This is not stuff most people worry about most of the time. Generally if you buy a stock on Monday you still want it on Wednesday; even if you don’t, we live in a society, and you’ll probably cough up the money anyway because that’s what you’re supposed to do. But at some level of volatility things break down. If a stock is really worth $400 on Monday and $20 on Wednesday, there is a risk that a lot of the people who bought it on Monday won’t show up with cash on Wednesday. Something very bad happened to them between Monday and Wednesday; some of them might not have made it. You need to make sure the collateral is sufficient to cover that risk. The more likely it is that a stock will go from $400 to $20, or $20 to $400 for that matter, 6 the more collateral you need.
But I suggest you read the entire thing - it does an excellent job discussing what's going on and showing why the current GME narrative makes no sense.
Honestly I'm not getting it. I understand the case when someone initiated the cash deposit and money are not settled yet, and there is a risk for broker that they will never settle on broker's bank account. But if we are talking about buying GME stock in non-margin account with settled money, what's the risk there?
If people bought stock on 400$ with settled cash, this cash is already on broker's account, so if it worth 20$ on Wednesday and poeple won't show up, what's the problem here?
Brokers even blocked buying GME stock on non margin accounts with settled cash.
edit: typos
You should read the notes, they help answer your questions.
Anyway, 2 points:
1. This is not about margin accounts. When trading on margin, it's RH that's financing you and taking on the risk. That's separate from what the clearing house does. Incidentally, RH did increase margin requirements due to the higher volatility.
2. The problem is RH offers instant settlement. That is, you can use your proceeds from a trade immediately in the apo, before even the trade is settled. That exposes RH, and the clearing house to settlement failures, and that's true regardless if the trade was done on a margin account or not. And that's the risk that clearing houses try to mitigate via asking for collateral.
How about Interactive Brokers case then, or AFAIK TD Ameritrade. They don't offer instant settlement (or may be they do, but the same was applied to settled money). They blocked buying GME stock on nonmargin accounts with settled money. What's the risk for them?
I don't know if the same was applied to RH (blocking GME stock on non margin account with settled money) but what I read is RH even removed GME ticker from the search, so you can't buy it.
edit: from the Bloomberg article you posted: "The trouble on Thursday began around 10 a.m., when after days of turbulence, the DTCC demanded significantly more collateral from member brokers, according to two people familiar with the matter.".
So I have my money settled in my broker's account for months, I'm buying without lending any additional money, why can't my broker show that I have all the collateral needed or even transfer my money?
Am I missing something here? Does it work per broker and not per broker's account maybe? So people with settled cash are affected becasuse of other people doesn't have enough collateral? Or may be because showing/transferring collateral to DTCC is not instantenius?
This is not stuff most people worry about most of the time. Generally if you buy a stock on Monday you still want it on Wednesday; even if you don’t, we live in a society, and you’ll probably cough up the money anyway because that’s what you’re supposed to do. But at some level of volatility things break down. If a stock is really worth $400 on Monday and $20 on Wednesday, there is a risk that a lot of the people who bought it on Monday won’t show up with cash on Wednesday. Something very bad happened to them between Monday and Wednesday; some of them might not have made it. You need to make sure the collateral is sufficient to cover that risk. The more likely it is that a stock will go from $400 to $20, or $20 to $400 for that matter, 6 the more collateral you need.
But I suggest you read the entire thing - it does an excellent job discussing what's going on and showing why the current GME narrative makes no sense.