Explanation of what happened: RobinHood, WeBull etc. and trading restrictions

I saw this on social media and sharing it here. There's a lot of crazy conspiracies out there (and some batshit crazy ones here) so its worth to at least explain what happened today with the stock restrictions for the few sane ones on Blind.

#robinhood #gme #bb #stock

First, we need to define two terms:

Social Media: A place where village idiots come together to create their own village.

Clearing house: a financial institution formed to facilitate the exchange of payments, securities, or derivates transactions. The clearing house stands between two clearing firms. Its purpose is to reduce the risk of a member firm failing to honor its trade settlement obligation. (Imagine an escrow, or your old-school weed dealer, but for stocks).

Before the market opened today, clearing firms (see above) told these brokerages (RH, WB, TD, etc.) to stop allowing opening positions for three companies as they're high volume with extremely high volatility, AMC, GME, BB and KOSS.

This matters to them because if you buy the stock today, there is a two day settlement period - those brokerage firms that you bought stock on have to fund that trade with the clearing central house called DTC for two whole days (48 hrs).

Because of the volatility of those stocks, DTC has made the cost of the collateral of the two-day holding period extremely expensive. Smaller brokerages, like WeBull or RobinHood, use clearing firms that cannot afford the cost to settle those trades (due to the high collateral + cost).

They also cannot use customer funds to front that cost due to regulation. So the clearance firms have to go into their own pockets to do it, but they simply cannot afford the cost of those trading clearances (due to the collateral, think of it as an insurance policy cost for a drunk 18 year old vs your mom). This is why the stocks are being put on hold on the smaller brokerages.

Now, large traditional brokerage accounts use clearing firms that can afford it and they have the cash to cover the risk, hence why they still allow for trading of high collateral volatile stocks, BUT they still restrict the amount that you can trade.

This is just the settlement mechanics of the market. There is no evil boogie man, and blaming it on small brokerages is just idiotic (see definition for Social Media above). If you don't like it, then ask your representatives to remove the collateral rate-hikes for high-volatility assets for clearing houses - which they can't do as these are private companies. Welcome to real life!

Also, the reason why you are able to trade commission free is because of RobinHood in the first place. Deleting it will just help centralize financial power to the large institutions and clearance houses in the first place (the WallStreet firms that you hated back in 08).