GameStop short squeeze

[nabalzbhf]

So what do you think is the likely outcome? priips style curtailing of option trading for retail in the US?

[e1644539]

This is not specific to GME, Degiro does this to all stocks since for ever. You can not submit a buy/cell order with a limit that is more than 10% different from the latest price.

[e1644539]

This is both smart and evil. Hedge funds launch ladder attacks to artificially lower the price of the stock by doing super low volume trades in order to trigger margin calls on retail investors.

[preparations]

Well, what are the chances of this happening to VWRL? Very close to zero, right?

[baldur]

@SwissTeslaBull

Back to the main topic… who bought the dip?

I bought today 80 GME at 130 USD (on Swissquote), so not at the bottom but quite close :).

[arthur]

Well done, bravo!
Lets see what will happen tomorrow.

[clon]

at least he is honest , 3 min. in:

Interactive Brokers chairman: Worried about integrity of the market

[nabalzbhf]

So the argument is that brokers and clearing houses started not trusting each other? (liquidity crisis)

[clon]

Yes! He feels responsible for his customers - HA! That responsibility sharply comes to an end when the customer is on the loosing side… how two-faced is this?

[Myfirstme]

To paraphrase the interview: „We are scr*wing our customers to protect ourselves, er, I mean, to protect our customers, of course. Phew, remembered just in time that customers are supposed to come first. Nobody noticed what our real priorities are, right?“

[arthur]

Oh my god this interview is a catastrophe! Not only did they change the rules in the middle of the game, but they took one whole team off the field! I am done with IB.

[nabalzbhf]

@TeaCup

Sounds like they admitted that they had themselves decided to bail-out market players. Don‘T think that is their role. And that they should unilaterslly decide for a bail-out at the expense if market participants.

If clearing can’t be done, there’s probably many people impacted, right? Wouldn’t the brokers absorb the losses? (because they were the one supposed to maintain their clients’ margins and provide the funds for clearing the transaction)

I’m not sure how it’s a better outcome for market participants (esp. the bystanders who were not in game).

[nabalzbhf]

I’d be surprised if the courts blink an eye, they stopped trading a few shares to prevent a systemic crash, I assume their ToS allows it anyway if they have semi-competent lawyers.

[arthur]

If he‘s still in, I‘m still in

[nabalzbhf]

By the way, similar interview from a different broker Yahooist Teil der Yahoo Markenfamilie

key quotes:

But in reality, what’s going on is that there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days. And because of the volatility of stocks, DTC has made the cost of the collateral of the two-day holding period extremely expensive.
And we just can’t afford-- well, we’re not a clearing firm, but our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can’t afford the cost of that trade clearance. That is the reason why these stocks are coming off. It has nothing to do with the decision or some sort of closed room cigar-- smoke-filled cigar room of Wall Street firms getting together to the dismay of the retail trader. This has to do with settlement mechanics of the market.

If the collateral increased by 3x overnight kinda makes sense… They let customer unwind their positions but not go into new ones.

[San_Francisco]

[stojano]

crypto version of reddit’s GME push: DOGE.
I sold 50% at 250% plus… now at 380%.

[Julianek]

A good explanation on the clearing regulations that led RH/IB to restrict trading in GME/AMC/etc.

https://twitter.com/KralcTrebor/status/1354952686165225478

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 recieve 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: https://sec.gov/rules/sro/nscc-an/2018/34-82631.pdf… 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: https://dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf… 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: https://dtcc.com/legal/financial-statements… 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.

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.

TLDR: On one hand, the netting of buyer/seller is so unbalanced, and on the other hand, the volatility on GME is so high, that brokers are on the hook to pay from their own pocket the collateral made from the difference between trade price and current price between T and T+2…

This is a correct decision. If the worst thing that happens is that people cannot trade stocks for a few days, that’s fine.

[Bojack]

I think in that case it’s almost better to tell the truth. “We had to stop you from buying because of the strain that regulations put on us”.

[Julianek]

No. They will prefer to look like the bad guys for a few days, rather than admit that they don’t have enough money to cover their collateral (even if the reason is regulatory). The latter is much worse because it leads to a bank run.