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That's actually a much more interesting question, and I admit, not something I had even considered. What kind of outlier situations and stress scenarios should
by bostik 5y ago
That's actually a much more interesting question, and I admit, not something I had even considered. What kind of outlier situations and stress scenarios should you be required to weather to be allowed to be a brokerage? We as a society instituted mandatory stress tests for banks after the last financial meltdown, after all.
The odd thing about the GameStop mess is that it inadvertantly exposed a lot of internal machinery of finance.
> But the 'you are allowed to only sell and not buy a stock' is so grossly wrong I don't see how anyone can look past that
I don't fall into either category, but I find myself disagreeing. These one-sided failure modes ("can only sell") are in fact common failsafes, although the reasons behind them are more generic. It may well be I look at things very differently because I operate on the other side.
Counterparty risks are real. When things start to fail, or there is a risk that an entity can not meet their obligations, the common fail safe is to limit/reduce exposure. Actions that would increase their exposure are not allowed, while actions that decrease their exposure, are.
When RH went into a one-sided failure mode with GameStop, they did what is required of them: they restricted their ability to increase exposure to a wildly imbalanced contract, only allowing trades that reduced the said exposure. Having these types of fail safes is, funnily enough, part of requirements for operating as a broker.
In effect, they were too poor to handle the outlier scenario. In the same way banks are too cash poor to allow all their customers to empty their accounts.
But oh boy, how they communicated that... now there's a lesson for future students.
- ProAm 5y agoYes there are a lot of lessons here, and no easy answers. I can poke holes in my own arguments. I still believe they shouldnt be allowed to be a brokerage based on past behavior and for the common good of everyone but its tough. And money talks, unfortunately.