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It’s Time for Real Time Settlement

blog.robinhood.com

371–380 of 445 posts

Re: It’s Time for Real Time Settlement

#371
post #331

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…

> 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, b…

> 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.

I'm a bit lost on your response. Are you advocating against SEC or stock exchange intervention? Remember that trading can be halted by stock exchanges also in order to decelerate massive movements. If the settlement happens on even a by-minute increment, then there is no effective recourse for these interventions. Flash crashes are black swan events and as such there's little incentive (as of now) for companies to build safeguards against it.

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

It's an explanation but doesn't explain why other stock brokers didn't impose the same limitations, nor why RH is tapping its credit lines. I say it's a diversion because it's an attempt to deflect blame for its own poor business practices and policies - e.g. if my server can't handle the load, I can't just say "well, if I had a faster load balancer...." to my users.

Re: It’s Time for Real Time Settlement

#372
post #331

Earlier quoted context omitted.

> 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, b…

> 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. I'm a bit lost on your response. Are you advocating against SEC or stock exchange intervention? Remember that trading can be halted by stock exchanges also…

> Are you advocating against SEC or stock exchange intervention? Remember that trading can be halted by stock exchanges also in order to decelerate massive movements. If the settlement happens on even a by-minute increment, then there is no effective recourse for these interventions.

Yes, I'm advocating against them. My position is that SEC and exchange intervention makes flash crashes more rather than less severe. (Also they're harmless; artificially suppressing the volatility of the stock market makes everything more fragile, we'd be better off embracing them and making sure all market participants are equipped to handle volatility. It's like how decades of suppressing forest fires has made forest fires much worse)

> It's an explanation but doesn't explain why other stock brokers didn't impose the same limitations, nor why RH is tapping its credit lines. I say it's a diversion because it's an attempt to deflect blame for its own poor business practices and policies - e.g. if my server can't handle the load, I can't just say "well, if I had a faster load balancer...." to my users.

If your hosting service suddenly cuts your server capacity down by 2/3, I think it'd be fair to complain about that to your users.

Re: It’s Time for Real Time Settlement

#373

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…

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

The market was designed as a system for human interaction. I think the atomic unit of time should be at the clock speed of humans. It increases the transaction cost, but in a more responsible, sustainable way imo.

Re: It’s Time for Real Time Settlement

#374

Earlier quoted context omitted.

For the record, back when I worked in finance I heard plenty of conversations about margin requirements going up, often forcing desks to liquidate positions that they otherwise wanted to keep. The idea that margin requirements might change is something finance has had to deal with for a very long time, and RH should have been prepared for the possibility. Better still, they should have had the controls in place to co…

I don't know that it would be accurate to assume that Robinhood was not prepared for the possibility of their deposit requirements changing. I think it's more likely that they were unprepared for the magnitude of changes in a lot of their underlying assumptions. There were 600k downloads of their app on Friday alone, which is roughly 4x the previous daily high water mark, which itself was an anomaly. On top of that,…

> I am just responding to blaming them for not having enough cash on hand to meet the DTC's new deposit requirement, which did come out of the blue ... given that it is a possibility that is laid out in the DTC rules

These two clauses contradict each other. If it's in the rules, it can't be "out of the blue".

If anything, the clearing house raising margin requirements in this situation is both expected and desirable behavior. It's the clearing house's job to both prevent RH from getting over-leveraged and to step in and cover in the case RH goes insolvent. And frankly it looks like RH was way over-extended, and that the clearing house was totally right in stepping in to stop them. Who knows how much worse this might have gotten without their interference.

> But I don't think any brokerage is well-capitalized enough to handle that for every scenario.

Which is why you don't let yourself get into this situation. You'll note that other brokerages did things like raise margin requirements on GME, block margin trading on GME entirely, or stop trading on GME options. These are tools that brokerages have available to them to both cool off the market shift the burden of margin requirements onto their customers. Other brokerages did this specifically to avoid ending up in RH's position, which is why RH had to raise more money and they did not. And they did this even though the bulk of GME trades weren't even on their systems. RH either did not have these controls in place, or they waited far too long to use them

Re: It’s Time for Real Time Settlement

#375

Earlier quoted context omitted.

Vlad said live on air (in Clubhouse) in conversation with Elon Musk on Sunday that the clearinghouse increased their requirements from (IIRC) 30% to 100%, and that the formula for calculating that was "not transparent" and had a component that was "a multiplier based on their opinion". RH negotiated with them all Thursday last week and reduced the required payment from $3B to ~$0.7B. So it sure seems like the DTCC ma…

> had a component that was "a multiplier based on their opinion" I'll chalk this up to colloquialism. The DTCC has very little discretion in what they do. That's why they're trusted to do it. The "opinion" component could be a reference to their line of credit banks, who adjust the rates they charge the DTCC based on their varied risk models. There is a valid argument that there isn't as much transparency in that lay…

No, the multiplier is from the "Margin Liquidity Adjustment Charge". It was raised so the brokers had to front 100% of purchase prices for 2 days.

People keep referring to a super transparent formula, yet nobody has actually been able to point me to what this formula actually is.

Seems quite opaque to me, actually.

Re: It’s Time for Real Time Settlement

#376

Earlier quoted context omitted.

I don't know that it would be accurate to assume that Robinhood was not prepared for the possibility of their deposit requirements changing. I think it's more likely that they were unprepared for the magnitude of changes in a lot of their underlying assumptions. There were 600k downloads of their app on Friday alone, which is roughly 4x the previous daily high water mark, which itself was an anomaly. On top of that,…

> I am just responding to blaming them for not having enough cash on hand to meet the DTC's new deposit requirement, which did come out of the blue ... given that it is a possibility that is laid out in the DTC rules These two clauses contradict each other. If it's in the rules, it can't be "out of the blue". If anything, the clearing house raising margin requirements in this situation is both expected and desirable…

> These two clauses contradict each other. If it's in the rules, it can't be "out of the blue".

I would strongly disagree with that statement. Just because something is specifically identified as possible doesn't mean that it isn't "out of the blue" when it happens. That depends on a variety of circumstances. In this particular case, I think you can look to the fact that IB, TD Ameritrade, Charles Schwab, etc. also had to restrict trading.

>Which is why you don't let yourself get into this situation. You'll note that other brokerages did things like raise margin requirements on GME, block margin trading on GME entirely, or stop trading on GME options. These are tools that brokerages have available to them to both cool off the market shift the burden of margin requirements onto their customers. Other brokerages did this specifically to avoid ending up in RH's position, which is why RH had to raise more money and they did not. RH either did not have these controls in place, or they waited far too long to use them

I am not sure why you think this is attributable to margin trading, other than the fact that Robinhood offers margin trading. The deposit requirements that are at issue here are independent of whether the shares are purchased with margin or not. If it was in fact margin trading that was causing the problem, why would Robinhood limit buys in general, as opposed to just limiting use of margin? I think the likely explanation for why other brokerages did not have to raise additional funds is because they have a much smaller percentage of customers purchasing meme stocks.

Re: It’s Time for Real Time Settlement

#377

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…

I know the industry moved to T+2 settlement for equities a few years back and will make a slow progression to shorter. I would love to pick your brain if you had a way to reach you

Re: It’s Time for Real Time Settlement

#378

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…

You don't need to hold and transfer the cash immediately with T+2 settlement because effectively your broker is lending the cash to you for 2 days with the shares as collateral, hence the margin requirements and the RobinHood debacle.

But there's no fundamental reason that loan must be made by your broker, aside from the historical T+2 convention. You could just repo the shares for two days while you wait for the cash to arrive.

Re: It’s Time for Real Time Settlement

#379

Earlier quoted context omitted.

> I am just responding to blaming them for not having enough cash on hand to meet the DTC's new deposit requirement, which did come out of the blue ... given that it is a possibility that is laid out in the DTC rules These two clauses contradict each other. If it's in the rules, it can't be "out of the blue". If anything, the clearing house raising margin requirements in this situation is both expected and desirable…

> These two clauses contradict each other. If it's in the rules, it can't be "out of the blue". I would strongly disagree with that statement. Just because something is specifically identified as possible doesn't mean that it isn't "out of the blue" when it happens. That depends on a variety of circumstances. In this particular case, I think you can look to the fact that IB, TD Ameritrade, Charles Schwab, etc. also h…

> Just because something is specifically identified as possible doesn't mean that it isn't "out of the blue" when it happens.

Again, the clearinghouse did exactly what they were supposed to do; step in and prevent RH from ending up in a position where it could default on its obligations. That's not the clearinghouse doing something "out of the blue" that is literally them doing their jobs. I find it absolutely baffling that people are upset at the clearinghouse for doing their job, especially since I'm certain that had the crash been bigger everyone would be furious at them for not having done something.

> In this particular case, I think you can look to the fact that IB, TD Ameritrade, Charles Schwab, etc. also had to restrict trading.

They did exactly what I think RH should have done; tighten or restrict margin trading on GME and put option trading on GME into liquidation only. When volatility starts to grow out of control, it's the brokerage's responsibility to start restricting customer leverage in these instruments, if nothing else for the broker's own protection.

> I am not sure why you think this is attributable to margin trading, other than the fact that Robinhood offers margin trading.

Because margin trading is literally designed to allow traders to take larger positions than they could otherwise afford. This both increases the total net position that RH customers have and it reduces the total cash that RH has on hand compared to the number of trades, since part of the money is literally loaned to the trader by RH. This isn't a big deal when the positions net out close to zero, but it can be disastrously bad when all your customers start trading in one direction.

Example. Without margin if I were to buy $2,000 worth of GME, I have to actually hand $2,000 over to RH. The worst case deposit requirement that the clearinghouse can ask from my position is $2,000, and thankfully I've given that amount of money over to RH. But RH would also let me buy $4,000 of GME on margin. Not only has their worst case deposit requirement gone up to $4,000, but I have only given them enough cash to cover half of it. Part of the responsibility of a broker is to keep an eye on what trades are done on margin to avoid too large of a net position from building up for this exact reason, and to do things like adjust margin requirements to prevent this kind of thing from happening to them.

> If it was in fact margin trading that was causing the problem, why would Robinhood limit buys in general, as opposed to just limiting use of margin?

They limited buys because they literally couldn't afford the deposit with their clearinghouse. Sells don't require a deposit, naturally. I believe if they'd taken steps earlier in the cycle to limit margin trading RH would have had more cash on hand to meet their deposits and allow customers to keep buying GME, but not on margin.

You'll note that other brokerages did limit margin trades of GME specifically, as well as putting GME options (another way to increase leverage) into liquidation only mode. This clearly signals that the other brokerages thought that decreasing leverage in GME was a good idea. Maybe RH should've done the same earlier?

> I think the likely explanation for why other brokerages did not have to raise additional funds is because they have a much smaller percentage of customers purchasing meme stocks.

That is certainly part of it, sure. This goes back to "Gamifying stock market trading is a bad idea". But you also can't ignore that the other brokerages seem to have universally taken steps specifically to unwind the amount of leverage their customers had in GME, all steps that RH didn't seem to do until their clearinghouse forced them. If TD Ameritrade and similar were moving in to stop the GME bubble when they didn't even have the majority of the meme traders, doesn't that imply that RH should have done something far earlier?

Re: It’s Time for Real Time Settlement

#380
post #331

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…

> 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, b…

According to Robinhood, they didn’t want to put limits on anything, it was the cleaning house that made them, so there had to be something that triggered AMD restrictions?
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