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       CNN | 4/11/2021 | Listen
       This change could help keep the GameStop fiasco from happening again
       By Clare Duffy, CNN BusinessUpdated: Thu, 25 Feb 2021 19:47:47
       GMTSource: CNN Business
       
       Part of what made last month's GameStop trading frenzy such a
       mess: Right as the stock was hitting its peak, Robinhood and other
       brokerages placed restrictions on traders' ability to buy it (and
       other surging "meme" stocks like AMC). 
       
       Traders were furious and some have filed lawsuits. Lawmakers ranging
       from Representative Alexandria Ocasio Cortez to Senator Ted Cruz were
       also concerned — the trading restrictions are among the reasons why
       Robinhood CEO Vlad Tenev was called to appear in a congressional
       hearing about the debacle earlier this month. 
       
       Many said the episode demonstrated that individual retail investors are
       at a disadvantage compared to hedge funds and other large Wall Street
       institutions. 
       
       Now, clearing firm The Depository Trust and Clearing Corporation (DTCC)
       — which provides, basically, underlying infrastructure for equities
       markets — has proposed shortening the settlement cycle for stock
       trades, which would reduce the likelihood of brokerages having to
       restrict trading during future periods of volatility. 
       
       To understand why this change would help, it's useful to look back
       at what went wrong last month. 
       
       Why Robinhood restricted trading 
       
       As soon as a trader presses "buy" on a stock on Robinhood,
       that stock appears in their portfolio. But they actually don't own
       it yet — there is a two-day stock settlement period (referred to as
       "T+2") before that purchase is finalized. 
       
       During that time, Robinhood (or another brokerage) must make a deposit
       to a clearinghouse to account for any risks that could occur during
       that two-day period. To protect investors, regulators require
       brokerages to keep a certain amount of capital on hand. The greater the
       volatility in trading, and thus the greater the risk, the larger that
       deposit has to be. 
       
       That's why, during the GameStop surge, Tenev received a 3:30 a.m.
       phone call on January 28 from Robinhood's clearinghouse asking the
       free trading app to put up a staggering $3 billion, which the CEO has
       said was "an order of magnitude" larger than its normal
       deposits. 
       
       Robinhood implemented the buying restrictions that day to help reduce
       volatility, risk and the need for such a massive deposit. Hours later,
       it raised $1 billion, signaling a cash crunch as it sought to meet the
       deposit requirements. Ultimately, Tenev has said the Robinhood team was
       able to persuade the clearinghouse to lower its capital request from $3
       billion to $1.4 billion.
       
       "We had no choice in this case," Tenev told Tesla boss Elon
       Musk in an interview on Clubhouse earlier this month. "We had to
       conform to our regulatory requirements."
       
       Shortening settlement cycles 
       
       Experts say cutting down the time between when someone initiates a buy
       and when that transaction is settled would reduce risk and the need for
       such large cash deposits. That would make it less likely that
       brokerages would have to take risk-mitigating steps like restricting
       buying in the future. 
       
       In the days following the GameStop chaos, Tenev wrote a blog post
       calling for the end of two-day settlements. 
       
       "The existing two-day period to settle trades exposes investors
       and the industry to unnecessary risk and is ripe for change,"
       Tenev said. "There is no reason why the greatest financial system
       the world has ever seen cannot settle trades in real time. Doing so
       would greatly mitigate the risk that such processing poses." 
       
       On Wednesday, DTCC, the clearing firm, laid out a two-year roadmap for
       reducing the settlement cycle from two days to one, a process it agrees
       would lead to cost savings, reduced market risk and lower deposit
       requirements. It also explained a number of reasons why making the
       settlement process real-time would be tricky, including the likelihood
       of more "failed" transactions. 
       
       The firm says there is growing desire among market participants for
       such a change.
       
       The settlement cycle was last shortened in 2017, when it moved from
       three days (T+3) to two days (T+2). 
       
       By the end of March, DTCC anticipates having completed development of a
       prototype for a one-day settlement system, and it hopes that industry
       players and regulators can officially make the switch to T+1 by 2023. 
       
       "We remain committed to working with the industry, regulators and
       key stakeholders to shape the future of clearance systems and all the
       exciting possibilities they could bring — from reduced risk and
       costs, to improved business resilience and increased operational
       efficiencies," DTCC Managing Director Michael McClain said in a
       statement. 
       
       The pressure may be on now as GameStop and other meme stocks appear to
       be on the rise again. GameStop had risen about 65% midday Thursday
       after closing Wednesday up nearly 104%. Koss, another company popular
       with Redditors, climbed nearly 47% Thursday.
       
       
       
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