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The Business and Financial ForumTHIS SPACE OPEN FOR ADVERTISEMENT. YOU SHOULD BE ADVERTISING HERE! Revscene Wall Street.
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These wallstreet fuckers are clowning everyone on crypto now too... all the sites you can buy dogecoin on are down and coinbase just flat out turned off the ability to buy it...
I'm seeing a lot of articles and interviews referencing an issue with liquidity.
What does everyone think about this? Could we be on the verge of a total market collapse, if GME moons and the float isn't large enough to cover the open option interest? (And yes, the root cause are short-sellers & the system who put the entire market and everyone at risk to make a buck, and will likely get bailed out again).
The other option is a continuation of what we saw today, brokerages restricting/limited users from buying certain stocks & options to ensure they have enough liquidity. But we've already seen the outrage from this and I can only imagine the outrage if this were to happen again tomorrow. This is protest/riot/etc level stuff, if we get screwed again.
Force them to pay out of their own pockets if there's "not enough liquidity in the market". They're playing with money that literally doesn't exist, so they should be the ones to make it exist.
And if they have to bail out, take it from their bank accounts to do so
There's plenty of money, they just don't want people to have access to it.
I wouldn't be surprised if RH restricts trading again if price of wsb stocks explode. RH raised about 5-600M in credit facility and raised 1B from investors to shore up their liquidity for margin requirement. So yea, I believe them when they said they restricted further buying to protect themselves from going under. But god forbid they take any actions as a private enterprise to save themselves right? Guess who also suffers if RH goes bankrupt and can't settle their trades? Its the retail investors whos owed money from RH.
Given how jaded the general public is against wall street, I know its easy to flock to the conspiracy theory of "its the 1% establishment colluding with each other to screw the little guy", but below is an excellent explanation of why RH restricted trading from someone that knows the back-end detail of trade settlement process and regulatory capital requirements. TLDR version of the story is that RH restricted trading due to the clearing deposits requirements imposed by the Dodd-Frank act which was enacted after the 08-09 crisis. If you're so convinced by the allegations of collusion, which has no tangible evidence so far (post any if you have), that you don't want to take the time to educate yourself on how the capital markets function, then so be it.
Spoiler!
Robinhood (RH) is a broker. They don't execute stock orders themselves. They sign up customers, route their orders to executing brokers, and keep track of who owns what. RH is also its own clearing broker, so they directly settle and custody their clients' securities.
Yes, RH is paid by Citadel to handle executing some of its order flow. This isn't as nefarious as it sounds - Citadel Equity Securities is paying to execute retail orders because they aren't pernicious (like having 500x the size behind them).
RH customers buy and sell stocks. Those trades don't settle (settle = closing, the exchange of cash for security) until T+2, two days later. Depending on the net of buys/sells, RH is on the hook to pay or receive that net cash. That's credit risk.
NSCC is the entity that takes that credit risk. It matches up the net buyers and sellers, post-trade, and handles the exchange of cash for security. To mitigate the credit risk that one of the clearing brokers fails, they demand the brokers post a clearing deposit with them.
The NSCC is required to do this by SEC rule, tracing to Dodd-Frank. Here's the details: sec.gov/rules/sro/nscc…
Everyone posts, and if a broker fails, then NSCC takes any losses out of that broker's deposit, then some from NSCC, then from everyone else (the other brokers).
This is a post-crisis idea encoded in Dodd-Frank that making everyone post collateral reduces the credit risk and systemic risk and such.
So how does the NSCC clearing deposit get calculated?
It's basically Deposit = min( 99% 2d VaR + Gap Risk Measure, Deposit Floor Calc) + Mark-to-Market ... math and jargon!
Let's use an example. Say Fidelity has clients who bought 2bn of stock and sold 1.5bn of stocks. First, net down buy/sell between customers in the same stock.
Say that leaves 1bn buy and 0.5bn sell. Run some math to answer "that won't move more than X with 99% odds in the next 2 days." Let's say that's 3% of the net, so 3% * (1bn-0.5bn) = 0.15bn = 15m. That the 99% 2d VaR.
Next, we ask "is any one stock net more than 30% of the net buy/sell" ... and if it is, then we take 10% of that amount and add it as the Gap Risk Measure. So if Fidelity customers bought 200m IBM, then add 20m to that 15m. That's Gap Risk Measure.
Deposit Floor Calc is some thing that looks at the 1bn buy and the 0.5bn sell and does a small calc and adds them, so that if the first calc (99% 2d VaR + Gap Risk Measure) is small, then this floor will keep the overall from being tiny.
Then, last, you add Mark-to-Market. Basically if your customers bought IBM at 140/shr and it goes to 110/shr before it settles for cash at 140/shr, the NSCC has 30/shr of credit exposure to the clearing broker and that amount gets added to the required collateral posted to NSCC.
There are some other items, but that's the basic idea - full details are here: dtcc.com/-/media/Files/…
The NSCC sets the framework, but it is spelled out in Dodd-Frank that they have to do so by law.
These deposits are held in the Clearing Fund at the NSCC.
Financials are here: dtcc.com/legal/financia…
They had 10.5bn in the Clearing Fund as of Sep 30, 2020.
This is the regime post-Dodd-Frank. NSCC updated it's rules in 2018 to improve the VaR calc and to add the Gap Risk Measure.
How did this impact Robinhood?
Well, let's say Robinhood had $20bn of client assets starting 2021. Those customers used to trade $1bn/d say. What is the context for Clearing Deposit? Say 2 days it's a little unbalanced and it's 1.2bn buy and 0.8bn sell. Ok, that's probably around 12m, maybe 20m deposit.
If they take in $600m of new deposits and say $400m wants to buy GME. Plus of their $20bn existing, say there is $400m of GME buys over the past 2d. Then the picture could look like 2.0bn buys and 1.0bn sells, which might normally be 30m deposit. But volatility went up. A bit.
Now 99% 2d VaR is much higher. It should be 20x higher for their net portfolio, but the formula will smooth it out some. Maybe it's ~4x bigger. So just on VaR, they have to post 120m now. That they should have.
The Gap Risk Measure is what kills them.
If GME is over 30% of their net unsettled portfolio, then they are required to post 10% of all the GME buys. So if that's 800m, they have to post another 80m. And there is no limit to it. As long as their clients are up P&L, the mark-to-market covers it.
But if RH takes in 500m of new money and 300m buys GME, then at minimum they are looking at posting 30m+ from just that exposure at NSCC. They cannot use client money - RH has to use their own resources to post. And if GME stock drops, RH has to post the loss pre-settlement.
This would also explain why RH drew its credit lines and said vague things about clearing requirements. bloomberg.com/news/articles/…
The policy goal here is to avoid the central plumbing entities from taking credit risk. In reality, such regulations raise costs and create barriers to entry. It raises profits for entities like DTCC (which owns NSCC and is itself owned by Wall St)
RH offered to open up stock market investing more broadly. They succeeded, clearly. But the regulations didn't change - there are still pro-Wall St, pro-incumbent rules and capital requirements. It's one of the most highly regulated industries in our nation.
So @AOC is right to ask how it can be that Robinhood stopped its clients from buying certain securities. And what she'll find is that the reason is that Dodd-Frank requires brokers like RH to post collateral to cover their clients' trading risk pre-settlement.
And it isn't the Fed or SEC who sets the rules. It's the Wall St owned central clearing entity itself, DTCC, that makes its own rules. So when the retail masses decided to squeeze the short-sellers, in the middle of crushing them, it was govt regulations which tripped them up.
if GME does indeed pop, i wonder what that's going to do to the worlds economy?
a lot of ppl will have money and will be out there spending.
RE could go up quite a bit, or do you think that's assuming too much?
suddenly if even 1% of millenials have 5x their money with the limited inventory in this city that could make quite a splash.
I bought a small amount yesterday taking advantage of what I thought was a temporary dip as a result of so many Americans being prevented from buying. With how far upwards things moved this morning, I decided to take the profit and run. There is high risk, and there is this, which is literally a house of cards.
I understand the thesis, but the simple reality is it is a giant prisoner's dilemma and it only takes a few people looking at these huge gains and saying "this has gone wildly beyond what I expected and time to buy a house" to start the momentum moving in the opposite direction.
At least if your play is Blackberry, there is an underlying business to consider; I don't really feel the same about Gamestop.
-Mark
__________________ I'm old now - boring street cars and sweet race cars.
I bought a small amount yesterday taking advantage of what I thought was a temporary dip as a result of so many Americans being prevented from buying. With how far upwards things moved this morning, I decided to take the profit and run. There is high risk, and there is this, which is literally a house of cards.
I understand the thesis, but the simple reality is it is a giant prisoner's dilemma and it only takes a few people looking at these huge gains and saying "this has gone wildly beyond what I expected and time to buy a house" to start the momentum moving in the opposite direction.
At least if your play is Blackberry, there is an underlying business to consider; I don't really feel the same about Gamestop.
-Mark
Totally agree with this, as well as my sentiment on BB. It seems like they actually have some solid future business potential with their software and partnerships.
__________________
Quote:
Originally Posted by skyxx
Sonick is a genius. I won't go into detail what's so great about his post. But it's damn good!
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if GME does indeed pop, i wonder what that's going to do to the worlds economy?
a lot of ppl will have money and will be out there spending.
RE could go up quite a bit, or do you think that's assuming too much?
suddenly if even 1% of millenials have 5x their money with the limited inventory in this city that could make quite a splash.
Kudo to Reddit, and to everybody that also in on the GME/meme stock.
The market maker however will take back money elsewhere. Look at them laying the smack down on all other equities.
There is also the liquidity and overleveaging issue that this whole meme craze has undercover. Fear is extremely high right now, whether you are in meme stock or not.
Percentage of people in GME making gains is small relative to the whole society that has significant stake in broad equity.
That being said. went back in GME today, sold off a lot of my other stuff to wait this out.
With 112% of float left, I am holding it until next week.
Have you thought about what the entry price for those shorts are now? We have no idea what those shorts truly are anymore. For all we know those shorts could have a substantial higher entry price now so they can sit back and wait for the inevitable(?) collapse. A lot of those shorts also could've been neutralized with some other synthetic derivatives. When Melvin said they covered their positions, I don't think they were straight up lying and risking jail time (Gabe Plotkin of Melvin is still worth 300M even if he closes shop). Even if they weren't 100% honest, you can bet they were exploring everything that is financially possible to save his fund, even if that means crystallizing the loss of the majority of his AUM. There's a lot of variables at play here other than short outstanding. You might be hoping that the attention span of the wsb community is as long as your patience.
Yah, honestly, it's greed and FOMO jumping in now. Melvin apparently covered his bets (took his loss, ate crow, tail between his legs, etc.) already so it's not about screwing hedge fund managers anymore. People are walking further and further out on a frozen pond while the temperature is rising ... the crash will come, it has to.
as much as i hate to admit it, i agree with you guys. i cant really picture some scenario with millions of kids get rich overnight. these hedge fund guys are slimy assholes, and they use esoteric strategies that are oversimplified and misunderstood by those outside of the bubble. i sold a lot of my position already, then bought back but a much smaller position afterwards. if it hits, it hits, if it goes to zero, then i've already accepted that possibility.
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