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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

#211

Post by totalZero »

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)

Slower settlement gives the exchange and clearinghouse time to process the trade, it gives firms time to borrow cash overnight in the repo market to pay for trades made by the front office, it gives short-sellers time to borrow and deliver shares, and so forth.

T+1 means overnight (options settle this way), so T+2 gives everyone in the world (sometimes you trade from one region for a legal entity in another) a little more than a full business day to tie everything out.

I see delayed settlement as part of the reason why we are able to trade instantaneously; execute first and address the details later.

EDIT: Also, the way equity trades presently clear is based on a net short and a net long, rather than breaking out individual trades as would be necessary for instantaneous execution.

Re: It’s Time for Real Time Settlement

#212

Post by totalZero »

atombender wrote: post #153
tomatocracy wrote: post #30

Earlier quoted context omitted.

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 t…

Adding support for fast settlement doesn't necessarily mean removing support for slow settlement. The customer placing an order could simply mark trades as "fast" or "slow".

...And then we would need arbitrageurs to keep the fast NBBO in line with the slow NBBO, so that people in the two pools can trade with each another.

Re: It’s Time for Real Time Settlement

#213

Post by gher-shyu3i »

rank0 wrote: post #209
gher-shyu3i wrote: post #165

Earlier quoted context omitted.

> Not Treasuries. Cash The way it should be. The quicker we do away with interest bearing and yielding assets, the better. It's the cause of the vast majority of the economic mess we're in today. We've literally known about this issue for thousands of years, interest and usury have been prohibited in Islam, Christianity, and Judaism. We still think we're smart and not going to be bitten by the dangers of interest, ye…

This is absurd. Capitalism is predicated on the ability to loan out money. No debt means no credit for new businesses. No mortgages. Governments can't issue bonds to raise capital. For all it's evils, our modern society and advancement as a species comes from capitalism. Society would literally collapse if we "do away with interest bearing and yielding assets." That being said, we can still work to create better fina…

> Capitalism is predicated on the ability to loan out money.

If that's true, then it's fundamentally broken (assuming interest bearing loans of course). You will never have a sustainable economic system that is based on interest bearing loans, we see it all the time with people waiting for the next crash to happen.

> No debt means no credit for new businesses

Not true. There are moral alternatives. If you want to start a business, pitch your idea to investors who are willing to put in money in exchange for a portion of the company. If it works out, everyone profits, otherwise, everyone takes risk equally and the holder of the idea is not left with crippling debt. This is just and fair.

> No mortgages.

Mortgages artificially increase property prices, continuing the cycle. There are alternatives that don't involve interest. You see it all the time in the auto industry where they have 0% loans. Do the same with houses. We already did that historically in Muslim nations.

> Governments can't issue bonds to raise capital.

Raise capital in an ethical way. The government can invest in its society and businesses for example. Obviously there are other solutions but that's for the specialists.

> Society would literally collapse if we "do away with interest bearing and yielding assets."

Except it didn't when people followed the teachings of their religion (specifically Islam). Great empires were built without interest. It's possible, it's just that it isn't as easy or perhaps convenient to those who stand to benefit the most from interest.

Re: It’s Time for Real Time Settlement

#214

Post by tptacek »

IgorPartola wrote: post #205
tptacek wrote: post #98

Earlier quoted context omitted.

Legality aside, imagine being an RH customer with a $300/shr position in GME locked in. Look where the stock is now, and where it's heading.

Which is why they shouldn’t have restricted it at all. Volatility is the name of the game. If they can only trade equities with predictable prices they are probably in the wrong business. And where the price is now is arguably the direct result of their actions. The price would be higher if they didn’t restrict buys while allowing hedge funds to gobble up the panicked sells from retail investors. Judging by the senti…

They had no choice but to restrict buys. They're subject to clearing collateral requirements based in large part on stock volatility. People keep saying RH should have just left it all alone, but if they had, they'd have been insolvent.

Re: It’s Time for Real Time Settlement

#215

Post by atombender »

totalZero wrote: post #212
atombender wrote: post #153

Earlier quoted context omitted.

Adding support for fast settlement doesn't necessarily mean removing support for slow settlement. The customer placing an order could simply mark trades as "fast" or "slow".

...And then we would need arbitrageurs to keep the fast NBBO in line with the slow NBBO, so that people in the two pools can trade with each another.

Why? This only affects settlement, not execution. Execution is already "real time".

Re: It’s Time for Real Time Settlement

#216

Post by JumpCrisscross »

Forge36 wrote: post #125
JumpCrisscross wrote: post #120

Real time equities settlement and clearing is a terrible idea. It sounds great. But it breaks a lot of good stuff. I'm surprised the CEO of a brokerage is advocating for it. (The article is a bit loose with the terms settlement and clearing. Again, surprising from the CEO of a company that almost got taken out by internal clearing failures.) If you only think about the American stock market from the perspective of a…

In the U.S. the Federal Reserve is already planning to support it. Thread discussing it from a few days ago.: https://news.ycombinator.com/item?id=25982987

> the U.S. the Federal Reserve is already planning to support it

The U.S. has a real-time payments system. (One of the oldest in the world.) It's called Fedwire [1].

It's artificially kneecapped–Congress set a minimum fee of pennies on the dollar and many banks charge retail clients $10 to 35 for wires. But the rails are there and used and understood.

(Detour: my "abolish the penny" issue is expand Fedwire's market hours, enable it on weekends and remove all Fed fees for wires under $250,000.)

[1] https://www.federalreserve.gov/paymentsystems/fedfunds_about...

Re: It’s Time for Real Time Settlement

#217

Post by atombender »

kasey_junk wrote: post #171
atombender wrote: post #149

Earlier quoted context omitted.

"Not charging $5 per trade" implies that other brokerages such as Schwab, Fidelity, and TD Ameritrade — which haven't been penalized by the SEC — suddenly offered poorer order execution when they dropped their commissions, which by all accounts they did not. They all experienced declines in revenue. What Robinhood did was to lie about their execution. They claimed their trade prices were as low as other brokerages, w…

Lol. You cannot judge your order execution quality as a retail customer. It takes the SEC years of investigation to do that. Its certainly not something retail brokers compete on. Robinhood lied and should be punished but they were penalized for doing so before other brokers had gone to $0. It remains to be seen what happens at the other brokers now that they are free.

The SEC judgement was on Dec 17, 2020. Schwab announced commission-free trading on Oct 7, 2020. IBKR dropped their fees (for IBKR Lite) in September that year.

Re: It’s Time for Real Time Settlement

#218

Post by astrange »

pokot0 wrote: post #142
astrange wrote: post #89

Earlier quoted context omitted.

This has nothing to do with being a margin account, it's DTCC requirements related to wanting to buy the same stock everyone else at the same broker also wants to buy.

My understanding is that it does. One example (there's more like the instant deposit): when you buy a stock with money from another sale not yet settled, you are basically using margin (a loan) and thus RH have cash requirements which are a % of the cost of the trade to be settled. If you don't allow that, and only let people trade on a cash basis after the trades have been settled, you effectively have 100% of the m…

Robinhood isn't allowed to use your money as collateral with DTCC, they must use their own. That's why it doesn't matter what kind of account you have.

Presumably their lack of trade fees hurts them here.

Re: It’s Time for Real Time Settlement

#219

Post by barnabee »

totalZero wrote: post #211
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)

Slower settlement gives the exchange and clearinghouse time to process the trade, it gives firms time to borrow cash overnight in the repo market to pay for trades made by the front office, it gives short-sellers time to borrow and deliver shares, and so forth. T+1 means overnight (options settle this way), so T+2 gives everyone in the world (sometimes you trade from one region for a legal entity in another) a little…

These are terrible reasons. Time to process the trade should be zero if systems are designed properly. If you need to borrow cash to trade you should do it first, etc.

If some participants want to stay slow, bear more risk, require more capital, etc... let them. But the rest of the financial system shouldn't be held back because of them.

Time for instantaneous settlement, across the board.

This will never happen if we leave it to banks, exchanges, clearing houses and the rest (some of them even have a vested interest in it not happening). This is one of the clearest use cases for blockchains [1]. It answers the problem of how next gen financial infrastructure will get built, and frankly the savings and benefits to be had are astronimical.

[1] These will probably be public blockchains, but it's possible a "proof of authority" real time settlement chain or similar operated by a consortium could work, too, as an interim step/for some cases

Re: It’s Time for Real Time Settlement

#220

Post by NovemberWhiskey »

gher-shyu3i wrote: post #213
rank0 wrote: post #209

Earlier quoted context omitted.

This is absurd. Capitalism is predicated on the ability to loan out money. No debt means no credit for new businesses. No mortgages. Governments can't issue bonds to raise capital. For all it's evils, our modern society and advancement as a species comes from capitalism. Society would literally collapse if we "do away with interest bearing and yielding assets." That being said, we can still work to create better fina…

> Capitalism is predicated on the ability to loan out money. If that's true, then it's fundamentally broken (assuming interest bearing loans of course). You will never have a sustainable economic system that is based on interest bearing loans, we see it all the time with people waiting for the next crash to happen. > No debt means no credit for new businesses Not true. There are moral alternatives. If you want to sta…

>Mortgages artificially increase property prices, continuing the cycle. There are alternatives that don't involve interest. You see it all the time in the auto industry where they have 0% loans. Do the same with houses.

If your perspective is that artificial bubbles in asset prices will be reduced by lowering the cost of borrowing (i.e. no interest) then you're going to have to explain that, because it's the opposite of what normally happens.

EDIT: Shariah-compliant mortgages are generally constructed so there's no interest, but the cashflows between the parties often look very similar. e.g. a Musharakah loan where you only initially own the home in the proportion of your downpayment but gradually buy more of it over time by paying the bank off over time, as well an element of rent. Interest rate is replaced by return rate because the form of the contract is different.

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