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The key turning point in
GameStop
last month’s saga – when brokers abruptly limited stock trading – could have been avoided if systems designed to settle transactions had moved faster, according to Vlad Tenev of Robinhood. Now, the CEO of the online broker can get his wish, at least in part.
Depository Trust & Clearing Corporation (DTCC) announced on Wednesday that it expects to be able to shorten the time between the time a transaction takes place and the time of completion – known as settlement – to one day out of two. DTCC is the strongest clearing center on the market, and serves as a hub where buyers and sellers go to complete and record their transactions.
Robinhood, which relies on a DTCC subsidiary called the National Securities Clearing Corporation (NSCC) to clear its transactions, has stopped all GameStop stock purchases (ticker: GME),
AMC Entertainment
(AMC) and other actions on 28 January. Other brokers have also imposed limits on transactions. The shares of the affected companies fell mostly that day and some did not regain their previous highs after that. Investors have blamed brokers – and especially Robinhood – for the change.
Robinhood said it was forced to take drastic action because of NSCC’s demands for more capital. Brokers need to deposit capital at clearing houses if there is a problem during the trade settlement process. During the GameStop frenzy, these deposit requirements increased due to the large amounts of shares traded and the leverage effect. Robinhood deposited $ 124 million on Jan. 25, but the NSCC demanded $ 3 billion on Jan. 28, Tenev said in a testimony at a congressional hearing last week. The deposit requirement eventually dropped to $ 1.4 billion that day, Tenev said, but Robinhood’s operations were plagued for days, with purchase limits and options.
At the meeting, Tenev said he believed the best way to solve the problem was to reduce the time to zero. “The existing two-day period for settlement of transactions exposes investors and the industry to unnecessary risks and is ready for change,” he said. The DTCC said it could not comment on the Robinhood episode.
But DTCC has been working for years to shorten the time from trading to settlement – and in 2017 it reduced this time from three to two days. DTCC executives now say they can reach T + 1 or complete a transaction one day after it takes place within two years – which could allow DTCC to reduce margin requirements for brokers and other market participants.
The delay between the moment a person hits “Buy” on an investment application and the complete registration of the transaction has less to do with technology and more to do with industry practice and risk management. DTCC says it has the technology to move to a one-day or even same-day solution right now, but that it will largely depend on the different parties that use their system to connect.
Delays between transactions and settlement also have a purpose, and reducing this time could have an impact on other processes. For example, investment firms that trade a stock several times during a day tend to smooth these transactions at the end of the day. This way, you don’t have to go through the same process for every transaction. Ensuring that all these transactions are settled and financed in real time or in a very short period of time would probably be impossible, given the current dynamics of the market.
DTCC has experimented with blockchain technology to clear and settle transactions. Some of the current processes could theoretically be automated under this system, which would store trading 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. DTCC is working on a prototype of a system, called Project Ion, which could one day put clearing and settlement on a blockchain.
For now, DTCC expects to be able to move forward with its current technology. A customer is already weighing.
“T + 1 is a welcome step towards real-time resolution,” Tenev said in response to the DTCC’s announcement. “We look forward to working with parliamentarians, regulators and industry to make this a reality.”
Write to Avi Salzman at [email protected]