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> It makes me wonder: who's on the hook if all these unsophisticated investors get wiped out? If they’re borrowing on margin, a correction happens, and they ge

> It makes me wonder: who's on the hook if all these unsophisticated investors get wiped out? If they’re borrowing on margin, a correction happens, and they get a margin call they can’t pay and end up negative, they owe the money to the brokerage. It’s like any other debt that can be bought or sold, I assume.

AYBABTME 6y ago
What happens when too many people that owe money to the brokerage go bankrupt?
- mcguire 6y ago
  They have insurance. What happens if the insurance system goes bankrupt?
  - parsimo2010 6y ago
    No they don't. The average person's insurance doesn't cover bad stock performance, the only insurance against bad trades is adjusting the beta of your portfolio. What happens when a main street investor gets hit by a crash, depending on how bad the crash is, is that they lose their savings. If they actually end up with debt that they can't repay, they may lose their house (if they own one), declare bankruptcy, and have their credit ruined for several years.
- quickthrowman 6y ago
  Well, hopefully the brokerage’s risk department prevents that! If too many people went bankrupt and owed margin debt and the brokerage went under, the government would step in and take custody of securities and cash and get them back to the holders, (at some point) who may or may not take a loss if they’re over SIPCs coverage limits of 250,000 cash and 500,000 of securities.
  - skohan 6y ago
    > Well, hopefully the brokerage’s risk department prevents that! Blind-spots do exist, as we have seen in 2008. I'm not saying that I know better, but we can't take it for granted that these organizations have an accurate assessment of all the risks, especially when they are making record profits.
    - quickthrowman 6y ago
      > Blind-spots do exist, as we have seen in 2008. I'm not saying that I know better, but we can't take it for granted that these organizations have an accurate assessment of all the risks, especially when they are making record profits. Absolutely! IB got caught with their pants down when /CL (WTI crude futures contract) went negative in April. Their system used to calculate margin requirements did not take negative contract prices into account, and neither did the trading software. Margin calls were not issued at the proper time, and traders couldn’t see the price or execute a trade on IB while the contract value was negative. Due to the latter, IB ended up absorbing any losses incurred by customers while /CL was negative. They lost around $110 million. https://www.ft.com/content/01ee0794-158f-40c5-8bb9-82cf5d5f314b https://www.ft.com/content/01ee0794-158f-40c5-8bb9-82cf5d5f3... https://www.bloomberg.com/news/articles/2020-05-08/oil-crash-busted-a-broker-s-computers-and-inflicted-huge-losses https://www.bloomberg.com/news/articles/2020-05-08/oil-crash...
edoceo 6y ago
And that debt gets packaged and bundled and resold

AYBABTME 6y ago

What happens when too many people that owe money to the brokerage go bankrupt?

mcguire 6y ago
They have insurance. What happens if the insurance system goes bankrupt?
- parsimo2010 6y ago
  No they don't. The average person's insurance doesn't cover bad stock performance, the only insurance against bad trades is adjusting the beta of your portfolio. What happens when a main street investor gets hit by a crash, depending on how bad the crash is, is that they lose their savings. If they actually end up with debt that they can't repay, they may lose their house (if they own one), declare bankruptcy, and have their credit ruined for several years.
quickthrowman 6y ago
Well, hopefully the brokerage’s risk department prevents that! If too many people went bankrupt and owed margin debt and the brokerage went under, the government would step in and take custody of securities and cash and get them back to the holders, (at some point) who may or may not take a loss if they’re over SIPCs coverage limits of 250,000 cash and 500,000 of securities.
- skohan 6y ago
  > Well, hopefully the brokerage’s risk department prevents that! Blind-spots do exist, as we have seen in 2008. I'm not saying that I know better, but we can't take it for granted that these organizations have an accurate assessment of all the risks, especially when they are making record profits.
  - quickthrowman 6y ago
    > Blind-spots do exist, as we have seen in 2008. I'm not saying that I know better, but we can't take it for granted that these organizations have an accurate assessment of all the risks, especially when they are making record profits. Absolutely! IB got caught with their pants down when /CL (WTI crude futures contract) went negative in April. Their system used to calculate margin requirements did not take negative contract prices into account, and neither did the trading software. Margin calls were not issued at the proper time, and traders couldn’t see the price or execute a trade on IB while the contract value was negative. Due to the latter, IB ended up absorbing any losses incurred by customers while /CL was negative. They lost around $110 million. https://www.ft.com/content/01ee0794-158f-40c5-8bb9-82cf5d5f314b https://www.ft.com/content/01ee0794-158f-40c5-8bb9-82cf5d5f3... https://www.bloomberg.com/news/articles/2020-05-08/oil-crash-busted-a-broker-s-computers-and-inflicted-huge-losses https://www.bloomberg.com/news/articles/2020-05-08/oil-crash...

edoceo 6y ago

And that debt gets packaged and bundled and resold