in

This is the true story of what happened to GameStop and Robinhood

The history of GameStop, Reddit and Robinhood is far from over. And not just because of the flurry of films on the subject that are in development.

As we anticipated, the CEOs of Reddit and Robinhood are called to testify at the public hearing of the United States Congress to clarify some issues of the case.

The CEO of Robinhood, Vlad Tenev, wanted to share some details of what will be his statement before the US legislators. In addition to, logically, share your point of view of the facts with some very interesting questions.

Tenev wanted to clear up any doubts about possible Robinhood malpractice in the GameStop case. The manager insists that
the signature blocked purchase orders to meet “regulatory deposit requirements” defined by the Securities and Exchange Commission.

The regulatory requirements to which they refer are, basically, the capital needs that brokers must deposit as collateral before the Clearing House (National Securities Clearing Corporation). A deposit or guarantee while the shares are delivered to the buyer and the funds are delivered to the seller. Something that is not really immediate.

Believe it or not, trading on the stock market is ‘not in real time’

trading

All market operations have temporary requirements for completion and execution. Simply explained, once an operation is issued, another two days are needed for it to become effective and settle (T + 2).

During that time, the transactions are recorded in a clearing house until they are finally settled. In this period, the buyer and seller must deposit a guarantee for the value of the operation in the clearinghouse. And this in turn can request an extraordinary guarantee, which varies depending on a series of factors, including volatility, risk and the number of pending operations of a share.

If a broker’s clients have more buy than sell orders on volatile securities, the deposit requirement is significantly higher.

And it is that before the barrage of operations during the GameStop rally, the Clearing House raised the capital needs of the brokers and their guarantee. Greatly limiting operations what operators like Robinhood could do with the available liquidity.

How much? $ 3 billion:

At approximately 5:11 am EST on January 28, the NSCC sent Robinhood Securities a notice stating that Robinhood Securities had a deposit deficit of approximately $ 3 billion.

That shortfall included a substantial increase in Robinhood Securities’ VaR-based deposit requirement to nearly $ 1.3 billion (compared to $ 696 million), along with a “surplus capital premium charge” of more than $ 2.2 billion.

Vlad Tenev insists that the limitation of operations has to do with this reason. And for nothing, with the theory that brokers sought to benefit large funds:

Any allegation that Robinhood acted to help hedge funds or other special interests to the detriment of our clients is absolutely false and market distorting rhetoric. ”

In fact, Robinhood’s terms and conditions of use warn its clients that the company may restrict operations at “its sole discretion and without prior notice.”

However, everything seems to indicate that the limitation of operations is far from a move to benefit the funds.

And it is that, suddenly, the capital that Robinhood had to deposit as collateral to the Clearing House soared. In total, the automatic notice from NSCC indicated that Robinhood Securities owed NSCC a total of 3.7 billion as collateral for the compensation fund. At that time, Robinhood was approximately 696 million dollars already deposited with the NSCC. For what they had to provide as collateral, just for ordered transactions, another $ 3 billion.

! function () {“use strict”; window.addEventListener (“message”, (function (a) {if (void 0! == a.data[“datawrapper-height”]) for (var and in a.data[“datawrapper-height”]) {var t = document.getElementById (“datawrapper-chart -” + e) ​​|| document.querySelector (“iframe[src*='”+e+”‘]”); t && (t.style.height = a.data[“datawrapper-height”][e]+ “px”)}}))} ();

With those numbers, the decision was already made:

Between 6:30 AM and 7:30 AM EST, the Robinhood Securities trading team made the decision to place trade restrictions on GameStop and other securities.

That is the main reason why those who had contracts on GameStop could sell their shares but not buy more, and those who had options on GameStop could buy shares to cover the differences, but not the other way around. The company did not have sufficient liquidity to be able to deposit the guarantees required by the NCSS.

Once Robinhood transferred deposit requirement from NSCC on Jan 28, turned to their investors (most funds) to obtain liquidity. Mainly, in view of the market and the number of operations forcing the company to have to meet future deposit requirements. In the four days after January 28, in total 3.4 billion were injected into Robinhood dollars to cover future deposits with the NSCC.

Limiting operations is neither new nor strange

The SEC itself also issued an alert to investors on January 30 making it clear that brokers they had the right to restrict transactions for legal, compliance or risk management reasons.

Stockbrokers may reserve the ability to decline or limit customer transactions. This can be done for legal, compliance or risk management reasons and is typically discussed in the customer account agreement.

In certain circumstances, stockbrokers may decide not to accept orders when a transaction presents certain associated legal or compliance risks.

And in the end, the waters returned to their course.

The article This is the true story of what happened to GameStop and Robinhood was published in Hypertext.