Robinhood’s GameStop debacle prompts modernization of stock clearing
When Robinhood Markets Inc. and other brokers brutally restricted trading in GameStop Corp.
, he shed light on a normally obscure corner of financial markets: the clearinghouse that processes US stock transactions.
Robinhood’s decision has infuriated its customers, sparked dozens of lawsuits against the Menlo Park, Calif., Based startup and will be considered in a Capitol Hill hearing next week. Initially, many investors assumed that the company’s decision to limit the purchase of GameStop shares was driven by hedge funds that had bet against the stock or by high-frequency trading companies. In fact, the move was prompted by something more mundane: a $ 3 billion margin call from the Depository Trust & Clearing Corp.
Robinhood and others are now calling for a modernization of the way DTCC processes nearly $ 1.7 trillion in securities transactions every day to prevent such an event from happening again.
DTCC is responsible for clearing and settling US stock market transactions. In other words, after each trade, he makes sure that the shares are delivered to the buyer and the cash is delivered to the seller, a process that takes two business days.
To protect against the risk of a buyer or seller defaulting during those two days, a DTCC affiliate known as National Securities Clearing Corp. maintains a multi-billion dollar fund to operate in the event of default. The fund is maintained by deposits from brokerage houses, including units from many Wall Street banks as well as Charles Schwab Corp.
Each day, NSCC adjusts the size of the fund based on factors such as market volatility and trading volume, and it may require additional funds from any of its member brokerage firms. Typically, these margin calls are relatively small, but in extreme cases brokers have a few hours to set up large amounts of money.
Robinhood chief executive Vlad Tenev last week called for this two-day period, known as T + 2 settlement, to be replaced with real-time settlement or immediate transaction processing. The current system forces cash to be tied up at the clearinghouse while investors wait for trades to clear, Mr. Tenev written in a blog post.
Such a stance could help Robinhood deflect blame as its actions come under scrutiny by regulators and politicians. Still, many on Wall Street say Mr. Tenev is right about the T + 2 settlement.
“You can order anything from Amazon… and get it in a day. But you cannot settle the stock transactions.
“Nowadays, there is no reason for it to take so long,” said Charles Cascarilla, managing director of Paxos, a cryptocurrency startup that is running a pilot project to settle U.S. stock transactions on the blockchain. , the technology behind bitcoin. “You can order anything on Amazon, from toilet paper to toothbrushes, and have it in a day. But you cannot settle the stock transactions.
DTCC, which is owned by a financial industry consortium, says it supports speeding up the stock market settlement cycle, although it has advocated for next day or same day settlement, rather than one. real-time settlement.
Even a modest acceleration of the settlement process would place a heavy burden on regulators and many banks, brokerage houses and financial software providers, all of whom would have to update their systems to prepare for the change. It took years to complete the last big adjustment in the process, when Wall Street went from a two-day to three-day settlement in 2017.
“We are very supportive of shortening the settlement cycle, and as it has become a topic of broader conversation in and around the industry, we see this as a net positive,” Murray Pozmanter, Head of Services for compensation and global DTCC services. business operations, said in an interview.
Robinhood wasn’t the only one receiving high margin calls from DTCC. Other companies, like Apex Clearing, have faced similar issues. Apex provides clearing services to brokers like Webull Financial LLC, which has also restricted trading on GameStop.
Mr Tenev said Robinhood’s operations team was made aware of DTCC’s $ 3 billion request at 6:30 a.m. ET on January 28, an unusually large margin call caused by clients flocking into a few stocks. volatile. After Robinhood agreed to implement the trading restrictions, reducing its risk according to DTCC’s formulas, the clearinghouse reduced its claim to $ 700 million. Robinhood has since raised $ 3.4 billion in a hasty fundraiser, enabling it to meet future collateral requirements.
Robinhood could have handled the situation better, according to the brokerage’s current and former executives. For example, Robinhood could have had larger lines of credit with its banks to handle margin calls, or it could have acted earlier and more gradually by placing trading restrictions on GameStop, they said.
“They should have been better prepared for this eventuality,” said Thomas Peterffy, President of the Interactive Brokers Group. Inc.,
which restricted the trading of some popular stocks. “The markets become volatile, and when they have large positions, they need to be able to respond to these clearinghouse calls.”
The episode fueled an obscure debate over whether clearing houses, rather than being a stabilizing force, can contribute to risk in the financial system.
Supporters of central clearing claim that forcing companies to route transactions through clearing houses increases market certainty and ensures quick and clean resolution in the event of a financial institution failure. But some economists and financial pressure groups say central clearing can fuel volatility during times of market stress.
This is because clearing houses seek to accumulate thicker buffers against losses when markets are volatile. This leads them to issue margin calls to banks and brokerage houses, which might need to sell assets quickly to raise funds, which could exacerbate massive sales.
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In February and March, for example, a coronavirus-fueled plunge in many markets led clearinghouses around the world to demand hundreds of billions of dollars in additional collateral, according to the contract industry group FIA. in the long term. This “contributed to an abrupt and disorderly ‘rush for money’ in financial markets which caused extreme upheaval in the US Treasury markets”, FIA said in an October report.
Something similar happened in miniature with DTCC margin calls during the height of the GameStop rally, said Craig Pirrong, professor of finance at the University of Houston. He pointed to the sharp swings in the S&P 500 and the Cboe Volatility Index, or VIX, during a time when Robinhood and other brokers were battling collateral demands.
“This shows that some eccentric actions can have consequences throughout the financial system,” Pirrong said. “In some ways it’s even darker. “
Write to Alexandre Osipovich at [email protected]
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