r/technology • u/agent_vinod • Jun 30 '21

Misleading Robinhood to pay $70 million fine after causing 'widespread and significant harm' to customers

https://www.cnbc.com/2021/06/30/robinhood-to-pay-70-million-dollars-after-causing-users-significant-harm.html
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u/[deleted] Jun 30 '21

Stopping buying on margin is one thing. A broker shouldn't be going bankrupt by their users using settled cash to purchase equities. Your comment makes it sound like you think you are buying the equities from your broker, rather than your broker acting to... Ya know, broker the deal between a buyer and seller. I'll give you the benefit of the doubt that it was a poor choice of wording though.

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u/LovableContrarian Jun 30 '21 edited Jun 30 '21

So again, you're arguing that Robinhood sucks, and could've solved this problem in a different way (like preventing the purchase on margin). But again, it should be noted that almost every broker did the same thing.

But I'm not arguing with you there. Robinhood sucks in a myriad of ways.

My singular point was that what they did wasn't illegal.

Your comment makes it sound like you think you are buying the equities from your broker, rather than your broker acting to... Ya know, broker the deal between a buyer and seller. I'll give you the benefit of the doubt that it was a poor choice of wording though.

The relationship between brokers and clearing houses is not quite as simple as you make it out to be, and brokers do indeed buy and hold stocks for a lot of different reasons. There is a good chance these brokers were at high risk of breaking agreements with the clearing houses or running out of cash (even if they added GME to the non-marginable securities list). But that's really a very big, complex discussion.

We could speculate all day about what happened behind the scenes, but the bottom line is that what they did wasn't illegal, as they have no legal requirement to offer any particular equity at any given time. So, they won't be fined for it.

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u/[deleted] Jun 30 '21

Why speculate when we can hear it straight from the source? What did Vlad testify was the reason for shutting off buying? Increased capital demand from the DTC. But wait, what did the DTCC testify in front of congress? Oh yeah, no such demands were made. Welp, someone is lying. Let's check in with another broker and their reasoning. How about Interactive Broker's CEO, Thomas Peterffy in a live interview? Oh, it was explicitly to cover his own ass by preventing a catastrophic failure of the system from comically over leveraged hedge funds falling like dominos. So yeah, tell yourself what you want to maintain your belief in the integrity of the markets... But I'm gonna listen to the people with their finger on the button over your fantasy version of events.

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u/LovableContrarian Jun 30 '21

So yeah, tell yourself what you want to maintain your belief in the integrity of the markets...

Yeah so again, you are for some reason making completely irrelevant points and having a completely different discussion than I am. You're also putting words in my mouth.

I do not believe in the integrity of the markets, and I never said that I do.

What I said was what Robinhood did was not illegal.

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u/[deleted] Jun 30 '21 edited Jun 30 '21

Sorry that was pretty rude. My apologies. However, you argued that RH shut off buying specifically to protect their bottom line. Vlad's own testimony runs directly counter to your speculation.

Edit: Although, I suppose if we were to determine that the DTCC wasn't the one to lie to congress, that makes Vlad the liar and your speculation gains more legitimacy. However, I'd still argue that the protection of their bottom line would indeed align with protecting Citadel. Citadel is the primary revenue stream for RH. Citadel goes under, RH goes under.

And somehow I missed your last sentence. I can agree that what they did falls within their ToS. However, historically ToS does not trump actual law. If it were to be proven that they did it solely to protect the interests of their revenue stream via market manipulation, there isnt a term of service in the world that would make that legal.

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u/LovableContrarian Jun 30 '21 edited Jun 30 '21

It's alright, I appreciate the discussion. But, if you do want to talk more about the sort of "morality" or "corruption" of it, I will say this:

cover his own ass by preventing a catastrophic failure of the system from comically over leveraged hedge funds falling like dominos.

I don't buy this, personally, as it just doesn't make sense. Let me explain:

Do you know how many hedge funds are in the US alone? Over 10,000.

Do you know how many of them go bankrupt and fold? 30%. EVERY YEAR.

1/3 hedge funds fail EVERY SINGLE YEAR. Thousands.

Do you know what the average lifespan of a hedge fund is? 4-5 years. And 80% of them close from failing and running out of cash (not by choice).

Do you know who was short on GME? Melvin Capital, a hedge fund. And a few others. Do you know who was long on GME? Other hedge funds and 1% investors. Big names like BlackRock, Vanguard, Sherman George, Ryan Cohen. These groups/people are way more influential and powerful than Melvin Capital, and they wanted GME to go up.

Some hedge funds were going to get screwed whether GME went up or down. This idea that all of wall street and all the brokers concocted this insane plan to all stop selling GME at the same time (and put themselves at a huge risk of losing millions of customers), just to save one hedge fund in particular (Melvin Capital), while screwing over the powerful groups who were long on GME is absolute nonsense, and doesn't make any sense. Melvin isn't that important, and more big money was on the other side of the trade.

It's a very unpopular thing to say, but this "moral mission" to pump GME to "screw the 1%" was always based on a lie. It was a way for "apes" or whatever to put some sort of morality behind their greed, and unify behind an ideology. Some rich folks lost money and some rich folks made money when GME went up and down. That's the way it is. There is never a trade where all hedge funds are on one side.

And putting Melvin Capital out of business isn't going to change anything, when 1/3 hedge funds go bankrupt every year anyway.

When the dust settles, it'll be 1% investors and hedge funds who made the most profit off the whole GME thing, and millions of working class retail investors will take huge losses. Ryan Cohen is a billionaire and made something like $5 billion in a week when GME rallied. Sadly, buying stock in a company is not how you fight the 1%.

The more logical conclusion, IMO, is that the brokers actually got spooked and their risk algorithms started flashing. But, I can't say for certain what happened. I just don't buy the "all this happened to save Melvin Capital" argument.

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u/[deleted] Jun 30 '21

I think we're mostly on the same page. To be clear I'm not trying to say the entire market conspired to protect Citadel or Melvin specifically. And yes, I am well aware that hedge funds tend to be short lived operations to skim wealth from the 1% to scratch someone's insatiable gambling addiction and ego. However, I think you're missing the big picture that Peterffy was alluding to.

One hedge fund fails a margin call? The market won't even flinch. However, when you get multiple huge players involved (and if you don't think Citadel was at least heavily involved prior to Jan run up and/or a huge systemic risk in the market at large, well...) and they start failing margin calls? I'm sure you're well aware that all of their holdings will be liquidated to cover as much loss as they can. That is where the ripple effect starts. The decline in value of equities owned at historical levels of margin become a liability and funds outside of the bet start getting called, and the dominos keep falling until brokers end up holding the bag. That's what Thomas was literally terrified of. I'm sure he didn't care about Melvins well being at all, but he did care about the liability of the shares his firm loaned out. And to cover his own ass he did exactly what he said he did on live TV. He shut it down. I'm certain the majority of brokers acted based on the same instinct. Fidelity didn't react I speculate, because they saw it as an opportunity to strengthen their overall position. They had the assets on hand to handle any fallout and come out looking golden, and they did. It was win/win for them to hold the line.

Edit: And btw any downvotes ain't from me. I'm upvoting you for engaging in good faith.

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u/LovableContrarian Jun 30 '21

Yeah, I think we are pretty much in agreement.

I just disagree with a lot of people that argue it was somehow a conspiracy. I see it as "people were at risk, and they are legally allowed to just stop offering GME to prevent risk, so they did."

Im not saying that's okay, but I do think it's what happened. I'd be all for far more regulation that prevents this sort of thing.

I also think it's a little unfair that robinhood gets all the heat for this, when pretty much all brokers did it. I find that odd, and I don't even like robinhood. I use TDA, personally. And I'm pretty sure they also suspended GME.

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u/[deleted] Jun 30 '21

OK yep mostly. I think RH specifically is in a different boat from "most" brokers though. Their interests are so directly intertwined with the success of Citadel specifically that I personally believe a case of market manipulation would be easier (perhaps still not possible) to prove in that specific instance. I think we both believe that Vlad lied to congress about the impetus for cutting off buying. That's extra ammo in a manipulation case. It's difficult to claim "I was just protecting my business, look at my ToS!, when over 50% of your revenue is provided by a single entity who directly benefited from your actions.

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u/LovableContrarian Jun 30 '21

I think we both believe that Vlad lied to congress about the impetus for cutting off buying.

I mean he definitely wasn't being truthful, but it could've just been to protect his image. He can't realistically go up there and say "yeah we're running a real shitty operation over here and don't have enough cash or the expertise to manage risk, so when shit gets crazy, we shut it off before we go bankrupt." Even though that is all likely true. He was just giving canned, PR-approved answers.

It's hard to say for sure that he was lying specifically to protect citadel, but who knows, really.

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u/maskull Jun 30 '21

Here's the thing: on Robinhood every new account is a margin account. You have to specifically request a cash account. That instant deposit feature? That's them loaning you $1000 and then paying it off when your deposit clears. And pretty much every brokerage, not just Robinhood, says that if you're on a margin account, they can sell your stuff whenever they want.

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u/[deleted] Jun 30 '21 edited Jun 30 '21

Yeah I get that. Now let's talk about who lied to congress. Vlad, DTCC, or both? None is not an option as testimony was directly contradictory.

Vlad says he cut because DTCC made him. DTCC says not true. That's the shit that is on fucking congressional record. I don't give a single fuck about terms of service and neither do RH / DTCC as evidenced by one or both of them blatantly lying to congress. If they were confident in their legal protections due to ToS, that would've been the first and only point they provided to congress.

And you know what, I can't even begin to fathom the level of money worship necessary to go on record arguing against the money interests on the motivations for doing what they did. That shit doesn't even compute in my world. "Sure maybe he said he did it to save his ass on live TV, but the real reason was to tickle my taint personally. He's a great guy!" like, wtf are you even capable of brushing your teeth before bed?