Text size
Michael M. Santiago / Getty Images
The key inflection point in the
GameStop
sage last month – when brokers suddenly restricted trading in the stock – could have been avoided if the systems designed to settle trades had moved faster, according to Robin Tenud’s Vlad Tenev. Now the CEO of the online broker can at least partially get his wish.
The Depository Trust & Clearing Corporation (DTCC) announced on Wednesday that it expects to shorten the time between a trade and its settlement, known as a settlement, to one day from two. The DTCC is the most powerful clearing house in the market, and serve as a center where buyers and sellers will finalize and record their trades.
Robinhood, which relies on a subsidiary of the DTCC, called the National Securities Clearing Corporation (NSCC) to wipe out its operations, has stopped all buying in shares of GameStop (ticker: GME).
AMC Entertainment
(AMC) and other shares on January 28th. Other brokers have also placed restrictions on some transactions. Shares of the companies affected mostly fell that day and some did not regain their previous highs thereafter. Investors blamed the brokers and especially Robinhood for the move.
Robinhood said he was forced to take drastic action because of the NSCC’s demands for more capital. Brokers must deposit capital with their clearing houses if there is a problem during the clearing process. During the GameStop frenzy, the deposit requirements increased due to the large amounts of shares traded and the leverage used. Robinhood paid $ 124 million on Jan. 25, but the NSCC demanded $ 3 billion on Jan. 28, Tenev said in a testimony before a congressional hearing last week. Tenev eventually dropped its deposit requirement to $ 1.4 billion, but Robinhood’s operations were affected for days, with restrictions on buying and options.
Tenev said during the trial that he thinks the best way to solve this problem is to reduce the time to settlement to zero. “The existing two-day trading period exposes investors and the industry to unnecessary risks and is ripe for change,” he said. The DTCC said it could not comment on the Robinhood episode.
The DTCC has been working for years to shorten the time from trading to establishment – and in 2017 the duration was reduced from three to two days. Managers of DTCC now say that they can reach T + 1 within two years, or complete a trade one day after it has taken place, which could enable the DTCC to lower the margin requirements for brokers and other market participants.
The delay between when a person hits ‘Buy’ on an investment app and the trade that is fully recorded has less to do with technology and more to do with the practice of the industry and risk management. The DTCC says it currently has the technology to move to a one-day or possibly even the same day settlement, but that it strongly depends on the different parties using its system to report.
The delay between trade and settlement also serves a purpose, and the reduction in time can affect other processes. For example, investment firms that trade multiple shares during one day tend to offset those operations at the end of the day. This way, they do not have to go through the same process for each trade. Ensuring that all industries are settled and financed in real time or within a very short period of time is likely to be impossible given the current market dynamics.
The DTCC has experimented with blockchain technology to erase and complete transactions. Some of today’s processes can theoretically be automated under the system, which can store trading data in encrypted files and allow the market players to join the database. But blockchain technology is not fast enough to keep up with current trading volume. The DTCC is working on a prototype of a system called Project Ion, which could one day put the cleaning and finishing on a blockchain.
For now, the DTCC expects to be able to continue with its current technology. One customer already weighs.
“T + 1 is a welcome stepping stone for real-time settlement,” Tenev said in response to the DTCC announcement. “We look forward to working with lawmakers, regulators and the industry to make this happen.”
Write to Avi Salzman at [email protected]