12 ms·

The real reason is as follows: You cannot use customer funds to cover dtcc collateral terms. Your milk example does not work, because you are not settling up

The real reason is as follows: You cannot use customer funds to cover dtcc collateral terms. Your milk example does not work, because you are not settling up the milk buy 2 days after. You settle your milk purchase on the spot.

cashewchoo 6y ago
Huh I didn't know that. The firm I worked for did self-clearing, and we had no customers (prop trading). I guess that means these requirements didn't really matter for us because everything was ours?
- IG_Semmelweiss 6y ago
  even if you self clear , you are still a broker clearer and you end up touching the DTCC. This is exactly what Robinhood is doing too. This twitter user explains, although it gets quite technical: https://mobile.twitter.com/wallstcynic/status/1355013438154616835?prefetchtimestamp=1611896590777 https://mobile.twitter.com/wallstcynic/status/13550134381546... Look at the tweet at 7:41PM EST. " But if RH takes in 500m of new money and 300m buys GME, then at minimum they are looking at posting 30m+ from just that exposure at NSCC. They cannot use client money - RH has to use their own resources to post. And if GME stock drops, RH has to post the loss pre-settlement."
  - lukeramsden 6y ago
    Last I heard, the DTCC have raised collateral requirements on GME from 1-3% to 100%. Seriously. That's the real reason clearing houses stopped accepting new orders on GME from brokers.
    - floxy 6y ago
      Is there a way for a regular person to see the current DTCC collateral requirements for a particular stock?
      - toomuchtodo 6y ago
        I believe this is only available in the Collateral Monitor dashboard that institutions that must post collateral have access to.
posix_compliant 6y ago
So you’re saying the issue is “what if the grocery goes insolvent before it can hand you the milk, but after you’ve paid”? I’m still not understanding how robinhood lost money in the first place.
- 015a 6y ago
  That's an accurate enough analogy. When you sell a stock on Robinhood, it takes ~2 days to "clear" the transaction. So, Robinhood credits your account, but Robinhood doesn't see that money for 2 days. They don't allow you to withdraw the money from Robinhood until its cleared, but you can purchase other stocks with the money, and if you do that, Robinhood now needs to send something to the seller. All brokerages, and the clearing houses they work with if they don't self-clear (RH, IB, WeBull, etc do not self-clear; bigger banks do), maintain a level of "float" to handle these payments; its like grease which allows the system to move faster, and the bigger these pools of money, the less risk there is. Robinhood is the #1 app on the App Store right now. EVERYONE is getting in on this. Many of these users likely joined with an invite code, and Robinhood will give out two random shares of stocks for each of these users ($$). After they're in the app, they're probably using the Instant Deposits feature to trade on up-to $1000 they've started transferring but which hasn't cleared yet (pressure on the float). Many of these users are, in WSB terminology, paper hands; they bought GME @ 250, its at 320 now, they want their gains, so they sell immediately; more pressure on the float. If that float hits zero, that's basically like, imagine your company's bank account hitting zero, its payday (because every single hour of every day is payday for a brokerage), and you have 50 million employees. People would sell stocks, and the number in their account wouldn't go up. In fact, people couldn't even buy or sell stocks, because that float is used to pay fees on every transaction to their clearing house. Now, people are scared; their faith in robinhood has been shook, and they want out. So, they try to sell stocks; they can't. They're angry. If they have settled funds, they pull those out, which just compounds the problem because now their balance sheets start looking weaker and weaker, which makes access to emergency credit lines harder. Basically, they would implode irrevocably. Even the hint of a liquidity crisis is enough to tarnish a firm's reputation. IMO, I think the biggest driver of this issue for Robinhood is their instant deposits functionality. That feature is insane, and in market runs like this, deadly. Robinhood hasn't actually "lost" money (well, not enough to cause a liquidity crisis); its just the problem of not having enough money right right now to pay people who need to be paid. But, the deeper issue is the US financial system and its molasses speed of moving money around. The Fed is making strides to improve this, but it will take a decade or more before we see real change.

cashewchoo 6y ago

Huh I didn't know that. The firm I worked for did self-clearing, and we had no customers (prop trading). I guess that means these requirements didn't really matter for us because everything was ours?

IG_Semmelweiss 6y ago
even if you self clear , you are still a broker clearer and you end up touching the DTCC. This is exactly what Robinhood is doing too. This twitter user explains, although it gets quite technical: https://mobile.twitter.com/wallstcynic/status/1355013438154616835?prefetchtimestamp=1611896590777 https://mobile.twitter.com/wallstcynic/status/13550134381546... Look at the tweet at 7:41PM EST. " But if RH takes in 500m of new money and 300m buys GME, then at minimum they are looking at posting 30m+ from just that exposure at NSCC. They cannot use client money - RH has to use their own resources to post. And if GME stock drops, RH has to post the loss pre-settlement."
- lukeramsden 6y ago
  Last I heard, the DTCC have raised collateral requirements on GME from 1-3% to 100%. Seriously. That's the real reason clearing houses stopped accepting new orders on GME from brokers.
  - floxy 6y ago
    Is there a way for a regular person to see the current DTCC collateral requirements for a particular stock?
    - toomuchtodo 6y ago
      I believe this is only available in the Collateral Monitor dashboard that institutions that must post collateral have access to.

posix_compliant 6y ago

So you’re saying the issue is “what if the grocery goes insolvent before it can hand you the milk, but after you’ve paid”? I’m still not understanding how robinhood lost money in the first place.

015a 6y ago
That's an accurate enough analogy. When you sell a stock on Robinhood, it takes ~2 days to "clear" the transaction. So, Robinhood credits your account, but Robinhood doesn't see that money for 2 days. They don't allow you to withdraw the money from Robinhood until its cleared, but you can purchase other stocks with the money, and if you do that, Robinhood now needs to send something to the seller. All brokerages, and the clearing houses they work with if they don't self-clear (RH, IB, WeBull, etc do not self-clear; bigger banks do), maintain a level of "float" to handle these payments; its like grease which allows the system to move faster, and the bigger these pools of money, the less risk there is. Robinhood is the #1 app on the App Store right now. EVERYONE is getting in on this. Many of these users likely joined with an invite code, and Robinhood will give out two random shares of stocks for each of these users ($$). After they're in the app, they're probably using the Instant Deposits feature to trade on up-to $1000 they've started transferring but which hasn't cleared yet (pressure on the float). Many of these users are, in WSB terminology, paper hands; they bought GME @ 250, its at 320 now, they want their gains, so they sell immediately; more pressure on the float. If that float hits zero, that's basically like, imagine your company's bank account hitting zero, its payday (because every single hour of every day is payday for a brokerage), and you have 50 million employees. People would sell stocks, and the number in their account wouldn't go up. In fact, people couldn't even buy or sell stocks, because that float is used to pay fees on every transaction to their clearing house. Now, people are scared; their faith in robinhood has been shook, and they want out. So, they try to sell stocks; they can't. They're angry. If they have settled funds, they pull those out, which just compounds the problem because now their balance sheets start looking weaker and weaker, which makes access to emergency credit lines harder. Basically, they would implode irrevocably. Even the hint of a liquidity crisis is enough to tarnish a firm's reputation. IMO, I think the biggest driver of this issue for Robinhood is their instant deposits functionality. That feature is insane, and in market runs like this, deadly. Robinhood hasn't actually "lost" money (well, not enough to cause a liquidity crisis); its just the problem of not having enough money right right now to pay people who need to be paid. But, the deeper issue is the US financial system and its molasses speed of moving money around. The Fed is making strides to improve this, but it will take a decade or more before we see real change.