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The issue is not just trading on margin, it's trading with unsettled funds, which you can do in a non-margin account, because it's a non issue 99.999% of the ti

The issue is not just trading on margin, it's trading with unsettled funds, which you can do in a non-margin account, because it's a non issue 99.999% of the time. Because of T+2 settlement when you buy/sell stock the actual exchange of shares and money only happens 2 business days later. If you sell a stock and then buy a different stock the same day you're trading with money that technically is not in your account yet, even in a cash account. It's fine because you wrote promissory note to pay $X in 2 days, but you're also holding a promissory note saying you are owed >=$X in 2 days. (And promissory notes to receive/deliver the respective shares). And there's a central clearinghouse enforcing this. But part of the reason why it's low risk is that the clearinghouse requires brokers to put up large amounts of cash as collateral to ensure they can pay all their promissory notes even if they go bust. They are fairly conservative in their collateral requirements. So when all your customers are trading a highly volatile stock with a notoriously high rate of failure to deliver (this is a whole other discussion), the clearinghouse gets antsy and may ask you to put up ridiculously large amounts of cash as collateral.

gruez 5y ago
>Because of T+2 settlement when you buy/sell stock the actual exchange of shares and money only happens 2 business days later. If you sell a stock and then buy a different stock the same day you're trading with money that technically is not in your account yet, even in a cash account. It's to do with T+2 settlement, but not with unsettled funds (funds you got from selling a stock, but hasn't settled yet). Basically, even if the funds were settled (eg. it's been sitting in your account for years), your broker has to put up the deposit on the day of trade, but can't use your money to do it. So if you bought $100 worth of shares and the deposit requirement was 100%, then your broker has to come up with $100 of their own cash (or borrow it from someone) to fulfill the trade. https://finance.yahoo.com/video/heres-why-robinhood-restricting-users-173049721.html https://finance.yahoo.com/video/heres-why-robinhood-restrict... >but our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can't afford the cost of that trade clearance.
- greenshackle2 5y ago
  Oh, I didn't know that, that's even worse for them, it means all customer Buys are done on 2-day credit, basically.
- SilasX 5y ago
  Say what? Why would brokers need to put up their own collateral to back customers’ long-settled cash? Because if the risk (to the rest of the market) that the broker doesn’t actually have that cash? That seems seriously messed up.
  - gruez 5y ago
    https://news.ycombinator.com/item?id=27694941 https://news.ycombinator.com/item?id=27694941
    - deleted 5y ago
      [deleted]
SilasX 5y ago
But wasn’t RH also prohibiting purchase even in non-margin accounts where the funds hadn’t moved at all for months and thus wasn’t going back and forth creating counterparty risk?

gruez 5y ago

>Because of T+2 settlement when you buy/sell stock the actual exchange of shares and money only happens 2 business days later. If you sell a stock and then buy a different stock the same day you're trading with money that technically is not in your account yet, even in a cash account. It's to do with T+2 settlement, but not with unsettled funds (funds you got from selling a stock, but hasn't settled yet). Basically, even if the funds were settled (eg. it's been sitting in your account for years), your broker has to put up the deposit on the day of trade, but can't use your money to do it. So if you bought $100 worth of shares and the deposit requirement was 100%, then your broker has to come up with $100 of their own cash (or borrow it from someone) to fulfill the trade. https://finance.yahoo.com/video/heres-why-robinhood-restricting-users-173049721.html https://finance.yahoo.com/video/heres-why-robinhood-restrict... >but our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can't afford the cost of that trade clearance.

greenshackle2 5y ago
Oh, I didn't know that, that's even worse for them, it means all customer Buys are done on 2-day credit, basically.
SilasX 5y ago
Say what? Why would brokers need to put up their own collateral to back customers’ long-settled cash? Because if the risk (to the rest of the market) that the broker doesn’t actually have that cash? That seems seriously messed up.
- gruez 5y ago
  https://news.ycombinator.com/item?id=27694941 https://news.ycombinator.com/item?id=27694941
  - deleted 5y ago
    [deleted]

SilasX 5y ago

But wasn’t RH also prohibiting purchase even in non-margin accounts where the funds hadn’t moved at all for months and thus wasn’t going back and forth creating counterparty risk?