Over the weekend, I received several messages from friends who I went to University with that are tracking the current war being waged by retail traders – spurred by the frenzy caused by online Reddit blog WallStreetBets (WSB) – that are determined to put the squeeze on hedge funds by pumping the price of stocks such as GameStop and AMC.
Among the questions I received, a few really stood out for me: ‘What is a CCP?’ ‘What is a DTCC?’ Finally, my time to use that market structure knowledge to impress my friends!
“Well,” I said, “A CCP is pretty much the middleman between buyers and sellers where all trades go through to clear and settle. It makes sure traders and brokers are able to put up collateral to cover any big movements in the market.”
“Ok,” they replied, “But what’s that got to do with me trying to buy into GameStop?”
Now, the challenge for me was to try a convey the complexities of market volatility, margin calls and settlement times. So as opposed to trying to condense the role of clearing and settlement houses in a few WhatsApp messages, this blog post might go some way to explaining why a decision by the US equities clearing house, DTCC, sparked so much outrage among the retail trading community.
Firstly, DTCC is the main hub for the US stock market and is connected to all the major brokers and trading platforms. As the stock price of GameStop stock began to jump dramatically, Robinhood and other brokers had to put up money with the DTCC to back those trades during the two days it takes for them to settle.
According to an article from the FT, the National Securities Clearing Corporation (NSCC), the equities clearing house for DTCC, had requested margin deposits from Robinhood of about $3 billion at 3am last Thursday (however, this was later reduced to $700 million). Other reports suggested industrywide collateral requirements jumped to $33.5 billion, up from $26 billion.
In response, Robinhood and some other trading platforms raised large sums of money to post with the DTCC to increase their backstop against the losses. But at the same time, it had to restrict trading in certain stocks, such as GameStop and AMC, while also unwinding some trades.
Now this decision has created a huge rift between those that agreed with the decision of DTCC to demand collateral and for Robinhood to suspend trading, and those that were incredibly angry that Wall Street was colluding to prevent retail traders beating them at their own game.
If a T+0 settlement cycle would have been in place (which has been pushed by the DTCC), it certainly could have wiped out Robinhood and countless others.
It is currently unclear how far this battle between retail traders and hedge funds will go, and the implications that will have on market structure and regulation. What other implications it could have on prime brokers and securities lenders that help hedge funds to make their short bets may also only begin to unravel.
Anyway, to my friends who have been asking what all this means, I hope this makes market structure sound cool.