5 ms·

What happened this week

30 points by millimeterman 6y ago

bhk 6y ago
> It was not because we wanted to stop people from buying these stocks. We did this because the required amount we had to deposit with the clearinghouse was so large—with individual volatile securities accounting for hundreds of millions of dollars in deposit requirements—that we had to take steps to limit buying in those volatile securities to ensure we could comfortably meet our requirements. This doesn't add up. How could the requried amount to deposit with the clearing house exceed the cost of the security being purchased? If it does not exceed the cost of the security, then why do they need to prevent purchases of stock from cash accounts?
- millimeterman 6y ago
  My understanding is that brokers are not legally allowed to use money in customers' accounts to put up collateral to the clearing house. So the broker must instead pull from their own cash reserves until the trade settles 2 days later, even if the customer has deposited enough money to cover the trade. I think what Robinhood is trying to avoid saying is that they simply didn't have enough money to cover that collateral. Hence why they have tapped into credit lines and have done an emergency funding round. If they had allowed GME to trade the past two days, it seems likely that they would have run out of money and instantly gone out of business.
  - platz 6y ago
    If you actually had a cash-only designated account, would the broker still have to pull from their own cash reserves to make the trade?
    - millimeterman 6y ago
      Yes, I believe they would.
      - jacobajit 6y ago
        What is the reasoning for this rule?
        millimeterman 6y ago
        Honestly, I haven't been able to find any good sources for the reasoning. It seems like it emerged as part of Dodd-Frank after the 2008 financial crisis, but almost no one is talking about why specifically the rule was enacted. My best guess is that it might be to help protect users' money from being put at risk by a malicious/incompetent brokerage.
  - bhk 6y ago
    Either (a) this is not true, or (b) this is an opportunity for reform. From the customer's perspective, the cash is provided up front and is tied up after the trade is made. The type of collateral requirement you are describing -- above and beyond and separate from what the customer has already provided -- seems to serve no purpose, and is being used against the customer. I know there are a lot of antiquated processes and rules involved in the financial system, like waiting several days for a "wire transfer" to go through, so I'm not too skeptical that things are actually this broken.
    - millimeterman 6y ago
      I see people who are knowledgeable about the financial system overwhelmingly agreeing that this is true. Here is a source from Money Stuff, which I think most people would consider very credible: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit-traders-on-robinhood-are-on-both-sides-of-gamestop https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... (the "Why did Robinhood stop them?" section) I definitely agree that this could use reform, but I don't know enough to say exactly what should be changed. The ideal solution would be to make clearing instant instead of T+2, but who knows if that will actually happen.
      - bhk 6y ago
        I find this fascinating (from the article you lined): > Webull Chief Executive Anthony Denier said his platform’s clearing firm, Apex Clearing Corp., notified him Thursday morning that Webull needed to shut off the ability to open new positions in certain stocks. Otherwise, Apex wouldn’t be able to settle the trades, he said. 1. Clearing houses raised capital requirements by a remarkable amount. 2. Apex specifically indicated that opening new positions in certain securities should be forbidden. This does not sound like an aggregate collateral shortfall. > The volatility of those stocks is approaching infinity as their trading volume increases, so the traditionally mild and technical credit risk around settling trades has become real and scary. Brokerages have to put up more money to guarantee against that risk, and also think about ways to prevent the risk from coming true. Hold on here... regardless of "infinite" volatility, the risk of a $300 buy order is at most $300, and when the brokerage is custodian of $300 settled real US dollars in the customer's account, there is no apocalyptic systemic risk. I would understand if this were simply a matter of Robinhood tightening margin requirements, but no, they were prohibiting all purchases, even from accounts with plenty of cash, and now we are hearing (not the first story they spun) that this was because of some nonsensical aspect of the DTCC collateral requirements (the buying customer's funds do not count and cannot be used as collateral). Collateral shortfall would apply to all purchases of all stocks, wouldn't it? Why not cap all purchases? And what exactly were the collateral requirements on GME? > Those outlays, which behave like margin in a brokerage account, can create a cash crunch on volatile days, say when GameStop falls from $483 to $112 like it did at one point during Thursday’s session. Hilarious! This intra-day volatility was caused by the brokerage's actions. This was the kind of raid that could happen only in the low volume environment created by the cessation of retail buying.
RikNieu 6y ago
I'm no trading expert, but why allow sales then? Wouldn't it have had similar implications?
- millimeterman 6y ago
  I am also no expert, so speculation ahead. - I have heard that the DTCC does not require collateral (or perhaps not as much collateral) for the party selling the stock. This would mean that allowing selling would pose little to no risk to brokers. - If that's not true, I wonder if Robinhood decided that preventing people from closing positions was an unacceptable risk. If GME tanked and people couldn't sell, the outrage would be insane. So perhaps they did the math, realized that their available cash wasn't enough to support both buying and selling, and decided that only allowing sells was the least bad option available.
  - deleted 6y ago
    [deleted]
- fat_pikachu 6y ago
  No, GME stock had a higher capitalization requirement than cash.
acjohnson55 6y ago
What's missing in this is any acknowledgement of their failure to educate their users on when they might fail. They make trading feel frictionless and instantaneous, except that they can't actually meet this expectation when it counts. At this point, any rational user should simply assume that RH will fail them at the most critical times, without warning. They have proved it again and again. And maybe we should all ask ourselves whether the appearance of frictionless trading is even a good thing to begin with.

30 points by millimeterman 6y ago

bhk 6y ago

> It was not because we wanted to stop people from buying these stocks. We did this because the required amount we had to deposit with the clearinghouse was so large—with individual volatile securities accounting for hundreds of millions of dollars in deposit requirements—that we had to take steps to limit buying in those volatile securities to ensure we could comfortably meet our requirements. This doesn't add up. How could the requried amount to deposit with the clearing house exceed the cost of the security being purchased? If it does not exceed the cost of the security, then why do they need to prevent purchases of stock from cash accounts?

millimeterman 6y ago
My understanding is that brokers are not legally allowed to use money in customers' accounts to put up collateral to the clearing house. So the broker must instead pull from their own cash reserves until the trade settles 2 days later, even if the customer has deposited enough money to cover the trade. I think what Robinhood is trying to avoid saying is that they simply didn't have enough money to cover that collateral. Hence why they have tapped into credit lines and have done an emergency funding round. If they had allowed GME to trade the past two days, it seems likely that they would have run out of money and instantly gone out of business.
- platz 6y ago
  If you actually had a cash-only designated account, would the broker still have to pull from their own cash reserves to make the trade?
  - millimeterman 6y ago
    Yes, I believe they would.
    - jacobajit 6y ago
      What is the reasoning for this rule?
      - millimeterman 6y ago
        Honestly, I haven't been able to find any good sources for the reasoning. It seems like it emerged as part of Dodd-Frank after the 2008 financial crisis, but almost no one is talking about why specifically the rule was enacted. My best guess is that it might be to help protect users' money from being put at risk by a malicious/incompetent brokerage.
- bhk 6y ago
  Either (a) this is not true, or (b) this is an opportunity for reform. From the customer's perspective, the cash is provided up front and is tied up after the trade is made. The type of collateral requirement you are describing -- above and beyond and separate from what the customer has already provided -- seems to serve no purpose, and is being used against the customer. I know there are a lot of antiquated processes and rules involved in the financial system, like waiting several days for a "wire transfer" to go through, so I'm not too skeptical that things are actually this broken.
  - millimeterman 6y ago
    I see people who are knowledgeable about the financial system overwhelmingly agreeing that this is true. Here is a source from Money Stuff, which I think most people would consider very credible: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit-traders-on-robinhood-are-on-both-sides-of-gamestop https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... (the "Why did Robinhood stop them?" section) I definitely agree that this could use reform, but I don't know enough to say exactly what should be changed. The ideal solution would be to make clearing instant instead of T+2, but who knows if that will actually happen.
    - bhk 6y ago
      I find this fascinating (from the article you lined): > Webull Chief Executive Anthony Denier said his platform’s clearing firm, Apex Clearing Corp., notified him Thursday morning that Webull needed to shut off the ability to open new positions in certain stocks. Otherwise, Apex wouldn’t be able to settle the trades, he said. 1. Clearing houses raised capital requirements by a remarkable amount. 2. Apex specifically indicated that opening new positions in certain securities should be forbidden. This does not sound like an aggregate collateral shortfall. > The volatility of those stocks is approaching infinity as their trading volume increases, so the traditionally mild and technical credit risk around settling trades has become real and scary. Brokerages have to put up more money to guarantee against that risk, and also think about ways to prevent the risk from coming true. Hold on here... regardless of "infinite" volatility, the risk of a $300 buy order is at most $300, and when the brokerage is custodian of $300 settled real US dollars in the customer's account, there is no apocalyptic systemic risk. I would understand if this were simply a matter of Robinhood tightening margin requirements, but no, they were prohibiting all purchases, even from accounts with plenty of cash, and now we are hearing (not the first story they spun) that this was because of some nonsensical aspect of the DTCC collateral requirements (the buying customer's funds do not count and cannot be used as collateral). Collateral shortfall would apply to all purchases of all stocks, wouldn't it? Why not cap all purchases? And what exactly were the collateral requirements on GME? > Those outlays, which behave like margin in a brokerage account, can create a cash crunch on volatile days, say when GameStop falls from $483 to $112 like it did at one point during Thursday’s session. Hilarious! This intra-day volatility was caused by the brokerage's actions. This was the kind of raid that could happen only in the low volume environment created by the cessation of retail buying.

RikNieu 6y ago

I'm no trading expert, but why allow sales then? Wouldn't it have had similar implications?

millimeterman 6y ago
I am also no expert, so speculation ahead. - I have heard that the DTCC does not require collateral (or perhaps not as much collateral) for the party selling the stock. This would mean that allowing selling would pose little to no risk to brokers. - If that's not true, I wonder if Robinhood decided that preventing people from closing positions was an unacceptable risk. If GME tanked and people couldn't sell, the outrage would be insane. So perhaps they did the math, realized that their available cash wasn't enough to support both buying and selling, and decided that only allowing sells was the least bad option available.
- deleted 6y ago
  [deleted]
fat_pikachu 6y ago
No, GME stock had a higher capitalization requirement than cash.

acjohnson55 6y ago

What's missing in this is any acknowledgement of their failure to educate their users on when they might fail. They make trading feel frictionless and instantaneous, except that they can't actually meet this expectation when it counts. At this point, any rational user should simply assume that RH will fail them at the most critical times, without warning. They have proved it again and again. And maybe we should all ask ourselves whether the appearance of frictionless trading is even a good thing to begin with.