Gabby Jones / Bloomberg News
So much for the “manipulated” market, the alleged conspiracy to bail out Reddit traders, and other nonsense that was loud about the stock market instructions last week
and other companies. It turned out that the main controversy was an above-average demand by the clearing house for capital.
As David Battan explains nearbyThis is almost certainly the story behind Robinhood, the internet trading app’s decision to limit trading in certain stocks for a period of time late last week. Politicians like Senator Ted Cruz and financial analysts from Barstools said they saw a conspiracy by the new robber barons.
The reality is more prosaic. Robinhood and other brokers have been inundated with traders looking to invest in GameStop and other stocks, often with options contracts that can increase leverage and trading risk. A clearinghouse that does and settles trades was watching volatile trading and asking for more collateral to handle potential losses.
Vlad Tenev, chief executive of Robinhood, explained the demand in an interview on Sunday night in a livestream on Clubhouse, a social networking app. “The request was around $ 3 billion, which is roughly an order of magnitude more than normal,” Tenev said.
A margin call is not a conspiracy. A clearing house is an intermediary between buyers and sellers in a financial market. It “cancels” or closes, acts and ensures that the parties perform the contract and assets are delivered. It also reduces risk by requiring trades to be secured with enough capital to reduce the likelihood of either trading party going bankrupt. This protects both investors and brokers.
Robinhood clears its business through the well-known Depository Trust & Clearing Corp. owned by a consortium of banks, broker-dealers and other financial companies. You can imagine that DTCC is part of the conspiracy and, at the request of the banks, has partnered with Robinhood to help short sellers pressured by the Reddit traders.
Perhaps you still believe that too
stole the 2016 election for Donald Trump. The Securities and Exchange Commission and other regulators should be able to find out sooner than the two years that special adviser Robert Mueller was needed.
By temporarily restricting trading in some stocks, Robinhood has reduced DTCC’s demand for capital. The company immediately raised $ 1 billion in new capital last week and has raised $ 2.4 billion since then, the Journal reports. This should help the company serve customers while reducing volatility on popular stocks.
On Monday, the Reddit crowds decided to raise the silver price for anything worth doing this exercise. Such trading raves may continue for some time as market participants have found they can use social media to create an investing mob and take hedge funds and other naps.
Short sellers caught on the wrong side of GameStop price action have learned a tough lesson about risk in the current market. All the better for pricing and trading discipline. There are no sinners or saints on either side of these transactions. There are consenting adults who trade with their own money.
In times of limited social trust, right and left financial markets must become targets of populist conspiracy theorists. In the past, Conservatives at least tried to understand how financial trading works before teaming up with leftists like Rep. Alexandria Ocasio-Cortez and Sen. Elizabeth Warren to form a hang-em-high posse against private markets. Unfortunately, in this age of conspiracy, knowing less gets more attention.
Can the right-wing populist mood be banished from American life through the brutal violence of social media censorship? Images: AP / AFP / Getty Images Composite: Mark Kelly
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Published in the print edition on February 2, 2021.