The sells were appropriate if bought on margin (once the share price took a dive). The thing is, RobinHood refused “buy” order that were completely inline with the margin requirements, and that caused the share price to dive.
Seems to be a coordinated move among all retail browsers (including IB according to people on this discussion - despite publicly claiming they are just hiking margins).
Basically, as of this morning, retail clients could only sell, whereas institutional clients could buy and sell as they wish.
Doesn’t sound remotely ok. In fact, sounds completely entirely not ok, and likely illegal (but I am not a lawyer)
> RobinHood refused “buy” order that were completely inline with the margin requirements, and that caused the share price to dive.
This is just a conspiracy theory. It doesn't even make sense. If GME was objectively such a good bet, you really think that those institutional investors out there were simply ignoring it? That Robinhood's users alone were the sole reason for the speculative spike in this stock?
This is a SCAM. Robinhood users were the VICTIMS. And I won't speak to their motives, and am no real fan, but the truth is Robinhood saved you people a ton of money by refusing those trades.
In the modern world the right to waste money is held to be very sacred - I have always viewed casinos as a great money -> fun conversion machine for those who can sensibly enjoy it... but for those who can't there isn't anyone stopping them at the door and saying "We already have 90% of your money, why don't you go home and enjoy a quiet evening of netflix".
The stock market has a long reputation of saying "Well, sucks to be you" when various scams are committed - even when a hedge fund manager burns through a bunch of retirement funds and then shows up at the company demanding their annual retainer so I am quite reluctant to buy that this one instance is when altruism is coming in to play.
A bunch of people are choosing to loose a bit of their money in exchange for warm fuzzy feelings - I think it's absolutely idiotic but then again I don't tend to patronize casinos either. If there is someone behind this running a pump & dump scam they absolutely should be prosecuted as normal, but falling victim to a financial scam on the stock market is one of those properties capitalist libertarians always hold up and they can't change their mind just because this one instance ended up screwing them over instead.
Margin accounts have capital requirements. If you’re over leveraged, they will liquidate your positions to ensure you have capital. This is standard. If people didn’t know about this, they have no business with a margin account.
1. Robinhood accounts are all margin by default. Most novice investors don't know the difference. They should, but I would wager Robinhood doesn't spend a lot of time educating people about this.
2. Long positions (buying and holding stock) aren't leveraged. There is no capital risk to holding a stock. If the sales of GME are entirely based on other positions being underwater, then sure, but it seems at least some of the examples provided aren't in that situation.
A broker can change margin maintenance requirements at any time, including for shares bought with margin. When using margin, a broker has wide latitude to liquidate positions of the account using margin.
Robinhood let’s you borrow money to buy stocks. If you borrow $10k to buy GME at $300 and it dropped to $100. There’s a risk to RH that you won’t be able to payback the loan. RH most likely will liquidate the position before it even hits $100 to mitigate the risk on the loan depending how leveraged you are.
I thought RH only allowed margin if you paid the monthly fee? Or, are you talking about margin for purposes of settling so you can trade again before a sale is fully settled?
It turns out that Robinhood accounts are margin by default, which is not really standard practice. I couldn't prove that this behavior (closing held positions without consent) was intended with that design, but it does feel pretty gnarly.
e: I'm leaving my original comment below for posterity, but I learned upthread that I was substantially misinformed here. Robinhood accounts are by default margin accounts, and their documentation describes this in an incredibly misleading way (https://robinhood.com/us/en/support/articles/robinhood-accou...):
> When you sign up for a new account, you’ll automatically start with a Robinhood Instant account, which is a margin account. This means you’ll have access to instant deposits and extended-hours trading. You also won’t have to wait for your funds to process when you sell stocks or make a deposit (up to $1,000).
I stand by my claim that margin accounts necessarily require forced liquidation, but this is pretty indefensible.
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If the stocks were bought on margin it's entirely non-objectionable. Forced liquidation is a well-known practice that's fundamental to margin accounts as a concept - without it, a margin account is just an unsecured loan, and nobody's going to offer the average margin trader a low-cost unsecured loan for stock speculation.
4. Liquidation. In the event of the death of the Customer, or in the event the margin in any account in which the Customer has an interest shall in either Robinhood’s or the Introducing Broker’s discretion become unsatisfactory to either Robinhood or the Introducing Broker, or be deemed insufficient by either Robinhood or the Introducing Broker, Robinhood is hereby authorized; (a) to sell any or all securities or other property which Robinhood may hold for the Customer (either individually or jointly with others); (b) to buy any or all securities and other property which may be short in such accounts; and/or (c) to cancel any open orders and to close any or all outstanding contracts; all without demand for margin or additional margin, notice of sale or purchase, or other notice or advertisement, and that any prior demand or notice shall not be a waiver of its rights provided herein.
(emphasis added, and if you like that there's an arbitration agreement too.)
WE CAN SELL YOUR SECURITIES OR OTHER ASSETS WITHOUT CONTACTING YOU. Some investors mistakenly believe that their brokerage firm must contact them for a margin call to be valid, and that their firm cannot liquidate securities or other assets in their accounts to meet the call unless the firm has contacted them first. This is not the case. Although we may attempt to notify you of margin calls, we are not required to do so. However, even if we have contacted you and provided a specific date to meet a margin call, we can still take necessary steps to protect our financial interests, including immediately selling the securities without notice to you. We may forcibly liquidate all or part of your account without prior notice, regardless of your intent to satisfy a margin call, in order to protect your interests or our interests.
YOU ARE NOT ENTITLED TO CHOOSE WHICH SECURITIES OR OTHER ASSETS IN YOUR ACCOUNT(S) ARE LIQUIDATED OR SOLD TO MEET A MARGIN CALL. Because
the securities are collateral for the margin loan, we have the right to decide which security to sell in order to protect our interests.
WE CAN INCREASE “HOUSE” MAINTENANCE MARGIN REQUIREMENTS AT ANY TIME AND ARE NOT REQUIRED TO PROVIDE YOU ADVANCE WRITTEN NOTICE. These changes in policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may require us to liquidate or sell securities in your account(s).
A margin call that liquidates a customer is not only perfectly reasonable but responsible on the part of the broker. I would never hold it against Robinhood to liquidate positions or have restrictions on buying/selling stocks where the broker could be at risk.
The problem is that Robinhood is selling positions that are fully covered by their clients as well as prohibiting the buying of shares even when the purchase is 100% covered by the user.
I've been in this industry for 15 years now, including obviously the great recession, the flash crash, brexit, and a host of highly volatile events resulting in massive market swings and this is absolutely unheard of. I've never seen a broker prevent its clients from buying shares or liquidating shares that are fully accounted for and pose no risk to the broker.
@Kranar exactly. the actions of the gme swarm are reasonable given the positions and the patterns of actions we all recognize from short sellers. until now, short sellers have pretty much been playing a game of poker where no one ever called their bluff. Of course, the short sellers that lost out on this can just blame it on covid and get bailed out.
They're not reasonable. Just because someone has a short position doesn't mean you can stake a position deliberately to trigger a squeeze and profit from the result. That's exactly what the GME swarm has been doing.
"Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal." - https://www.sec.gov/investor/pubs/regsho.htm
I wouldn't be surprised if Robinhood and other brokers' compliance teams made the decision that the penalty for shutting down trading was less than the potential fallout for enabling illegal market manipulation behavior. Just because it's coordinated online between individuals doesn't mean that it's not illegal market manipulation.
The loophole here is that all new Robinhood accounts are margin accounts by default. You have to go through a process to switch from a margin account to a cash account and I suspect 95% of Robinhood's customers have no idea what the difference is or why they'd ever want to do that.
So Robinhood technically is allowed to do this as per the letter of the law, and now the question is whether Robinhood is violating any fiduciary duties they have to their customers.
But how many of the accounts have larger positions in GME than equity? It doesn't make sense to margin call or liquidate someone who is good for the whole amount. Also if someone has some leverage it's not reasonable to liquidate them completely.
This is exactly why people should be outraged. The type of risk that requires a margin call isn't present by just holding long positions in a security. Unless you are trading options or selling short, your equity is equal to your positions, and no margin call should be necessary.
They are literally using the margin call mechanic to force closures in positions that have no risk.
An unsettled ACH withdrawal that you initiated does not cause massive risk. It's a two-day float. There's no way to undo an ACH transfer; it's guaranteed funds. Even if you lose all of it, it doesn't matter, since they'll be paid back once the check clears.
I am in total agreement with you, this is outrageous. I'm only speculating as to what I believe Robinhood's position is, which is that these accounts are technically margin accounts and so Robinhood has the right to liquidate them as per the account "agreement".
[edit]
though there are some reports that the stocks were bought on margin, which makes it more(?) okay, I guess?