https://twitter.com/GregMannarino/status/1355311856320045057
Robinhood Restricted list expands to 50 names, with only 1 to 5 share maxhttps://t.co/h3h6MQL1qD pic.twitter.com/POPMBD0sTC
— Open Outcrier (@OpenOutcrier) January 29, 2021
First: RH was not the only brokerage to restrict buying in $GME et al. Much of the below applies to many brokerages. I'm going to use "RH" in my writing for simplicity and because it's the most prominent, but it's not fair to call this a RobinHood issue, per se.
— Compound248 đź’° (@compound248) January 29, 2021
Let's talk plumbing. 🪠đźŞ
Most RH clients (& all HFs) use “margin” accounts, not “cash” accounts. RH's sign up process nudges new customers into margin accounts by default.
Whether RH should do that is worthy of discussion another day.
This is a story of lending and capital.
— Compound248 đź’° (@compound248) January 29, 2021
When an RH’er buys $GME, a whole bunch of things happen behind the scenes, all of which are the ugly plumbing of Wall Street. pic.twitter.com/qjVGaYeDEU
— Compound248 đź’° (@compound248) January 29, 2021
Side Note for Later:
For equity options contracts (puts and calls), the primary clearing entity is OCC (Options Clearing Corp). I'm going to refer to "DTCC" below, but know that the same story can be told for options with OTC.
— Compound248 đź’° (@compound248) January 29, 2021
This guarantee is typically an extremely low risk proposition.
However, "low risk" does not equal “no risk” pic.twitter.com/uOYBlfuetG
— Compound248 đź’° (@compound248) January 29, 2021
So, you bought $GME in your RH margin account: what's happens behind the scenes?
— Compound248 đź’° (@compound248) January 29, 2021
3) Selling Broker vs. Selling Client: Selling Broker fronts its client credit for the proceeds immediately upon transaction;
4) DTCC vs. Selling Broker: DTCC owes the selling broker proceeds at day's end;
5) RH vs. RH Client: (see next Tweet)— Compound248 đź’° (@compound248) January 29, 2021
It's actually not particularly important to the story, but we all know RH’s real customer is not you – you are the product.
RH’s *real* customers are buyers of “order flow”, the largest of whom is Citadel (the same Citadel that bailed out Melvin Capital with Point72 on Monday)
— Compound248 đź’° (@compound248) January 29, 2021
Citadel et al get a sneak peak at RH's order flow (ie, pending trade activity) & use that to “provide you liquidity” (ie, front-run your trade).
— Compound248 đź’° (@compound248) January 29, 2021
This is important because if RH failed, you would not “own” your stocks, per se. You would be a creditor with a claim against RH. This is a key risk of margin accounts.
See Lehman Brothers.
— Compound248 đź’° (@compound248) January 29, 2021
While many brokers share the proceeds of stock lending w/ clients, RobinHood does not. RobinHood keeps it all.
This is a critical way RH gets paid. This payment can be VERY large on hard to borrow names.
— Compound248 đź’° (@compound248) January 29, 2021
In order to meet legal requirements, the broker has to find un-lent shares (so the same shares aren’t lent twice). The PB will “tag” those shares, indicate to the client the prevailing cost to borrow, and provide the client a “locate ID” that guarantees that client those shares.
— Compound248 đź’° (@compound248) January 29, 2021
Let's look at the HF’s transaction:
– The PB lent the HF specific $GME shares, which the HF immediately sold, receiving cash.
– The HF balance sheet is: owes shares and has cash…
— Compound248 đź’° (@compound248) January 29, 2021