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It’s Time for Real Time Settlement

blog.robinhood.com

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Re: It’s Time for Real Time Settlement

#21

Post by kelnos »

hehehaha wrote: post #3

I don’t even know what to say about this. It doesn’t sound like he learned his lessons at all. He’s calling for real-time settlement which is not practical for equities. On top of that he completely dismissed RH’s root problems: very loose margins and new account standards. I was defending RH on HN last week but I have to reconsider.

> He’s calling for real-time settlement which is not practical for equities.

Why not? In most cases share ownership is just a row or two in some database. If you can update those in real time (which you should; a legacy system that doesn't support this can be upgraded, even if at significant cost in implementation and testing), and do instant (or near-instant) funds transfers, you should be able to settle within minutes. Certainly same-day, at least.

Now, I would accept that maybe instant settlement is not desirable. Maybe it's good to be able to reverse fraudulent or illegal trades before money fully changes hands, for example. But that's a different thing.

Re: It’s Time for Real Time Settlement

#22

Post by tobyjsullivan »

the_mitsuhiko wrote: post #17
300bps wrote: post #11

US Equities recently changed from T+3 to T+2: https://www.sec.gov/news/press-release/2017-68-0 There are many types of securities that are already settling at T+0.

What does T+0 mean? Instantly or same day?

According to [0]:

> 'T' is the transaction date

If that's an accurate definition, then it's safe to say it would technically mean same day.

Simultaneously, if we want to be technically accurate to a pedantic level, "instant" would be impossible given speed limits of information transmission (speed of light), etc. So "T+0" couldn't mean "instant" in any case.

Maybe some settlements are, in fact, near-instant but I don't think that's implied by "T+0".

[0] https://www.investopedia.com/ask/answers/what-do-t1-t2-and-t...

Re: It’s Time for Real Time Settlement

#23

Post by stu2b50 »

kelnos wrote: post #20
justlurkin12 wrote: post #18

Earlier quoted context omitted.

Real time securities wouldn't need brokerages to front collateral while the trades settle by the virtue of no settling period. They would only have to deal with customer capital used to buy the stock.

Wasn't a big part of this issue fueled by RH fronting the money for trades when the customer was transferring money into their account from a bank over ACH? Making ACH instant (which I believe is in the works) would solve that, not T+0 for settlement. (I don't have a good feel for what was the bigger driver of RH's issues though: overextension because of slow ACH or slow trade settlement.)

No, brokers must front collateral to clearing firms simply because there's no inherent reason to trust any of the firms will have their capital or equity obligations in T+2 days. ACH transfers and margin, although possible reasons why a firm wouldn't have funds, are not the direct reason, which is DTCC requirements.

Re: It’s Time for Real Time Settlement

#24

Post by olejorgenb »

justlurkin12 wrote: post #18
jeffbee wrote: post #14

Wouldn't real-time settlement have completely destroyed RH last week? How would they have funded trading?

Real time securities wouldn't need brokerages to front collateral while the trades settle by the virtue of no settling period. They would only have to deal with customer capital used to buy the stock.

I still don't get why customer capital can't be used as collateral. Which scenario is this rule protecting the customer from?

Re: It’s Time for Real Time Settlement

#25

Post by 300bps »

the_mitsuhiko wrote: post #17
300bps wrote: post #11

US Equities recently changed from T+3 to T+2: https://www.sec.gov/news/press-release/2017-68-0 There are many types of securities that are already settling at T+0.

What does T+0 mean? Instantly or same day?

Same day settlement. Definitely not instant.

Re: It’s Time for Real Time Settlement

#26

Post by mike_d »

zaroth wrote: post #4
hehehaha wrote: post #3

I don’t even know what to say about this. It doesn’t sound like he learned his lessons at all. He’s calling for real-time settlement which is not practical for equities. On top of that he completely dismissed RH’s root problems: very loose margins and new account standards. I was defending RH on HN last week but I have to reconsider.

Robinhood got called up at 3am with an extortion demand for $3 billion due that morning, unless they shut off Buy orders of GME. The collateral call had nothing to do with Robinhood’s ability to pay for the orders it was placing. The problem was the GME short sellers were insolvent at the prices the stock was trading at, and contagion from the hedges failing would have left the clearinghouse looking at billions in lo…

Which is why you push back and tell the clearinghouse to make a public statement to that effect.

The CH is faced with two options: One, make the statement and hurt a public reputation they don't care about in the first place. Or they could cut off all trading to RH, which puts RH on the same side of the fight as they have been trying to market themselves as being on from the beginning. Win win.

Re: It’s Time for Real Time Settlement

#27

Post by scubbo »

vmchale wrote: post #16
tristanj wrote: post #6

It's a good thing that DTCC aware of this issue and is looking into accelerating this to T+1 (followed by T+0) using blockchain and distributed ledgers. https://www.finextra.com/finextra-downloads/newsdocs/embraci... Edit: No clue why this is downvoted.

Why is blockchain involved?

To get hype to get funding.

Re: It’s Time for Real Time Settlement

#28

Post by justlurkin12 »

olejorgenb wrote: post #24
justlurkin12 wrote: post #18

Earlier quoted context omitted.

Real time securities wouldn't need brokerages to front collateral while the trades settle by the virtue of no settling period. They would only have to deal with customer capital used to buy the stock.

I still don't get why customer capital can't be used as collateral. Which scenario is this rule protecting the customer from?

That's my question as well. I think it's because the customer capital has to be transferred to the counterparty that issued the sell. I imagine that it makes things complicated if the DTCC has to send over 1-10% of this amount and then the brokerage that executed the buy has to send over the rest so, if I had to guess, they did this for simplicity's sake. Btw the requirement to not use customer collateral is enforced by the DTCC and not at a brokerage level discretion.

Re: It’s Time for Real Time Settlement

#29

Post by MattGaiser »

choeger wrote: post #12
silverfox17 wrote: post #10

Earlier quoted context omitted.

Probably blockchain

They could mitigate by using a quantity of ML and mix in some good old-fashioned Big Data. As a side note, we need a defined unit for the quantity of hiptech in a software project. I propose one AI (= 100 Microservices).

Better add in some cloud just to be sure and at least one IoT developer for premise security.

Re: It’s Time for Real Time Settlement

#30

Post by tomatocracy »

ssivark wrote: post #8

Out of curiosity, are there any reasons to prefer slower settlement? (Since this seems like a no-brainer, but clearly hasn’t happened already)

There are reasons to prefer settlement is not instantaneous - eg it makes fat finger trades easier to unwind. There are also probably some special cases like creation/destruction of ETF shares, ADRs, IPO greenshoe etc which take a bit longer to work through.

But I think the main reason for these changes being slow to occur is because noone wanted to break the system in the process - the settlement process for share trades in the US is/was viewed as quite fragile due to the way it had evolved over time.

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