What happened this week

I find this fascinating (from the article you lined):

> Webull Chief Executive Anthony Denier said his platform’s clearing firm, Apex Clearing Corp., notified him Thursday morning that Webull needed to shut off the ability to open new positions in certain stocks. Otherwise, Apex wouldn’t be able to settle the trades, he said.

1. Clearing houses raised capital requirements by a remarkable amount.

2. Apex specifically indicated that opening new positions in certain securities should be forbidden. This does not sound like an aggregate collateral shortfall.

> The volatility of those stocks is approaching infinity as their trading volume increases, so the traditionally mild and technical credit risk around settling trades has become real and scary. Brokerages have to put up more money to guarantee against that risk, and also think about ways to prevent the risk from coming true.

Hold on here... regardless of "infinite" volatility, the risk of a $300 buy order is at most $300, and when the brokerage is custodian of $300 settled real US dollars in the customer's account, there is no apocalyptic systemic risk.

I would understand if this were simply a matter of Robinhood tightening margin requirements, but no, they were prohibiting all purchases, even from accounts with plenty of cash, and now we are hearing (not the first story they spun) that this was because of some nonsensical aspect of the DTCC collateral requirements (the buying customer's funds do not count and cannot be used as collateral).

Collateral shortfall would apply to all purchases of all stocks, wouldn't it? Why not cap all purchases? And what exactly were the collateral requirements on GME?

> Those outlays, which behave like margin in a brokerage account, can create a cash crunch on volatile days, say when GameStop falls from $483 to $112 like it did at one point during Thursday’s session.

Hilarious! This intra-day volatility was caused by the brokerage's actions. This was the kind of raid that could happen only in the low volume environment created by the cessation of retail buying.

Honestly, I haven't been able to find any good sources for the reasoning. It seems like it emerged as part of Dodd-Frank after the 2008 financial crisis, but almost no one is talking about why specifically the rule was enacted. My best guess is that it might be to help protect users' money from being put at risk by a malicious/incompetent brokerage.

> IB's CEO Thomas Peterffy said on CNBC that their intent was to protect large market participants, including clearing houses.

This is the same thing I'm talking about, just arguably phrased poorly. If the clearing house is in danger you risk cascading financial failure that endangers everyone, not just people buying GME. Yes that includes large market participants but it also includes Joe Blow holding AAPL or TSLA.

There is a conversation worth having about DTCC's potential conflicts of interest, but it seems clear to me that DTCC cannot be allowed to go down. They need to raise collateral requirements, regardless of the PR fallout that small brokerages might face.

> The article you cited quotes the WeBull CEO saying that Apex dictated restrictions on specific stocks. That is at odds with the story that it was just a matter of brokers not being able to meet collateral requirements.

I think being careful with terminology is important here. WeBull is what's known as an "introducing broker". They deal with clients through their app and such, but they don't really do any of the back-office work. They offload that to a clearing _firm_ called Apex, who ultimately is the one that must post collateral to the clearing _house_ DTCC[1]. According to WeBull's CEO, Apex realized they would be unable to put up the collateral and so called up all the brokerages they work with to tell them that GME would be halted.

Robinhood and most larger brokerages such as TDA, Fidelity, and Vanguard are all self-clearing. It's essentially like if WeBull and Apex were the same company. So while technically speaking it was the clearing firm portion that couldn't post collateral, the introducing broker and clearing firm are the same company so people tend to just simplify and say that the brokerage itself couldn't meet collateral requirements.

> One consistent theme seems to be that clearing houses are behind this, and that their restrictions were not dictated by a formula, but were more arbitrary.

The clearing house (in the US, there's really only one) is definitely behind this, but I don't know that the restrictions were arbitrary. It's pretty standard practice for the DTCC to raise collateral requirements on volatile stocks, and they generally inform clearing firms until the morning that restrictions go into place, giving clearing firms only a few hours to provide additional capital[2]. Whether that's a good standard practice is certainly arguable.

1. See here for the difference between a clearing house and a clearing firm: https://www.money-zine.com/definitions/investing-dictionary/...

2. See page 49 of https://dtcc.com/-/media/Files/Downloads/legal/policy-and-co...