What happened this week(blog.robinhood.com)
blog.robinhood.com
What happened this week
https://blog.robinhood.com/news/2021/1/29/what-happened-this-week
17 comments
My understanding is that brokers are not legally allowed to use money in customers' accounts to put up collateral to the clearing house. So the broker must instead pull from their own cash reserves until the trade settles 2 days later, even if the customer has deposited enough money to cover the trade.
I think what Robinhood is trying to avoid saying is that they simply didn't have enough money to cover that collateral. Hence why they have tapped into credit lines and have done an emergency funding round. If they had allowed GME to trade the past two days, it seems likely that they would have run out of money and instantly gone out of business.
I think what Robinhood is trying to avoid saying is that they simply didn't have enough money to cover that collateral. Hence why they have tapped into credit lines and have done an emergency funding round. If they had allowed GME to trade the past two days, it seems likely that they would have run out of money and instantly gone out of business.
Either (a) this is not true, or (b) this is an opportunity for reform.
From the customer's perspective, the cash is provided up front and is tied up after the trade is made. The type of collateral requirement you are describing -- above and beyond and separate from what the customer has already provided -- seems to serve no purpose, and is being used against the customer.
I know there are a lot of antiquated processes and rules involved in the financial system, like waiting several days for a "wire transfer" to go through, so I'm not too skeptical that things are actually this broken.
From the customer's perspective, the cash is provided up front and is tied up after the trade is made. The type of collateral requirement you are describing -- above and beyond and separate from what the customer has already provided -- seems to serve no purpose, and is being used against the customer.
I know there are a lot of antiquated processes and rules involved in the financial system, like waiting several days for a "wire transfer" to go through, so I'm not too skeptical that things are actually this broken.
I see people who are knowledgeable about the financial system overwhelmingly agreeing that this is true. Here is a source from Money Stuff, which I think most people would consider very credible: https://www.bloomberg.com/opinion/articles/2021-01-29/reddit... (the "Why did Robinhood stop them?" section)
I definitely agree that this could use reform, but I don't know enough to say exactly what should be changed. The ideal solution would be to make clearing instant instead of T+2, but who knows if that will actually happen.
I definitely agree that this could use reform, but I don't know enough to say exactly what should be changed. The ideal solution would be to make clearing instant instead of T+2, but who knows if that will actually happen.
I find this fascinating (from the article you lined):
> Webull Chief Executive Anthony Denier said his platform’s clearing firm, Apex Clearing Corp., notified him Thursday morning that Webull needed to shut off the ability to open new positions in certain stocks. Otherwise, Apex wouldn’t be able to settle the trades, he said.
1. Clearing houses raised capital requirements by a remarkable amount.
2. Apex specifically indicated that opening new positions in certain securities should be forbidden. This does not sound like an aggregate collateral shortfall.
> The volatility of those stocks is approaching infinity as their trading volume increases, so the traditionally mild and technical credit risk around settling trades has become real and scary. Brokerages have to put up more money to guarantee against that risk, and also think about ways to prevent the risk from coming true.
Hold on here... regardless of "infinite" volatility, the risk of a $300 buy order is at most $300, and when the brokerage is custodian of $300 settled real US dollars in the customer's account, there is no apocalyptic systemic risk.
I would understand if this were simply a matter of Robinhood tightening margin requirements, but no, they were prohibiting all purchases, even from accounts with plenty of cash, and now we are hearing (not the first story they spun) that this was because of some nonsensical aspect of the DTCC collateral requirements (the buying customer's funds do not count and cannot be used as collateral).
Collateral shortfall would apply to all purchases of all stocks, wouldn't it? Why not cap all purchases? And what exactly were the collateral requirements on GME?
> Those outlays, which behave like margin in a brokerage account, can create a cash crunch on volatile days, say when GameStop falls from $483 to $112 like it did at one point during Thursday’s session.
Hilarious! This intra-day volatility was caused by the brokerage's actions. This was the kind of raid that could happen only in the low volume environment created by the cessation of retail buying.
> Webull Chief Executive Anthony Denier said his platform’s clearing firm, Apex Clearing Corp., notified him Thursday morning that Webull needed to shut off the ability to open new positions in certain stocks. Otherwise, Apex wouldn’t be able to settle the trades, he said.
1. Clearing houses raised capital requirements by a remarkable amount.
2. Apex specifically indicated that opening new positions in certain securities should be forbidden. This does not sound like an aggregate collateral shortfall.
> The volatility of those stocks is approaching infinity as their trading volume increases, so the traditionally mild and technical credit risk around settling trades has become real and scary. Brokerages have to put up more money to guarantee against that risk, and also think about ways to prevent the risk from coming true.
Hold on here... regardless of "infinite" volatility, the risk of a $300 buy order is at most $300, and when the brokerage is custodian of $300 settled real US dollars in the customer's account, there is no apocalyptic systemic risk.
I would understand if this were simply a matter of Robinhood tightening margin requirements, but no, they were prohibiting all purchases, even from accounts with plenty of cash, and now we are hearing (not the first story they spun) that this was because of some nonsensical aspect of the DTCC collateral requirements (the buying customer's funds do not count and cannot be used as collateral).
Collateral shortfall would apply to all purchases of all stocks, wouldn't it? Why not cap all purchases? And what exactly were the collateral requirements on GME?
> Those outlays, which behave like margin in a brokerage account, can create a cash crunch on volatile days, say when GameStop falls from $483 to $112 like it did at one point during Thursday’s session.
Hilarious! This intra-day volatility was caused by the brokerage's actions. This was the kind of raid that could happen only in the low volume environment created by the cessation of retail buying.
> Hold on here... regardless of "infinite" volatility, the risk of a $300 buy order is at most $300, and when the brokerage is custodian of $300 settled real US dollars in the customer's account, there is no apocalyptic systemic risk.
While this does seem true, it appears the DTCC and the law don't care. It's my understanding that if a brokerage defaults on a payment to DTCC even once, it's game over. Brokerage goes out of business overnight. And the law prevents from brokerages from using client cash to make those payments.
> I would understand if this were simply a matter of Robinhood tightening margin requirements, but no, they were prohibiting all purchases, even from accounts with plenty of cash, and now we are hearing (not the first story they spun) that this was because of some nonsensical aspect of the DTCC collateral requirements (the buying customer's funds do not count and cannot be used as collateral).
This "story" has been said repeatedly, by very reputable sources and even by a direct competitor to Robinhood, long before Robinhood said anything about it. Robinhood is hardly the only brokerage to limit buying - TDA, Merrill, IBKR, and all Apex-cleared brokerages have also done so, though to a lesser extent. I have no love for Robinhood specifically and I frankly think that them going out of business would be a net benefit to retail investors. But I find it very hard to believe that this is a lie that Robinhood has fabricated.
Like I said, nothing Robinhood does to restrict margin requirements or require customers to put up cash helps them out of this situation. In the very short term, Robinhood must pay out of their pocket and it seems like they were simply incapable of doing so.
> Collateral shortfall would apply to all purchases of all stocks, wouldn't it? Why not cap all purchases? And what exactly were the collateral requirements on GME?
DTCC can set collateral requirements per symbol, as far as I understand. So they can jack up the requirements for GME while leaving other stocks untouched. Plus I'd guess most brokerages would rather halt a single symbol than completely shut down business for a whole day. As for what the exact requirements were, we may never know. It doesn't appear to be public information.
> Hilarious! This intra-day volatility was caused by the brokerage's actions.
Indirectly, maybe? Directly, probably not. Despite what wallstreetbets would have people believe, it seems like retail is not moving GME significantly. The same article shows Citadel's numbers for retail order flow and it's pretty much balanced buying and selling.
While this does seem true, it appears the DTCC and the law don't care. It's my understanding that if a brokerage defaults on a payment to DTCC even once, it's game over. Brokerage goes out of business overnight. And the law prevents from brokerages from using client cash to make those payments.
> I would understand if this were simply a matter of Robinhood tightening margin requirements, but no, they were prohibiting all purchases, even from accounts with plenty of cash, and now we are hearing (not the first story they spun) that this was because of some nonsensical aspect of the DTCC collateral requirements (the buying customer's funds do not count and cannot be used as collateral).
This "story" has been said repeatedly, by very reputable sources and even by a direct competitor to Robinhood, long before Robinhood said anything about it. Robinhood is hardly the only brokerage to limit buying - TDA, Merrill, IBKR, and all Apex-cleared brokerages have also done so, though to a lesser extent. I have no love for Robinhood specifically and I frankly think that them going out of business would be a net benefit to retail investors. But I find it very hard to believe that this is a lie that Robinhood has fabricated.
Like I said, nothing Robinhood does to restrict margin requirements or require customers to put up cash helps them out of this situation. In the very short term, Robinhood must pay out of their pocket and it seems like they were simply incapable of doing so.
> Collateral shortfall would apply to all purchases of all stocks, wouldn't it? Why not cap all purchases? And what exactly were the collateral requirements on GME?
DTCC can set collateral requirements per symbol, as far as I understand. So they can jack up the requirements for GME while leaving other stocks untouched. Plus I'd guess most brokerages would rather halt a single symbol than completely shut down business for a whole day. As for what the exact requirements were, we may never know. It doesn't appear to be public information.
> Hilarious! This intra-day volatility was caused by the brokerage's actions.
Indirectly, maybe? Directly, probably not. Despite what wallstreetbets would have people believe, it seems like retail is not moving GME significantly. The same article shows Citadel's numbers for retail order flow and it's pretty much balanced buying and selling.
I don't know what to believe at this point.
IB's CEO Thomas Peterffy said on CNBC that their intent was to protect large market participants, including clearing houses.
The article you cited quotes the Webull CEO saying that Apex dictated restrictions on specific stocks. That is at odds with the story that it was just a matter of brokers not being able to meet collateral requirements.
One consistent theme seems to be that clearing houses are behind this, and that their restrictions were not dictated by a formula, but were more arbitrary.
EDIT: I just found some commentary along these lines...
https://twitter.com/KralcTrebor/status/1355175395642003456
IB's CEO Thomas Peterffy said on CNBC that their intent was to protect large market participants, including clearing houses.
The article you cited quotes the Webull CEO saying that Apex dictated restrictions on specific stocks. That is at odds with the story that it was just a matter of brokers not being able to meet collateral requirements.
One consistent theme seems to be that clearing houses are behind this, and that their restrictions were not dictated by a formula, but were more arbitrary.
EDIT: I just found some commentary along these lines...
https://twitter.com/KralcTrebor/status/1355175395642003456
> IB's CEO Thomas Peterffy said on CNBC that their intent was to protect large market participants, including clearing houses.
This is the same thing I'm talking about, just arguably phrased poorly. If the clearing house is in danger you risk cascading financial failure that endangers everyone, not just people buying GME. Yes that includes large market participants but it also includes Joe Blow holding AAPL or TSLA.
There is a conversation worth having about DTCC's potential conflicts of interest, but it seems clear to me that DTCC cannot be allowed to go down. They need to raise collateral requirements, regardless of the PR fallout that small brokerages might face.
> The article you cited quotes the WeBull CEO saying that Apex dictated restrictions on specific stocks. That is at odds with the story that it was just a matter of brokers not being able to meet collateral requirements.
I think being careful with terminology is important here. WeBull is what's known as an "introducing broker". They deal with clients through their app and such, but they don't really do any of the back-office work. They offload that to a clearing _firm_ called Apex, who ultimately is the one that must post collateral to the clearing _house_ DTCC[1]. According to WeBull's CEO, Apex realized they would be unable to put up the collateral and so called up all the brokerages they work with to tell them that GME would be halted.
Robinhood and most larger brokerages such as TDA, Fidelity, and Vanguard are all self-clearing. It's essentially like if WeBull and Apex were the same company. So while technically speaking it was the clearing firm portion that couldn't post collateral, the introducing broker and clearing firm are the same company so people tend to just simplify and say that the brokerage itself couldn't meet collateral requirements.
> One consistent theme seems to be that clearing houses are behind this, and that their restrictions were not dictated by a formula, but were more arbitrary.
The clearing house (in the US, there's really only one) is definitely behind this, but I don't know that the restrictions were arbitrary. It's pretty standard practice for the DTCC to raise collateral requirements on volatile stocks, and they generally inform clearing firms until the morning that restrictions go into place, giving clearing firms only a few hours to provide additional capital[2]. Whether that's a good standard practice is certainly arguable.
1. See here for the difference between a clearing house and a clearing firm: https://www.money-zine.com/definitions/investing-dictionary/...
2. See page 49 of https://dtcc.com/-/media/Files/Downloads/legal/policy-and-co...
This is the same thing I'm talking about, just arguably phrased poorly. If the clearing house is in danger you risk cascading financial failure that endangers everyone, not just people buying GME. Yes that includes large market participants but it also includes Joe Blow holding AAPL or TSLA.
There is a conversation worth having about DTCC's potential conflicts of interest, but it seems clear to me that DTCC cannot be allowed to go down. They need to raise collateral requirements, regardless of the PR fallout that small brokerages might face.
> The article you cited quotes the WeBull CEO saying that Apex dictated restrictions on specific stocks. That is at odds with the story that it was just a matter of brokers not being able to meet collateral requirements.
I think being careful with terminology is important here. WeBull is what's known as an "introducing broker". They deal with clients through their app and such, but they don't really do any of the back-office work. They offload that to a clearing _firm_ called Apex, who ultimately is the one that must post collateral to the clearing _house_ DTCC[1]. According to WeBull's CEO, Apex realized they would be unable to put up the collateral and so called up all the brokerages they work with to tell them that GME would be halted.
Robinhood and most larger brokerages such as TDA, Fidelity, and Vanguard are all self-clearing. It's essentially like if WeBull and Apex were the same company. So while technically speaking it was the clearing firm portion that couldn't post collateral, the introducing broker and clearing firm are the same company so people tend to just simplify and say that the brokerage itself couldn't meet collateral requirements.
> One consistent theme seems to be that clearing houses are behind this, and that their restrictions were not dictated by a formula, but were more arbitrary.
The clearing house (in the US, there's really only one) is definitely behind this, but I don't know that the restrictions were arbitrary. It's pretty standard practice for the DTCC to raise collateral requirements on volatile stocks, and they generally inform clearing firms until the morning that restrictions go into place, giving clearing firms only a few hours to provide additional capital[2]. Whether that's a good standard practice is certainly arguable.
1. See here for the difference between a clearing house and a clearing firm: https://www.money-zine.com/definitions/investing-dictionary/...
2. See page 49 of https://dtcc.com/-/media/Files/Downloads/legal/policy-and-co...
If you actually had a cash-only designated account, would the broker still have to pull from their own cash reserves to make the trade?
Yes, I believe they would.
What is the reasoning for this rule?
Honestly, I haven't been able to find any good sources for the reasoning. It seems like it emerged as part of Dodd-Frank after the 2008 financial crisis, but almost no one is talking about why specifically the rule was enacted. My best guess is that it might be to help protect users' money from being put at risk by a malicious/incompetent brokerage.
What's missing in this is any acknowledgement of their failure to educate their users on when they might fail. They make trading feel frictionless and instantaneous, except that they can't actually meet this expectation when it counts.
At this point, any rational user should simply assume that RH will fail them at the most critical times, without warning. They have proved it again and again.
And maybe we should all ask ourselves whether the appearance of frictionless trading is even a good thing to begin with.
At this point, any rational user should simply assume that RH will fail them at the most critical times, without warning. They have proved it again and again.
And maybe we should all ask ourselves whether the appearance of frictionless trading is even a good thing to begin with.
I'm no trading expert, but why allow sales then? Wouldn't it have had similar implications?
I am also no expert, so speculation ahead.
- I have heard that the DTCC does not require collateral (or perhaps not as much collateral) for the party selling the stock. This would mean that allowing selling would pose little to no risk to brokers.
- If that's not true, I wonder if Robinhood decided that preventing people from closing positions was an unacceptable risk. If GME tanked and people couldn't sell, the outrage would be insane. So perhaps they did the math, realized that their available cash wasn't enough to support both buying and selling, and decided that only allowing sells was the least bad option available.
- I have heard that the DTCC does not require collateral (or perhaps not as much collateral) for the party selling the stock. This would mean that allowing selling would pose little to no risk to brokers.
- If that's not true, I wonder if Robinhood decided that preventing people from closing positions was an unacceptable risk. If GME tanked and people couldn't sell, the outrage would be insane. So perhaps they did the math, realized that their available cash wasn't enough to support both buying and selling, and decided that only allowing sells was the least bad option available.
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No, GME stock had a higher capitalization requirement than cash.
This doesn't add up. How could the requried amount to deposit with the clearing house exceed the cost of the security being purchased? If it does not exceed the cost of the security, then why do they need to prevent purchases of stock from cash accounts?