Trading On margin

Will Gamestop Frenzy Change Stock Markets? SEC releases report on market conditions in early 2021

Less than a year ago, in January 2021, GameStop Corp. – GME made national headlines when its stock price fell from less than $ 19 on December 31, 2020 to $ 325 a share on January 29, 2021. The increase in the company’s share price in The difficulty was in large part because of retail investors (who shared investment advice on social media platforms like Reddit) buying the stock to force a “short squeeze” on hedge funds that had heavily shorted GME. Amid soaring prices and volatility, Robinhood (the broker through which many retail investors traded) suspended trading in GME.

The inability of retail traders to execute their GME transactions through Robinhood has led to significant negative media coverage and even Congressional hearings. In October 2021, SEC staff also intervened by releasing their report on GME and “same stock” events. Among others, the report commented on: digital engagement practices of brokers; payment of the order flow; sale of transactions to market makers; and the dynamics of short selling.

But the report also drew attention to a lesser-known but crucial trigger for the January events: The National Securities Clearing Corporation’s high margin appeals to member clearing houses, like Robinhood. In January 2021, the NSCC asked Robinhood to pay a $ 1 billion margin call, or face potential liquidation through the Securities Investor Protection Corporation (SIPC). According to the report, the events of January 2021 “raises questions about the possible effects of sharp margin calls on smaller-cap brokers and other ways to reduce their risk. “

Now that we have had time to digest the report, we need to pay close attention to any possible changes to the rules regarding order flow payment, the way brokers design their apps to encourage trading, margin calls. on clearing companies and NSCC’s shortening of settlement cycles.

This episode … raises questions about the possible effects of sharp margin calls on smaller-capitalized brokers and other ways to reduce their risk.…

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