Keep everyone trading and possibly run out of cash to cover everything? Or stop trading and possibly hose the folks trying to make trades?
Because of T+2 settlement when you buy/sell stock the actual exchange of shares and money only happens 2 business days later. If you sell a stock and then buy a different stock the same day you're trading with money that technically is not in your account yet, even in a cash account.
It's fine because you wrote promissory note to pay $X in 2 days, but you're also holding a promissory note saying you are owed >=$X in 2 days. (And promissory notes to receive/deliver the respective shares). And there's a central clearinghouse enforcing this.
But part of the reason why it's low risk is that the clearinghouse requires brokers to put up large amounts of cash as collateral to ensure they can pay all their promissory notes even if they go bust. They are fairly conservative in their collateral requirements.
So when all your customers are trading a highly volatile stock with a notoriously high rate of failure to deliver (this is a whole other discussion), the clearinghouse gets antsy and may ask you to put up ridiculously large amounts of cash as collateral.
It's to do with T+2 settlement, but not with unsettled funds (funds you got from selling a stock, but hasn't settled yet). Basically, even if the funds were settled (eg. it's been sitting in your account for years), your broker has to put up the deposit on the day of trade, but can't use your money to do it. So if you bought $100 worth of shares and the deposit requirement was 100%, then your broker has to come up with $100 of their own cash (or borrow it from someone) to fulfill the trade.
https://finance.yahoo.com/video/heres-why-robinhood-restrict...
>but our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can't afford the cost of that trade clearance.
There have been several Congressional Hearings since January’s drama, and something definitely doesn’t add up.
Robinhood’s CEO stated, under oath, that they switched off buys of GME following discussions with the DTCC.
In a later hearing, the head of the DTCC stated — again, under oath and on the record — that Robinhood’s decision was entirely their own, and they had never spoken with Robinhood about it.
Someone is lying.
I would urge anyone interested in this (ongoing) saga to read this excellent investigative journalism piece here:
Or, both people are stating the story from their side, and there is context missing.
Robinhood: "We switch off after discussions with the DTCC [about increased reserve requirements which we could not meet]"
DTCC: "It was entirely their decision, we never spoke to them about [the explicit actions they would have to take. It's definitely a coincidence that most other brokers did the exact same thing]"
Take a read of that article I linked, it gives an excellent and impartial summary of many of the conflicts of interests affecting all parties involved. It also brings up numerous issues I never see discussed here, given most people are only aware of the “mainstream narrative” — there is much more evidence being uncovered than most people are aware of.
That doesn't seem clear. Possible, but not for sure. Too much of this reads like hardcore conspiracy theorists, but maybe that's just biasing me against the legit bits.
Of course artificially removing all demand is going to tank the price.
Retail got screwed, and it wasn't by retail.
It was a short squeeze of unprecedented scale — the first widespread opportunity for wealth redistribution of its kind, thanks largely to social media.
Where “Occupy Wall Street” failed, “Liquidate Wall Street” was winning.
The hedge funds blatantly rigged the public trading system to avoid bankruptcy. I can’t believe so many people still defend them.
And that's exactly why ALL financial instruments & systems should operate publicly, transparently.
[1] quotes used because settlement actually happens 2 days after the trade is made.
The blame should go toward the DTCC who increased their margin requirements on buyers for seemingly no reason other than to coerce everyone into stopping retail investors from squeezing the rich shorts.
...except credit risk
https://www.bloomberg.com/opinion/articles/2021-01-29/reddit...
>[T+2 settlement] means that the seller takes two days of credit risk to the buyer. I see a stock trading at $400 on Monday, I push the button to buy it, I buy it from you at $400. On Tuesday the stock drops to $20. On Wednesday you show up with the stock that I bought on Monday, and you ask me for my $400. I am no longer super jazzed to give it to you. I might find a reason not to pay you. The reason might be that I’m bankrupt, from buying all that stock for $400 on Monday.
The quote in my previous comment covers that, specifically:
>I am no longer super jazzed to give it to you. I might find a reason not to pay you. The reason might be that I’m bankrupt, from buying all that stock for $400 on Monday.
It's not that they'll show up and say "on second thought I don't want that stock anymore, please cancel my order". It's that they'll go bankrupt in the meantime. This was already mentioned in the original comment.
>The reason might be that I’m bankrupt
They do, that's what the collateral is for. From the linked article:
>The way that stock markets mostly deal with this risk is a system of clearinghouses. The stock trades are processed through a clearinghouse. The members of the clearinghouse are big brokerage firms—“clearing brokers”—who send trades to the clearinghouses and guarantee them. The clearing brokers post collateral with the clearinghouses: They put up some money to guarantee that they’ll show up to pay off all their settlement obligations. The clearing brokers have customers—institutional investors, smaller brokers—who post collateral with the clearing brokers to guarantee their obligations. The smaller brokers, in turn, have customers of their own—retail traders, etc.—and also have to make sure that, if a customer buys stock on a Monday, she’ll have the cash to pay for it on Wednesday.
The catch here seems to be that the broker can't use customer funds for collateral (see my other comments in this thread), so the broker has to come up with the money themselves by drawing on lines of credit. If those lines of credit run dry, then they can't take any more orders.
But <lock up> is only a “valid operation” when executed with “the broker’s own funds”. Why? To whom would “locking up $X from broker funds” be a valid operation, but “locking up $X from client funds” wouldn’t be?
Your comments are saying “that’s just how it is”, but that’s not a reason. Is it a wholly arbitrary operation handed down from on high that accomplishes nothing? Is it a matter of the financial system not being able to trust client-originating money?
regulations, presumably to protect the retail trader. It was part of dodd-frank. https://twitter.com/kralctrebor/status/1354952686165225478
>Is it a matter of the financial system not being able to trust client-originating money?
Yeah pretty much. If every trader had their funds sitting in one place (with the clearinghouse or the fed), then the clearinghouse wouldn't need a deposit system since they can easily validate whether everyone has the funds.
If you weren’t, you’re not really resolving my confusion here.
"unsafe" is the wrong word here. That would imply the clearinghouse doesn't think the collateral is as good if it came from the customer rather than the broker. This isn't the case. The requirement to use broker funds is not to protect the clearinghouse, it's to protect the customer in case the clearinghouse seizes the collateral (as they're allowed to do) when things go south. By using broker (or their creditor's funds), the customer's funds aren't at risk.
This still doesn't make sense.
The collateral is lost either way, but when the broker puts up the collateral the broker is on the hook for the loss, not the customer.
That is, it's some kind of capricious being capable of seizing and willing to seize any money trusted to them, with no recourse, but somehow the presence of collateral makes it all better, even though that could be seized too.
Regulations? Presumably customer funds are segregated from company funds, so the company and the clearinghouse can't raid it if they need money.
>At the very least, it's a bizarre threat model that the clearinghouse can seize both, but it will only ever seize collateral (which is what your claim requires to make sense).
>That is, it's some kind of capricious being capable of seizing and willing to seize any money trusted to them, with no recourse, but somehow the presence of collateral makes it all better, even though that could be seized too.
by "seize" I don't mean the clearinghouse can walk into the offices (or bank accounts) of any of their member and grab whatever they want. They're seizing (or more accurately, refusing to return) the deposit that the member sent on the day of trade.
Okay, and again, if "regulations" are enough for one case, why not the other? If a "regulation" can prevent the clearinghouse from holding on to asset they're not entitled to, why not use that instead of requiring the broker to put up money that will compensate the customer when the CH holds on to an asset they're not entitled to?
>by "seize" I don't mean the clearinghouse can walk into the offices (or bank accounts) of any of their member and grab whatever they want. They're seizing (or more accurately, refusing to return) the deposit that the member sent on the day of trade.
Great, that's how I was using it too.
But the clearinghouse is entitled to it. The clearinghouse member's collateral is used to make up the difference (the credit risk) should the member fail to pay the required amount on the day of settlement. If you prohibit the clearinghouse from seizing it, then that kills the point of the collateral.
I think we’re going in circles. And if I may give some unsolicited feedback, if I understood this topic as well as you’re claiming to, I probably would have given answers that avoided reaching that point. If I didn’t, I would have confessed as much, earlier in the thread, once I started giving your answers.