Former Citadel Securities director explains what happened with Robinhood and GameStop last week

Episode 7 of Season 3 of The Scoop was recorded remotely with The Block’s Frank Chaparro and Shane Swanson of Greenwich Associates. 

Listen below, and subscribe to The Scoop on AppleSpotifyGoogle PlayStitcher or wherever you listen to podcasts. Email feedback and revision requests to [email protected]

This episode of The Scoop is brought to you by Blockset. With Blockset, companies gain access to tools such as:

1. A highly scalable API that supports Bitcoin, Ethereum, Ripple, and other top chains
2. AML/KYC data expediting time to market by complying with legal requirements
3. Leading custody solutions using modern multi-party compute (MPC) technology 


Stock markets have seen unprecedented levels of trading in recent days, fueled by retail trading activity tied to Wall Street Bets. Robinhood — which became the key figure in this drama as the venue through which much of the publicly visible trading occurred — has been a focal point of this market backdrop after buckling under the pressure of heightened activity and temporarily limiting purchases of certain stocks, like GameStop and AMC. 

In response, Robinhood came forward and tied its response to the underlying settlement infrastructure. Robinhood said in a blog post that the limits on trading were connected to soaring clearinghouse deposit requirements. The firm later said that a move to real-time trade settlement would remedy f the issues that faced not only Robinhood but other brokers. Here's from the blog:

"The clearinghouse deposit requirements are designed to mitigate risk, but last week’s wild market activity showed that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that introduce new risks."

Shane Swanson of Greenwich Associates — a market structure wonk and former director at Citadel Securities — breaks down exactly what happened to the markets last week and why things stopped trading on a new episode of The Scoop podcast.

Here's Swanson:

"I like to use examples because I am a simple guy and examples seem to help. If I am a broker and I have $10,000 worth of capital and these aren't the accurate numbers, but say that allows me to trade $100,000 worth in the market because I have some leverage capabilities. And I am going to let somebody trade with me and I am going to give them margin which means I'm going to lend them money and they're going to trade, and I am exposed to that lending risk. And they trade all the way up and they use all my $100,000 that I am allowed to expose myself to, once I hit that $100,000 I can't trade anymore. I can't expose myself to any more risk. I have used up the bucket of capital of which I am allowed to trade now."

As for what happens next, Swanson told The Scoop that "it's always hard to go backwards on cost," referring to the ramifications of moving from T+2 to a more instant settlement process.

"It all depends. If the costs are egregious enough that the industry has to absorb commissions could come back. Movement from T-plus 2 to T-plus 1 settlement would be over a long enough time horizon I believe that would not be something that ends up impacting the retail investors in terms of cost," Swanson explained.

A full summary of this conversation will be published next week. We hope you enjoy the episode.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Trending Stories

Get Your Crypto
Daily Brief

Delivered daily, straight to your inbox.

DAOs: An Institutional Guide to Decentralized Governance

Arca provides fundamental information about decentralized autonomous organizations (DAOs) for institutions transitioning into the age of tokenized ecosystems. This guide explores the components, purpose, functions, and practical applications of these nascent entities and the opportunities and challenges for this compelling governance approach.
Read Full Story
Sponsored Post

Layer-2 Scaling Solutions: A Framework for Comparison - Commissioned by Polygon

Ethereum had a breakout year in 2021. It’s native asset, ETH’s, market capitalization surpassed $500 billion for the first time. Its network facilitated upwards of $7 trillion value transfer. Non-fungible tokens (NFTs) emerged as another “killer application” that have put its technology on the global stage and caught the attention of the masses.
Read Full Story
May 5, 2022, 3:17PM UTC