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> I'm surprised the CEO of a brokerage is advocating for it. settlement is a necessary but undesirable part of the business of a brokerage, because it locks up

> I'm surprised the CEO of a brokerage is advocating for it. settlement is a necessary but undesirable part of the business of a brokerage, because it locks up capital, which is costly, for a business model whose margins are shrinking rapidly. it used to be that brokerages could earn something from the overnight repo on the balance sheet in order to compete aggressively on fees but nowadays overnight rates are so low and zero-cost execution is the cat let out of the bag. maybe prime brokerages can comfortably rely on the bank's overall B/S to manage this risk but specialist and retail brokerages are all aggressively shrinking capital to stay competitive at the cost of not doing business on days like these. how much is robinhood paying for drawing down those credit lines over the last week just to tide over the 2-day mismatch in trading and settlement? how close was it to getting stopped on doing business in all the other tickers that aren't GME and AMC? I honestly think robinhood would rather not have done that wsb business at all.

princeb 6y ago
edit: immediate settlement is profoundly beneficial for a brokerage. imagine a single trade on the robinhood app, there is counterparty risk between the retail trader and rh and there is a separate counterparty risk between rh and the marketmaker. the two risks perfectly offset at the point of trade, but deteriorate as the market moves further away from the trade price. over several days, the loss probability can become completely lopsided. under instant settlement conditions, the counterparty risk is neutralized immediately. as a side note, the ficc (which is the fixed income part of the dtcc) already does intraday matching. this is not, as i understand it, exactly settlement, but a pure flow brokerage, lets say, can net down their two-way exposures to reduce margin. this mollified the margining requirements surge in march 2021 when gov bond vol increased 3-4x.

princeb 6y ago

edit: immediate settlement is profoundly beneficial for a brokerage. imagine a single trade on the robinhood app, there is counterparty risk between the retail trader and rh and there is a separate counterparty risk between rh and the marketmaker. the two risks perfectly offset at the point of trade, but deteriorate as the market moves further away from the trade price. over several days, the loss probability can become completely lopsided. under instant settlement conditions, the counterparty risk is neutralized immediately. as a side note, the ficc (which is the fixed income part of the dtcc) already does intraday matching. this is not, as i understand it, exactly settlement, but a pure flow brokerage, lets say, can net down their two-way exposures to reduce margin. this mollified the margining requirements surge in march 2021 when gov bond vol increased 3-4x.