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> If I sell GME to buy AMZN, does that have different collateral implications to selling GME to buy GME an hour later? Yes. Stock trades don't settle instant

> If I sell GME to buy AMZN, does that have different collateral implications to selling GME to buy GME an hour later? Yes. Stock trades don't settle instantly, and brokers must put up collateral to ensure that parties don't walk away if the price moves against them between the order and the settlement. Thanks to the meme-stock volatility, DTCC (the clearing house) imposed special collateral requirements for Gamestop stock. Also thanks to it being a meme stock, Robinhood was "net long" in its purchases -- its users weren't making offsetting transactions. The overall result was that Robinhood was on the hook for stupidly high (and unexpectedly high) collateral requirements for Gamestop, but most other stocks were business-as-usual. That's also why Robinhood would allow users to close out (sell) Gamestop positions even during the purchase freeze: doing so would reduce Robinhood's collateral requirement. None of this has anything to do with unsettled customer funds. Usually DTCC's operations are invisible to retail investors, so it's a huge surprise when the exceptional happens.

thebean11 4y ago
Ah TIL that the requirements would be different per-stock. It still seems to me that Robinhood should be able to fulfill orders for customers who had fully settled funds in the account. If I have money in my account (fresh from my bank account) that money is enough for 100% collateral.
- winenbug 4y ago
  Assuming that the average meme-stock chaser trades with settled funds, though.
  - thebean11 4y ago
    Right, that's my point. Why stop trading with settled funds, when it was only unsettled funds causing the issue?
- drexlspivey 4y ago
  They can't use customer funds for collateral to the clearing house, they must use their own funds
  - thebean11 4y ago
    Might be missing something, if I deposit $100 and use it to purchase stock, they cannot use my $100? What does that even mean given that money is fungible?
    - kasey_junk 4y ago
      Money is fungible but how its accounted for isn’t. I’m not an expert in the regs around margin accounts but have worked in other spaces where my company was holding money for others. It is usually strictly regulated. In some jurisdictions you must hold it in specific accounts that have particular attributes and you must have dollar for dollar parity between the account and the money you collect. In almost every situation where you are holding money for someone else you aren’t allowed to use it to pay your own debts. And in this case the collateral obligation is on Robinhood not on their account holders.
    - drexlspivey 4y ago
      When you deposit $100 dollars in Robin Hood they must keep that $100 in a bank account. If you later use those dollars to buy a stock they must post collateral to the clearing house but not the $100 dollars you deposited (those must sit in the bank account still). Your account however is being credited with the stock instantly. In two days when the trade settles they transfer the $100 dollars to the clearing house and get their colatteral back. The problem as you can see is that you deposited $100 and they have to use $15 (for example) more of their own cash. If overnight the 15% margin requirement changes to 30% and RH doesn't have a huge amount of cash sitting around they are going to get squeezed.
  - freemint 4y ago
    They can't take it for collateral however they could ask to have it lend to RH to serve as two day collateral.
dragontamer 4y ago
>Stock trades don't settle instantly More precisely: US Law for the time (and today) is T+2 settlement. Meaning the trade doesn't _actually_ happen until 2 days later. It is the job of all the middle-men to make it look like it appeared instantly. But the price of GME was changing dramatically, so the middle-men (DTCC) asked Robinhood for more money than Robinhood expected. Robinhood couldn't afford the higher price, and DTCC didn't want to trade anymore unless more $$$ was offered up to "cover their ass" in case the stock price changes in 2 days. ------ Those middlemen work in most situations. But when the stock is like +500% in a few hours (or whatever happened that day...), they tend to get squeamish. After all, they're the bagholders if any of these trades go bad. Quickly-changing stock prices makes them more-and-more squeemish.

thebean11 4y ago

Ah TIL that the requirements would be different per-stock. It still seems to me that Robinhood should be able to fulfill orders for customers who had fully settled funds in the account. If I have money in my account (fresh from my bank account) that money is enough for 100% collateral.

winenbug 4y ago
Assuming that the average meme-stock chaser trades with settled funds, though.
- thebean11 4y ago
  Right, that's my point. Why stop trading with settled funds, when it was only unsettled funds causing the issue?
drexlspivey 4y ago
They can't use customer funds for collateral to the clearing house, they must use their own funds
- thebean11 4y ago
  Might be missing something, if I deposit $100 and use it to purchase stock, they cannot use my $100? What does that even mean given that money is fungible?
  - kasey_junk 4y ago
    Money is fungible but how its accounted for isn’t. I’m not an expert in the regs around margin accounts but have worked in other spaces where my company was holding money for others. It is usually strictly regulated. In some jurisdictions you must hold it in specific accounts that have particular attributes and you must have dollar for dollar parity between the account and the money you collect. In almost every situation where you are holding money for someone else you aren’t allowed to use it to pay your own debts. And in this case the collateral obligation is on Robinhood not on their account holders.
  - drexlspivey 4y ago
    When you deposit $100 dollars in Robin Hood they must keep that $100 in a bank account. If you later use those dollars to buy a stock they must post collateral to the clearing house but not the $100 dollars you deposited (those must sit in the bank account still). Your account however is being credited with the stock instantly. In two days when the trade settles they transfer the $100 dollars to the clearing house and get their colatteral back. The problem as you can see is that you deposited $100 and they have to use $15 (for example) more of their own cash. If overnight the 15% margin requirement changes to 30% and RH doesn't have a huge amount of cash sitting around they are going to get squeezed.
- freemint 4y ago
  They can't take it for collateral however they could ask to have it lend to RH to serve as two day collateral.

dragontamer 4y ago

>Stock trades don't settle instantly More precisely: US Law for the time (and today) is T+2 settlement. Meaning the trade doesn't _actually_ happen until 2 days later. It is the job of all the middle-men to make it look like it appeared instantly. But the price of GME was changing dramatically, so the middle-men (DTCC) asked Robinhood for more money than Robinhood expected. Robinhood couldn't afford the higher price, and DTCC didn't want to trade anymore unless more $$$ was offered up to "cover their ass" in case the stock price changes in 2 days. ------ Those middlemen work in most situations. But when the stock is like +500% in a few hours (or whatever happened that day...), they tend to get squeamish. After all, they're the bagholders if any of these trades go bad. Quickly-changing stock prices makes them more-and-more squeemish.