In defense (kinda) of Robinhood

++Thread++

Clearing the air: Robinhood is still at fault.

I stand by what I said earlier.

Their relationship with Citadel reeks of mixed incentives.

https://twitter.com/BestInterest_JC/status/1355508633354829824?s=20

But they also had legitimate reasons to halt trading last week.

Namely, their huge growth of users. And huge growth of users purchasing options

Which meant Robinhood had to raise margin to cover its positions.

What’s that mean?

People like us buy/sell through Robinhood,

Then Robinhood then buy/sells on our behalf “in the market”

You perceive your trade as instantaneous.

But in the background, it’s not instantaneous.

Pending transactions “in the market” take two days ("T+2") before they are final.

These pending transactions eventually get cleared by the Depository Trust and Clearing Corporation, or DTCC

Once cleared, everybody is happy.

But there’s a small problem…

During the two before settlement, what happens if Robinhood goes out of business?

“Out of business?! Crazy!”

No. It could happen. The DTCC’s job is to make sure a brokerage—like Robinhood—has enough collateral to cover all its pending transactions.

If RH went bankrupt, their customers’ accounts (that’s you!) would get liquidated in the bankruptcy process

The DTCC wants to make sure brokerages’ customers don’t get screwed.

So the DTCC told Robinhood, “You need to put up more collateral. Your new/crazy clients aren’t covered.”

Robinhood halted trading on GME while raising capital for that purpose.

Robinhood has been asking for this to happen. Don't feel too bad for them.

RH auto-signs its users up for “Reg T” accounts, meaning they can trade using margin (aka using borrowed money)

This means that Robinhood has to post extra-high collateral on their users’ behalves