5 ms·
Not an expert myself, but I've been interested in the field for a while. The clearinghouse ultimately moves the security and money to their right place, and al
by seabird 6y ago
Not an expert myself, but I've been interested in the field for a while.
The clearinghouse ultimately moves the security and money to their right place, and allows brokerages to let each side move on faith that everything will be right once the dust settles. On settlement risk, a key point is that there usually isn't a huge amount of risk. This is why DTCC is nearly imperceptible for retail players. In this case, the volume and short situation is so extreme that clearinghouses are getting antsy that there may not be enough of the securities available to actually make good in the end, so they're twisting arms at brokerages and requiring they have 100% of it on-hand so that there's no surprises when they go to officially give the buyer their security and the seller their money. This is obviously very expensive, which is why brokerages started limiting buying of volatile securities, have had to take out money to get 100% hedge on these trades, and why RH is allowing trading of volatile securities but only in volumes of 5.
Market makers buy stock for delta hedging because if they don't, they could get caught out and either deliver at a loss or not be able to deliver at all. Figuring out how much you need is a trick of the trade; if you or I knew what their strategy was, their position could be in danger.
- mcguire 6y agoSpeaking as a long term value investor who is mostly noshing po'corn and watching, I have a couple of questions: Don't the settlement worries provide evidence of naked shorts? (Naked shorts being selling a share without being sure the share would be available at settlement? And naked shorts illegal?) Wouldn't the normal procedure be to halt all trading until the issues had cleared up? As opposed to allowing positions to be closed, but not opened?
- seabird 6y agoNaked shorts are not impossible, especially if you're talking about naked call options. They're comparatively rare (being illegal just means you get fined if you get caught, it's really "not that serious" for a big player), and small timers aren't allowed to participate, but they're not impossible. An even bigger point than that is that the short doesn't necessarily have to be naked in the legal sense for you to fail to deliver, especially when a security has gone completely Texas like GME has. This situation is rare. Halting all trades is very scary for all parties involved. It's way worse for just about everybody than asking brokerages to have 100% collateral is.
- mcguire 6y agoBut halting trading is not entirely uncommon. It's what happens when weird stuff is going on. I've never heard of preventing opening new positions while allowing positions to be closed.
- seabird 6y agoHalting trading temporarily is extremely common. A halt for hours or days at a time is not.