Finance

Robinhood rolls out margin trading in the UK after regulator nod

Published

2 months ago

October 21, 2024

Business Finance News

Tthe Robinhood logo is displayed on a smartphone screen.

Rafael Henrique | Sopa Images | Lightrocket | Getty Images

LONDON — Robinhood said Monday that it’s rolling out margin investing — the ability for investors to borrow cash to augment their trades — in the U.K.

The U.S. online investment platform said that the option would allow users in the U.K. to leverage their existing asset holdings as collateral to purchase additional securities.

The launch of margin trading follows the recent approval of the product, after Robinhood held conversations with Britain’s financial regulator, the Financial Conduct Authority (FCA).

Margin trading is a rarity in the U.K., where regulators see it as more controversial because of the risks involved to users. Some platforms in the country limit margin trading for only high-net-worth individuals or businesses. Other firms that offer margin investing in the U.K. include Interactive Brokers, IG and CMC Markets.

The rollout comes after Robinhood debuted a securities lending product in the U.K. in September, allowing consumers to earn passive income on stocks they own, as part of the company’s latest bid to grow its market share abroad.

The stock trading app touted “competitive” interest rates with its margin loans offering. Rates offered by the platform range from 6.25% for margin loans of up to $50,000 to 5.2% for loans of $50 million and above.

Jordan Sinclair, president of Robinhood U.K., said that many customers feel they can’t access more advanced products like margin trading in Britain, as they’re typically reserved for a select few professional traders investing with the likes of heavyweight banks JPMorgan Chase, Goldman Sachs, Morgan Stanley and UBS.

“There’s so many barriers to entry,” Sinclair told CNBC in an interview. “Ultimately, that’s what we want to break down all those stigmas and barriers to just basic investing tools.”

He added, “For the right customer this is a great way to diversify and expand their portfolio.”

A risky business

Investing on borrowed cash can be a risky trading strategy. In the case of margin trading, investors can use borrowed money to increase the size of their trades.

Say you wanted to make a $10,000 investment in Tesla. Usually, you’d have to fork out $10,000 of your own cash to buy that stock. But by using a margin account, you can “leverage” your trade. With 10x leverage, you’d only need to have $1,000 upfront to make the trade, instead of $10,000.

That can be a lucrative strategy for professional traders, who can make even larger returns than on usual trades, if the value of the purchased asset rises significantly.

Watch CNBC's full interview with Robinhood CEO Vlad Tenev

It’s a riskier path for retail traders. If the value of the asset you’re buying on borrowed cash drops significantly, your losses will be dramatic, too.

Robinhood announced it was launching in the U.K last November, opening up its app to Brits in March. At the time of launch, Robinhood was unable to offer U.K. users the option of margin trading, pending discussions with the FCA.

“I think with the regulator, it was just about getting them comfortable with our approach, giving them a history of our product in the U.S., what we’ve developed, and the eligibility,” Robinhood’s Sinclair told CNBC.

Sinclair said that Robinhood implemented robust guardrails to ensure that customers don’t invest more cash than they can afford to lose when margin investing.

The platform requires users seeking to trade on margin to have a minimum of $2,000 of cash deposited in their accounts. Customers also have to opt in to use the product — they’re not just automatically enrolled for a margin account.

“There are eligibility criteria. There is a way to review appropriateness of this product for the right customer,” Sinclair added. “Fundamentally, that’s a really important part of this product. We recognize it isn’t for the novice investor that’s just getting started on our customer.”

Robinhood says that its customers’ uninvested cash is protected to the tune of $2.5 million with the U.S.’ Federal Deposit Insurance Corporation, which the firm says adds another layer of protection for users.

Finance

Stocks making the biggest moves midday: AAL, AVGO, JPM

Published

24 hours ago

December 24, 2024

Business Finance News

Finance

Biggest banks planning to sue the Federal Reserve over annual stress tests

Published

1 day ago

December 24, 2024

Business Finance News

A general view of the Federal Reserve Building in Washington, United States.

Samuel Corum | Anadolu Agency | Getty Images

The biggest banks are planning to sue the Federal Reserve over the annual bank stress tests, according to a person familiar with the matter. A lawsuit is expected this week and could come as soon as Tuesday morning, the person said.

The Fed’s stress test is an annual ritual that forces banks to maintain adequate cushions for bad loans and dictates the size of share repurchases and dividends.

After the market close on Monday, the Federal Reserve announced in a statement that it is looking to make changes to the bank stress tests and will be seeking public comment on what it calls “significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements.”

The Fed said it made the determination to change the tests because of “the evolving legal landscape,” pointing to changes in administrative laws in recent years. It didn’t outline any specific changes to the framework of the annual stress tests.

While the big banks will likely view the changes as a win, it may be too little too late.

Also, the changes may not go far enough to satisfy the banks’ concerns about onerous capital requirements. “These proposed changes are not designed to materially affect overall capital requirements, according to the Fed.

The CEO of BPI (Bank Policy Institute), Greg Baer, which represents big banks like JPMorgan, Citigroup and Goldman Sachs, welcomed the Fed announcement, saying in a statement “The Board’s announcement today is a first step towards transparency and accountability.”

However, Baer also hinted at further action: “We are reviewing it closely and considering additional options to ensure timely reforms that are both good law and good policy.”

Groups like the BPI and the American Bankers Association have raised concerns about the stress test process in the past, claiming that it is opaque, and has resulted in higher capital rules that hurt bank lending and economic growth.

In July, the groups accused the Fed of being in violation of the Administrative Procedure Act, because it didn’t seek public comment on its stress scenarios and kept supervisory models secret.

CNBC’s Hugh Son contributed to this report.