[hehehaha]

I don’t even know what to say about this. It doesn’t sound like he learned his lessons at all. He’s calling for real-time settlement which is not practical for equities. On top of that he completely dismissed RH’s root problems: very loose margins and new account standards. I was defending RH on HN last week but I have to reconsider.

[kelnos]

> He’s calling for real-time settlement which is not practical for equities.

Why not? In most cases share ownership is just a row or two in some database. If you can update those in real time (which you should; a legacy system that doesn't support this can be upgraded, even if at significant cost in implementation and testing), and do instant (or near-instant) funds transfers, you should be able to settle within minutes. Certainly same-day, at least.

Now, I would accept that maybe instant settlement is not desirable. Maybe it's good to be able to reverse fraudulent or illegal trades before money fully changes hands, for example. But that's a different thing.

[justlurkin12]

dumb question, why is not practical? As for the root problems, those are not related to the issue from last week (not sure if you're aware, but margin had no factor in play with the DTCC requirements).

[hehehaha]

There are many reasons but most importantly, delayed settlement serves as fraud deterrent and error/exception handling. Should be T+1 same as options. Think of it as a database, do you want instantaneous non-reversible commits by default when transactions number in the billions with known error rate? Or perhaps have a reasonable buffer for safety?

[PeterisP]

For cash, pretty much every country has a functioning real time gross settlement system that manages to do essentially instantaneous non-reversible commits by default and carries all the large payments and the netting settlements for all kinds of smaller bundled payments. Yes, there are risks, errors and fraud - but if that's manageable for very, very large amounts of cash, why wouldn't it be for stock?

[rodgerd]

Most countries do not settle in real-time, or even close to it.

Even ones moving towards it are still allowing 5 - 15 minute windows on settlement.

[hehehaha]

I would go even further. If I am building a next gen electronic wallet (which happens to be a side project of mine) I’d build in a full week of escrow-like mechanism by default.

[unethical_ban]

Why are reasonable buffers done in days? Why should fraud prevention be done by lag, rather than proper IAM?

And non-malicious errors are reversible.

[justlurkin12]

T+0 implies same day not instant. I think you can enable all of those features with hours of delay instead of days.

[hehehaha]

I can maybe see T-0. But I am pretty sure Vlad is talking about near real-time. Even with T-0, most of the trading is done in the last ten minutes at 3:50 EST (due to vwap). I don’t see the benefit in settling T-0 outweighing the value of safety net provided by extra time overnight.

[mikelward]

Why is it not practical?

[zaroth]

Robinhood got called up at 3am with an extortion demand for $3 billion due that morning, unless they shut off Buy orders of GME.

The collateral call had nothing to do with Robinhood’s ability to pay for the orders it was placing.

The problem was the GME short sellers were insolvent at the prices the stock was trading at, and contagion from the hedges failing would have left the clearinghouse looking at billions in loses.

[ZephyrBlu]

Sorry, what? I can't tell if you're serious.

Robinhood didn't get extorted, their clearinghouse told them they needed more capital to secure further $GME trades, because the volatility has been off the charts.

Vlad even states this in the article!

> Clearinghouse deposit requirements skyrocketed overnight

...

> The clearinghouse deposit requirements are designed to mitigate risk

[unethical_ban]

I think the point is, the effect of that sudden change was the screwing over of retail investors at the expense of funds and firms that weren't locked out. And that RH should have seen this coming if it were all "by the book". And how the hell can those fees go up so instantly?

If we're going to be all "free market" about how only the strong survive, RH should be eliminated.

[ZephyrBlu]

It _was_ by the book and they _should_ have seen it coming.

"How do clearinghouses determine how much is required?

It’s pretty technical, but the process basically works as follows: clearinghouses look at a firm’s customer holdings as a portfolio. They use a volatility multiplier, looking at specific stocks, to quantify their risk. The clearinghouse may assign significant additional charges based on how much of one stock a firm’s customers hold. If a firm’s customers have more buy than sell orders, and the securities they’re buying are more volatile, the deposit requirement will be higher. Clearinghouses can also require additional deposits if certain thresholds are met."

https://www.streetinsider.com/Corporate+News/Robinhood+Blame...

[unethical_ban]

Do you agree, then, that RH should be punished, if not dismembered as an entity, for incompetence leading to billions in stock losses?

[myWindoonn]

This is the same fallacious argument that media cartels use to claim that copyright infringement "costs" them and incurs "losses". No, this is unrealized revenue, and that's generally not punishable by law; there have to be specific circumstances which would indicate fraudulent behavior.

RH is trying their best to stay afloat and carry out their fiduciary duty, and it seems that the incompetence is not with RH but with the many users who misunderstood how RH works.

(To be clear, we should dismember the entire system of short-selling shares of corporations, for the billions of dollars worth of damages and injuries which are done to the employees of those corporations and the social fabric. But that is not the same as revoking RH's charter.)

[Spivak]

If RH is eventually found to have stopped trading on GME in purpose to manipulate the price then sure let the SEC draw and quarter them. But RH wouldn't be so severely punished for having downtime and this is basically that.

[mike_d]

Which is why you push back and tell the clearinghouse to make a public statement to that effect.

The CH is faced with two options: One, make the statement and hurt a public reputation they don't care about in the first place. Or they could cut off all trading to RH, which puts RH on the same side of the fight as they have been trying to market themselves as being on from the beginning. Win win.

[ABeeSea]

I don’t think it was the CH’s choice. I believe the collateral requirements are set in Dodd-Frank.

And financial firms don’t go j to extended bankruptcies when they run out of cash like other companies. They immediately go into receivership and/or liquidation. Trying to play chicken with the CH would have just ended RH as a company pretty much immediately.

[mike_d]

If it was a regulatory requirement, then they should have been put in to receivership immediately. Being unable to meet colleterial requirements means they extended credit beyond their means.

[ABeeSea]

They never went over the threshold because they turned off buying for the most volatile stocks.

[justlurkin12]

Actually if RH didn't wire over the funds, they would be dissolved due to illiquidity.