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Thank you for discussing this and bringing your perspective. Question, why are we operating near-real-time settlement systems for securities if it doesn't elim

Thank you for discussing this and bringing your perspective. Question, why are we operating near-real-time settlement systems for securities if it doesn't eliminate such risks? I don't understand why these transactions aren't being netted and conducted as close to real-time as possible. This aspect of the economy seems like a significant vulnerability.

FabHK 6y ago
There is no real-time-settlement for securities, AFAIK. They're settled two biz days later. RH, of course, seemingly settles things immediately vis-a-vis its retail clients. That creates the whole web (well, not a web, really, but a snow flake with a central counterpart which branch off again) of credit and collateral, which generally works extremely well, but comes to its limits with irrational price action such as this. I don't see the lack of real-time-settlement as a vulnerability so much, but more the mismatch. But I'd suggest fixing it not by increasing the frequency of settlement, but by decreasing the frequency of trading (Tobin tax (which, funnily enough, is also called Robin Hood tax [1]); replace continuous trading with a couple of auctions a day; ???). [1] https://en.wikipedia.org/wiki/Tobin_tax https://en.wikipedia.org/wiki/Tobin_tax
- areoform 6y ago
  Quick note, settlement risk is indeed serious and I've covered it somewhere else. Side note, I am against the Tobin Tax. I think public markets are more important than most folks believe. I do believe that frequent trading is a good thing, as is retail participation in markets. One of the amplifiers of income inequality, I suspect, in the past few decades has been the fact that high-growth companies that normally would have gone public sooner have stayed private for longer, denying participation from the public market. For example, a well chosen index of Dot Com stocks that included Amazon, Google, E-Bay etc. picked in 1998 would have, provided there was continuous investment and a long-hold, injected a large amount of capital back into the public and retirement systems, which would have helped lift all boats so to speak. AMZN was originally at around $4/share (adjusted for splits, provided this data source is correct, https://www.macrotrends.net/stocks/charts/AMZN/amazon/stock-price-history https://www.macrotrends.net/stocks/charts/AMZN/amazon/stock-... ), if you had bought 1k stocks of the company in pre-2000, and held until now. Your originally $4k position would be worth 3.2M. That's quite crazy. And it's retirement money for a lot of people. Amazon's growth has occurred in the public, giving retail investors the ability to tap into the formation of new wealth. SpaceX's, AirBNB's, DropBox's etc hasn't. They're playthings of the well heeled. Not the gumshoes. We need to re-orient public markets in such a way that everyone gets to participate in wealth creation. Not restrict it even further.
  - FabHK 6y ago
    > I do believe that frequent trading is a good thing, as is retail participation in markets. On the frequent trading, let's agree to disagree. On retail participation, agreed. But I don't think that the Tobin Tax would inhibit it, but rather HFT and maybe day trading. Fully agree that this new thing of companies staying private longer and longer is a bad development, with the best deals available only to the few connected and wealthy.
JumpCrisscross 6y ago
> why are we operating near-real-time settlement systems for securities if it doesn't eliminate such risks? The firms that provided instantaneous-seeming settlement got the orders. And settlement failures were rare and correlated enough that avoiding them wasn't a differentiator. Then we got centralized clearinghouses and deposit insurance and the risk fell so far into the background that it's entirely novel to many market participants today. > why these transactions aren't being netted and conducted as close to real-time as possible It is technically difficult. It provides less room for correcting errors. And because real-time payment rails are fundamentally more expensive than batched rails, and if your payments aren't in sync with your settlement you've got a credit component somewhere. > seems like a significant vulnerability It does, but I don't think it is. Clearinghouses spread risk across a lot of people. They also help early identify daisy-chains, e.g. a single broker sold ten shares to ten brokers who then sold it to ten more fifty times and that single broker hasn't settled yet, and loops, e.g. I owe you and you owe Larry and Larry owes Bob and Bob owes me, of settlement risk. That's why Dodd-Frank moved many derivatives onto centralized clearinghouses. That said, we've only had these since the 1970s. Counterfactual: we didn't have the technology to do this until the 1970s.
- areoform 6y ago
  I've been studying the history of the settlement systems, and incidentally, this is a lesson learnt by each successive generation. https://news.ycombinator.com/item?id=25791646 https://news.ycombinator.com/item?id=25791646 A part of the reason why the Automated Clearing House system was setup was the collapse of Herstatt, which was a settlement failure that led to the global push for RTGSes. It is not that difficult to imagine another such storm. A heavily shorted stock, where retail traders "rally" to stick to the man and buy + hold on to the majority of the stock in circulation. And then the shares left in pools + the open market aren't enough to cover everyone's position. Creating a cascading failure.
  - petegordon 6y ago
    That is interesting. Thanks. I’ve been looking at settlement also and am particularly interested in overnight Interest rates. https://en.m.wikipedia.org/wiki/Overnight_indexed_swap https://en.m.wikipedia.org/wiki/Overnight_indexed_swap This past years changes at the Fed for Central Bank Interest Rate Swap Lines and 9 new banks, which included Sweden and others. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200729b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... The dollar is running the world right now. Lots of demand even as, or maybe why, the value has been weakening. https://www.marketwatch.com/investing/index/dxy https://www.marketwatch.com/investing/index/dxy Curious when the dollar running the world will begin to change. The US dollar and CN Yuan are the only countries keeping us with positive, basically zero, interest rates globally (See IMF SDR) https://www.imf.org/external/np/fin/data/sdr_ir.aspx https://www.imf.org/external/np/fin/data/sdr_ir.aspx Lastly, Power to the Players! Still looking for more short squeeze on the GME shorts, would like to see them get pushed down to a reasonable level of the float (5-20%?). I’m holding.

FabHK 6y ago

There is no real-time-settlement for securities, AFAIK. They're settled two biz days later. RH, of course, seemingly settles things immediately vis-a-vis its retail clients. That creates the whole web (well, not a web, really, but a snow flake with a central counterpart which branch off again) of credit and collateral, which generally works extremely well, but comes to its limits with irrational price action such as this. I don't see the lack of real-time-settlement as a vulnerability so much, but more the mismatch. But I'd suggest fixing it not by increasing the frequency of settlement, but by decreasing the frequency of trading (Tobin tax (which, funnily enough, is also called Robin Hood tax [1]); replace continuous trading with a couple of auctions a day; ???). [1] https://en.wikipedia.org/wiki/Tobin_tax https://en.wikipedia.org/wiki/Tobin_tax

areoform 6y ago
Quick note, settlement risk is indeed serious and I've covered it somewhere else. Side note, I am against the Tobin Tax. I think public markets are more important than most folks believe. I do believe that frequent trading is a good thing, as is retail participation in markets. One of the amplifiers of income inequality, I suspect, in the past few decades has been the fact that high-growth companies that normally would have gone public sooner have stayed private for longer, denying participation from the public market. For example, a well chosen index of Dot Com stocks that included Amazon, Google, E-Bay etc. picked in 1998 would have, provided there was continuous investment and a long-hold, injected a large amount of capital back into the public and retirement systems, which would have helped lift all boats so to speak. AMZN was originally at around $4/share (adjusted for splits, provided this data source is correct, https://www.macrotrends.net/stocks/charts/AMZN/amazon/stock-price-history https://www.macrotrends.net/stocks/charts/AMZN/amazon/stock-... ), if you had bought 1k stocks of the company in pre-2000, and held until now. Your originally $4k position would be worth 3.2M. That's quite crazy. And it's retirement money for a lot of people. Amazon's growth has occurred in the public, giving retail investors the ability to tap into the formation of new wealth. SpaceX's, AirBNB's, DropBox's etc hasn't. They're playthings of the well heeled. Not the gumshoes. We need to re-orient public markets in such a way that everyone gets to participate in wealth creation. Not restrict it even further.
- FabHK 6y ago
  > I do believe that frequent trading is a good thing, as is retail participation in markets. On the frequent trading, let's agree to disagree. On retail participation, agreed. But I don't think that the Tobin Tax would inhibit it, but rather HFT and maybe day trading. Fully agree that this new thing of companies staying private longer and longer is a bad development, with the best deals available only to the few connected and wealthy.

JumpCrisscross 6y ago

> why are we operating near-real-time settlement systems for securities if it doesn't eliminate such risks? The firms that provided instantaneous-seeming settlement got the orders. And settlement failures were rare and correlated enough that avoiding them wasn't a differentiator. Then we got centralized clearinghouses and deposit insurance and the risk fell so far into the background that it's entirely novel to many market participants today. > why these transactions aren't being netted and conducted as close to real-time as possible It is technically difficult. It provides less room for correcting errors. And because real-time payment rails are fundamentally more expensive than batched rails, and if your payments aren't in sync with your settlement you've got a credit component somewhere. > seems like a significant vulnerability It does, but I don't think it is. Clearinghouses spread risk across a lot of people. They also help early identify daisy-chains, e.g. a single broker sold ten shares to ten brokers who then sold it to ten more fifty times and that single broker hasn't settled yet, and loops, e.g. I owe you and you owe Larry and Larry owes Bob and Bob owes me, of settlement risk. That's why Dodd-Frank moved many derivatives onto centralized clearinghouses. That said, we've only had these since the 1970s. Counterfactual: we didn't have the technology to do this until the 1970s.

areoform 6y ago
I've been studying the history of the settlement systems, and incidentally, this is a lesson learnt by each successive generation. https://news.ycombinator.com/item?id=25791646 https://news.ycombinator.com/item?id=25791646 A part of the reason why the Automated Clearing House system was setup was the collapse of Herstatt, which was a settlement failure that led to the global push for RTGSes. It is not that difficult to imagine another such storm. A heavily shorted stock, where retail traders "rally" to stick to the man and buy + hold on to the majority of the stock in circulation. And then the shares left in pools + the open market aren't enough to cover everyone's position. Creating a cascading failure.
- petegordon 6y ago
  That is interesting. Thanks. I’ve been looking at settlement also and am particularly interested in overnight Interest rates. https://en.m.wikipedia.org/wiki/Overnight_indexed_swap https://en.m.wikipedia.org/wiki/Overnight_indexed_swap This past years changes at the Fed for Central Bank Interest Rate Swap Lines and 9 new banks, which included Sweden and others. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200729b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... The dollar is running the world right now. Lots of demand even as, or maybe why, the value has been weakening. https://www.marketwatch.com/investing/index/dxy https://www.marketwatch.com/investing/index/dxy Curious when the dollar running the world will begin to change. The US dollar and CN Yuan are the only countries keeping us with positive, basically zero, interest rates globally (See IMF SDR) https://www.imf.org/external/np/fin/data/sdr_ir.aspx https://www.imf.org/external/np/fin/data/sdr_ir.aspx Lastly, Power to the Players! Still looking for more short squeeze on the GME shorts, would like to see them get pushed down to a reasonable level of the float (5-20%?). I’m holding.