GameStop’s January commercial outage and search for a solution

Text size

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 liquidate transactions were moved faster, according to Vlad Tenev of Robinhood. Now, the CEO of the online broker can get his wish, at least in part.

The Depository Trust & Clearing Corporation (DTCC) announced Wednesday that it expects to be able to shorten the time elapsed between the time a transaction occurs and when it ends (known as a settlement) to one day from two. The DTCC is the most powerful exchange center on the market. and serves as a hub where buyers and sellers will finalize and register their businesses.

Robinhood, which relies on a DTCC subsidiary called the National Securities Clearing Corporation (NSCC) to liquidate its operations, stopped buying any stock from GameStop (ticker: GME).

AMC Entertainment

(AMC) and other actions on January 28th. Other brokers also put limits on some transactions. The shares of the affected companies fell mainly that day and some did not regain their previous highs later. Investors blamed brokers, and in particular Robinhood, for the change.

Robinhood said it was forced to take drastic action due to demands from the NSCC for more capital. Brokers must deposit capital into their clearing houses in case there are any problems during the trade liquidation process. During the GameStop frenzy, these deposit requirements increased due to the large amounts of shares being traded and leverage being used. Robinhood entered $ 124 million on Jan. 25, but the NSCC asked for $ 3 billion on Jan. 28, Tenev said in statements for a congressional hearing last week. The deposit requirement eventually dropped to $ 1.4 billion that day, Tenev said, but Robinhood operations were affected for days, with purchase limits and options.

At the hearing, Tenev said he believes the best way to solve this problem is to reduce the time to settlement to zero. “The existing two-day period to liquidate operations exposes investors and industry to unnecessary risks and is ripe for change,” he said. The DTCC said it cannot comment on the Robinhood episode.

However, the DTCC has been working for years to shorten the time from trade to liquidation, and in 2017 it reduced that time period to two days from three. DTCC executives now say they can reach T + 1, or end an operation a day after it occurs, in two years, which could allow DTCC to reduce margin requirements for brokers and other market participants.

The delay between the time a person clicks “Buy” on an investment app and the total trade record has less to do with technology and more to do with industry practice and risk management. The DTCC says it has the technology to move to a one-day deal or possibly even the same day right now, but that it will largely depend on the various parties using its system to sign in.

The delay between transactions and settlement also has a purpose and reducing this time can affect other processes. For example, investment firms that trade a stock several times during a day tend to clear these trades at the end of the day. That way, they don’t have to go through the same process for every operation. Ensuring that all these operations are settled and financed in real time or in a very short period of time would probably be impossible given the current market dynamics.

The DTCC has been experimenting with blockchain technology to clean up and liquidate transactions. Some of the current processes could theoretically be automated under this system, which would store business data in encrypted files and allow market players to connect to the database. But blockchain technology is not fast enough to keep up with the current trading volume. The DTCC is working on a prototype of a system, called Project Ion, that could one day put clearing and settlement on a blockchain.

For now, the DTCC hopes to be able to move forward with its current technology. A customer is already heavy.

“T + 1 is a good step for a real-time deal,” Tenev said 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]