A recurring theme when these things happen is people being incensed as they peek at the way things work. We scream "obvious market manipulation" and then learn how normative this is.
This story has been exceptionally good to follow because the mechanisms, as well as one half of the trades are all relatively simple and public. This isn't a scheme with super-complicated instruments and acronyms making their first appearances in the news. It's a simple strategy. Simple stocks. Simple shorts. Simple companies.
These /wsb nutters just found stocks that was aggressively and irresponsibly shorted. I've heard 140% of the total shares in existence. In theory (because who knows how tf it actually works irl), they now need to buy shares in order to sell them at the contracted price. There are only so many shares for sale, and the buyers have no choice. The /wsb nutters (and now also everyone who hates hedge funds) are holding to spite them.
Meanwhile, brokerage CEOs are hinting (and more) at market integrity-level issues yesterday. Solvency of clearing houses and other infrastructure stuff that we only hear about during a scandal.
This kind of makes sense, there are theoretical market conditions where prices go to infinity... which is the ultimate stretch goal for wsb right now.
> In theory (because who knows how tf it actually works irl), they now need to buy shares in order to sell them at the contracted price.
This assumes that the old shorts haven't already been closed. Existing shorts could very well just be those that've been created within the last couple days at the current overvalued price.
> Meanwhile, brokerage CEOs are hinting (and more) at market integrity-level issues yesterday. Solvency of clearing houses and other infrastructure stuff that we only hear about during a scandal.
Yup, the Chairman of Interactive Brokers was pretty explicit.
> We are worried about the integrity of the marketplace and the clearing system
How is it possible that a $20bn company threatens the stability of clearing houses. Tesla moves by $20bn regularly. How does one affect the clearing house as a whole differently from the other?
It looks to me as if there are more stocks sold short than people are willing to sell back. The brokerages have plenty of money, but if 140% of stocks are shorted, delivering them all to their rightful owners is obviously difficult.
If that is in fact the case, the only ones who could prevent a full-blown market meltdown is Gamestop if they issued the missing 40%.
I don't actually know, but I think shorts are covered by borrowing stock, which is a rule that exists to fix this problem... though the fact that it's possible to short more stock than exist suggests borrowing stock doesn't mean what it sounds like.
More generally though, the talk was about clearing problems all stock trades, not just these. I can understand how a meltdown related directly to the stocks in question could happen. I don't understand why this threatens the solvency of the whole clearing house. Even if all 140% are due at once (they're not) @ $0, someone owes someone else $25bn - $30bn.
It doesn't affect the clearing houses, it affects the brokers.
The clearing houses told the brokers (WeBull, Robinhood) that they need $x of capital to secure the trades, and they simply didn't have that cash.
This is only occurring because of the overall volatility and volume of trades going through particular brokers. Some brokers have been unaffected, presumably because they have more cash on hand.
I don't really understand why they would need to put up a margin in order to execute/clear a fully paid buy order on the exchange. Users promised $x in exchange for stock. RH have their $x. RH needs to make good on the exchange or clearing house. Seems to me that risk runs the other way... Other brokers/clearing house participants might be unable to pay RH users because leverage + a unexpectedly high stock price.
I understand why RH would shut down leverage. After that point, I don't understand why/how stock purchases represent a risk to anyone but the buyer. How is the non-leveraged side creating a risk of nonpayment? I really don't know how any of this works though, so let's leave this all aside. Lets grant that RH/users are at risk of being unable to cover trades.
So what? GME buys on RH create a scenario that risks RH running out of money. So what? Why/how does this risk the clearing houses? It's a $20bn stock. A 2% move in any of the big companies is a $20bn.
because the volume is so high that it was a multiple of the total shares in existence yesterday.
im simplyfing but RH could have had to put up to 300m - 1B collateral just to cover the gamestop trades. (they can't use their customers money for this)
A recurring theme when these things happen is people being incensed as they peek at the way things work. We scream "obvious market manipulation" and then learn how normative this is.
This story has been exceptionally good to follow because the mechanisms, as well as one half of the trades are all relatively simple and public. This isn't a scheme with super-complicated instruments and acronyms making their first appearances in the news. It's a simple strategy. Simple stocks. Simple shorts. Simple companies.
These /wsb nutters just found stocks that was aggressively and irresponsibly shorted. I've heard 140% of the total shares in existence. In theory (because who knows how tf it actually works irl), they now need to buy shares in order to sell them at the contracted price. There are only so many shares for sale, and the buyers have no choice. The /wsb nutters (and now also everyone who hates hedge funds) are holding to spite them.
Meanwhile, brokerage CEOs are hinting (and more) at market integrity-level issues yesterday. Solvency of clearing houses and other infrastructure stuff that we only hear about during a scandal.
This kind of makes sense, there are theoretical market conditions where prices go to infinity... which is the ultimate stretch goal for wsb right now.