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It is not a conspiracy but the system is broken. Everyone seems to be missing the point of WHY collateral requirements have gone up. It is not because of volat

It is not a conspiracy but the system is broken. Everyone seems to be missing the point of WHY collateral requirements have gone up. It is not because of volatility of the price movement, but volatility of whether the trade will clear. The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay. What seems to have happened is somewhere along the line a broker did not margin call the hedge funds fast enough, and DTCC with their collateral requirements has spread the risk from that one broker or clearing house to all of the brokers. In essence, the hedge funds losses are in a way "too big to fail" now because of the way the risk was spread. In this system, everyone is working to protect themselves (thus not conspiracy), which in turn happens to be screwing over retail. The big issue is the broker somewhere or risk management team that did not force the short sellers to buy back their shares when it was still possible to do so without affecting the brokerages. They missed the time and now the losses might be too large to absorb. Meanwhile, they have no problem margin calling retail. Robinhood might be faced with an impossible situation they didn't cause, but they also aren't pointing the finger at the culprits and where the problem started, which is some entity allowing the hedge funds to be over leveraged and then not de-risking from that leverage fast enough when the trade went against them. A lot of this is explained by the webull ceo in this video: https://www.youtube.com/watch?v=4RS4JIEVyXM&feature=youtu.be https://www.youtube.com/watch?v=4RS4JIEVyXM&feature=youtu.be

gruez 6y ago
>Meanwhile, they have no problem margin calling retail. Presumably because hedge funds have more lenient margin agreements than retail. After all, it's easier to collect from a hedge fund with billions AUM compared to a bunch of millennials living paycheck to paycheck with $50k of student loans.
- oysterberry 6y ago
  Yes this is true, and sometimes they don't even need to collect because they can write off the small loss (this is explained in the video from the webull ceo). But the lenient margin requirements let them hang themselves when they can't collect because the losses are too big and will bankrupt the hedge fund. So now they are too big to fail, it's not only the hedge funds problem that they made a bad trade, it is now DTCC and the brokers problem that the hedge fund made a bad trade.
oysterberry 6y ago
A more succinct explanation: Hedge fund has huge unrealized loss that may bankrupt them if they try to buy the shares that they shorted back. Their broker realizes too late, and if they margin call them now, the hedge fund might not have enough money to pay for the shorts. Thus, the broker will need to pay. DTCC realizes this, and ups the collateral requirement so that the broker / clearing house has to insure someone will pay (whether it's the broker or hedge fund). Because DTCC works with all the clearing houses and brokers, the risk from the hedge funds is suddenly everyone's problem to deal with together. By trying to deal with it, they close down trading for retail, and coincidentally aid the hedge funds short position. Maybe the answer to this is DTCC needing to have collateral requirements per clearing house or broker where they think the risk is highest (the bankrupting hedge funds). Maybe it's regulation to not allow such high leverage or force margin calls faster so the losses can't be too big to fail. Hopefully something is done to fix it!
- xadhominemx 6y ago
  That's a succinct but false explanation. DTCC does not care if a HF is about to lose a bunch of money and maybe even put a prime brokerage on the hook. Hedge funds make and lose hundreds of billions every week. No prime brokerage would let Melvin end up near insolvency before issuing liquidation margin call and even if there wasn't enough post-liquidation to cover losses, prime brokerages have a collective market cap of more $1 trillion and are easily able to absorb a several billion dollar shortfall. It's obvious to anyone who knows what they're talking about that you are a financial neophyte inventing nonsense conspiracies.
  - Rastonbury 6y ago
    A lot of that crowd here, at least on wsb people don't take themselves so seriously!
  - oysterberry 6y ago
    Can you explain why the collateral required is higher (if no one has any insolvency issues)? If you watch the video I posted in the parent comment with the webull ceo, he states the exact scenario where brokers have no problem margin calling a small retail account, but for a big firm and big losses it's problematic, and so do you have more to add than the webull ceo on this topic? I encourage the discussion and the information you added. Prime brokerages may be able to absorb the damage and thus are able to post the collateral needed, but then if the smaller brokerages like robinhood also need to post the same collateral while having smaller risk of clearing problems, isn't that the problem of the risk spreading?
PragmaticPulp 6y ago
Your argument relies on the assumption that hedge funds haven’t been margin called, and that they haven’t closed their early short positions. Many funds have claimed they closed early shorts. The piece people seem to misunderstand the most is that total short interest won’t tell us if specific shorts were closed out. New shorts can replace old shorts at the higher price. It’s like arguing that nobody could have lost their job or got a new job because the national unemployment rate was unchanged. Aggregate numbers don’t tell us about specific shorts. Is it really so hard to believe that people would want to short the downside of an obvious short-term market bubble?
- DSingularity 6y ago
  Yeah. I find it hard to believe that any serious money is shorting anything remotely close to a meme stock right now. Who the hell would want to risk their career on a trade with infinite downside when it seems like the prevailing market sentiment is crush the shorts? Don’t forget that this is a market where most people believe TSLA is vastly overvalued.
  - dcow 6y ago
    There hasn't been enough volume for the shorts to be closed.
    - NovemberWhiskey 6y ago
      Why do you say that? The total free float is about 47M shares; I understand short interest was about 150% of float but volume on GME last week was over 500M, wasn't it?
      - Rastonbury 6y ago
        Shorts covering is expected to move the price way more that it has. That 500m vol is people/algos trying to profit of intraday movements keeping the price relatively stable (for GME)
tonfa 6y ago
> The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay. If anything wasn't the market worried that RH would go bankrupt (when the GME inevitably crashes)? Unlike retail, hedge funds and market makers have risk modelling, and they got out of trades they can't afford (plus all the shorts had collateral, if they can't afford it the broker closed it).

gruez 6y ago

>Meanwhile, they have no problem margin calling retail. Presumably because hedge funds have more lenient margin agreements than retail. After all, it's easier to collect from a hedge fund with billions AUM compared to a bunch of millennials living paycheck to paycheck with $50k of student loans.

oysterberry 6y ago
Yes this is true, and sometimes they don't even need to collect because they can write off the small loss (this is explained in the video from the webull ceo). But the lenient margin requirements let them hang themselves when they can't collect because the losses are too big and will bankrupt the hedge fund. So now they are too big to fail, it's not only the hedge funds problem that they made a bad trade, it is now DTCC and the brokers problem that the hedge fund made a bad trade.

oysterberry 6y ago

A more succinct explanation: Hedge fund has huge unrealized loss that may bankrupt them if they try to buy the shares that they shorted back. Their broker realizes too late, and if they margin call them now, the hedge fund might not have enough money to pay for the shorts. Thus, the broker will need to pay. DTCC realizes this, and ups the collateral requirement so that the broker / clearing house has to insure someone will pay (whether it's the broker or hedge fund). Because DTCC works with all the clearing houses and brokers, the risk from the hedge funds is suddenly everyone's problem to deal with together. By trying to deal with it, they close down trading for retail, and coincidentally aid the hedge funds short position. Maybe the answer to this is DTCC needing to have collateral requirements per clearing house or broker where they think the risk is highest (the bankrupting hedge funds). Maybe it's regulation to not allow such high leverage or force margin calls faster so the losses can't be too big to fail. Hopefully something is done to fix it!

xadhominemx 6y ago
That's a succinct but false explanation. DTCC does not care if a HF is about to lose a bunch of money and maybe even put a prime brokerage on the hook. Hedge funds make and lose hundreds of billions every week. No prime brokerage would let Melvin end up near insolvency before issuing liquidation margin call and even if there wasn't enough post-liquidation to cover losses, prime brokerages have a collective market cap of more $1 trillion and are easily able to absorb a several billion dollar shortfall. It's obvious to anyone who knows what they're talking about that you are a financial neophyte inventing nonsense conspiracies.
- Rastonbury 6y ago
  A lot of that crowd here, at least on wsb people don't take themselves so seriously!
- oysterberry 6y ago
  Can you explain why the collateral required is higher (if no one has any insolvency issues)? If you watch the video I posted in the parent comment with the webull ceo, he states the exact scenario where brokers have no problem margin calling a small retail account, but for a big firm and big losses it's problematic, and so do you have more to add than the webull ceo on this topic? I encourage the discussion and the information you added. Prime brokerages may be able to absorb the damage and thus are able to post the collateral needed, but then if the smaller brokerages like robinhood also need to post the same collateral while having smaller risk of clearing problems, isn't that the problem of the risk spreading?

PragmaticPulp 6y ago

Your argument relies on the assumption that hedge funds haven’t been margin called, and that they haven’t closed their early short positions. Many funds have claimed they closed early shorts. The piece people seem to misunderstand the most is that total short interest won’t tell us if specific shorts were closed out. New shorts can replace old shorts at the higher price. It’s like arguing that nobody could have lost their job or got a new job because the national unemployment rate was unchanged. Aggregate numbers don’t tell us about specific shorts. Is it really so hard to believe that people would want to short the downside of an obvious short-term market bubble?

DSingularity 6y ago
Yeah. I find it hard to believe that any serious money is shorting anything remotely close to a meme stock right now. Who the hell would want to risk their career on a trade with infinite downside when it seems like the prevailing market sentiment is crush the shorts? Don’t forget that this is a market where most people believe TSLA is vastly overvalued.
- dcow 6y ago
  There hasn't been enough volume for the shorts to be closed.
  - NovemberWhiskey 6y ago
    Why do you say that? The total free float is about 47M shares; I understand short interest was about 150% of float but volume on GME last week was over 500M, wasn't it?
    - Rastonbury 6y ago
      Shorts covering is expected to move the price way more that it has. That 500m vol is people/algos trying to profit of intraday movements keeping the price relatively stable (for GME)

tonfa 6y ago

> The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay. If anything wasn't the market worried that RH would go bankrupt (when the GME inevitably crashes)? Unlike retail, hedge funds and market makers have risk modelling, and they got out of trades they can't afford (plus all the shorts had collateral, if they can't afford it the broker closed it).