Didn’t believe I have the 4th blog on the recent stock price surge in GameStop, etc.
But here are 3 things to say.
1/ Platform restrictions
Yesterday, some restrictions were put on those stocks by TD Ameritrade and Charles Schwab (also owns TD Ameritrade; acquisition announced in Nov 2019). Robinhood also increased margin requirement on those stock to 100%.
Today, nearly all major stock trading platforms put restrictions on those stocks. Robinhood, notably, won’t show search result for those tickers/companies and only allow order to sell those position, including GME, AMC, KOSS, BBBY, BB, NOK, EXPR, etc.
Robinhood is under the spotlight, for its name and its innovation and mission to democratize investing. (See Robinhood CEO interview video at the end)
2/ Options that are still in play
I did a little excel calculation, only for call options that expire tomorrow (Jan 29), Feb 19, March 19 and April 16.
If GameStop closes at $300 tomorrow, and assuming all future calls are settled – the call options’ net value would be about $4.4 billion in total, and ~$1.7 billion for Jan 29 options alone.
What’s more crazy – the underlying stock count for those in-the-money call options expiring tomorrow are close to 10 million shares or 19% of the floating.
If GME closes at $200 tomorrow, those call options are worth $2.2 billion at least.
If GME closes at $400 tomorrow, those call options are worth $6.7 billion at least.
And there are more call options in other dates.
3/ Who is broke (don’t know)
In interviews and articles by brokers, (Robinhood, Webull, Interactive Brokers, etc.), they talked about clearing house requirement, etc.
It could also be the counter-party risk from the other side of those call options – as the Interactive Brokers Chairman said “so if there are $10-15 billion loss in there, somebody has to pay them. will they be able to pay is a big question”.
Don’t think people want to see some market makers or brokers or investment banks broke.
But – guess someone is or might be broke.
Robinhood CEO Vlad Tenev defends the company’s decision to limit trading on some symbols following the GameStop stock chaos, saying they must “prudently manage the risk and the deposit requirements.” pic.twitter.com/z2Ar8d9YX1
— Christopher C. Cuomo (@ChrisCuomo) January 29, 2021
Robinhood CEO interview
Some further reading…
ANTHONY DENIER: Well, it wasn’t our choice. Our clearing firm gave us a call and said we’re going to have to stop allowing new opening positions in the three names, AMC, GME, and KOSS. Highly volatile, and what happens is this is not a political decision. And unfortunately, it got political. I think, you know, I think it was once said that don’t let any good crisis go to waste. And that’s clearly what’s happening here.
And we’re seeing politicians jump on the bandwagon so they can get– so they can start trending on Twitter. But in reality, what’s going on is that there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days. And because of the volatility of stocks, DTC has made the cost of the collateral of the two-day holding period extremely expensive.
And we just can’t afford– well, we’re not a clearing firm, but our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can’t afford the cost of that trade clearance. That is the reason why these stocks are coming off. It has nothing to do with the decision or some sort of closed room cigar– smoke-filled cigar room of Wall Street firms getting together to the dismay of the retail trader. This has to do with settlement mechanics of the market.
And:
ANTHONY DENIER: …There is no way that a customer would not be able to sell a position they hold. We are simply stopping opening of new positions. Liquidations can happen at any time. This is general market mechanics. We have customer protections in place. We would never stop a customer from being able to get out of a position. But currently, we are stopping customers from getting into a new position. And that has to do with it possibly.
Amid this week’s extraordinary circumstances in the market, we made a tough decision today to temporarily limit buying for certain securities. As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.
Starting tomorrow, we plan to allow limited buys of these securities. We’ll continue to monitor the situation and may make adjustments as needed.
To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to.