Robinhood users blamed the brokerage for suspending trading of GameStop stocks and other securities last month, amid a buying spree sparked by retail traders on a Reddit forum.

But Robinhood may not have had a choice. Robinhood, after all, is just one player among many in a market for government securities that has grown over decades. In this system, brokerage apps like Robinhood are just the tip of an iceberg, but actual transactions and settlement remain hidden from the public. Much of the control remains in the hands of a single centralized custodian: the Depository trust and clearing house (DTCC).

Settlement occurs when inventory is delivered to the buyer and funds are delivered to the seller. Often the intermediary – DTCC – is responsible for facilitating this delivery, at least in the securities market. The brokerage would send the client’s funds to DTCC through its clearing company.

DTCC controls rates, acts as a counterparty for most transactions and supports the entire government securities market.

It also has a subsidiary, the National Securities Clearing Company (NSCC), which is responsible for clearing and settlement services, as well as a subsidiary called the Depository trust company (DTC) which is responsible for keeping records and clearing securities of companies and municipalities.

DTCC calculates cash margin requirements for stocks and publishes the data on its website. Brokers can take this information and use it to model what the markets do, said Carlos Domingo, CEO and founder of Securitize, a security token company and transfer agent registered with the Securities and Exchange Commission (SEC).

Clearing houses also use this information to determine brokers’ margin requirements, which helps them ensure they have sufficient liquidity.

When certain stocks become volatile, for example due to a coordinated effort to buy them and increase their price, the clearing company may charge more to settle trades. Applications like Webull, M1 and Public all costs of the clearing house quoted when they suspended trading in stocks like GME last month.

Robinhood said in a blog post published at the end of January said he had also suspended trading in GME and other securities due to the company’s clearing costs.

Before we get into what happened with GameStop, it’s worth considering why DTCC exists, as well as the decades of infrastructure that the U.S. securities market is based on.

Transactions were previously settled by making transactions with physical pieces of paper, Domingo said. In the 1960s, Wall Street back offices were unable to keep up with the daily volume of transactions, the so-called the paperwork crisis on Wall Street.

“They had to close Wall Street on Wednesday to settle the transactions,” he said. “They were considering two options to digitize or automate this system. One could be a peer-to-peer settlement where brokers could settle against each other, or they could use a centralized depository, and that’s how DTCC was born.

Settlement transactions went from five days (T + 5) to three days (T + 3), then to two days (T + 2).

T + 2 has only happened in recent years, said Gautam Gujral, general counsel and co-founder of digital asset management platform Vertalo.

“To make this slight change from T + 3 to T + 2, it took about six years of unheard-of effort on Wall Street to get there,” he said.

While Robinhood mainly blamed compensation costs for stopping transactions, CEO Vlad Tenev also highlighted the payment deadlines as a problem, claiming that the two-day gap creates risk for investors.

For simplicity’s sake, let’s review an assumption. If I had to sign up for a brokerage app like Robinhood, Webull, or Cash App (for example), I could buy and sell publicly available securities. These include stocks like GME or exchange traded funds (ETFs). Some brokers now also allow clients to purchase cryptocurrencies, although there may be restrictions in trading or transferring these to off-platform wallets. Here’s what this hypothetical process might look like:

What that does mean, however, is that when you buy a stock on Robinhood and it shows up in your portfolio, it doesn’t necessarily mean you ‘own’ it or that trade has been settled, Domingo said.

Some apps – Domingo cited JPMorgan as an example – show unsettled trades, but “Robinhood does nothing like that.

“The fact that people are trading on Robinhood, they think it’s like buying bitcoin because they’re buying bitcoin and it shows up in their account,” he said. This is not a new problem either.

Robinhood could have taken steps to ease the trading shutdown last month, Domingo said. If the company had better modeled what was going on with the GME market and other volatile stocks, it could have predicted cash flow requirements.

“The fact that Robinhood missed this, in my opinion, is a sign of mismanagement on their side,” he said. “They definitely cost people money because of their lack of planning.”

Robinhood CEO Tenev asserted that T + 0 would prevent volatile markets like those seen with GameStop and AMC.

“Investors wait for their trades to clear and the clearing brokers have their own money locked up until settlement is made on the last days after the trade,” Tenev wrote in a blog post in February. “The clearinghouse filing requirements are designed to mitigate risk, but the wild activity of the market over the past week has shown that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that introduce new risks. “

However, the move to a shorter settlement requires broad buy-in from the securities market industry.

The move from T + 3 to T + 2 required industry approval, and a further shortening of the settlement cycle will also require participants to agree, Gujral said.

A DTCC spokesperson referred CoinDesk to a blog post on its website when contacted for comment, titled “Why shortening the settlement cycle will benefit industry and investors. ”

The post, a question-and-answer session with chief executive Michael McClain, also said industry participants were reluctant to shorten the settlement cycle further.

“Although the stock clearing and settlement subsidiaries of DTCC, NSCC and DTC, can support some T + 1 and even same-day settlements using existing technology, many market players are not using this option due to the complexity of the market structure, existing business and operational processes, “the post said.

Switching to same-day settlement could risk reducing the liquidity supported by the current market, the DTCC publication said.

The technology exists to further shorten the time to settlement, Domingo said. DTCC even investigated whether security tokens or other decentralized solutions could be more effective. A similar study was carried out by the Bank of Canada.

“The conclusion was the same. From a technological point of view, it can be done, but these people trade with more money than they have, ”he said.

There are also trade-offs with moving to a shorter settlement period. The current T + 2 model allows clients and brokers to send trades on credit, but this would be more difficult and risky at T + 1 or T + 0.

“They can do that with the current model because it’s not an instant settlement,” Domingo said.

DTCC’s message also noted that the entity has considered whether distributed ledger technology is a solution to reducing settlement times.

“We know there [are] settlement efficiency using blockchain. It is already developing on the private securities market, [though] not at all in the government securities market, ”Gujral said. “At the very least, what needs to happen is that the market needs to start studying how to use a private or public blockchain to start doing this, using pretty instant settlement.”

However, most of these benefits appear to apply only to private securities markets, which are smaller and less liquid.

Tenev wrote “technology is the answer” in his blog post in favor of faster settlement. However, while eliminating third-party intermediaries could streamline parts of the process, it could also create some financial risks for brokers and clients.

“You bring credit risk to another level,” Domingo said.

The question also arises as to whether a currently functioning blockchain can support the U.S. public securities market and the volume of transactions that would require.

“Blockchain solves a bunch of these things, but we’re still developing the architecture and ecosystem that does it,” Gujral said.