What are the odds of a flash crash in the next week as a result of this activity? The system of banks and market makers and clearing houses is a always way more coupled than the the owners let on... history shows they don't know how to risk manage these sorts of situations.
Newest from the front lines, Freetrade (UK trading app) just blocked buy orders for US stocks... but they explicitly pin it on "a sudden and unexpected decision by our FX provider, and their bank"[0]. In another statement, they also express their deep unhappiness about it[1].
Assuming they're being honest - and I see no reason to doubt it - it's refreshing, compared to Robin Hood's communications, and more importantly it highlights your point. The "backend" of the market seems way more coupled than I imagined it is.
> The "backend" of the market seems way more coupled than I imagined it is.
Exactly. Overlay this on the backdrop of a frothy, juiced up market and a bunch of angry people on their phones (I bought a few GME out of spite at $360 after considering it way back at $15)... one little push could cause the market to throw a rod, I feel. These people run the system at max RPM with minimal oil as it is.
Corrobating on this, same thing happened on my side that all US financial products (apart from regular deposits, cheque (or check?) and loans including credit cards) were suspended "beyond our control", so there is some action taken by US-based fincacial companies due to this (either because of laziness or genuine worry that they might be punished).
Nota bene: I do hold some Nokia stocks, but it is from (Nasdaq) Helsinki and not from NYSE and it was already in my possesion waay before these brouhaha. I don't hold any other stocks that were affected, including stocks for GameStop.
From a distance, this is all a storm in a teacup. It's a small handful of stocks, and every single one in S&P500 is waaaay bigger, in terms of trading volumes and market cap.
Anything can happen, but in finance terms, this is tiny so far.
The issue isn't GME market cap vs the S&P 500. It's that the clearing houses, exchanges and other intermediaries that guarantee every trade may go bankrupt due to the $15+ billion loss on options that they may have to cover.
I'd be very worried about Robin Hood's solvency, since they let people trade on margins, and retail investors are presumably difficult to get debts out from. I seriously doubt they underwrite their own options, more likely they just sell some broker's options.
Otherwise... sure some funds might lose a lot of money. But a lot of money for a fund (and it's investors). I wouldn't say we're seeing anything like systemic risk. If nothing else, Redditors' pockets are only so deep, and there's only so much meme stocks they can buy.
So where does it leave us? Perhaps Robin Hood might go under (though it looks like they learnt their lesson and got some cash, so maybe not). Some funds went under, and maybe some other will too. But generally, funds are not major systemic risk. They are speculative money. It's been going on for long enough that clearing houses requested the higher margins already. I don't think banks have any real skin in this game.
What was so terrible about 2008 financial crash, from the technocratic point of view, was that it was banks that were affected, and they are, among other things, the very plumbing of the financial system we all depend on.
Of course life can prove me wrong :) but I'm not remotely worried atm.
Clearing houses cover any shortage of money due to one party not paying up. So if someone sells an option on an exchange, then doesn't pony up, the clearing house must. And if too many people don't pony up, the clearing house is in trouble.
Except it is far more complicated. Does Robin Hood allow the selling options? That would seem ridiculously stupid if it does, but let's say yes. The clearing house has nothing to do with the seller, or in fact probably with Robin Hood. It will be dealing with Robin Hood's dealer, probably a big bank (think JP Morgan or the like), and there's a cascade of who-owes-who.
Robin Hood clients ought to pay to Robin Hood if they owe money on short options, but if they fail, then Robin Hood must cover that to the broker. The broker wants to make sure it doesn't lose any money on trading with Robin Hood, because if it does, it still needs to make good to the exchange. And only if the broker fails, then the clearing house gets involved.
If you can only buy options on Robin Hood (or, in any case, cannot be short), then there isn't much of an issue there. The issue would arise if the broker cannot pay the option payouts, but that's very unlikely. Banks deal with option trading all the time, and spend lots of money on hedging their exposure to the underlying stock. This is essentially a solved problem, and the scale of what's going on is way too small to stress that.
Let's say you are buying an option contract on an exchange. You don't know who is selling to you and whether they can actually pay you when the time comes. In order to solve this issue, intermediates act as a guarantor of all transactions allowing investors to treat each seller the same. This lets investors only care about price instead of "who".
I am not an expert, I only have very surface knowledge and don't know the exact chain of intermediaries for each market but I know one such guarantor is the Chicago mercantile exchange.
> On Thursday, Robinhood was forced to stop customers from buying a number of stocks like GameStop that were heavily traded this week. To continue operating, it drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin, or lending, requirements from its central clearing facility for stock trades, known as the Depository Trust & Clearing Corporation.
Because of the volatility of the stock, I believe. 100->300->200->300 in the space of no time at all. You could've watched the stock just jump all over the place in real-time, pretty much.
What's small for the whole market isn't necessarily small for Robin Hood.
It's not out of the question that Robin Hood could go under as a result of these shenanigans. Just very unlikely that would trigger any serious fallout downwind.
It's down to minutiae in the collateral brokers have to post to ensure that the clearing house doesn't eat losses. Trades on Wednesday aren't settled until Friday, so if a brokerage firm dies in the interim they have an obligation to complete a bunch of trades that they might not have cash for, and unwinding that exposes counterparties to the price moves in the interim. RH users have been buying a lot of meme stocks that move a lot in price, so they have to put up vast amounts of funds to ensure that nobody else suffers losses if they were to back out of the unsettled trades.
I’d be very careful about making this assumption. There is always bleed over in unexpected ways. When these stocks spiked on Wednesday the market as a whole came down hard. Perception is extremely important and if people start to fear that brokerages could be insolvent or just lose faith in the valuations of stocks as a whole it could definitely effect the entire market.
I follow the markets, and the market does a hard mini-crash about once every two weeks. You don't notice it as a buy-and-hold investor, but it raises the hackles of many short-term traders.
Barely more than zero because there are market circuit breakers now and broker dealers are supposed to be limiting order flow so that HFTs can't be submitting huge numbers of orders that are massively far away from what the security is trading at. Of course some broker dealers play much faster and looser than others but if shit really hits the fan the circuit breaker catches it.
The last giant crash was triggered by a single party (Bear Stearns) running out of credit. Do not underestimate the events that could follow if this volatility destabilizes a large market participant.
That was the point of my original post. Not that current events are comparable to historical events as far as the mechanism of crisis is concerned... but that stresses like the ones today have a way of uncovering new and interesting failure modes which people collectively wrote off as unlikely.
There's definitely going to be some impact on other stocks, as at the very least, retail trading apps overcompensate and block buys on other stocks (including Freetrade for all the US stocks right now). Hard to quantify the magnitude of the impact, though.
