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.
And not allowing any margin use to sub for unsettled funds on that second buy lowers the total margin balance.
Exactly. Most people don’t realize...the trade is immediate but the fund transfers aren’t until they’re cleared.
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.
How do High Frequency Traders get around the +3 in that equation?
Talk to me about those WITHOUT margin accounts: I buy a stack and actual cash leaves my account. That money automatically underpins the trade regardless of the time it takes to settle. How come non-margin account holders are prevented from buying?
And by the exact same mechanism, SELLING has far more inherent risk because unless the buy that clears the sell order comes from a non-margin account, the very real likelihood the buyer can’t do pay is much greater. Literally infinitely so if the buyer is the counter party that shorted the stock in the first place!
It’s absurdly indefensible for Robinhood or any other broker or clearinghouse to ban buying from non-margin accounts for the reason of liquidity risk.
The ONLY reason to ban buying but not selling is to drive the stock down to a level that provides the shorting party a chance to reload their shorts at a more favorable price.
Full stop.
So, that makes the buying ban even more outrageous because it artificially crashes the value of the stock you are holding AND unfairly allows the criminal who shorted the stock a chance to recover.
Instead of a thumb, Robinhood is putting their entire weight on the scale to cheat GME holders.