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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 po

by 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.

by KMag 6y ago

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.