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Broker action surrounding GME etc on Jan-2021

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Hey Boomer,
I hear what you are saying, but truly think your perspective is skewered. As you say "you are not saying this is right or wrong".
I am saying, in my loudest voice, with my lungs burning, "THIS IS WRONG".

well, yes. much of what i’m hearing and reading around the web sounds wrong to me. like @ckessel post just above...like, really? if you have shares why can’t you hedge. same as if you have the cash, why can’t i buy a put or a call. the risk is only the premium paid. even if it auto-exercised the broker can take it over and liquidate it should i not have the cost of exercise. some of this stuff sounds like it’s either systems failure or lack of control/functionality within their systems. so the only solution is a blanket solution. a sledgehammer approach to fix one problem but manage to screw another set of issues up.
 
and further, with the increase in volatility and option volume comes margin and capital requirements...then that opens possibility for capital drain/drought at given firm. funds must be committed for requirements at clearing houses that would otherwise be used for other core parts of business (cleraring and settlement, stock loan, regulatory customer reserves, treasury financing, fx, etc) to have to commit an outsized amount of capital to an undersized return on that capital on behalf of a bunch of what would otherwise be ignored basket of stocks is not something any broker/firm wants to deal with when we could potentially be at the beginning of something potentially very bad

...if you believe all the tweets and stories from today then some major pain is coming. if that stuff is just hearsay, then probably nothing will happen except traders like us lose opportunity and some get really burned

- please everyone here dont be on the wrong end of this
This is a fair warning, I am thinking about what’s my risks there and how to mitigate.

I am starting to transfer cash(shame on me to have cash) to bank account.

I believe stocks are safe even if broker goes belly up those shares are still mine.

Options I am not sure, but I heard there is some kind of insurance with a upper limit, cannot remember how much and what it covers.

Care to correct me if I’m wrong?
 
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Couldn't care less about Gamestonk, but this is wrong. Would participate in a class action for the first time ever, but never owned any of those stocks. And hear me out - it is the same line of "we screw you for your own safety" that accelerated dramatically with COVID discussions, then moved to political issues and now will be used more and more everywhere because it works so well.
 
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This is a fair warning, I am thinking about what’s my risks there and how to mitigate.

I am starting to transfer cash(shame on me to have cash) to bank account.

I believe stocks are safe even if broker goes belly up those shares are still mine.

Options I am not sure, but I heard there is some kind of insurance with a upper limit, cannot remember how much and what it covers.

Care to correct me if I’m wrong?

good question. i’m not sure what happens to your positions if a broker goes poof

first, i imagine it’ll be impossible to trade or transfer out until someone picks through the scraps and assumes the customer base of accounts. that could be days/weeks???

not sure about upper limits insurance. if you’re talking about sipc insurance not sure if that applies to all stock, cash, options, etc

i mean, the fact that brokers are burning us on the trading opportunities..you’d hope it means they continue as an entity...but you’re right to think DR scenario i guess. i have acct at fidelity to transfer positions to should ib tank. and then vice versa should fidelity. although 401k would have to go elsewhere
 
Couldn't care less about Gamestonk, but this is wrong. Would participate in a class action for the first time ever, but never owned any of those stocks. And hear me out - it is the same line of "we screw you for your own safety" that accelerated dramatically with COVID discussions, then moved to political issues and now will be used more and more everywhere because it works so well.

if the craft works, apply it to other scenarios and repeat until exhausted
 
upload_2021-1-28_22-2-17.png
 
they are not supposed

Which is why I foresee some market reforms coming. And why I'm going to contribute to making those reforms happen. At minimum, we can all contact our representatives. I also encourage everybody to make it clear that you're also going to be providing feedback to your opposition party(s) along the same lines, and that this is important enough to be an important driver to your future voting choices (I plan to tell them that this has effectively turned me into a single issue voter, as this percolates out and puts into question all of the foundations of our country).

https://twitter.com/IBKR/status/1354913175918047234

Apparently IBKR has "implemented" similar controls on their accounts. Including cash accounts, as per the comment section

Great info. IBKR is in this mess because they weren't sufficiently aggressive about increasing their margin requirements. Even with the settlement info provided later, they could still have done a better job of protecting themselves. Same with Robinhood.


and further, with the increase in volatility and option volume comes margin and capital requirements...then that opens possibility for capital drain/drought at given firm. funds must be committed for requirements at clearing houses that would otherwise be used for other core parts of business (cleraring and settlement, stock loan, regulatory customer reserves, treasury financing, fx, etc) to have to commit an outsized amount of capital to an undersized return on that capital on behalf of a bunch of what would otherwise be ignored basket of stocks is not something any broker/firm wants to deal with when we could potentially be at the beginning of something potentially very bad

Or very good (well - given that the markets survive something very bad and immediate).

The good in this situation is that the cockroaches are out in the open, whether is bad actors in particular, or bad regulation and enforcement (which I also use to covered the market makers that are supposed to be neutral). And they're out in such a way that anybody and everybody can be helped to understand whether actively participate in the stock market as well, including in such a way that they can be rallied to get involved (at least a little bit - all we really need are enough polls tells the current politicians this is there last trip around the merry-go-round, and this will get done).

I THINK that the primary, and possibly only, change that is needed is to restore the previous implementation of the uptick rule - all the time, all securities. (Plus brokerages doing a better job of managing their margin requirements - mostly be expanding the margin range, and being more aggressive about pushing individual issues to 100% margin on long stock, and higher margin requirements on short stock positions).

Couldn't care less about Gamestonk, but this is wrong. Would participate in a class action for the first time ever, but never owned any of those stocks

I'm the same except that I established a small (100 share, $30k) position earlier this week. I was mostly thinking about taking advantage of the overall investment thesis that wsb has been using and I wanted to get me some of that action.

Now that this has happened I am retaining that position, specifically so that I have skin-in-the-game around the resolution. It's a small amount - not as small as Chamath's position relatively to overall portfolio, but small nonetheless.


That's a great pile of into. The description of the settlement process you have there looks to me like something that is ripe for technology disruption. There's no reason for settlement to take more than a few minutes. That's a series of standard API calls - keep the current layering in the industry with the different participants having different rules and mechanisms for being paid.

Turn all of that mess into automated interactions via those providers using standardized API calls, and this 2 day settlement window / grief goes away.
 
We need a LTSE backed by blockchains.
Stocks will be the new currency, think about it, seems to be able to solve a big problem called wall street.

Maybe that's the real functional use of blockchain technology that will bring it into widespread use, and transform it from a niche thing that many people can't / don't grok, and into something that will finally take off and start getting into more and more industries.

I don't have an in with any of the blockchain communities or infrastructure.


I suspect that if somebody can settle transactions fast and securely; there have been hacks previously, so open sourcing that technology and using transparency and the free labor by many motivated programmers to stress it, will be important to establishing the security (which will also be better security than the current settlement process, I'm sure). Once the background is established, we just need a few brokers on board with it (so that the details are hidden away in the back office -we'd just know that we trust trading through that infrastructure better than any others.

And THEN Elon and Tesla could be brought on board and insist that TSLA be transacted in that infrastructure. Beyond Elon and his public company(s), I bet Chamath would bring all of his companies, and future SPACs, over. Somewhere pretty quickly, all of the high tech industry will be faced with a conundrum, and will need to come over.

And high tech is such a high component of the economy, the whole stock market will need to make the switch. Of course the Shortseller Enrichment Commission might also make it a requirement (who am I kidding).
 
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Ameritrade did the crap as Robinhood. I have BB stock and tried to sell a covered call against it and they won't let me. I want to take advantage of the IV, the premiums are good. Ameritrade is literally denying me about $4 a share in IV premiums I could have collected today. Thousands of dollars, basically stolen from me by Ameritrade. I have the damn shares. If the stock went nuts, they get to turn around and give them to whoever bought the call. Maddening.

Nearly every broker is in on the fix, so I'm not sure taking my business elsewhere is even possible. Particularly since thinkorswim is a really nice interface for trading.

I think Schwab, Fidelity and Vanguard were ok..

All the others seemed to have placed restrictions on GME, AMC, NOK, BB +
 
below is a general overview of market participants, and how trading, clearing, and settlement works. I see many in my travels that don’t have a clear idea what happens after they enter an order, or who or what entity is responsible for each function in the marketplace - so hopefully this will shed some light on the process - but feel free to skip, or feel free to dive in and question or discuss

I don’t know and wont list the a -> z of every step or wrinkle in the process…but this is intended to provide a better understanding of the workflow. there are literally volumes of books about this (after the trade is made is a nice one) ..so while this post will be skipped by many (i understand it seems long and boring), so i wont be offended
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market participants:
  • Exploring the Differences Between a Broker and a Market Maker
  • There are many different players that take part in the market. These include buyers, sellers, dealers, brokers, and market makers. Some help to facilitate sales between two parties, while others help create liquidity or the availability to buy and sell in the market. A broker makes money by bringing together assets to buyers and sellers. On the other hand, a market maker helps create a market for investors to buy or sell securities. In this article, we'll outline the differences between brokers and market makers. See link for more general detail
  • brokers are intermediaries – they are generally a passthru, and there are regulatory requirements to ensure they don’t hold prop positions, especially in the brokerage entity which is supposed to be solely the customer holdings
  • A market maker can sometimes also be a broker, which can create an incentive for a broker to recommend securities for which the firm also makes a market. Investors should thus perform due diligence to make sure that there is a clear separation between a broker and a market maker.
  • Its important to note that clearing house and depository participants could be made up of brokers, investment banks, market makers, prop trading firm, etc, etc…all the market participants..depending on who self-clears and who uses a clearing broker or prime broker to do their backoffice business
  • What Is a Clearinghouse?
  • A clearinghouse is a designated intermediary between a buyer and seller in a financial market. The clearinghouse validates and finalizes the transaction, ensuring that both the buyer and the seller honor their contractual obligations. A depository is exactly what it sounds like…its where all the US settled stock sits. However, for example, OCC (Options clearing corp) is actually both clearing house and depository for US options. Where for US stock, you have NSCC for clearing and DTCC for settlement.
  • Clearing house participants are all obligated to pay for the securities and instruments they trade, settle, and clear, as are depository participants. Normally its mark to market.
  • During elevated levels of volatility, the clearing house (and/or its board – which is made up of representatives of its participants) may raise the margin requirement across the board if its market related volatility. Or they could require it for certain securities or baskets of securities.
    • So instead of broker or other market participant pledging 1bb in capital to ‘clear’ your days trades, you may have to put up 1.25b instead, or even 1.75bb as a. that’s a significant deviation.
    • If, by some disaster, one of the participants explodes, the others are liable, in theory.
    • But in turmoil, they all know that its unlikely only 1 would explode…considering the prop arms of many of these banks use the same techniques to squeeze every penny out of the market.
    • That’s why 2008 wouldn’t have ended with just JPM, GS, BoA picking up the slack for everyone else…they all would have gone down without intervention. So the idea that shared responsibility is better than 2008, but kinda more like a drop in the ocean in reality, in my opinion.
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For US Stock trading, clearing, settlement – think of the process in 3 phases

Execution – buyer and seller agreeing on price to exchange the security or instrument, whether directly or through intermediaries like introducing brokers or prime brokers, for example
  • This is very simple and general…there could be scores of explanations about how orders are handled, where they are routed and executed, etc. not getting into that here, most generally know hoe to buy a stock or option, and know whether they get it at a ‘fair’ price
Centralized Clearing
  • Who – National Securities Clearing Corporation (NSCC)
  • Function - Perform the act of netting the trades/obligations across market participants (brokers, banks, etc, any market participant that is a centralized clearing participant, which is mainly everyone – for simplicity and reasons explained here: Introduction to National Securities Clearing Corporation (NSCC)) , posting the margin required to ‘settle’ the trades, recording and reporting to participants
  • Both net Short and Net long participants for the day are reported, with the collateral required to settle the positions, this is called CNS – Continuous Net Settlement
  • Through the CNS process, the net long and short for each security are determined
  • The totals, or ‘net’ can have different outcomes
  • You can have the long net stock prepare to be settled at the depository (below)
  • Or it can become a CNS Fail (cns will net fail to receive from some participants and net fail to deliver to other participants), CNS remains the central counterparty to the deliver/receive obligation
  • Or CNS ‘kicks out the fails to individual failing participants in the form of a B2B fail…the short fails to deliver to the long…the short FTD (fail to deliver) to long which is FTR (fail to receive) from the short…CNS is ‘out of the mix’
  • There are FINRA rules as to how fails are tolerated, whether CNS fail or B2B fail
  • Generally the FTR participant must ‘buy in’ the FTD participant (albeit slightly different tolerances/guidelines for CNS vs. B2B)
  • Additionally, as lodger (@Artful Dodger) has highlighted on a number of occasions, there are different rules for certain participants. These exceptions to the above rules are guised in the ‘need to maintain efficient markets and liquidity’
  • Despite the above, in the simplest of transactions, a large % of long stock are ‘settled’ at the depository, while a small % end in CNS FTR or B2B FTR
Settlement
  • Who – Depository Trust and Clearing Corp (DTCC)
  • Function – post settlement based upon NSCC tracking of prior day T+1 reporting to all market participants (same as above, they are NSCC and DTCC participants)
  • Post settlement means only long stock settlement, credit the net long stock to participant accounts and debit the $ to pay for the settlement of the stock
  • DTCC does not settle short stock – that would be illogical, shorts are handled in the netting that occurs at NSCC through the settlement cycle…as described above
  • Handle B2B and SLB transactions/‘settlements’, pledges and financing transactions…
  • where broker/participant manage segregation of customer ‘fully paid’ shares versus margin/excess free shares
  • The broker must segregate fully paid shares, and NOT allow use of those shares for lending or financing/pledging, period…the cardinal rule of brokerage business, dont touch customer owned funds/securities
  • This is important because shares are held in omnibus account on behalf of participant, so the DTCC position will be the minimum of total customer segged long position
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Example: if a broker has 5 customers, (ill stick with settled position, because trade vs settled will get more involved with what is going on in stock record and segregation)

1. A is long 500 shares of aapl bought with cash
2. B is long 100 shares of aapl bought with some cash and some margin
3. C is long 250 shares of appl bought with full margin
4. D is short 100 shares aapl
5. E is short 150 shares of apple

Internally at the broker/market participant:

Cust Side Stock Record
Customer | Position (trade) | Position (settled) | Segregation
A | 500 | 500 | 500
B | 100 | 100 | 50
C | 250 | 250 | 0
D | -100 | -100 | 0
E | -150 | -150 | 0

Firm Side Stock Record:
Account | position |
Borrow | 0 |
DTCC.Free | -600 |
Net cust/firm | 0 |

Externally at DTCC :
total position | 600 |
of which segged | 550 |
of which free excess | 50 |

Point being, the broker can use the margin long shares to ‘cover’ the customer short shares, until the long sells, at which point it has to borrow from a counterpart to cover the short customers. If it cannot borrow, it has a deadline to borrow, otherwise execute a buy-in of those shorts

The buy in, is actually a buy…the buy trade passes through NSCC and CNS like any other buy of stock, and can result in settlement at DTCC or a CNS fail, or a B2B fail, repeating the cycle and resetting the timeline…so yes, you can play the short game in legitimate fashion (not counting the MM exception rules) if you can ‘afford’ to risk buy-ins at unfavorable prices, and high interest rates on borrows. This is unlikely to be equitable. The MM exception rules, allow for, at least from our general POV, the 'recycling' practice to be more favorable…given what we witness in the marketplace and how that practice seemingly manifests itself in stock price action – although hard to prove
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Practical trade example from start to finish:
  • customer enters an order to buy 100 shares of AAPL, they have 14,000 in cash or collateral/account equity to fully pay for the stock purchase
  • the broker handles the order
    • reviews the order against the market price of the security or instrument, the customer cash or equity, or if they have the available margin
    • for margin, they weigh the cost of the trade plus any individual margin requirement – some stocks may have an increased margin requirement due to volatility or liquidity
    • in combination, they weigh the cost of the trade versus the customer’s account, or portfolio, based upon RegT or Portfolio Margin scheme, whatever the customer account is set up for
    • also, for example, if the customer account is heavily weighted in ‘risky’ equities or if it has a concentration in a specific stock or basket of stocks, there may be a haircut to the margin that’s extended to that account
  • the order is then routed to the ‘marketplace’
  • could be direct to exchanges
  • could be crossed with another order internally that has the same limits but opposite side of the trade
  • could be to liquidity provider or market maker like Citadel, Wolverine, et.al
  • all of these require ‘reporting to the tape’, meaning that its reported to NSCC (Natl Sec Clr Corp)
    • an exception is ‘dark pool’ trades which may not be subject to tape reporting
  • once executed and reported, for stock - on T (Trade Date) NSCC consumes all the reported street trades from electronic brokers, introducing brokers, mainstream exchanges, ECNs, liquidity pools, whatever you want to call the collective ‘market’
  • on T+1 NSCC reports the total net activity in each security to each market participant, the expected settlement for the next day (T+2, or S/D – Settle Date)
  • on T+2 the 100 share buy settles within the collective net long of the brokers omnibus position at DTCC
  • since the 100 shares was not bought using margin, it is segregate at DTCC, and cannot be used to finance or loan or any broker activity
    • on top of this, if the customer goes and does some other trading and exceeds into broker margin, the broker runs this margin requirement daily..so just because its fully paid and segregated today, doesn’t mean it will be tomorrow.
    • If the customer never enters into margin, then it will always be fully paid and segged
      • Only exception is the customer voluntarily chooses to enter into agreement to lend their fully paid shares, then the broker can loan the shares out
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There is so much more in each topic point to understand…and we could go on for weeks discussing..but hopefully this gives a bit more clarity on the process, which may help us determine where the breakdown is in future issues we come across.
 
Fractional share trading, OK. Crypto??? Not as an intro to the markets!
My kids have been following & learning about Cryptos the last 4 years when I first started buying, they have been exposed to equities & real estate since they were toddlers so they are well prepared for the financial & emotional rollercoaster that comes with investing.

So far looks like Webull - Investing in Stocks, Trading, Online Broker and Research the Market is a good alternative to RH.
 
My kids have been following & learning about Cryptos the last 4 years when I first started buying, they have been exposed to equities & real estate since they were toddlers so they are well prepared for the financial & emotional rollercoaster that comes with investing.

So far looks like Webull - Investing in Stocks, Trading, Online Broker and Research the Market is a good alternative to RH.
I get scared off by their 'free 4 stocks when you sign up and add funds to the account' marketing.
 
I get scared off by their 'free 4 stocks when you sign up and add funds to the account' marketing.
4 free stocks is nothing.

The competition for assets is fierce, brokerage firms will pay large cash bones for new accounts with large balances, a few years back I transferred from Fidelity to TDA & was surprised at the cash & other rewards being offered that weren't advertised.
 
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Ameritrade did the crap as Robinhood. I have BB stock and tried to sell a covered call against it and they won't let me. I want to take advantage of the IV, the premiums are good. Ameritrade is literally denying me about $4 a share in IV premiums I could have collected today. Thousands of dollars, basically stolen from me by Ameritrade. I have the damn shares. If the stock went nuts, they get to turn around and give them to whoever bought the call. Maddening.

Nearly every broker is in on the fix, so I'm not sure taking my business elsewhere is even possible. Particularly since thinkorswim is a really nice interface for trading.

They still won't let me sell covered calls on BB. BB has tanked lately and selling those covered calls would have made up for a large percentage of those losses. It's part of why I wasn't concerned it might be bubble-ish because covered calls would protect my downside. I'm incredibly pissed at TD Ameritrade. Fortunately, BB was a small position so overall it doesn't hurt me, but...grrr...

I can sell covered calls if I get the broker on the phone, which is damn near impossible right now due to the GME fallout. If there is a class action against Ameritrade, I'll sign on. Their BB restrictions over the last week created real losses for me.
 
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