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Then you still don't understand the problem. This had nothing to do with consumer margin; they could have not offered margin as a product and still ended up in

Then you still don't understand the problem. This had nothing to do with consumer margin; they could have not offered margin as a product and still ended up in this situation. The TLDR is that DTCC requires cash from the brokerage firm for buying a stock until settlement clears, which means the money you pay to buy $100 worth of apple, a percentage of that amount must be paid directly by the brokerage i.e. not from the $100 you gave but from the businesses account. During the gamestop fiasco, the percentage of money required from the brokers increased in orders of magnitude for GME and other meme stocks which caused a pseudo liquidation issue, but not actually since no one's balances were at risk yet. It's ironic because this prevents small brokerages from building their own clearing houses and reducing competition in that space. Robinhood innovated to push the feature development cycle faster and got punished for it due to an archaic rule about settlement time. T+2 is really 99% of the reason this happened -- sure RH could have raised additional funds, but a black swan event isn't usually what a smaller bank plans for.

deleted 5y ago
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omeze 5y ago
T+2 is an artifact of fund transfer settlement times isn’t it? Or to rephrase, why do we still have T+2 for equities?
- Armisael16 5y ago
  Financial markets appreciate having a little time to call back mistakes. Also, transactions are a lot easier and cheaper if you can do them at the end of the day instead of immediately. We could probably switch to T+1 without significant problems. Real-time settlement would be a whole other kettle of fish.
- totalZero 5y ago
  It used to be T+3. We switched to T+2 about 4 years ago. That amount of time gives firms the opportunity to borrow in the overnight market to get cash for purchases, and also allows short sellers a bit of time to secure borrow so that they can deliver shares. Even on T+2, hundreds of millions of dollars' worth of GME stock failed to deliver. Thus, I thumb my nose at the suggestion that T+1 (which is what we use in the options market) would have resolved the issue. In actuality, Vlad is correct that faster settlement would have liberated some of his firm's cash, but it's not a real solution considering that other parts of the settlement process would break. It's easier for him to point fingers than to admit "We were writing checks that our firm couldn't cash."
totalZero 5y ago
Sorry but I think you're the one who doesn't understand. Or you're shilling for Vlad. A customer with a given amount of capital can buy far more stock on margin than on cash. Buying additional stock on the firm's dime puts the firm itself at risk and also increases deposit requirements. DTCC deposit requirements take margin into account but even if that were not the case RH bought more stock on margin than it would have in a cash-only restriction. When Robinhood clients trade on margin, Robinhood itself takes risk on the position. There is no guarantee that margined trades will be liquidated when they go beyond minimum maintenance. Markets have discontinuous jumps all the time. So you can get situations like what happened with Archegos, where banks lost billions on the margin leverage that they provided to the customer. T+2 isn't archaic, it was introduced a few years ago and even in T+2 many firms are unable to deliver shares on time. Vlad started to blame T+2 because his firm didn't have enough money to cover deposits, but (A) that could have been resolved by restricting margin to reduce GME buying power, and (B) hundreds of thousands of those shares failed to deliver on T+2 anyway.

deleted 5y ago

[deleted]

omeze 5y ago

T+2 is an artifact of fund transfer settlement times isn’t it? Or to rephrase, why do we still have T+2 for equities?

Armisael16 5y ago
Financial markets appreciate having a little time to call back mistakes. Also, transactions are a lot easier and cheaper if you can do them at the end of the day instead of immediately. We could probably switch to T+1 without significant problems. Real-time settlement would be a whole other kettle of fish.
totalZero 5y ago
It used to be T+3. We switched to T+2 about 4 years ago. That amount of time gives firms the opportunity to borrow in the overnight market to get cash for purchases, and also allows short sellers a bit of time to secure borrow so that they can deliver shares. Even on T+2, hundreds of millions of dollars' worth of GME stock failed to deliver. Thus, I thumb my nose at the suggestion that T+1 (which is what we use in the options market) would have resolved the issue. In actuality, Vlad is correct that faster settlement would have liberated some of his firm's cash, but it's not a real solution considering that other parts of the settlement process would break. It's easier for him to point fingers than to admit "We were writing checks that our firm couldn't cash."

totalZero 5y ago

Sorry but I think you're the one who doesn't understand. Or you're shilling for Vlad. A customer with a given amount of capital can buy far more stock on margin than on cash. Buying additional stock on the firm's dime puts the firm itself at risk and also increases deposit requirements. DTCC deposit requirements take margin into account but even if that were not the case RH bought more stock on margin than it would have in a cash-only restriction. When Robinhood clients trade on margin, Robinhood itself takes risk on the position. There is no guarantee that margined trades will be liquidated when they go beyond minimum maintenance. Markets have discontinuous jumps all the time. So you can get situations like what happened with Archegos, where banks lost billions on the margin leverage that they provided to the customer. T+2 isn't archaic, it was introduced a few years ago and even in T+2 many firms are unable to deliver shares on time. Vlad started to blame T+2 because his firm didn't have enough money to cover deposits, but (A) that could have been resolved by restricting margin to reduce GME buying power, and (B) hundreds of thousands of those shares failed to deliver on T+2 anyway.