Imagine you found a number one trading platform and end up having to dilute your stake by a factor of 2 (or more likely) within a week because of a meme stock. I actually feel bad for the founding members at RH.
As I understand it, RH got themselves into trouble by covering people before their deposits cleared, allowing them to buy stocks effectively on credit. It's an obvious problem ahead, if there's a sudden influx of customers all chasing some expensive stock.
Allowing people to buy stocks on credit with a few clicks is a risky business model. Surely they knew that.
I think RH would have had a much easier time in the court of public opinion if they had simply blocked their "instant deposit" feature to new users flooding into the network last week, and forced them to wait 3 days for ACH. People would have been super annoyed but it would have been pretty understandable in a world where the situation actually matched your description ("sudden influx of new customers buying risky stocks before their deposits cleared.")
What actually happened was that users with perfectly well-funded accounts also couldn't buy the stock, and nobody would explain why. (The actual explanation appears to be related to complicated rules around T+2 settlement and collateral, but that's a whole different thing than "people buying risky stocks on credit" which implies that the users were taking risks rather than the system is broken in complicated ways.)
Is it really? I absolutely appreciate that feature. Do we still want to be stuck in old financial system where it takes days for money transfer? It should all be instantaneous. That said, their risk/compliance team failed big time.
It is a nice feature. And of course we don't want to be stuck in the old financial system. But we are. Making transfer appear instant, when they are not, means the depositee has to take out a loan until it clears in reality. It's inherently risky as implemented.
I wouldn't be the first to advise against shipping the product before the buyer's cheque has cleared.
But I thought they had to put up collateral even someone was buying with USD that had been in their account for a while? Remember, they didn't just turn off insta-buy or whatever they call it.
It wasn't because of a meme stock. It was because RH took on a huge risk. Up until the last few weeks that gamble paid off in spades, but the chickens have come home to roost. Take the good with the bad.
Allowing people to buy stocks on credit with a few clicks is a risky business model. Surely they knew that.