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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

#271

Post by JumpCrisscross »

swampthing wrote: post #258
JumpCrisscross wrote: post #207

Earlier quoted context omitted.

It's as accurate as it is inaccurate. Had Robinhood not been able to find hundreds of millions of dollars of cash that day, they would have been declared insolvent.

I don't think that's true. They raised the additional capital so that their customers could continue buying shares of those 8-50 companies. Had they not raised that capital, they would have just had to keep blocking those buys, but they would have been fine otherwise.

> Had they not raised that capital, they would have just had to keep blocking those buys, but they would have been fine otherwise

This is not my understanding. The 3AM phone call was a collateral call. That covers existing trades.

As a clearing broker, when they sent in the trade they created the liability.

Re: It’s Time for Real Time Settlement

#272

Post by danhak »

u10 wrote: post #266
danhak wrote: post #257

Earlier quoted context omitted.

The incentive already exists in the form of long investors doing their due diligence.

How does that make any sense? If the stock was growing 15% year over year without any indication that there are any issue, why would any investor want to provide any information or do any research on why that isn't the case? If an investor knew that there was fraud going on they would probably keep it to themselves and simply invest in the company anyways, because the financial incentive is there.

In your hypothetical example, a stock is going up and up, and I suspect it might be fraudulent, and you believe I have no incentive to pull my money out before the house of cards collapses?

Getting my money out is all the incentive I need! I bet plenty of Theranos investors would've loved to do exactly that. And there was no shorting involved in that company.

Re: It’s Time for Real Time Settlement

#273

Post by kasey_junk »

danhak wrote: post #236
tptacek wrote: post #231

Earlier quoted context omitted.

This simply doesn't make sense. When nobody is incentivized to correct stock prices downwards, you just get injustices in the opposite direction. You can look at the private markets to see what this looks like: Theranos.

The law of supply and demand doesn't require shorting in order to "correct" prices downward. The counterpoint to your Theranos example is the fact that Enron existed too. Both of them were fraudulent. Both collapsed after some number of years. One privately held, one publicly-traded and shortable. Same outcome, no? I can't (directly) short the price of strawberries at my farmer's market, or the cost of rent in my sma…

Short and long positions are important for things that a) have a future value of money component and b) have risk that can be mitigated in a cost effective way.

Artists would take advantage of this in the form of working on commission. Large enough commissions do in fact allow shorting in the form of insurance. The same is true of strawberry farmers & landlords at various places on the size distribution.

One of the complaints my farmers market strawberry vendors have is that they don’t have access to the same finance agreements that large producers have. Part of that is because it’s not cost effective enough to short them.

Re: It’s Time for Real Time Settlement

#274

Post by gher-shyu3i »

u10 wrote: post #269
gher-shyu3i wrote: post #265

Earlier quoted context omitted.

Sorry, but fixing one wrong with another is not the way. Are you honestly saying that stock shorting is the only incentive someone has to look at fraud? I don't buy that one bit.

What incentive would an investor have to claim that a company is fraudulent if there is no financial upside to it? Altruism? That's just naive. Sure, you could point towards regulators but we know that the advantage will always be with the regulated.

You answered it, fix regulators, and heavily punish fraud, don't let people get away with a slap on the wrist. This is literally the job of the justice system. You may as well say what benefits do police or FBI have for catching criminals. The reward is a stable and just society, on top of their salaries.

On a side note, this is one aspect that religion addresses. Ripping people off is not going to end up well when facing God.

Re: It’s Time for Real Time Settlement

#275

Post by auntienomen »

danhak wrote: post #247
matwood wrote: post #241

Earlier quoted context omitted.

> Stock shorters, as you point out, actively bet against a company or industry or economic structure in general, it's their benefit to see a company collapse or not do well. Companies that have inefficiently deployed capital or have problems like a Theranos or Enron should collapse. People keep acting like shorts show up to a company like Apple and take it down. That's not at all what happens. Shorts are a lot like v…

Theranos collapsed without any shorting involved. Isn't this a counterpoint to the argument that shorting is required for "price discovery" and the unmasking of fraud?

It took 10 years. Might have been faster and wasted less capital if had been publicly traded and therefore possible to short it.

Re: It’s Time for Real Time Settlement

#276

Post by mattnewton »

kasey_junk wrote: post #259
mattnewton wrote: post #252

Earlier quoted context omitted.

The shorts don’t take money from the company, they take money from people unfortunate enough to invest in a failing company. In some cases that money could have helped the company land, in others it was going towards something doomed and possibly fraudulent, but either way it doesn’t come from the companies coffers directly unless the company does a buyback from the shorts. The people losing money are other investors…

That’s a fine position to take so long as you recognize the vast majority of long money also doesn’t go to the companies coffers unless the do another offering. Your argument isn’t a moral one.

Much long money is absolutely used by the company indirectly; they can use their stock like a currency to raise funds with debt, pay employees, acquire companies with stock, etc. Thats hopefully a virtuous cycle where people do more stuff that creates value.

I don’t mean to make a moral argument, just question the need for short positions. If the company is truly bad their shares should deflate as demand deflates, no short seller position necessary. I think, from the perspective of the needs of society, punishing bad investors who fail shouldn’t be as rewarding as finding the right investments to grow.

Re: It’s Time for Real Time Settlement

#277

Post by satellite2 »

psychlops wrote: post #249
satellite2 wrote: post #238

Earlier quoted context omitted.

Swift is only a communication protocol it doesn't solve the clearing problem. The clearing problem is really at its core about avoiding to move cash and how to transfer debt between two entities that don't know (and trust) each other, as far fetched as it sounds. When you transfer $1 to a friend of yours that is at another bank, your bank owes you one less dollar and your friend's bank owe him one more. But aginst wh…

Swift is a communication protocol to move digital cash. Once the wire goes through, the next bank has the cash and the last bank doesn't. That solves the clearing problem (for currencies). Yes, the process is sticky as every bank likes to hold the money as long as possible, but ownership is clear and fast. The clearing problem for OP is with stocks and deal with purchasing and selling from different owners using a re…

Everything is inverted from the bank perspective. When they receive "cash" they actually receive an obligation to pay one of their client against some other debt, which might not be an enviable position.

There is no such thing as digital cash actually. You have cash, the real and physical and all the rest is balance sheet expansion, i.e. debt.

If you are interested in banking I would encourage you to watch this course from the Columbia university: https://www.coursera.org/learn/money-banking which is the reference and is fascinating.

Re: It’s Time for Real Time Settlement

#278

Post by gher-shyu3i »

mattnewton wrote: post #262
kasey_junk wrote: post #189

Earlier quoted context omitted.

I had an interesting conversation with someone who took the view that all short positions were ursary. They had well thought out & logically reasoned from their premises arguments to back that up. I was really glad to hear their position. It filled me with dread because it would destroy our current agricultural industry. And as much as I recognize the problems with it, “a large percentage of the population starving r…

I also don’t think short selling as it is currently practiced is a net social good, but I don’t know anything about it’s importance in the agricultural sector. What does short selling provide there?

From what I understood from his comment, he was worried about how shorting would cause the collapse of the agricultural sector, so agreeing with you that it's a bad and dangerous practice.

Re: It’s Time for Real Time Settlement

#279

Post by gher-shyu3i »

NovemberWhiskey wrote: post #246
gher-shyu3i wrote: post #225

Earlier quoted context omitted.

When did we have 0% interest on houses in modern times? I said that mortgage interest contributes to bubbles, not that it's the only cause. Interest is more insidious, because it allows people who have wealth to gather even more wealth without putting in the appropriate risk to balance it, giving them the luxury to purchase assets easily, contributing to those bubbles somewhat indirectly. However, because of interest…

> However, because of interest, those same wealthy people have an even bigger advantage. They take out mortgages, and after a while they can take out loans on said mortgages to acquire even more assets. It's genius really (in a very evil way). A mortgage is a liability, not an asset. You can't take out a loan against a liability. Nothing you're writing here really makes any sense to me, despite the benefit of the dou…

You can take out a loan on an existing mortgaged asset after you built some equity into it, especially if the asset increased in price during that period. You don't have to have paid it off. It goes to show how evil the entire setup is. It's basically laying domino blocks, the moment something happens, the entire thing collapses.

Re: It’s Time for Real Time Settlement

#280

Post by kasey_junk »

mattnewton wrote: post #262
kasey_junk wrote: post #189

Earlier quoted context omitted.

I had an interesting conversation with someone who took the view that all short positions were ursary. They had well thought out & logically reasoned from their premises arguments to back that up. I was really glad to hear their position. It filled me with dread because it would destroy our current agricultural industry. And as much as I recognize the problems with it, “a large percentage of the population starving r…

I also don’t think short selling as it is currently practiced is a net social good, but I don’t know anything about it’s importance in the agricultural sector. What does short selling provide there?

All futures contracts contain a “short” position. In its most basic a producer of the commodity agrees to sell in the future at a certain price now. This locks in their profit but is only useful to them if they are trying to hedge the price being worse in the future. They are borrowing a future position to make it tenable to produce now.

Without it most agriculture would be too risky to engage in (without a governmental entity stepping in and doing the same activity as the futures market).

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