> [1] Specifically, they're required by the DTCC to put up a deposit on every trade their users make. During periods of low volatility this is fine because they can come up with the money, but when volatility goes up so do the deposit requirements, which can cause them to become insolvent. This is further compounded by the fact that their product invisibly hands out margin, eg. "instant" deposits of $1000, or giving you the money before it settles (2 days later).
Assuming they aren't allowing any margin to be used on GME (including instant deposits) how could they possibly not come up with the money? Does that mean they are doing other stuff with users money and only fractionally paying for shares? The clearinghouse (normally) just assumes they are good for it if they ever need to come get it?
EDIT: Apparently it is a fractional deposit that the clearing house requires. Apparently though, it can't be client money. So my next question is, why is that?
Don't most brokers allow you to continue trading before settlement? (so someone has to put collateral for that)
I guess most traders would complain if they had to wait two days after every trade :)
Edit, maybe best is to look at the explanation from Money Stuff:
> But at some level of volatility things break down. If a stock is really worth $400 on Monday and $20 on Wednesday, there is a risk that a lot of the people who bought it on Monday won’t show up with cash on Wednesday. Something very bad happened to them between Monday and Wednesday; some of them might not have made it. You need to make sure the collateral is sufficient to cover that risk.
> Don't most brokers allow you to continue trading before settlement?
Hasn't that changed a bit though? I'm trying to recall what the policy change alert I got a few years ago. Something about you can buy shares with proceeds of unsettled sales, but if you sell the new shares before the previous sale is settled, your account can get flipped into some state where you have reduced trading abilities for a period of time. 30 days?
It was implied that "the SEC made us do it". I think it was meant to put the kibosh on day trading. You can still day trade, but your returns are cut dramatically by requiring a larger cash position.
> Don't most brokers allow you to continue trading before settlement? (so someone has to put collateral for that)
Sure, but I wonder why RH didn't just change their rules to being that you won't be able to trade instantly with any sold GME, and then used client funds as collateral? This seems much better than stopping buying altogether. I suppose maybe the code wasn't in place for something like this, idk.
But that's not necessarily settled right? E.g. client sells AMC, then buys GME. At this point RH doesn't have the cash to for it (the settlement should clear, but it still needs to come up with the collateral).
(I'm not an expert so take it with a grain of salt, but that makes at least some sense :))
The fraction became 100% on GME, which is typical for highly volatile stocks. That's why they had to disable trading in it - they could cover the small fraction, but not 100%.
Assuming they aren't allowing any margin to be used on GME (including instant deposits) how could they possibly not come up with the money? Does that mean they are doing other stuff with users money and only fractionally paying for shares? The clearinghouse (normally) just assumes they are good for it if they ever need to come get it?
EDIT: Apparently it is a fractional deposit that the clearing house requires. Apparently though, it can't be client money. So my next question is, why is that?