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> This might indicate that, at least for this sort of fintech, "lean" can't be an option: there will need to be some form of deep-pocket backing in order to sto

> This might indicate that, at least for this sort of fintech, "lean" can't be an option: there will need to be some form of deep-pocket backing in order to stop the company from going belly-up due to a short-term credit crunch. Honestly, I think this is tough. Building a regulatory regime for a six sigma event is extremely difficult. That being said, there probably needs to be a better mechanism--maybe a market wide 24 hour circuit breaker plus some sort of emergency credit backstop--to ensure liquidity for these types of events without disadvantaging any particular market participants. I dunno, I'm making shit up here and don't know what the hell I'm talking about. Seems complicated though... Now, I will say, if you ask me, it's about time to start putting in even more short-side controls. Allowing these massive funds to build gigantic positions with infinite loss potential clearly represents systemic risk, particularly given we've seen over and over and over again that, as much as these institutions are supposed to be "professionals", their risk management is utterly inadequate. Start with totally banning naked shorts. Increase margin requirements on short positions. Maybe flat out ban shorting over a certain percentage of float. How about limit the amount of short-side risk a firm can hold as a percentage of its total portfolio. RH is in many ways a victim of a much much larger structural market dysfunction. > Fortunately RH had sufficient funding for that, So that I don't agree with. RH had to completely stop buy-side activity on their platform yesterday and then massively curtailed it today. Not only did they not have sufficient funding to support BAU, they still don't! Meanwhile, the controls they put in place to allow them to limp along single-handedly produced a massive drop in the price. Then, to add insult to injury, they increased margin requirements and margin called accounts, forcing liquidation at substantially reduced prices, thereby locking in losses for their clients. My guess is they're buying time, right now, by limiting buy-side volume and dipping into credit lines, until the 1B cash infusion lands on their books, all while preparing for the class action lawsuits and congressional investigations. Oh, and that IPO? Expect that to be postponed...

ineedasername 6y ago
So that I don't agree with. Good point, and is actually the thing I have the most problem with here with other institutions but you're right that RH did the same thing: only weathered the storm by a few mechanisms, one of which upended democratic access to the market. RH probably had a bad choice to make: The clearing houses were demanding more collateral, RH had to figure it out. RH was still wrong, but the fundamental problems were those mechanisms that allowed lack of collateral to discriminatorily disadvantaged on class of investors in favor of others. I doubt that was the deliberate intent when these mechanisms arose, but it sure is the result, and needs to be fixed. I'm not convinced on the theory of efficient markets & allocation of capital. WSB making decisions knowingly contrary to the underlying finances of a company sort of undermines that theory. Those theories pretty much rely on people making, mostly, fundamentally, financial decisions, even if they're wrong or poorly informed. WSB was making more a philosophical decision (along with some pile on FOMO, sure) and that method of decision making is definitely not covered by the theory of efficient markets. Though I suppose the GME incident, with the peripheral stocks like AMC, could be viewed as the first round of an iterated prisoner's dilemma. It was a "defection" that worked this time. But, if the institutions impacted and those watching are left to respond on their own instead of through artificial protection, they might very well come up with strategies that would thwart the philosophical decision making of WSB in this situation.

ineedasername 6y ago

So that I don't agree with. Good point, and is actually the thing I have the most problem with here with other institutions but you're right that RH did the same thing: only weathered the storm by a few mechanisms, one of which upended democratic access to the market. RH probably had a bad choice to make: The clearing houses were demanding more collateral, RH had to figure it out. RH was still wrong, but the fundamental problems were those mechanisms that allowed lack of collateral to discriminatorily disadvantaged on class of investors in favor of others. I doubt that was the deliberate intent when these mechanisms arose, but it sure is the result, and needs to be fixed. I'm not convinced on the theory of efficient markets & allocation of capital. WSB making decisions knowingly contrary to the underlying finances of a company sort of undermines that theory. Those theories pretty much rely on people making, mostly, fundamentally, financial decisions, even if they're wrong or poorly informed. WSB was making more a philosophical decision (along with some pile on FOMO, sure) and that method of decision making is definitely not covered by the theory of efficient markets. Though I suppose the GME incident, with the peripheral stocks like AMC, could be viewed as the first round of an iterated prisoner's dilemma. It was a "defection" that worked this time. But, if the institutions impacted and those watching are left to respond on their own instead of through artificial protection, they might very well come up with strategies that would thwart the philosophical decision making of WSB in this situation.