GameStop’s January trading halt – and the search for a solution

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The key turning point in the

GameStop

last month’s saga – when brokers suddenly limited stock trading – could have been avoided if systems designed to settle trades changed faster, according to Vlad Tenev de Robinhood. Now, the CEO of the online brokerage can fulfill his wish, at least partially.

Depository Trust & Clearing Corporation (DTCC) announced on Wednesday that it expects to be able to shorten the time between when a deal takes place and when it ends – known as settlement – to a day of two. The DTCC is the most powerful clearinghouse on the market, and serves as a hub where buyers and sellers finalize and record their trades.

Robinhood, who relies on a DTCC subsidiary called National Securities Clearing Corporation (NSCC) to clear its trades, has stopped all purchases of GameStop shares (ticker: GME),

AMC Entertainment

(AMC) and other actions on January 28. Other brokers have also placed limits on some transactions. The shares of the affected companies fell mainly on that day and some did not recover their previous highs after that. Investors blamed brokers – and Robinhood in particular – for the change.

Robinhood said he was forced to take drastic measures due to NSCC demands for more capital. Brokers need to deposit capital in their clearing houses, in case there is a problem during the settlement process. During the GameStop frenzy, these deposit requirements increased because of the large amounts of shares being traded and the leverage being used. Robinhood deposited $ 124 million on January 25, but the NSCC asked for $ 3 billion on January 28, Tenev said in testimony to a Congressional hearing last week. The deposit requirement dropped to $ 1.4 billion that day, Tenev said, but Robinhood’s operations were affected by days, with limits placed on purchases and options.

At the hearing, Tenev said he thinks the best way to resolve this problem is to reduce the settlement time to zero. “The existing two-day period for settling trades exposes investors and the industry to unnecessary risk and is ready for change,” he said. The DTCC said it cannot comment on the Robinhood episode.

However, the The DTCC has been working for years to shorten the time between trading and settlement – and in 2017 it reduced that time interval from three to two days. DTCC executives now say they can reach T + 1, or finalize a deal the day after it occurs, within two years – which could allow DTCC to reduce margin requirements for brokers and other market participants.

The delay between when a person clicks “Buy” on an investment application and the fully recorded transaction has less to do with technology and more to do with industry practice and risk management. The DTCC says it has the technology to switch to one-day settlement or possibly the same day now, but that it will depend heavily on the various parties that use its system to sign.

The delay between negotiations and settlement also serves a purpose, and reducing that time can impact other processes. For example, investment firms that trade a stock several times during the day tend to make a net profit from those trades at the end of the day. That way, they don’t have to go through the same process for each trade. Making sure that all these trades are settled and financed in real time, or in a very short period, would probably be impossible due to the current market dynamics.

The DTCC has experimented with blockchain technology to clear and settle trades. Some of the current processes could, theoretically, be automated under this system, which would store business data in encrypted files and allow market participants to connect to the database. But blockchain technology is not fast enough to keep up with the current volume of trading. The DTCC is working on a prototype system, dubbed the Ion Project, which one day could put clearing and settlement on a blockchain.

For now, the DTCC hopes to be able to advance its current technology. A customer is already evaluating.

“OT + 1 is a welcome stepping stone to a real-time deal,” said Tenev in reaction to the DTCC announcement. “We look forward to working with legislators, regulators and the industry to make this a reality.”

Write to Avi Salzman at [email protected]