Ole Fart Reality Room

[BigBake1]

I cannot find the notice for this but here is good synopsis explaining the deposits required by settling firms to trade illiquid stock.

The NSCC imposes that deposit requirement to clearing firms when a trade size exceeds 25% of 20-day ADV, "as a way to limit settlement risks" (whaaaat?), however the NSCC itself doesn't limit tradeable order sizes.
The deposit is then wired by clearing firms to the NSCC and the money is returned back to the clearing firm when the trade settles at T+3.

The amount of the requirement on subbies pretty much gets out of whack: here are a couple examples:

120,000 share trade @ $0.008 => NSCC deposit requirement of (($0.01x120,000)-($0.008x120_000)) => $1200-$960 = $240. Not much at all, right? Here comes the funny stuff...

10,000,000 share trade @ $0.0001 => NSCC deposit requirement of (($0.01x10,000,000)-($0.0001*10,000,000)) => $100,000-$1,000 = $99,000. The pain!!!

That is, $99,000 has to be wired by the clearing firm to be able to settle a trade worth $1,000! Since those funds are tied for 3 days (T+3) the chunk the brokerage misses on interest revenue of the funds they wire can be considerable. In the above example, at a 10% interest rate, they'd miss (3/365)*0.1*$99,000 = $81.

However Penson, rather than skipping those costs (like eTrade, Scotty and Fidelity do) or charging 'em as an extra fee to customers, they opted by limiting trade size to 10%-20 day ADV and rejecting online orders whose size is greater than that. They also imposed also a buy-in rule where if the NSCC deposit requirement exceeded $50,000, the shares would be bought in at T+1 in the customer account at the current market price of the stock (wouldn't that be unauthorized trading??!!, SEC where are you??!!)

The author misses the point at the end, there is nothing illegal about Penson's risk department adding to the NSCC requirements, they just cannot take away the risk. Each clearing firm has to do their own risk assessment and determine if they add additional measures to protect against riskier investments.