Saturday: The Day Brokerage Houses Throw Clearing Firms Under the Gamestop Bus

Vanity ^ | 1/30/2021 | RinaseaofDs

[RinaseaofDs]

It's has begun.

Today Webull is throwing ETC under the bus, trying to justify why you can SELL a stock and not buy it.

The source link contains an explanation of what a Clearing Firm does.

ETC is the near-monopoly player in the industry.

[Jim Noble]

[Fido969]

This is an interesting idea. I remember from “The Big Short” they’d sell mortgages, but then a market was made that merely bet on the mortgages, without involving the mortgage itself.

Those were called “synthetic CDOs”.

Here is the scene from the Big Short that explains it:

https://www.youtube.com/watch?v=AUM59Eh6vTw

[BiglyCommentary]

I posted this earlier this morning:

Let say a RobinHood client has an account with $500 in it and they buy and sell one share of GME at $350. The next day they want to do the same. The problem is the funds from the first sale are not settled. It takes 3 days for the clearing house to settle the trade (do the paper work, transfer the sellers funds, do the book keeeping, etc.) That is known as T+3, trade date + 3 days.

Most brokerages will allow another trade if the client has a margin account. The funds needed ($350) for the second share buy comes from $150 of settled funds in the account and $200 from margin. So, yes, margin is involved, the firm is at risk for those borrowed funds.

Now multiple the above by millions of clients with frenzied trading activity in a highly volatile stock. The firm’s total margin debit outstanding skyrockets. Capital ratio requirements get pegged. Selling client stock is one way to un-peg that needle, start reducing the total.

[Yo-Yo]

The clearing house itself is the buyer, so they can use the shares to clear other buy orders of short sellers.

So they're only selling to short sellers.

[BiglyCommentary]

And not allowing any margin use to sub for unsettled funds on that second buy lowers the total margin balance.

[SauronOfMordor]

My guess is that there is so much “phantom shares” out there, that the clearing houses can’t reliably settle trades.

It’s a hot potato they don’t want to find themselves left holding.

[aquila48]

I confess, even though I’ve been investing is stocks for quite a while, I have no idea of the inner workings of a trade especially the role of the clearing house. It was one of those esotoric things that always seem to work - sort of like a carburetor in a car.

I thought it was illegal to sell or lend stocks you don’t own. Why isn’t Citadel being charged with fraud?

[sheana]

Exactly. Most people don’t realize...the trade is immediate but the fund transfers aren’t until they’re cleared.

[BwanaNdege]

I'm interested. Do you take bitcoin?

Only S&H Green Stamps

or Top Value Stamps

[CodeJockey]

So lets see how TD Ameritrade likes what I do Monday. I’ll seek out a stock with a price around $5.00 (Not considered a penny stock)

I have a cash balance over $1,000.00 in my account.

I’ll place a market order for 1 share. Once it’s filled I’ll repeat that 199 times.

There are no fees for trading at Ameritrade. Wonder how they’ll like that. Be a lot of overhead and accounting on their part.

[Kartographer]

You know what is really heart breaking about this? Some brokers somewhere have lost a dollar

[cgbg]

sort of like a carburetor in a car.

The car and the carburetor exist in the physical world.

Financial transactions do not.

It does not matter...until it does.

[SDShack]

Good explanation on how margin gets created in an account because of the clearing time. What I don’t get is how you can short 140% of a stock to begin with. That means there has to be dark pools of ghost stock out there that is ‘off books’. This is how the system has been corrupted. That is clearly used to ONLY benefit the hedge funds to monnkey hammer down a stock and make money only for the hedgies. This is NOT the textbook NORMAL world that the little investor lives in, and explains why the little guy gets screwed by the big brokers. A perfect example of this is the precious metals market manipulation. What WSB did was find a loophole to play in the hedge fund world and give the hedgies a wedgie.

[RushIsMyTeddyBear]

Bkmrk

[liberalh8ter]

T+3 is correct and all I'm going to say about that is do you realize what a nightmare it is to balance a “floating” account with a 72 hour trail? If it was ONLY your trades it could be done easily but think of it in a massive scale within a CH. Factor in to that ONE trade that was input incorrectly. LOL.

[The Louiswu]

Yeah like that’s gonna happen

[aquila48]

” buying creates excess counterparty risk, but selling doesn’t, WHO’S ON THE OTHER SIDE OF THE TRANSATCTION? ONe hand can’t clap. Somebody has to buy the trade.

This is the part that’s been bothering me for a few days now. Do they mean you can put up for sale, but allow no buyers? So the only effect is to drive the price down.”

The only thing I can figure is that the counter party in this case is the clearing house itself. There are not two parties to a trade but three - the seller, the clearing house and the buyer.

Because Citadel sold and/or lent stocks they didn’t have, now they are desperate to buy them at ridiculous because the prices are going to get even more ridiculous.

[The Louiswu]

No matter how this plays out the WSB folks on Reddit are going to do this again because they’ve been successful this time and there is a DEEP hatred for what they perceive as the 1% Wall Street thugs. Can’t say I blame them and I hope the crush Melvin with Diamond Hands. HOLD GME.

[dila813]

They can’t, you can do it even outside a broker. A short sell is basically a fee you pay to borrow someone’s stock you sell with the promise to pay market price later or return the share....you can’t ban that.

[comps4spice]

It pays to have friends high up in the Uniparty.