<instructions>Your goal is to analyze the following comment and estimate how highly it will be upvoted by the Hacker News community.</instructions><comment><author>IG_Semmelweiss</author><text>These are 2 different things&lt;p&gt;(1) Credit risk - this is what you describe&lt;p&gt;(2) Counterparty risk - this is collateral. This is different.&lt;p&gt;The 2 are interlinked insofar that the counterparty (2) may react to the perceived credit risk (1) , however these are 2 separate risks at play.&lt;p&gt;**
To go back to the milkman, the correct analogy would be:&lt;p&gt;Your son wants milk. You go to the farmer&amp;#x27;s market - but you can&amp;#x27;t hand over cash to farmer. Remember, his milk is spoiling, there&amp;#x27;s a huge line to buy, and he just doesn&amp;#x27;t have time to count bills, square exact change, or screen for potential fake bills. He only accepts bank transfers, and you dont have a bank acct. So you buy milk on credit, and agree to settle when he&amp;#x27;s not too busy (as you have always done).&lt;p&gt;Now, the farmer has been noticing you are buying a lot of milk for your son, and the empty milk bottles you left with him on deposit (&amp;quot;float&amp;quot;) are not sufficient to carry all the milk you are buying....so he&amp;#x27;s now asking for many more bottles, which are expensive. He refuses cash collateral - he will only take more bottles, because he&amp;#x27;s concerned about all the cash you seem to be handling recently.&lt;p&gt;You don&amp;#x27;t have extra cash of your own, for bottles. You can&amp;#x27;t commingle funds. So therefore, you stop taking milk requests from son...and the other 10M children</text><parent_chain><item><author>015a</author><text>That&amp;#x27;s an accurate enough analogy.&lt;p&gt;When you sell a stock on Robinhood, it takes ~2 days to &amp;quot;clear&amp;quot; the transaction. So, Robinhood credits your account, but Robinhood doesn&amp;#x27;t see that money for 2 days. They don&amp;#x27;t allow you to withdraw the money from Robinhood until its cleared, but you &lt;i&gt;can&lt;/i&gt; purchase other stocks with the money, and if you do that, Robinhood now needs to send something to the seller. All brokerages, and the clearing houses they work with if they don&amp;#x27;t self-clear (RH, IB, WeBull, etc do not self-clear; bigger banks do), maintain a level of &amp;quot;float&amp;quot; to handle these payments; its like grease which allows the system to move faster, and the bigger these pools of money, the less risk there is.&lt;p&gt;Robinhood is the #1 app on the App Store right now. EVERYONE is getting in on this. Many of these users likely joined with an invite code, and Robinhood will give out two random shares of stocks for each of these users ($$). After they&amp;#x27;re in the app, they&amp;#x27;re probably using the Instant Deposits feature to trade on up-to $1000 they&amp;#x27;ve started transferring but which hasn&amp;#x27;t cleared yet (pressure on the float). Many of these users are, in WSB terminology, paper hands; they bought GME @ 250, its at 320 now, they want their gains, so they sell immediately; more pressure on the float.&lt;p&gt;If that float hits zero, that&amp;#x27;s basically like, imagine your company&amp;#x27;s bank account hitting zero, its payday (because every single hour of every day is payday for a brokerage), and you have 50 million employees. People would sell stocks, and the number in their account wouldn&amp;#x27;t go up. In fact, people couldn&amp;#x27;t even buy or sell stocks, because that float is used to pay fees on every transaction to their clearing house. Now, people are scared; their faith in robinhood has been shook, and they want out. So, they try to sell stocks; they can&amp;#x27;t. They&amp;#x27;re angry. If they have settled funds, they pull those out, which just compounds the problem because now their balance sheets start looking weaker and weaker, which makes access to emergency credit lines harder. Basically, they would implode irrevocably. Even the hint of a liquidity crisis is enough to tarnish a firm&amp;#x27;s reputation.&lt;p&gt;IMO, I think the biggest driver of this issue for Robinhood is their instant deposits functionality. That feature is insane, and in market runs like this, deadly. Robinhood hasn&amp;#x27;t actually &amp;quot;lost&amp;quot; money (well, not enough to cause a liquidity crisis); its just the problem of not having enough money right right now to pay people who need to be paid.&lt;p&gt;But, the deeper issue is the US financial system and its molasses speed of moving money around. The Fed is making strides to improve this, but it will take a decade or more before we see real change.</text></item><item><author>posix_compliant</author><text>So you’re saying the issue is “what if the grocery goes insolvent before it can hand you the milk, but after you’ve paid”?&lt;p&gt;I’m still not understanding how robinhood lost money in the first place.</text></item><item><author>IG_Semmelweiss</author><text>The real reason is as follows:&lt;p&gt;You cannot use customer funds to cover dtcc collateral terms.&lt;p&gt;Your milk example does not work, because you are not settling up the milk buy 2 days after. You settle your milk purchase  on the spot.</text></item><item><author>michaelt</author><text>&lt;i&gt;&amp;gt; Non-zero chance had they not haulted trading on those symbols they would&amp;#x27;ve been insolvent by close of trading today, depending on the size of their credit line.&lt;/i&gt;&lt;p&gt;Perhaps you can help me understand something.&lt;p&gt;In the absence of margin trading, if I deposit $100 of cash at my brokerage, then I order my broker to buy $100 worth of Stock A, how does credit and the possibility of bankruptcy enter into the transaction at all?&lt;p&gt;After all, if I give my kid $5 and send him to the store to buy some milk, he doesn&amp;#x27;t need to find &amp;#x27;liquidity&amp;#x27; or a &amp;#x27;credit line&amp;#x27; or risk bankruptcy.</text></item><item><author>ajsharp</author><text>&amp;quot;To continue operating, it drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin, or lending, requirements from its central clearing facility for stock trades, known as the Depository Trust &amp;amp; Clearing Corporation.&amp;quot;&lt;p&gt;Non-zero chance had they not haulted trading on those symbols they would&amp;#x27;ve been insolvent by close of trading today, depending on the size of their credit line.&lt;p&gt;I watched the CEO on CNN tonight, and while I found him pretty difficult to watch, this is a very difficult position to be in. If you admit on TV that your company is experiencing liquidity issues -- even if temporary in nature such as with clearing custodianship requirements -- you run the risk of triggering a greater panic through customer withdrawals&amp;#x2F;redemptions.&lt;p&gt;This could turn into a run on the brokerage pretty quickly, and probably already has in some measure, especially after a day of massively lost customer trust. He certainly didn&amp;#x27;t help it by going on TV and lying about their liquidity issues. They probably would&amp;#x27;ve been better off by issuing a statement and keeping him off TV.</text></item></parent_chain></comment><story><title>Robinhood, in Need of Cash, Raises $1B from Its Investors</title><url>https://www.nytimes.com/2021/01/29/technology/robinhood-fundraising.html</url></story>
<instructions>Your goal is to analyze the following comment and estimate how highly it will be upvoted by the Hacker News community.</instructions><comment><author>hnrodey</author><text>Just my two cents.&lt;p&gt;I created a Robinhood account on Wednesday evening and transferred $1000 via Plaid. My account is still not active and AFAIK that $1000 is in limbo.&lt;p&gt;The app tells me &amp;quot;We&amp;#x27;re reviewing your application and your deposit is pending. Application approval may be delayed. We&amp;#x27;ll notify you when you can begin trading.&amp;quot;</text><parent_chain><item><author>015a</author><text>That&amp;#x27;s an accurate enough analogy.&lt;p&gt;When you sell a stock on Robinhood, it takes ~2 days to &amp;quot;clear&amp;quot; the transaction. So, Robinhood credits your account, but Robinhood doesn&amp;#x27;t see that money for 2 days. They don&amp;#x27;t allow you to withdraw the money from Robinhood until its cleared, but you &lt;i&gt;can&lt;/i&gt; purchase other stocks with the money, and if you do that, Robinhood now needs to send something to the seller. All brokerages, and the clearing houses they work with if they don&amp;#x27;t self-clear (RH, IB, WeBull, etc do not self-clear; bigger banks do), maintain a level of &amp;quot;float&amp;quot; to handle these payments; its like grease which allows the system to move faster, and the bigger these pools of money, the less risk there is.&lt;p&gt;Robinhood is the #1 app on the App Store right now. EVERYONE is getting in on this. Many of these users likely joined with an invite code, and Robinhood will give out two random shares of stocks for each of these users ($$). After they&amp;#x27;re in the app, they&amp;#x27;re probably using the Instant Deposits feature to trade on up-to $1000 they&amp;#x27;ve started transferring but which hasn&amp;#x27;t cleared yet (pressure on the float). Many of these users are, in WSB terminology, paper hands; they bought GME @ 250, its at 320 now, they want their gains, so they sell immediately; more pressure on the float.&lt;p&gt;If that float hits zero, that&amp;#x27;s basically like, imagine your company&amp;#x27;s bank account hitting zero, its payday (because every single hour of every day is payday for a brokerage), and you have 50 million employees. People would sell stocks, and the number in their account wouldn&amp;#x27;t go up. In fact, people couldn&amp;#x27;t even buy or sell stocks, because that float is used to pay fees on every transaction to their clearing house. Now, people are scared; their faith in robinhood has been shook, and they want out. So, they try to sell stocks; they can&amp;#x27;t. They&amp;#x27;re angry. If they have settled funds, they pull those out, which just compounds the problem because now their balance sheets start looking weaker and weaker, which makes access to emergency credit lines harder. Basically, they would implode irrevocably. Even the hint of a liquidity crisis is enough to tarnish a firm&amp;#x27;s reputation.&lt;p&gt;IMO, I think the biggest driver of this issue for Robinhood is their instant deposits functionality. That feature is insane, and in market runs like this, deadly. Robinhood hasn&amp;#x27;t actually &amp;quot;lost&amp;quot; money (well, not enough to cause a liquidity crisis); its just the problem of not having enough money right right now to pay people who need to be paid.&lt;p&gt;But, the deeper issue is the US financial system and its molasses speed of moving money around. The Fed is making strides to improve this, but it will take a decade or more before we see real change.</text></item><item><author>posix_compliant</author><text>So you’re saying the issue is “what if the grocery goes insolvent before it can hand you the milk, but after you’ve paid”?&lt;p&gt;I’m still not understanding how robinhood lost money in the first place.</text></item><item><author>IG_Semmelweiss</author><text>The real reason is as follows:&lt;p&gt;You cannot use customer funds to cover dtcc collateral terms.&lt;p&gt;Your milk example does not work, because you are not settling up the milk buy 2 days after. You settle your milk purchase  on the spot.</text></item><item><author>michaelt</author><text>&lt;i&gt;&amp;gt; Non-zero chance had they not haulted trading on those symbols they would&amp;#x27;ve been insolvent by close of trading today, depending on the size of their credit line.&lt;/i&gt;&lt;p&gt;Perhaps you can help me understand something.&lt;p&gt;In the absence of margin trading, if I deposit $100 of cash at my brokerage, then I order my broker to buy $100 worth of Stock A, how does credit and the possibility of bankruptcy enter into the transaction at all?&lt;p&gt;After all, if I give my kid $5 and send him to the store to buy some milk, he doesn&amp;#x27;t need to find &amp;#x27;liquidity&amp;#x27; or a &amp;#x27;credit line&amp;#x27; or risk bankruptcy.</text></item><item><author>ajsharp</author><text>&amp;quot;To continue operating, it drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin, or lending, requirements from its central clearing facility for stock trades, known as the Depository Trust &amp;amp; Clearing Corporation.&amp;quot;&lt;p&gt;Non-zero chance had they not haulted trading on those symbols they would&amp;#x27;ve been insolvent by close of trading today, depending on the size of their credit line.&lt;p&gt;I watched the CEO on CNN tonight, and while I found him pretty difficult to watch, this is a very difficult position to be in. If you admit on TV that your company is experiencing liquidity issues -- even if temporary in nature such as with clearing custodianship requirements -- you run the risk of triggering a greater panic through customer withdrawals&amp;#x2F;redemptions.&lt;p&gt;This could turn into a run on the brokerage pretty quickly, and probably already has in some measure, especially after a day of massively lost customer trust. He certainly didn&amp;#x27;t help it by going on TV and lying about their liquidity issues. They probably would&amp;#x27;ve been better off by issuing a statement and keeping him off TV.</text></item></parent_chain></comment><story><title>Robinhood, in Need of Cash, Raises $1B from Its Investors</title><url>https://www.nytimes.com/2021/01/29/technology/robinhood-fundraising.html</url></story>