LEE KRAMER'S ROOM: With Views

[ergo sum]

As the trading mania grew, the financial system’s risk reduction mechanisms — managed by obscure entities at the center of the stock market called clearinghouses — kicked in on Thursday, forcing Robinhood to find emergency cash to continue to be able to trade. It had to stop customers from buying a number of heavily traded stocks and draw on a more than $500 million bank line of credit. On Thursday night, the company also took an emergency infusion of more than $1 billion from its existing investors.

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After Robinhood limited some trading on Thursday and the price of the stock plunged, furious users flooded online app stores with vitriolic reviews, with some accusing Robinhood of doing the bidding of Wall Street. Others sued the company for the losses they sustained. Robinhood’s continuing vulnerability, even after raising $1 billion, became clear on Friday when it restricted trading in more than 50 stocks.
“It was not because we wanted to stop people from buying these stocks,” Robinhood said in a blog post on Friday night. Rather, the start-up said, it restricted buying in volatile stocks so that it could “comfortably” meet deposit requirements imposed by its clearinghouses, which it noted had increased tenfold during the week.

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One institution that tripped up Robinhood this past week is a clearinghouse called the Depository Trust & Clearing Corporation. Owned by its member financial institutions including Robinhood, the D.T.C.C. clears and settles most stock trading, essentially making sure that the money and the shares end up in the right hands. (Options trades are cleared by another entity.)

But the D.T.C.C.’s role is more than just clerical. Clearinghouses are supposed to help insulate a particular market from extreme risks, by making sure that if a single financial player goes broke, it doesn’t create contagion. To do its job, the D.T.C.C. requires its members to keep a cushion of cash that can be put toward stabilizing the system if needed. And when stocks are swinging wildly or there’s a flurry of trading, the size of the cushion it demands from each member — known as a margin call — can grow on short notice.

That’s what happened on Thursday morning. The D.T.C.C. notified its member firms that the total cushion, which was then $26 billion, needed to grow to $33.5 billion — within hours. Because Robinhood customers were responsible for so much trading, they were responsible for footing a significant portion of the bill.

The D.T.C.C.’s demand is not negotiable.

https://www.nytimes.com/2021/01/30/business/robinhood-wall-street-gamestop.html?action=click&module=Top%20Stories&pgtype=Homepage