Why isn't Robinhood letting me trade? (hint: there's probably not a conspiracy against you)

Today's been a big day in the stock market. Lots of people have lost a lot of money, and a lot of people are understandably really upset. Here's a quick breakdown of what's happened so far

• A subreddit called /r/wallstreetbets (visit at your own peril), which has exploded in popularity recently and has over 5 million subscribers (and counting) got really excited about three stocks: GME (Gamestop), AMC (the movie theater place), and BB (Blackberry). Gamestop was the main stock. 
• Yes, I know all three companies are doing terribly in the real world. I won't go into why they got excited about the stocks here. 
• They convinced a lot of other people to buy the stocks and they did well. Really well. Take a look at their Yahoo Finance pages and look at their 1 month price charts (then ignore the past two days).
• GME, BB, AMC
• Everyone got in on it, and I mean it. When a lot of people buy a single stock, the price rises.
• It turns out, this was hurting a lot of Hedge Funds and Institutional Investors that were taking short positions (i.e. they were betting against) these companies. They tried to fight back. It didn't really work.

Today

That brings us to today. Today, all the platforms that common people (i.e. "retail investors") use locked the ability to buy shares of these stocks (GME, AMC, BB and a few more), and only allowed people to sell their current shares. This left the Institutional Investors with the ability to buy and sell the stock, and Retail Investors with the ability to just sell the stock. Without the buying pressure of the Retail Investors, the share price of all three stocks quickly plummeted. And a lot of regular people lost money. And a lot of people got really mad. 

Of course, the people quickly turned their anger towards the platforms that had locked them (and others) out of the ability to buy more shares, which had caused the share price of their currently held stocks to plummet. The main platform that the anger was directed towards was Robinhood, which is arguably the face of retail investing. Rumors quickly swirled on Reddit of financial relationships between Robinhood and market makers like Citadel, which had issued large loans to hedge funds that had issued large short positions against GME and faced bankruptcy if the stock price continued to rise. Claims of market manipulation were thrown. Congress got involved -- the usual players voiced their displeasure with Wall Street and implied an investigation was forthcoming. Some unusual players did too.

I'll be upfront here, I got swept up in the hype. I wanted to be part of the movement -- it was fun so I took out a position in BB. I lost a lot of money today. I spent a lot of time thinking about and discussing with friends what could have happened today. Why did Robinhood do this? I used to work in Finance at an economic consulting firm that worked on litigation very similar to the one that will likely be brought against Robinhood for today's events, so I have a little background on things like this (disclaimer: this does not reflect the opinions or expertise of my former employer). I had some theories: 

• Wall Street sucks (again, on this, I would know). There's no two ways about it. There was some collusion and market manipulation here. The big bad hedge funds forced the hands of Robinhood et. al. and said we're going to ruin you if you don't stop this right now and that was that, and all of us regular people were left holding the bag. 
• Robinhood decided they had some sort of fiduciary duty to protect their users from entering into such volatile and overpriced stocks (and believe me, they were overpriced -- do you really think I should have invested in Blackberry in 2021?). On the other side, they felt they had a duty to allow their customers to close out their positions and exit the market safely. It seemed like a somewhat reasonable surface level argument.

What Probably Happened

Then I stumbled upon an interview with the CEO of one of Robinhood's competitors, Webull on Twitter. I listened and decided to do some digging to verify for myself (it was surprisingly buried on the internet). Here's what I found: 

• There's one central securities depository called the Depository Trust Company (DTC). 
• When you buy a stock on Robinhood they take the order to the DTC (usually through an intermediary called a clearinghouse). The DTC fills the order by finding a seller. The same thing happens when a hedge fund wants to buy securities, or a bank. 
• But. There is associated risk with matching a buyer to a seller. To resolve this, there is something called the settlement cycle wherein there is a 2-day holding period where the buyer puts down a clearing fund deposit to collaterize the transaction. The transaction is guaranteed otherwise, though.
• After the two days, they get the deposit back. 

Here's the kicker: "the Clearing Fund [deposit] takes into consideration mark-to market and volatility (among other factors)." Volatile stocks are stocks that have large price changes over short periods of time (like GME, BB, and AMC). That means the clearinghouses/DTC were requiring firms to front excessively high collateral in order to buy shares of these companies.

As explained by the Webull CEO, many of these firms like Robinhood (probably) simply just didn't have the cash on to front the collateral to fulfill the MASSIVE influx of buy orders incoming for these stocks. They simply couldn't. So they de-listed the stocks and made it impossible to take any buy actions. They kept the option of selling open, because they had a fiduciary duty to allow their customers to do whatever they physically could with their own shares as long as the shares were trading. It wasn't exactly their fault the price collapsed -- it was a byproduct of not having enough money to fulfill the orders. 

On the other hand, the Institutional Investors have plenty of cash lying around. More than enough to pay the collateral. And if they don't, they can borrow it from each other. So they continued trading, usually executing strategies that were counterproductive to the retail investors that are currently holding the stock hoping the price will return to yesterday's levels. 

Conclusion

Despite the existence of platforms like Robinhood, retail investors still can't afford to play the game when the stakes actually get high. Also, please don't be so quick to jump to conspiracy theories and think about if there's another side to what's happening. Jumping to conclusions is becoming increasingly common and it's killing us. Thanks for reading!

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