The FTD rate on GME has been extreme even leading up to the massive price spike. When the price rose to $300+ these FTDs could have only increased, and started carrying some very heavy liabilities, into the billions of dollars.
If a short seller was going to get called and failed to cover, anyone who held those shares long were at risk. But actually the clearinghouse is the one who has to make the buyers whole. First, any collateral held in the clearinghouse from the short selllers would be used to cover, but it wouldn’t be nearly enough. Then funds are drawn from a collective pool, but not exactly evenly from all participants. As I understand it, the brokerages that bought the shares that FTDd would have to pay a somewhat higher proportion of the shortfall.
I think this is essentially why Robinhood got the 3am call demanding $3 billion. The risk of a hedge fund failing was a multi-billion dollar contagion about to the hit the clearinghouse. They needed to cover that risk and they hit up the brokerage who was buying the majority of the shares.
I don’t see how Robinhood itself was at any risk of default. I think they got caught up in it because their counter-party was insolvent and the clearinghouse knew it.
It wasn’t a risk of Robinhood not being able to pay for its Buy orders. If that was the case they could just shut of margin trading on GME and be done (no buying GME on margin, or using GME as collateral for other margin buys). Basically buying the mandatory “FTD insurance” on GME became prohibitively expense.
I’d love to see a public accounting of the reserve fund algorithms, and who else they asked to pony up billions of dollars that morning.
I think ultimately when the clearinghouse itself became at risk of a multi-billion dollar contagion they pumped the brakes on the stock in order to keep the hedge funds alive. The massive FTD rate is a solid indicator of clearinghouse risk. And it wasn’t Robinhood’s FTD, but they were on the other end of the trade.