patagonia wrote:
Considering technology, you'd think trades happened instantaneously, But there is actually a period of 2 days between the when the trade is placed and when it becomes "official" for lack of a better word. Stocks trade on a T+2 basis, it's dumb and old but this is the way of the world. So when you buy a stock you are essentially promising to pay them in 2 days and they are promising to deliver in 2 days. But, what we see is the stock in our accounts instantly and the money out instantly. We don't see that 2 day transition. This is because the clearinghouse essentially guarantees everything will get processed smoothly. The way they guarantee everything is that the brokers (RH, Schwab, Morgan Stanley, etc) place a bunch of money in what is essentially a giant escrow account. This is mandated by the SEC. Sometimes, when stocks move around a lot the clearinghouse will require extra escrow (this is because there may be a greater difference between the price of the stock when you placed the trade and when it will actually be delivered).
This is what happened last week. The clearinghouse went to RH and said we need more money for these trades. This is not negotiable - there is no bargaining.
So why only Buy orders and not Sell orders? Well, buy orders means money goes out of RH to the other party. This needs to be escrowed. Sell orders means stock out and money in, so it's the other party placing the escrow. That is why these companies were fine with sell, but not buy, orders.
Hope this helps.
I understood some of it, and your explanation reinforces some of my understanding. But I still dont understand how the volatility does not affect selling. I am sure the other party was required to have large amounts of escrow money present too. Volatility would have to go both ways.
Significant volatility has occurred in the past, short squeezes have occurred in the past. This should have been expected as I knew about the possible short squeeze early in the week. Isnt it the job of the clearinghouse and RH to anticipate this more than random internet users? This time, the decision affected the retail investor. Why would you halt 100% backed buy orders? it makes no sense especially if money is just sitting in your brokerage account. I agree with halting all margin trading.
This explanation by a brokerage's chairman makes it seem like they just want to make sure clearinghouse is paid. Which makes sense. BUT the people who were going to pay here were overwhelmingly the short selling hedge funds. So they wanted to make sure the hedge funds can pay? This seems like an excuse to protect the "market", but it saves the hedge fund in doing so. The squeeze was halted, and the billionaires cant go broke.
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Also, to clarify, I have no money in this frenzy. Pure hope for the retail investor to win, and to have fair playing grounds. True democratization.