11 ms·

>Keep in mind that when someone sells a different stock to buy GME in the same day, they're buying GME on margin. Stock trades don't settle until T+2, so any ne

by SilasX 6y ago

>Keep in mind that when someone sells a different stock to buy GME in the same day, they're buying GME on margin. Stock trades don't settle until T+2, so any new purchases using those proceeds are done on margin. TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2]. And so, enshrined in law, we have this bolted-on system where you have to put up extra collateral just to be confident of something that shouldn't need said collateral. There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions. In this case, they had to add that collateral, even when buying with money that pretty obviously was there (had been deposited years ago). Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what? [1] https://yudkowsky.medium.com/r-wallstreetbets-is-trying-something-unprecedented-in-history-and-the-medias-not-reporting-it-7ab507e4a038 https://yudkowsky.medium.com/r-wallstreetbets-is-trying-some... [2] Incidentally, people like to ridicule Bitcoin for taking an hour to settle since you have to wait an hour to get six confirmations. But that's actually fast compared to this (centralized!) system, since you have to compare to the time after which you can "take the stock/cash and run".

soared 6y ago
> There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions. Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good. Imagine rebuilding ythe core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software. You also need to meet heavy government regulation and comply with oversight. There is a whole shit ton of reasons this process hasn't been updated to T+0. It was t+3, now t+2, and I've heard (from the CEO of Webull on bezinga power hour yesterday) wanting t+1 this year. Edit - to be clear I'm not saying dropping the current system for a new one is the only option. I'm saying improving the system at all (or rebuilding it) is arguably one of the most challenging software tasks one could undertake and there are serious reasons financial markets are not anywhere near what is "technically possible".
- syshum 6y ago
  >>Imagine rebuilding the core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software. That is a bad analogy, MS takes years to change the core because it require INSANE levels of backwards compatibility. Apps written for windows 2000 still work and need to work today... This would not need to be the case with this type of system, there are a whole host of political reasons why the system is built the way it is, part of it is the desire to control it (and in this case the wrong people where doing things they were not suppose to) I am sure you will call that "conspiracy", but the reality is that the investment system is setup to be slow and opaque not because of the need for backwards compatibility, or security it is that way so the "correct people" control it plain and simple
  - SilasX 6y ago
    In fairness, stock exchanges care even more about backward compatibility and so it would be at least as much an issue for them. Edit: Sorry, I say it way too much, but this merits a repeat of the one-liner: "The reason God was able to finish the earth in only six days is that He didn't have to worry about backward compatibility [or legacy system integration, or satisfying an installed userbase]."
    - splintercell 6y ago
      Sure, but there's no real reason why ALL companies need to have their stocks compatible with each other on the same exchange.
      - the_local_host 6y ago
        > [T]here's no real reason why ALL companies need to have their stocks compatible I think it would be way harder to trade a basket of stocks (e.g. pairs trading, going long one and short the other) if you had to worry about mismatched settlement dates across the different stocks; it would be like trading spot against a one-day forward.
ashtonkem 6y ago
Fun fact; back when I worked in finance (2015-2017), forex trades including Bitcoin actually settled slower than anything else by about a day. Our pipelines had to detect crypto trades in order to fix the expected settlement date.
- xur17 6y ago
  Why did they settle slower?
  - ashtonkem 6y ago
    Not clear to me. I wasn’t involved in settlement; it was just my job to make sure the system reflected external reality. In the case of BTC trades we were just told what the system did, not why. It also was a relatively simple “crypto trades settle in 2 days” algorithm which didn’t require a lot of investigation on our part. I will say that a lot of finance stuff is driven by norms and history, and it can be surprisingly hard to change things. My favorite example is the British “gilt” bond. Most government bonds have “coupon” days where interest is paid out, and obviously the traders of these bonds like to calculate the accrual of interest between them when trading. Gilt bonds, so named from the gilded edge the paper used to have, pays out the coupon to whoever has the bond a few days before coupon day because in the 1600s it took a lot of effort to figure out who actually had the physical bond paper. Back when I worked in finance they still had this system from nearly 400 years ago. Obviously the ability to sell a bond and still collect the coupon wreaks absolute havoc with the interest calculation.
vinniejames 6y ago
The reason for this is the fact that large businesses profit from being the middle-man here. Moving towards automated settlement on a blockchain reduces cost and increases efficiency,it's a win-win for everybody except the middle-man
- Beldin 6y ago
  Having the stock market emit 325.95 kg CO2 per transaction [1] is one of the few ways I've ever heard to make the stock market significantly worse for society -- irrespective of your current feelings about it. [1] https://digiconomist.net/bitcoin-energy-consumption/ https://digiconomist.net/bitcoin-energy-consumption/
  - Scoundreller 6y ago
    There’s more to crypto than Bitcoin.
- tzs 6y ago
  There's nothing in fast, cheap, automated settlement that requires a blockchain. A centralized system should cost less, at least compared to a proof of work blockchain, due to energy costs. Also, stock markets are heavily regulated. In a centralized system, it is relatively easy to enforce regulations. How do you do that in a blockchain based system?
  - yks 6y ago
    Blockchain is the biggest "solution looking for a problem" of our time and because it looks like we've entered the meme age, I'd not be surprised if everything was reimplemented with blockchain regardless of the fit.
    - spiralx 6y ago
      There is a massive overlap between /r/wallstreetbets, Elon Musk fan-boys and crypto enthusiasts I bet, and this mess has something for all of them: gaming, FOMO, evil short-sellers, beating the system, lots of diagrams with arrows and an app that's easy to use and easier to blame.
modeless 6y ago
Yes. DTCC and their T+2 settlement are the villains here. It's a ridiculous legacy system that needs to go.
- beezle 6y ago
  DTCC is not a villian. You would have the same problems for any settlement greater than T+0 and in the limit T>0 the problem actually increases as you eliminate the possibility of netting positions.
  - modeless 6y ago
    How does the problem increase if settlement is measured in milliseconds instead of days? Retail brokerages could just wait for trades to settle instead of trying to maintain this fiction that trades are done before they settle.
    - kazinator 6y ago
      The absolute speed/latency of trading is not relevant; what is relevant is the speed of trading decision relative to the speed at which information propagates to all involved.
      - modeless 6y ago
        We're not talking about trade execution here. Trade execution is already fast. We're talking about settlement.
    - hntrader 6y ago
      What problem does moving from T+2 to T+0 solve exactly? Aren't the capital requirements the same, and hence the outcome would've been the same? I'm no expert on this topic so I could be wrong.
      - freeone3000 6y ago
        The entire point of collateral is to hedge against you not being able to provide the money in two days, when the share actually is exchanged for cash. If, instead of collateral, you got the cash, capital requirements would be reduced as you would get the money from sales immediately, and wouldn't need to keep a pile of money to collateralize buys while waiting on the income from your sales.
skybrian 6y ago
Unlike Bitcoin, stock trading errors can be corrected. The review process isn't automatic.
- Scoundreller 6y ago
  I think ethereum showed us that the blockchain can be corrected when they screw up. Just depends how important the people are that lost. https://www.wired.com/2016/06/50-million-hack-just-showed-dao-human/ https://www.wired.com/2016/06/50-million-hack-just-showed-da... If I fat finger something on TD Ameritrade, nobody is going to rescue me.
  - skybrian 6y ago
    It seems they might under certain circumstances, but you need to ask for a correction within 30 minutes? I don't know how you'd do that on Ameritrade. I'm guessing this isn't about the normal UI that most customers use, though. I imagine it's possible to submit bids and asks at any price, and someone could fat-finger that. So, someone who put in a bid at 222 for a stock that's trading around 22 might have a reasonable case that it's a typo for 22.2 and should be reversed. https://www.investopedia.com/terms/e/erroneous-trade.asp https://www.investopedia.com/terms/e/erroneous-trade.asp
Animats 6y ago
TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days. It's worse in crypto. Try to get cash out of a crypto exchange by T+2.[1] [1] https://news.bitcoin.com/coinbase-withdrawal-delays-leave-users-frustrated-crying-foul/ https://news.bitcoin.com/coinbase-withdrawal-delays-leave-us...
- SilasX 6y ago
  I use Gemini, which has been happy to wire me money that shows up the same day in the other bank’s checking account.
- dan-robertson 6y ago
  Crypto doesn’t have clearinghouses or the same notion of settlement. If you and I agreed to trade a Bitcoin, we could settle ~immediately by getting a transaction onto the blockchain. It’s not so straightforward with stock.
- sunshinerag 6y ago
  Again the problem is not in the crypto side but the cash (fiat) side
- veeti 6y ago
  Coinbase IBAN transfers go through in 5-10 minutes for me, even weekends. Faster than Bitcoin!
scatters 6y ago
> Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what? That's how your "free" trading account is paid for. If you don't like it, fine! Just be prepared to pay per trade and per month.
- Scoundreller 6y ago
  Other brokers lend out your stuff too. > TD Ameritrade earned about 4.1% and E*TRADE earned 3.5% from securities lending. Schwab’s is upper bounded at 2.2%. Interactive Brokers was an outlier at about 9.7%. (These are all net of payments to clients; Schwab, notably, passes the fee revenue for their mutual funds to the fund shareholders.) https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone... All RH did was figure out there’s enough money sloshing around to do away with commissions and disrupt them. After RH, other brokers cancelled commissions without going bankrupt. I’d be using RH if I could too. So many $s spent on commissions that were just a profitgrab.
tinus_hn 6y ago
Wait until you find out that stock can be traded even though it doesn’t actually exist
newacct583 6y ago
But... 2-day latency for purchases of interest in companies sounds perfectly reasonable given the notional purpose of those transactions. Isn't the real scandal that we've built a huge trillion dollar industry around this idea of "trading" that has nothing to do with the asset being purchased?
Jommi 6y ago
https://old.reddit.com/r/wallstreetbets/comments/l2n5wv/most_of_you_are_helping_the_gme_shorts_and_you/ https://old.reddit.com/r/wallstreetbets/comments/l2n5wv/most...
KMag 6y ago
Nobody is really a fan of the SEC breaking trades, but many view it as a necessary evil to promote stability of the system in the face of fallible humans and potentially buggy systems. Shortening settlement reduces the time window where the SEC can reliably intervene. Take the example I gave earlier[0] of a pension fund manager fat-fingering an order with a hypothetical 1-minute settlement window. With one-minute settlement, by the time anyone realizes the pension fund has made a 10 million USD mistake, that money may be spread across a charity, a new baseball stadium, and thousands of stock trades indirectly via an ETF arbitrageur indirectly via an options market maker's delta hedging. It's a fictional tale, but it's not far fetched in a world of rapid settlement. Hopefully some day we have much more reliable automated systems and humans further from the loop, but until then, slow settlement increases the window to take corrective action. [0] https://news.ycombinator.com/item?id=25953459 https://news.ycombinator.com/item?id=25953459
- londons_explore 6y ago
  If you pay someone by mistake, there is already well established law for getting your money back.... And you can do it anytime within some number of years. Theres no reason to slow the original payment down when there is a process for getting mistaken payments back.
  - KMag 6y ago
    With fat-finger trades, you're often dealing with huge amounts of money, and the counter parties are often shell corporations. A friend of mine was actually one of the defense attorneys for a hedge fund that had the legal entity for one of its funds go bankrupt on some electricity trades where the clearinghouse's margin requirements weren't large enough. The clearing house tried to recoup its losses from a sister fund under the same hedge fund. If I recall correctly, the bankrupt fund actually lost a bunch of money to its sister fund. The clearing house ended up losing in court. Another friend of mine runs an electricity trading fund, and was pretty upset at the ruling. After the court loss, the clearing house needed to recoup its losses by raising fees. Once trades have actually cleared, the only recourse is often a messy court battle.
toast0 6y ago
> We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2]. We know who owns almost all the shares. It's Cede & Co. They own almost all the shares of all the publicly traded companies. But if you sell shares that aren't owned by Cede & Co, it takes longer to process them, because corporate transfer agents are sloooooow; supposed to deliver in T+2, but more like T+7. My understanding is a brokerage is only allowed to lend your shares if you have a margin account; and possibly only if you have an open margin position. Of course, Robinhood pushes a margin account on everyone, and that turns purchases with unsettled cash into a margin position; apparently RH doesn't allow that in cash accounts, even though most established brokers do. At this point, I'm not sure why anybody would choose RH as a brokerage. They seem less reliable, their UX is bamboozling, most established brokerages charge the same $0 comissions and give more of the payment for order flow to clients, established brokerages (tend to) have much more excess capital on hand to meet increased collateral requirements, established brokerages can enable settings to limit risky (to the brokerage) trades in volitale stocks without blocking all trades, and RH is decidedly non-transparent.
gnu8 6y ago
> Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what? That is how short selling works and it is not a controversial process. It is normally transparent or invisible to the owner of the shares, eg you still get your dividends and can sell the shares at will. My understanding is that if the short seller goes bankrupt and cannot repurchase the shares, the brokerage provides the shares to the owner and takes the loss themselves.
amluto 6y ago
I’m not very familiar with stock settlement, but I’m quite familiar with the settlement of some other, less regulated instruments. These often also have two-day settlement but seem less dysfunctional. So I’m not convinced that the T+2 settlement is the problem per se. To the contrary, T+2 settlement gives people a chance to correct errors, if any, before anyone takes the money and runs. I can imagine a two-day settlement system that works better. Specifically, all parties would need to post cash with the clearinghouse before buying and to post stock before selling. Customer funds would be expected to be used for this purpose — no broker should ever go bust because their customers bought stock too fast. And, critically, unsettled receipts would be valid collateral, possibly with a small haircut. So, if you sell one stock, you can immediate use (most of) the proceeds to buy something else without needing to come up with additional collateral. In effect, this would be immediate settlement plus two-day escrow.
- selectodude 6y ago
  That's literally exactly what currently happens. Every stock has a margin requirement, you post cash with the clearing house as a percentage of order flow. When a particular equity becomes highly volatile, the amount of margin you need to post goes up. In GME's case, to 100 percent. So when somebody on Robinhood uses instant deposit, Robinhood has no access to your funds for a couple days, but when you buy GME, they need to put up 100 percent collateral on your behalf when they submit your order request. They simply didn't have the liquidity to cover all of that.
  - amluto 6y ago
    As I understand it, Robinhood cannot use customer funds to satisfy their collateral requirement, nor can they use the proceeds from sales that have not settled. And somehow naked shorts exist, which means that it’s possible to sell stocks without first posting 100% of that stock as collateral. The fact that Robinhood needs to come up with external funding to secure a customer cash stock purchase (if I’ve understood the current rules correctly) is, IMO, bizarre at best. So no, I don’t think the market already works the way I proposed.
FabHK 6y ago
> stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what? A great thing that helps keeping the fees down, and understood by everyone in the industry, and (thanks to elaborate and battle tested systems) hardly ever a problem. Just like overbooking on airplanes. There are enough problems in the financial industry; this is not one of them. Next, brokerages are not allowed to use customer money as collateral, that's why they don't use "money that pretty obviously was there (had been deposited years ago)." Regarding "people like to ridicule Bitcoin": the equity markets have many orders of magnitude more transactions per day than crypto can handle.
totalZero 6y ago
We do know who owns the stock. That's how dividends are distributed. The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well; first you trade, then you settle the trade. It just works on a T+2 basis. > people like to ridicule Bitcoin for taking an hour to settle What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day.
- colejohnson66 6y ago
  According to [0], Bitcoin has a volume of ~54B in the past 24 hours (from posting). So it’s not the same, but it’s a damn massive amount. It’s less than an order of magnitude. [0]: https://coinmarketcap.com/currencies/bitcoin/ https://coinmarketcap.com/currencies/bitcoin/
- SilasX 6y ago
  >The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well; If what you were saying is true, we wouldn't be the problem under discussion. The fact that it's not true is why we do. If we could have such certainty in the moment over who owned what stock, then we wouldn't need to put up collateral to hedge against the possible failure-to-deliver. >>people like to ridicule Bitcoin for taking an hour to settle >What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day. The question is about latency, not throughput. That is, Nasdaq might throw up $300B/day worth of tentative transfers, but you still have to wait 2 days to "take the assets and run". And two-day latency is still bad when, unlike Bitcoin, you can take advantage of centralization and lack of anonymity.

by SilasX 6y ago

soared 6y ago

> There is no reason, with all the identities attached, and auditing procedures, and digital signing, and protocols we have today, that we shouldn't be able to know who owns the stock at any given point, and not have to rely on these super-slow resolutions. Trillions of dollars are moved in these markets - you can't just hop in and do a quick rebuild with crypto, launch it, and call it good. Imagine rebuilding ythe core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software. You also need to meet heavy government regulation and comply with oversight. There is a whole shit ton of reasons this process hasn't been updated to T+0. It was t+3, now t+2, and I've heard (from the CEO of Webull on bezinga power hour yesterday) wanting t+1 this year. Edit - to be clear I'm not saying dropping the current system for a new one is the only option. I'm saying improving the system at all (or rebuilding it) is arguably one of the most challenging software tasks one could undertake and there are serious reasons financial markets are not anywhere near what is "technically possible".

syshum 6y ago
>>Imagine rebuilding the core infrastructure at Microsoft - that takes years and years. But now you also have the entirety of the global economy dependent on your software. That is a bad analogy, MS takes years to change the core because it require INSANE levels of backwards compatibility. Apps written for windows 2000 still work and need to work today... This would not need to be the case with this type of system, there are a whole host of political reasons why the system is built the way it is, part of it is the desire to control it (and in this case the wrong people where doing things they were not suppose to) I am sure you will call that "conspiracy", but the reality is that the investment system is setup to be slow and opaque not because of the need for backwards compatibility, or security it is that way so the "correct people" control it plain and simple
- SilasX 6y ago
  In fairness, stock exchanges care even more about backward compatibility and so it would be at least as much an issue for them. Edit: Sorry, I say it way too much, but this merits a repeat of the one-liner: "The reason God was able to finish the earth in only six days is that He didn't have to worry about backward compatibility [or legacy system integration, or satisfying an installed userbase]."
  - splintercell 6y ago
    Sure, but there's no real reason why ALL companies need to have their stocks compatible with each other on the same exchange.
    - the_local_host 6y ago
      > [T]here's no real reason why ALL companies need to have their stocks compatible I think it would be way harder to trade a basket of stocks (e.g. pairs trading, going long one and short the other) if you had to worry about mismatched settlement dates across the different stocks; it would be like trading spot against a one-day forward.

ashtonkem 6y ago

Fun fact; back when I worked in finance (2015-2017), forex trades including Bitcoin actually settled slower than anything else by about a day. Our pipelines had to detect crypto trades in order to fix the expected settlement date.

xur17 6y ago
Why did they settle slower?
- ashtonkem 6y ago
  Not clear to me. I wasn’t involved in settlement; it was just my job to make sure the system reflected external reality. In the case of BTC trades we were just told what the system did, not why. It also was a relatively simple “crypto trades settle in 2 days” algorithm which didn’t require a lot of investigation on our part. I will say that a lot of finance stuff is driven by norms and history, and it can be surprisingly hard to change things. My favorite example is the British “gilt” bond. Most government bonds have “coupon” days where interest is paid out, and obviously the traders of these bonds like to calculate the accrual of interest between them when trading. Gilt bonds, so named from the gilded edge the paper used to have, pays out the coupon to whoever has the bond a few days before coupon day because in the 1600s it took a lot of effort to figure out who actually had the physical bond paper. Back when I worked in finance they still had this system from nearly 400 years ago. Obviously the ability to sell a bond and still collect the coupon wreaks absolute havoc with the interest calculation.

vinniejames 6y ago

The reason for this is the fact that large businesses profit from being the middle-man here. Moving towards automated settlement on a blockchain reduces cost and increases efficiency,it's a win-win for everybody except the middle-man

Beldin 6y ago
Having the stock market emit 325.95 kg CO2 per transaction [1] is one of the few ways I've ever heard to make the stock market significantly worse for society -- irrespective of your current feelings about it. [1] https://digiconomist.net/bitcoin-energy-consumption/ https://digiconomist.net/bitcoin-energy-consumption/
- Scoundreller 6y ago
  There’s more to crypto than Bitcoin.
tzs 6y ago
There's nothing in fast, cheap, automated settlement that requires a blockchain. A centralized system should cost less, at least compared to a proof of work blockchain, due to energy costs. Also, stock markets are heavily regulated. In a centralized system, it is relatively easy to enforce regulations. How do you do that in a blockchain based system?
- yks 6y ago
  Blockchain is the biggest "solution looking for a problem" of our time and because it looks like we've entered the meme age, I'd not be surprised if everything was reimplemented with blockchain regardless of the fit.
  - spiralx 6y ago
    There is a massive overlap between /r/wallstreetbets, Elon Musk fan-boys and crypto enthusiasts I bet, and this mess has something for all of them: gaming, FOMO, evil short-sellers, beating the system, lots of diagrams with arrows and an app that's easy to use and easier to blame.

modeless 6y ago

Yes. DTCC and their T+2 settlement are the villains here. It's a ridiculous legacy system that needs to go.

beezle 6y ago
DTCC is not a villian. You would have the same problems for any settlement greater than T+0 and in the limit T>0 the problem actually increases as you eliminate the possibility of netting positions.
- modeless 6y ago
  How does the problem increase if settlement is measured in milliseconds instead of days? Retail brokerages could just wait for trades to settle instead of trying to maintain this fiction that trades are done before they settle.
  - kazinator 6y ago
    The absolute speed/latency of trading is not relevant; what is relevant is the speed of trading decision relative to the speed at which information propagates to all involved.
    - modeless 6y ago
      We're not talking about trade execution here. Trade execution is already fast. We're talking about settlement.
  - hntrader 6y ago
    What problem does moving from T+2 to T+0 solve exactly? Aren't the capital requirements the same, and hence the outcome would've been the same? I'm no expert on this topic so I could be wrong.
    - freeone3000 6y ago
      The entire point of collateral is to hedge against you not being able to provide the money in two days, when the share actually is exchanged for cash. If, instead of collateral, you got the cash, capital requirements would be reduced as you would get the money from sales immediately, and wouldn't need to keep a pile of money to collateralize buys while waiting on the income from your sales.

skybrian 6y ago

Unlike Bitcoin, stock trading errors can be corrected. The review process isn't automatic.

Scoundreller 6y ago
I think ethereum showed us that the blockchain can be corrected when they screw up. Just depends how important the people are that lost. https://www.wired.com/2016/06/50-million-hack-just-showed-dao-human/ https://www.wired.com/2016/06/50-million-hack-just-showed-da... If I fat finger something on TD Ameritrade, nobody is going to rescue me.
- skybrian 6y ago
  It seems they might under certain circumstances, but you need to ask for a correction within 30 minutes? I don't know how you'd do that on Ameritrade. I'm guessing this isn't about the normal UI that most customers use, though. I imagine it's possible to submit bids and asks at any price, and someone could fat-finger that. So, someone who put in a bid at 222 for a stock that's trading around 22 might have a reasonable case that it's a typo for 22.2 and should be reversed. https://www.investopedia.com/terms/e/erroneous-trade.asp https://www.investopedia.com/terms/e/erroneous-trade.asp

Animats 6y ago

TBH, that, for me, is the real scandal here. We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days. It's worse in crypto. Try to get cash out of a crypto exchange by T+2.[1] [1] https://news.bitcoin.com/coinbase-withdrawal-delays-leave-users-frustrated-crying-foul/ https://news.bitcoin.com/coinbase-withdrawal-delays-leave-us...

SilasX 6y ago
I use Gemini, which has been happy to wire me money that shows up the same day in the other bank’s checking account.
dan-robertson 6y ago
Crypto doesn’t have clearinghouses or the same notion of settlement. If you and I agreed to trade a Bitcoin, we could settle ~immediately by getting a transaction onto the blockchain. It’s not so straightforward with stock.
sunshinerag 6y ago
Again the problem is not in the crypto side but the cash (fiat) side
veeti 6y ago
Coinbase IBAN transfers go through in 5-10 minutes for me, even weekends. Faster than Bitcoin!

scatters 6y ago

Scoundreller 6y ago
Other brokers lend out your stuff too. > TD Ameritrade earned about 4.1% and E*TRADE earned 3.5% from securities lending. Schwab’s is upper bounded at 2.2%. Interactive Brokers was an outlier at about 9.7%. (These are all net of payments to clients; Schwab, notably, passes the fee revenue for their mutual funds to the fund shareholders.) https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/ https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone... All RH did was figure out there’s enough money sloshing around to do away with commissions and disrupt them. After RH, other brokers cancelled commissions without going bankrupt. I’d be using RH if I could too. So many $s spent on commissions that were just a profitgrab.

tinus_hn 6y ago

Wait until you find out that stock can be traded even though it doesn’t actually exist

newacct583 6y ago

But... 2-day latency for purchases of interest in companies sounds perfectly reasonable given the notional purpose of those transactions. Isn't the real scandal that we've built a huge trillion dollar industry around this idea of "trading" that has nothing to do with the asset being purchased?

Jommi 6y ago

https://old.reddit.com/r/wallstreetbets/comments/l2n5wv/most_of_you_are_helping_the_gme_shorts_and_you/ https://old.reddit.com/r/wallstreetbets/comments/l2n5wv/most...

KMag 6y ago

Nobody is really a fan of the SEC breaking trades, but many view it as a necessary evil to promote stability of the system in the face of fallible humans and potentially buggy systems. Shortening settlement reduces the time window where the SEC can reliably intervene. Take the example I gave earlier[0] of a pension fund manager fat-fingering an order with a hypothetical 1-minute settlement window. With one-minute settlement, by the time anyone realizes the pension fund has made a 10 million USD mistake, that money may be spread across a charity, a new baseball stadium, and thousands of stock trades indirectly via an ETF arbitrageur indirectly via an options market maker's delta hedging. It's a fictional tale, but it's not far fetched in a world of rapid settlement. Hopefully some day we have much more reliable automated systems and humans further from the loop, but until then, slow settlement increases the window to take corrective action. [0] https://news.ycombinator.com/item?id=25953459 https://news.ycombinator.com/item?id=25953459

londons_explore 6y ago
If you pay someone by mistake, there is already well established law for getting your money back.... And you can do it anytime within some number of years. Theres no reason to slow the original payment down when there is a process for getting mistaken payments back.
- KMag 6y ago
  With fat-finger trades, you're often dealing with huge amounts of money, and the counter parties are often shell corporations. A friend of mine was actually one of the defense attorneys for a hedge fund that had the legal entity for one of its funds go bankrupt on some electricity trades where the clearinghouse's margin requirements weren't large enough. The clearing house tried to recoup its losses from a sister fund under the same hedge fund. If I recall correctly, the bankrupt fund actually lost a bunch of money to its sister fund. The clearing house ended up losing in court. Another friend of mine runs an electricity trading fund, and was pretty upset at the ruling. After the court loss, the clearing house needed to recoup its losses by raising fees. Once trades have actually cleared, the only recourse is often a messy court battle.

toast0 6y ago

> We have such an antiquated system that we can't actually be confident who owns the stock at any point until you do some super-slow settlement process that takes two days[2]. We know who owns almost all the shares. It's Cede & Co. They own almost all the shares of all the publicly traded companies. But if you sell shares that aren't owned by Cede & Co, it takes longer to process them, because corporate transfer agents are sloooooow; supposed to deliver in T+2, but more like T+7. My understanding is a brokerage is only allowed to lend your shares if you have a margin account; and possibly only if you have an open margin position. Of course, Robinhood pushes a margin account on everyone, and that turns purchases with unsettled cash into a margin position; apparently RH doesn't allow that in cash accounts, even though most established brokers do. At this point, I'm not sure why anybody would choose RH as a brokerage. They seem less reliable, their UX is bamboozling, most established brokerages charge the same $0 comissions and give more of the payment for order flow to clients, established brokerages (tend to) have much more excess capital on hand to meet increased collateral requirements, established brokerages can enable settings to limit risky (to the brokerage) trades in volitale stocks without blocking all trades, and RH is decidedly non-transparent.

gnu8 6y ago

> Plus, some articles are claiming[1] that even stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what? That is how short selling works and it is not a controversial process. It is normally transparent or invisible to the owner of the shares, eg you still get your dividends and can sell the shares at will. My understanding is that if the short seller goes bankrupt and cannot repurchase the shares, the brokerage provides the shares to the owner and takes the loss themselves.

amluto 6y ago

I’m not very familiar with stock settlement, but I’m quite familiar with the settlement of some other, less regulated instruments. These often also have two-day settlement but seem less dysfunctional. So I’m not convinced that the T+2 settlement is the problem per se. To the contrary, T+2 settlement gives people a chance to correct errors, if any, before anyone takes the money and runs. I can imagine a two-day settlement system that works better. Specifically, all parties would need to post cash with the clearinghouse before buying and to post stock before selling. Customer funds would be expected to be used for this purpose — no broker should ever go bust because their customers bought stock too fast. And, critically, unsettled receipts would be valid collateral, possibly with a small haircut. So, if you sell one stock, you can immediate use (most of) the proceeds to buy something else without needing to come up with additional collateral. In effect, this would be immediate settlement plus two-day escrow.

selectodude 6y ago
That's literally exactly what currently happens. Every stock has a margin requirement, you post cash with the clearing house as a percentage of order flow. When a particular equity becomes highly volatile, the amount of margin you need to post goes up. In GME's case, to 100 percent. So when somebody on Robinhood uses instant deposit, Robinhood has no access to your funds for a couple days, but when you buy GME, they need to put up 100 percent collateral on your behalf when they submit your order request. They simply didn't have the liquidity to cover all of that.
- amluto 6y ago
  As I understand it, Robinhood cannot use customer funds to satisfy their collateral requirement, nor can they use the proceeds from sales that have not settled. And somehow naked shorts exist, which means that it’s possible to sell stocks without first posting 100% of that stock as collateral. The fact that Robinhood needs to come up with external funding to secure a customer cash stock purchase (if I’ve understood the current rules correctly) is, IMO, bizarre at best. So no, I don’t think the market already works the way I proposed.

FabHK 6y ago

> stock you do own, whose purchase long ago settled, is being lent out without your direct knowledge by the broker for a profit, which is like ... what? A great thing that helps keeping the fees down, and understood by everyone in the industry, and (thanks to elaborate and battle tested systems) hardly ever a problem. Just like overbooking on airplanes. There are enough problems in the financial industry; this is not one of them. Next, brokerages are not allowed to use customer money as collateral, that's why they don't use "money that pretty obviously was there (had been deposited years ago)." Regarding "people like to ridicule Bitcoin": the equity markets have many orders of magnitude more transactions per day than crypto can handle.

totalZero 6y ago

We do know who owns the stock. That's how dividends are distributed. The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well; first you trade, then you settle the trade. It just works on a T+2 basis. > people like to ridicule Bitcoin for taking an hour to settle What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day.

colejohnson66 6y ago
According to [0], Bitcoin has a volume of ~54B in the past 24 hours (from posting). So it’s not the same, but it’s a damn massive amount. It’s less than an order of magnitude. [0]: https://coinmarketcap.com/currencies/bitcoin/ https://coinmarketcap.com/currencies/bitcoin/
SilasX 6y ago
>The desire to have instantaneous trades is why the transfer of funds follows the agreement to trade. The system actually works pretty well; If what you were saying is true, we wouldn't be the problem under discussion. The fact that it's not true is why we do. If we could have such certainty in the moment over who owned what stock, then we wouldn't need to put up collateral to hedge against the possible failure-to-deliver. >>people like to ridicule Bitcoin for taking an hour to settle >What is the dollar value of bitcoin transactions per day, versus the dollar value of stock trades per day? Nasdaq alone trades something like $300B/day. The question is about latency, not throughput. That is, Nasdaq might throw up $300B/day worth of tentative transfers, but you still have to wait 2 days to "take the assets and run". And two-day latency is still bad when, unlike Bitcoin, you can take advantage of centralization and lack of anonymity.