- Trading platform Robinhood warned day traders on Thursday night to raise their cash buffers on several widely-held stocks hours before market open, or they could face an account deficit.
- The trading platform said it would increase the minimum amount required to be held in user accounts from October 16 onwards to “help protect” customers from increased election volatility.
- “If you hold any of the affected stocks on margin, your buying power may decrease or your account may be in a deficit after these changes go into effect,” Robinhood said.
- “If you do not resolve the margin call, we may need to sell off some or all of your stock to cover the call,” it said.
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Retail trading platform Robinhood warned users late on Thursday to raise their cash reserves on several widely-held stocks, hours before market open.
The company, which has spearheaded commission-free stock and ETF trading, said it would increase the margin maintenance requirements for those stocks affected by election volatility. It maintains the move would help protect customers from increased election volatility.
Packy McCormick, a day trader and author of the Not Boring newsletter, posted the warning in a tweet at 9.42 pm ET on Thursday, minutes after receiving it. Regular trading on the New York Stock Exchange starts at 9.30 am ET.
Other users blasted the move, with one even saying “I’m not sure how this could be legal.”
Investing on margins means that traders can borrow money as loans from Robinhood to buy stocks and options, making it possible to boost investment gains. Margin maintenance, meanwhile, is the minimum amount required to be held in the account to avoid stumbling blocks with Robinhood.
“If you hold any of the affected stocks on margin, your buying power may decrease or your account may be in a deficit after these changes go into effect,” the warning read.
Users will be issued a “margin call” if they fall short of the required minimum and don’t deposit additional funds to increase their account value by the end of the trading day on October 16.
“If you do not resolve the margin call, we may need to sell off some or all of your stock to cover the call,” it said.
It is common practice on futures exchanges for margin requirements to increase as market volatility rises, because of the greater potential for traders to rack up losses that they cannot then afford to cover.
Stock market volatility rose earlier this year to its highest since the extremes witnessed during the financial crisis of 2008 and 2009, as investors around the world dumped equities to hold cash, government bonds, and even gold.
The warning was issued on the same day that Bloomberg reported hackers gained access to almost 2,000 trading accounts on Robinhood’s platform.
This week, the company sent a push notification through its app prompting customers to start using two-factor authentication. Security “is a top priority and something we take very seriously,” a spokesperson told Business Insider.
The trading platform has seen its popularity explode recently, with COVID-19 only fuelling its prominence, given the boom in retail trading thanks in part to the volatility across markets from uncertainty over coronavirus. Lockdowns earlier this year that halted most professional sporting activity, for example, encouraged many amateur investors to try day-trading.
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