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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

#331

Post by lmm »

paulpan wrote: post #289
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…

110% agreed. This is a near-textbook example of "just because you can doesn't mean you should". The simple reason in this age of high frequency trading and massive amounts of money being moved around, a tiny arbitrage opportunity could instantly be magnified and trigger a system (market) crash. Whereas these crashes can and do occur today, the non-realtime aspect of settlement and clearing mitigates to a large extent…

> Whereas these crashes can and do occur today, the non-realtime aspect of settlement and clearing mitigates to a large extent. See the 2010 flash crash example: https://en.wikipedia.org/wiki/2010_flash_crash

How so? I'd argue that the SEC policy of breaking "clearly erroneous" trades before settlement exacerbates that kind of flash crash: market-makers can't step in to prop up prices and then hedge their exposure, because their trades will be broken and their hedges won't. If settlement was real-time, preventing flash crashes would be profitable and people would do it.

> Also this feels like a diversion tactic from the implosion of Robinhood of the company from last week's debacle. For those unaware, RH also put limits on AMD stock to be traded - what the heck?!

It's not a diversion, it's a genuine explanation - the collateral requirements were why RH had to impose a bunch of limits.

Re: It’s Time for Real Time Settlement

#332

Post by totalZero »

krick wrote: post #310
totalZero wrote: post #234

Earlier quoted context omitted.

T+0 means securities and funds change hands instantaneously (or maybe EOD) rather than on the present two-day lag. That two-day process is managed by a clearinghouse that requires members like Robinhood to put up large amounts of money, which Robinhood doesn't have in spades, for clearing and collateral. He's trying to blame that requirement for Robinhood's most recent miserable failure.

That far I could vaguely guess, but I don't see any connection between these fact. First off, what do you mean by "Robinhood's most recent miserable failure"? The story as I know it: WSB pumped up GME, somebody (Melvin's Capital) majorly fucked up and lost money, somebody (Blackrock, Citadel, some lucky traders) gained something from the situation, basically, business as usual. Then Robinhood screwed over it's custom…

> what do you mean by "Robinhood's most recent miserable failure"?

I mean "failure" in the literal sense. It's not a particularly reliable brokerage.

"FINRA said in a statement that the brokerage failed to make sure clients were getting the most favorable prices possible from October 2016 to November 2017." (19 Dec 2019)

https://qz.com/1772017/robinhood-fined-1-25-million-by-finra...

"As Robinhood's stock-trading app failed, the company was maxing out its credit" (10 Mar 2020)

https://www.latimes.com/business/story/2020-03-10/robinhood-...

"failing to satisfy its duty to seek the best reasonably available terms to execute customer orders" (17 Dec 2020)

https://www.cnn.com/2020/12/17/investing/robinhood-sec-settl...

> Is he blaming T+2 for forcing him/Robinhood to prevent users to buy stock? How so?

In a sense, he's blaming T+2 for tying up his firm's money, which his firm uses to make margin loans and put up collateral.

> I still don't quite understand what T+2 means

It means that if I buy stock from you today, I pay you (and you give me the shares) in two days' time. The trade is instantaneous but its settlement (where we actually exchange the goods for the dough) is not. That transaction is carried out through a clearinghouse.

> all trades are recorded by a centralized entity (NYSE)

NYSE is one stock exchange. It doesn't record all the trades. Look up DTC and NSCC.

Re: It’s Time for Real Time Settlement

#333

Post by bertjk »

gher-shyu3i wrote: post #225
NovemberWhiskey wrote: post #220

Earlier quoted context omitted.

> 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 opposit…

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…

Ok, this is kind of fascinating. So interest is bad.

Is rent bad? If I have a car or a house is it bad if I rent it out?

How about if I had a bag of cash, is it bad if I rent that out? How are the two scenarios different?

Re: It’s Time for Real Time Settlement

#334

Post by ashtonkem »

swampthing wrote: post #298
Traster wrote: post #293

Earlier quoted context omitted.

They ended up in a situation where they had to prevent trading, draw down their entire credit lines and then do another funding round to shore up $3.4Bn - it's pretty clear they fucked up their collateral.

Do you consider them having their collateral requirements changed on them at 3am to be them messing up? If your bank tells you your mortgage payment is going to be 10x this month, and you have to scramble to cover that, did you mess up your personal finances?

If you run a brokerage, you should know that collateral requirements can change based on market conditions.

Re: It’s Time for Real Time Settlement

#335

Post by totalZero »

paxys wrote: post #326
totalZero wrote: post #201

Earlier quoted context omitted.

> Robinhood actually fronts the least money out of all major brokers (something like $1000). None of the brokers I have ever used have ever fronted me money. If the required equity isn't going to be in the account by the settlement date, they won't spot me so much as a fiver. There's an argument to be made that Robinhood Instant is a violation of federal margin regulations because it allows margin risk to be taken in…

I can transfer $100K (or maybe more) from my bank into Vanguard right now and trade using it instantly while they wait 3-5 days for the deposit to clear. It is definitely a common practice among the larger brokers.

Must be nice.

Re: It’s Time for Real Time Settlement

#336

Post by tptacek »

themihai wrote: post #323
paulpan wrote: post #289

Earlier quoted context omitted.

110% agreed. This is a near-textbook example of "just because you can doesn't mean you should". The simple reason in this age of high frequency trading and massive amounts of money being moved around, a tiny arbitrage opportunity could instantly be magnified and trigger a system (market) crash. Whereas these crashes can and do occur today, the non-realtime aspect of settlement and clearing mitigates to a large extent…

If we are at this maybe we should abolish high frequency trading as well along with the PFOF? The whole scheme looks like some malware program.

It looks like that because it's complex and technical and people don't understand it, but it also saved retail investors a bunch of money. I don't understand how a jet engine works, but I don't feel any urge to advocate for jet engine policy changes.

Re: It’s Time for Real Time Settlement

#337

Post by kasey_junk »

mattnewton wrote: post #316
kasey_junk wrote: post #280

Earlier quoted context omitted.

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 governmen…

I am not an expert but this seems different from the short selling we're talking about. In short selling of a stock, the stock is borrowed and sold immediately for profit. There is no productive action the short seller engages in to recover the stock, they just rebuy it on the open market, or not at all if the company has gone bankrupt. If you are really stretching it, they can produce research that shows the stock s…

If I’m a farmer that has corn crops to sell, I receive immediate renumeration for production in the future (in the simplest contracts) if I don’t produce anything at all, I literally take the money and run, it what happens? What about if hail destroys my entire crop? What if it destroys half my crop but I claim it destroys all of it?

There are definite moral differences between those cases but in operational terms it’s better for everyone if I just payout everything as efficiently as possible. Presuming it’s all equal anytime I spend holding real claims because fraud might happen is a net bad. Now expand that to more complicated valuations of future value of money? Should I impede farmer John’s payouts to Farmer Bill because the rain was ever so slightly different on his acres than the other? What if farmer John is willing to forego that expedience for future consideration on his plot?

Multiply this by a billion. We have a complicated market where producers and consumers need to a) set a first price and then b) change their price as both the market conditions change _and also my own as an investor, decisions change_.

It is dramatically more efficient for everyone to just take positions in the market even if some of them are pessimistic.

The same thing is true of any product that had future value and also it’s efficient to make risk management easy. Stocks clear both hurdles trivially.

Re: It’s Time for Real Time Settlement

#338

Post by totalZero »

kasey_junk wrote: post #318
totalZero wrote: post #305

Earlier quoted context omitted.

There's no money in proving that different brokers have varying execution quality, and it's not a regulatory requirement to execute instantaneously. I'm not sure how Nanex figures into it; there's nothing nefarious involved. If I am in New York and I send a limit buy order to Schwab that is two cents through the offer, Schwab may route my order to a market-maker in Chicago who uses a decision model to either take the…

Let’s be clear are you sending routed orders in this case? Are you suggesting that limit orders are filling but at a different price than expected or not filling at all? The reason Nanex is important is that they’ve made bank on proving that risk systems and broker latency don’t matter when enforcing reg nms. Neither does order volume. If you can accurately track execution to the point where you can see slippage (not…

I use two brokerages and I almost exclusively trade US listed equity options. That's why it's easy to know if I'm getting good liquidity or not; the price doesn't move as much and the spreads are far wider than cash. If I use the one with PFOF, on rare occasions it takes a minute or more for my order to show up on the screens. The other one is very fast with SOR but it doesn't always get a high percentage of the displayed size. When I worked at a shop I got most of the displayed size pretty much all the time because the SOR was way better.

Analogous to the PFOF situation...if a hedge fund sends a limit order to a bank the NBBO may have moved unfavorably by the time it gets sent down to a floor broker. That may be horrible execution but it's not illegal for a floor broker to suck at picking up the phone promptly.

I guess my point is that it doesn't take long to figure out which brokers can improve your committed price, which floors participate aggressively, which electronic crosses break you up, etc, and that knowledge can affect customer fills. But I get what you're saying and you're right that people could monetize it if they had hard quantitative slippage data. That wasn't really what I was describing.

>The reason Nanex is important is that they’ve made bank on proving that risk systems and broker latency don’t matter when enforcing reg nms

I don't understand what you mean by broker latency and Reg NMS...latency between different legs of SOR can affect execution even without a trade-through violation by causing the offer on Exchange B to fade if an order routed to Exchange A crosses the betters there well before the bid destined for Exchange B arrives. I think I'm missing a piece of the puzzle here.

Re: It’s Time for Real Time Settlement

#339

Post by gher-shyu3i »

vageli wrote: post #307
gher-shyu3i wrote: post #279

Earlier quoted context omitted.

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.

> 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. Is not a mortgage very similar to owning X% of a thing? Like, if I had a mortgage for $100,000 and I've paid $10,000 towards it, it's almost akin to owning 1/10 of the house (which would play out in the event of liquidation, all other things equal). That real est…

If you paid $10k toward a $100k asset, most of that $10k actually goes toward interest because of how the loan is setup.

Islam never denies that time and money are related, it just places moral restrictions on how money can be used in society without exploitation.

Re: It’s Time for Real Time Settlement

#340

Post by jpambrun »

tptacek wrote: post #322
stjohnswarts wrote: post #312

Earlier quoted context omitted.

I agree, what I personally think needs to change is high speed/algorithmic trading on the millisecond (microsecond?) level. It should be humans trading, not machines. Sure they can listen to the machines but at the end of the day it should be on human time, say at least 10 minutes for transactions to complete without possibility of any changes to the transaction

When humans did all the trading, it cost drastically more to trade, all that money went directly into the pockets of market insiders, and the whole market was crooked as a barrel of fishhooks. Google "odd eighths scandal".

You can't access this high speed trading. This is the toy of billionaires that can afford microwave link between New York and Chicago and have dedicated teams of FPGA developers to write high speed network stacks with trading logic embedded in them.

This is what the parent comment was talking about.

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