GameStop’s trade freeze in January – and the search for a solution

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The main inflection point in the

GameStop

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

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

Robinhood, which relies on a subsidiary of the DTCC called the National Securities Clearing Corporation (NSCC) to clear its transactions, stopped buying GameStop stock (ticker: GME),

AMC Entertainment

(AMC) and other stocks on January 28. Other brokers have also set limits on some trades. Shares of the affected companies tended to fall that day and some did not reach their previous highs thereafter. Investors blamed the brokers – and Robinhood in particular – for the shift.

Robinhood said it was forced to take drastic measures due to demands from the NSCC for more capital. Brokers are required to deposit capital with their clearing houses in case there is a problem during the trade settlement process. During the GameStop frenzy, those deposit requirements rose due to the large amounts of stocks being traded and the leverage used. Robinhood deposited $ 124 million on Jan. 25, but the NSCC asked for $ 3 billion on Jan. 28, Tenev said in a testimony before a congressional hearing last week. The deposit requirement eventually dropped to $ 1.4 billion that day, Tenev said, but Robinhood’s business was impacted for days, with buy and options limits.

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

however, the DTCC has been working on shortening the time between trading and settlement for years – and in 2017 it shortened that time span from three to two days. DTCC executives now say they can reach T + 1, or complete a trade within two years a day after it occurs – which could allow the DTCC to lower margin requirements for brokers and other market participants.

The delay between when a person clicks ‘Buy’ on an investment app and the transaction being fully recorded has less to do with technology and more to do with industry practice and risk management. The DTCC says it has the technology to now move on a day or possibly even the same day, but it will depend heavily on the different parties using the system to sign up.

The delay between transactions and settlement also serves a purpose, and shortening that time can affect other processes. For example, investment firms that trade in one stock multiple times a day tend to settle those trades at the end of the day. That way, they don’t have to go through the same process for every transaction. Ensuring that all these transactions are settled and funded in real time or in a very short period of time would likely be impossible given the current market dynamics.

The DTCC has been experimenting with blockchain technology to clear and settle transactions. Some of the current processes could theoretically be automated under that system, storing trading data in encrypted files and allowing market players to hook into the database. But blockchain technology is not fast enough to keep up with current trading volume. The DTCC is working on a prototype system called Project Ion that could one day put clearing and settlement on a blockchain.

For now, the DTCC expects to be able to make progress with its current technology. A customer is already weighing.

“T + 1 is a welcome stepping stone to a real-time settlement,” Tenev said in response to DTCC’s announcement. “We look forward to working with lawmakers, regulators and industry to make this happen.”

Write to Avi Salzman at [email protected]