering running clearing operations tend to be extremely capital intensive and very heavily regulated due to collateral requirements. The upside, however, is that a firm stands to gain substantial revenue by adding the ability to utilize customer assets through the process and can be a big moneymaker in the brokerage business.тАЭ

When it says they can use customer assets through the process, do they mean something other than use customers cash as collateral?

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Indecisive decider's avatar

"As Mike Macchiaroli of the SEC humorously and accurately stated after Dodd Frank forced derivatives into central counterparty clearing, clearing houses donтАЩt so much solve liquidity crises as radiate them outward." Who benefits from this?

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ih8edjfkjr's avatar

тАЬThisтАЭ meaning what exactly? Clearing agencies? DonтАЩt misunderstand me. IтАЩm joking about their effect in some instances, but they also solve over problems.

Or тАЬthisтАЭ meaning the bizarre price action in these names?

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Matty's avatar

And if they'd suspended trading on both sides, that might make sense. However they suspended only the buys - even if they were required collateral only on buys, that goes directly against their claim that they didn't want to fuel speculation.

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ih8edjfkjr's avatar

You'd prefer they also suspend sales? Preventing long sellers from closing their positions? That's a minority view. Broker-dealers never want to be in a position of prohibiting customers from closing positions. Remember, Robinhood does not accept short sales.

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Martin Vandepas's avatar

"That's a minority view." What are you basing that on? Did you check with the 7.9M people on WSB?

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Matty's avatar

Instead of firmly putting their thumb on the scale?

Yes, of course.

Again, note Robinhood's supposed reason, which was that the markets were too volatile, not that they couldn't cover buys.

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Martin Vandepas's avatar

Wow. Thanks for the explanation. I never understood that before. But when robinhood is facing a liquidity crisis, shouldn't they just get emergency funding from their investors or commercial lines of credit? Doesn't the fed even have a facility for this? The way they chose to solve their liquidity crisis was to put a massive finger on the scales of the market which had a material negative effect on a huge group of their customers. That's unexcusable, and should end with them being shutdown by regulators.

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ih8edjfkjr's avatar

That's exactly what they did, but - and I'm not a VC guy, so I may be mistaken - VCs probably aren't that used to do doing $1B investment rounds with 48 hour turn-around times. What they needed were unsecured NSCC spike-line facilities. News reports suggest that they drew $500-600MM (unclear whether spike lines at the BD level or unsecured revolver at holdco level that holdco in turn contributed as either equity or unsecured financing) on credit facilities, so they had liquidity that they thought was appropriate for spikes in NSCC clearing fund deposit requirements, but they underestimated the size of their liquidity needs. For context, here is Robinhood Securities' most recent publicly-available balance sheet (Robinhood Securities is the clearing firm for Robinhood Financial): https://cdn.robinhood.com/assets/robinhood/legal/RHS%20Unaudited%20Statement%20of%20Financial%20Condition%2006.30.20.pdf

It shows clearing deposits of $235MM. Assuming that was self funded with equity, and the additional $600 drawn is all in excess of normal RH clearing fund deposit requirements, they were hit with $800MM+ NSCC clearing deposit requirement, a littles less than 4x normal liquidity needs.

It's worth noting here that Robinhood is new to clearing. For most of its history, it cleared at Apex (the old Person). It has been self-clearing for only like a year or two and they are doing it with less than half a billion of shareholders equity. For comparison, Interactive Brokers and Fidelity's NFS maintain close to $6B shareholder's equity and they have decades more experience with unusual NSCC spikes. It's easy to criticize new businesses as amateurs and idiots, but remember, they still built a bigger broker-dealer than anyone in this comment section did.

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Martin Vandepas's avatar

Why couldn't they have limited the amount of new money transfers coming into users accounts or put additional holds on the money coming in. Surely they knew that new money coming in was soon to be used to buy stocks and add to their liquidity problem. They also could have margin called people and closed their positions, right? This theory also doesn't explain why they blocked users from even searching for GME or AMC. It didn't even show up, you couldn't even look at the chart. Like WTF is the reason for that?

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ih8edjfkjr's avatar

Customers depositing money in their accounts isn't the cause of their liquidity issues and refusing their deposits wouldn't solve the issue. Also, not all stock purchases will have the same impact under NSCC's VAR calculation. Its purchases of these wildly volatile securities that have been generating the outlandish collateral requirements. I have the same answer re margin calls. Margin generally isn't the issue. Of course, no one is particularly interested in taking some of these over-valued securities as collateral and most BDs have increased house margin on these names substantially if not to 100%.

I really can't comment on the search issue you are raising. First I have heard of it, don't know if it is accurate, but assuming it is, a wild guess is that in a desperate attempt to avoid admitting the liquidity crises, they tried to reduce orders in the securities by obscuring and hiding info. Sort of the brokerage equivalent of standard Twitter political behavior. But this isn't informed. I really don't know.

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Martin Vandepas's avatar

My point is that if they wanted to reduce their liquidity problem without tipping the scales for certain stocks, delaying new funds would have had the effect of reducing the new purchases of GME and that would have helped them. I mean could they have just sold all their customers GME for them. Why not do that?

Regarding the search, I'm a customer and I experienced it myself. A search for GME or AMC came up empty on Tuesday. It's mentioned in the class action lawsuit filed Thursday: тАЬRobinhood purposefully, willfully, and knowingly removing the stock тАШGMEтАЩ from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market,тАЭ said the lawsuit, filed in Manhattan federal court. тАЬRetail investors could no longer buy or even search for GME on RobinhoodтАЩs app.тАЭ

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Wazoomann's avatar

Just a guess, but it is entirely possible that the searches were creating backend/server issues so they chose to reduce overhead (allowing app to continue working for other trades) by eliminating those search results. I have no idea if this is true, just speculating (no pun intended).

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Martin Vandepas's avatar

As a customer I'd rather that their whole platform shut down when server load gets too high than they start pulling specific stocks. (They had outages every trading day last week) They shouldn't be allowed to have the power to move billion dollar markets with their decisions about how to manage server overloads. There's too much opportunity for insider trading and corruption there among IT staff and others.

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Koshmarov's avatar

Old line from The eXile: "Insider trading is the whole point of the market."

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Koshmarov's avatar

Also to your point: isn't this whole imbroglio reducible to Reddit having better IT staff than the corporate financial monoliths?

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ih8edjfkjr's avatar

That seems like a much bigger disruption to customers - many of whom have no interest in GME - than just declining new opening orders in these names. While forcing margin customers to sell GME would have reduced NSCC clearing deposit requirements, it is worth reiterating that the mere act of holding already settled GME shares is not the issue and is not contributing to those NSCC clearing deposit requirements. The NSCC clearing fund deposit is to secure member obligations between trade date and settlement date. After settlement date, there is no obligation to NSCC. The securities have been paid for, and RH has debited customers' accounts the cash it used to pay for it.

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Martin Vandepas's avatar

As a customer, while I'm mildly infuriated by a service disruption, I find blocking buys on certain stocks to be simply unacceptable. They've had site-wide complete service disruptions for hours across every trading day last week. That's inconvenient but at least it seemed fair. Given that the rise in these stocks was driven by traders on Robinhood, they are unilaterally short circuiting investor sentiment and price discovery in the market while traders on other platforms are free to trade. It's just unbelievable to me that they would choose to cause large swings in the prices of some select securities rather than just shutting the service down. It's just the antithesis of what you want a broker to be. It gives one person (robinhood ceo) the power to cause $30B swings in the market when these restrictions are imposed or lifted. The opportunities for insider trading or corruption are mind boggling.

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Koshmarov's avatar

"they are unilaterally short circuiting investor sentiment and price discovery in the market while traders on other platforms are free to trade."

psst -- it wasn't just RH. I use a different platform but was faced with the same shutdown. If other commenters are to be believed, there were at least 3. I'm guessing several more.

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ih8edjfkjr's avatar

I guess I understand your point, but I'm sure they were a lot more concerned with their own liquidity position and how many customers they were going to impact than "fairness" in some senseless war involving a handful of symbols.

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Steve's avatar

Would a brokerage changing their interface in order to manipulate order flow be considered protected speech?

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Martin Vandepas's avatar

I don't know the legal definition of "protected speech" but the class action lawsuit will go though the courts and we'll get to see if what they did is illegal or not.

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Steve's avatar

I meant in the sense of speech government shall make no law prohibiting.

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Martin Vandepas's avatar

Yes. I just meant that it will be interpreted and decided in the courts as it should be.

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Pat's avatar

I read a NUT story explaining that. You did a good job, except some terms you use might not be understood by a layman such as myself.

But what I gathered from that article, the process has exposed RHтАЩs weakness. If someone, such as the Barstool guy and the WSB people really wanted to crush RH, all they would need to do is pick stocks that are more or less stable and trade them like the devil, all on RH naturally, billions of trades, for a few days. That would cause NSCC to require even more cushion. RH would have to get more infusions of venture capital loans, and pretty soon, they would be way over their potential market value and wouldnтАЩt be able to issue an IPO. Crushed.

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Martin Vandepas's avatar

Or robinhood just halts buys on those stocks as soon as they detect they may need more cash which is exactly what they did. But that solution pisses off so many customers and people lose faith that they will be able to trade that robinhood's long term future is in question.

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Martin Vandepas's avatar

They simply shouldn't allowed that amount of customer money to be transferred into their platform until they had enough capital to buffer all the trading with that money in any stock. They could have delayed new customer accounts of limited incoming transfers to $1000 a week or something like that. Their platform shows you the most popular stocks other people are trading. It actively gamifies and encourages trading like this. They should have planned for the consequences on their liquidity.

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Martin Vandepas's avatar

*shouldn't HAVE allowed*

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Pat's avatar

No edit button! Arrrrrrrrrrgggggg

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Koshmarov's avatar

More and more people are saying this.

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Pat's avatar

They canтАЩt halt buys for every stock. The main strategy, I think, would be to make billions of trades on a daily basis to a limited number of stocks. That way RH becomes a drain on the rest of the brokers. They have to add more money to the reserve to cover all the trades at RH.

One consequence, even if venture capitalists loan RH even more money, is that would pressure the other brokers and NSCC to abandon RH. No clearinghouse, no brokerage, no IPO. Leave the two rats holding their multibillion dollar dead app.

How dare they screw the little guys.

But, you know, IтАЩm not wise in the ways of Wall Street. Perhaps it isnтАЩt possible to do what I think can be done. It sure seems that that would be a way to destroy RH.

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Martin Vandepas's avatar

Well they were limiting 50 different stocks so I think their strategy is just to keep doing that as much as they need to. But it also seems like without it even being a coordinated or intentional attack on robinhood, traders are breaking the platform just by buying volatile shares quickly. This will likely continue and be an ongoing PR problem, liquidity problem, lawsuit problem, and also potentially a regulatory problem for Robinhood. It seems to me their future is very much up in the air.

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Pat's avatar

The little guys want blood. I don't blame them. RH has already used up internal funds and got another billion from their original backers. Which means they are pretty leveraged out, flat busted broke. One or two more wild rides and they won't be able to come up with the reserves needed to keep doing business with the clearinghouse. Traders just need to pick stocks that are not in the list RH came up with. Volume of trades. That's the key.

Interesting. Whatever happens.

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Martin Vandepas's avatar

That list has been changing throughout each day. The stocks change and the quantity of each stock change. There were 50 stocks at one point earlier this week. Now there are 8. What makes you think they wouldn't stay ahead of it and add a new stock to the list before it gets too far?

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Pat's avatar

That would be blatant market manipulation if RH blocked all stocks that had an uptick in volume. The SEC would have to act, if that happened. Especially if it was a stable stock, such as, IDK, Intel.

This is all speculation, on my part. I don't know nothing about the stock market. I know WSB has a tremendous tool they can use. Numbers. That would allow them to disperse their power out however they wanted to use it.

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Martin Vandepas's avatar

I think what they are doing *is* blatant market manipulation. It doesn't matter if they had liquidity reasons motivating it, the effect was $20B market cap swings in some of the tickers they restricted and it materially harmed their customers and also shareholders with other brokerages. It all happened so fast we'll see what happens when the SEC catches up. It was big names too, not just troubled companies. Here's a quote from a CNBC article, "The stock trading app has also expanded its list of restricted stocks. Some of the new names include Advanced Micro Devices, Starbucks, Novavax, General Motors and Beyond Meat."

https://www.cnbc.com/2021/01/29/robinhood-is-still-severely-limiting-trading-gamestop-holders-can-only-buy-one-additional-share.html

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Koshmarov's avatar

Certain companies displease the Generalissimo for one reason or another and become the Vanishing Commissar. Free market gonna free market!

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Stxbuck's avatar

No, crony capitalists gonna crony!

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Pat's avatar

Sorry. NYT

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Martin Vandepas's avatar

Now that all the unrestricted trading from Wednesday has cleared and they have secured hundreds of millions in funding, we should expect the restrictions should be reducing right? HA I'm not holding my breath. Currently, as of Sunday morning, GME is limited to a single share: https://robinhood.com/us/en/support/articles/changes-due-to-recent-market-volatility/

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ih8edjfkjr's avatar

I'm not sure. I'm super curious to see whether they actually failed on an NSCC call and got hit with an additional adequate assurance deposit requirement.

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Martin Vandepas's avatar

That may be, but if it is, they aren't keeping their customers informed. If they cared about their customers ability to make their own investment choices and about price discovery for these tickers in the market, wouldn't it be helpful for them to be more transparent about what's going on so we (and the market) could know what to expect? They don't they only care about themselves.

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ih8edjfkjr's avatar

I would definitely start with the assumption that price discovery for these issuersтАЩ securities is way, way down their list of concerns. Watching the directions of ACATs is going to be consuming much more of their attention.

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Martin Vandepas's avatar

Well the regulators should be concerned with a broker screwing with price discovery. Or at least that what I want my regulators to be concerned with. Elizabeth Warren seems concerned. I had to google ACATs ("The Automated Customer Account Transfer Service is a system that facilitates the transfer of securities from one trading account to another") but yeah I heard Fidelity is swamped with new business right now. I immediately got my cash balance out of Robinhood and luckily I have other accounts I can trade in.

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Robert's avatar

So Matt misfired with his comments on why Robinhood stopped trading then.

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Steve's avatar

But... admit it, you were worried for a minute there. Before RH started manipulating GME by preventing buying, and making it clear where they stood, there had to have been a moment where you thought you might have to praise RH :)

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Paul E's avatar

RH has been a part of the club all along. You cannot get into the stock market/financial sector without membership.

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Pensatrice's avatar

All you have to do is look at who their investors are to know they're absolutely in the club.

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Political Economist's avatar

Well that and the fact that google just deleted a bunch of negative reviews that came from them preventing their users from using their platforms

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Martin Vandepas's avatar

The problem with them selling order flow to make money off customers is independent of the problem with them preventing buys of specific stocks. If they hadn't restricted anything and simply allowed people to trade normally they wouldn't really be deserving of any praise, that's what everyone expects a brokerage to do.

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Steve's avatar

Absolutely. But, when the squeeze was on initially, you had people positioned to profit from this order flow making essentially the same argument Matt was "we shouldn't celebrate the inexperienced accessing the market when they could mess stuff up", but for the opposite definitions of "stuff". Matt was worried about the masses getting slaughtered by pros. While the pros were worried about getting slaughtered by the masses.

RH restricting buy access changes the argument. It's no longer about how dumb or smart the retail investors are. It's about the fact that RH is there purely to provide a flow that is profitable to those that are paying for it.

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