Robinhood CEO calls for a fix on the ‘antiquated settlement structure’
22 February 2021 US
Image: Евгений Федорцов/adobe.stock.com
Vladimir Tenev, CEO of Robinhood, an American financial services company known for offering commission-free trades of stocks and exchange-traded funds via a mobile app, is pushing for the settlement infrastructure to be modernised.
This follows the course of events from January when Robinhood had to restrict trading in stocks including Gamestop because of the volatility caused by retail traders.
Experts say that these traders were determined to squeeze hedge funds that have short positions in the companies.
While the stock price of GameStop stock increased, Robinhood, along with other brokers in the market, had to put up money with the Depository Trust & Clearing Corporation (DTCC) to back those trades during the two days it takes for them to settle.
In a Q&A series hosted on Robinhood’s blog, the CEO answered customers’ questions. Tenev was asked how he would handle things differently if this was to occur again in the future.
As part of his response, Tenev explains that he was pushing for the settlement infrastructure to be modernised.
He noted that the events that occurred were not uniquely a Robinhood issue but an industry issue where many broker dealers and trading platforms prevented their customers from opening positions in these stocks.
Tenev suggests that solving the problem for the system will require “systemic change” and fixing of the “antiquated settlement structure”.
Tenev says Robinhood’s mission is to democratise finance for all and believes that Robinhood became popular because it represented a movement.
“It represented this idea that individual investors could have the same access to the markets and the same tools that the big guys have,” he says in the blog video.
Discussing the events from January in further detail, Tenev explains: “On 28 January, due to high collateral requirements and the regulatory deposit requirements and the need for us to put up cash as a firm, we had to temporarily restrict buying certain securities that were very popular on the internet and that disappointed customers greatly — it is something we are trying to learn from and prevent from happening ever again.”
“One of the interesting non-intuitive things is that you would think that we could just use our customer’s cash that they have deposited in their accounts to pay for these trades but actually since there is a two day settlement period, we can’t do that.”
Instead, the CEO explains they had to put up the company’s cash as collateral to pay for these trades.
According to Tenev, historic volatility concentrated in all of these stocks, as well as a lot of new customers joining, led to a situation, industry-wide, where collateral requirements at clearinghouses inflected.
Working with its clearinghouses, Robinhood made the decision to restrict the buying of these securities so that it could make the deposit for the collateral.
Over the next couple of days, Robinhood raised over $3 billion in capital and pulled on some lines of credit so it could gradually relax and eventually remove all of these restrictions.
In a pre-prepared statement on 18 February, prior to the hearing before the US House of Representatives Committee on Financial Services, Tenev voiced his belief that a T+0 system would be the way forward.
The settlement date for stocks was T+5 or five business days after the transaction date before moving to T+3. While every country has its own settlement cycle, a number of countries operate on T+2 or two business days after the transaction date.
The T+0 settlement cycle, which Tenev is in favour of, requires trades to settle on actual trade date, often within hours of execution
In the hearing, Tenev affirms that during the week of 25 January 2021, Robinhood saw the impact the T+2 trade settlement period has on its customers and ultimately the entire American financial system.
“Clearinghouse deposit requirements skyrocketed overnight. People were unable to buy some of the securities they wanted. The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change,” says Tenev.
According to the CEO, every day, clearing brokers like Robinhood Securities have to meet deposit requirements imposed by clearinghouses to support customer trades between the trade date and the date the trades settle.
Tenev believes investors are left waiting for their trades to clear, and the clearing brokers have their proprietary cash locked up until the settlement is final days after the trade.
The clearinghouse deposit requirements are designed to mitigate risk, but the wild market activity showed that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that introduce new risks.
Tenev comments: “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. Indeed, real time settlement would have allowed Robinhood Securities to better react to periods of increased volatility in the markets without restricting the purchasing of securities. It has been four years since the securities industry moved from a three-day to a two-day settlement cycle.”
Additionally, Tenev suggests that DTCC has recognised the benefits of an even shorter timeframe, leveraging technology.
Meanwhile, millions of new investors have entered the market for the first time as technology transforms the world. “It is time for the financial system to catch up,” Tenev says.
He adds: “The industry, congress, regulators, and other stakeholders need to come together to deploy our intellectual capital and engineering resources to move to real-time settlement of US equities. Accomplishing this won’t be without its well-documented challenges, but it is the right thing to do and Robinhood is eager to drive this critical effort on behalf of all investors.”
Tenev is not the only one to support a movement to a T+0 platform. Kenneth Griffin, founder and CEO of Citadel, an American multinational hedge fund and financial services company, also voiced his opinion in a pre-prepared statement on the matter before the Committee on Financial Services US House of Representatives.
Griffin outlines that recent events have highlighted “clear opportunities” to improve the market.
One takeaway, says Griffin, is the importance of modernising the settlement process, including shortened settlement cycles and transparent capital models.
“As we have seen, longer settlement periods expose firms to more risk in the time between execution and settlement, requiring higher levels of capital. Settlement cycles should be shortened from T+2 to T+1,” Griffin comments.
Griffin concludes: “Transparent clearing house capital requirements will enable brokers and market makers to better prepare for potential capital demands and minimise the risk of associated market interruptions. Both of these enhancements are well within reach today.”
This follows the course of events from January when Robinhood had to restrict trading in stocks including Gamestop because of the volatility caused by retail traders.
Experts say that these traders were determined to squeeze hedge funds that have short positions in the companies.
While the stock price of GameStop stock increased, Robinhood, along with other brokers in the market, had to put up money with the Depository Trust & Clearing Corporation (DTCC) to back those trades during the two days it takes for them to settle.
In a Q&A series hosted on Robinhood’s blog, the CEO answered customers’ questions. Tenev was asked how he would handle things differently if this was to occur again in the future.
As part of his response, Tenev explains that he was pushing for the settlement infrastructure to be modernised.
He noted that the events that occurred were not uniquely a Robinhood issue but an industry issue where many broker dealers and trading platforms prevented their customers from opening positions in these stocks.
Tenev suggests that solving the problem for the system will require “systemic change” and fixing of the “antiquated settlement structure”.
Tenev says Robinhood’s mission is to democratise finance for all and believes that Robinhood became popular because it represented a movement.
“It represented this idea that individual investors could have the same access to the markets and the same tools that the big guys have,” he says in the blog video.
Discussing the events from January in further detail, Tenev explains: “On 28 January, due to high collateral requirements and the regulatory deposit requirements and the need for us to put up cash as a firm, we had to temporarily restrict buying certain securities that were very popular on the internet and that disappointed customers greatly — it is something we are trying to learn from and prevent from happening ever again.”
“One of the interesting non-intuitive things is that you would think that we could just use our customer’s cash that they have deposited in their accounts to pay for these trades but actually since there is a two day settlement period, we can’t do that.”
Instead, the CEO explains they had to put up the company’s cash as collateral to pay for these trades.
According to Tenev, historic volatility concentrated in all of these stocks, as well as a lot of new customers joining, led to a situation, industry-wide, where collateral requirements at clearinghouses inflected.
Working with its clearinghouses, Robinhood made the decision to restrict the buying of these securities so that it could make the deposit for the collateral.
Over the next couple of days, Robinhood raised over $3 billion in capital and pulled on some lines of credit so it could gradually relax and eventually remove all of these restrictions.
In a pre-prepared statement on 18 February, prior to the hearing before the US House of Representatives Committee on Financial Services, Tenev voiced his belief that a T+0 system would be the way forward.
The settlement date for stocks was T+5 or five business days after the transaction date before moving to T+3. While every country has its own settlement cycle, a number of countries operate on T+2 or two business days after the transaction date.
The T+0 settlement cycle, which Tenev is in favour of, requires trades to settle on actual trade date, often within hours of execution
In the hearing, Tenev affirms that during the week of 25 January 2021, Robinhood saw the impact the T+2 trade settlement period has on its customers and ultimately the entire American financial system.
“Clearinghouse deposit requirements skyrocketed overnight. People were unable to buy some of the securities they wanted. The existing two-day period to settle trades exposes investors and the industry to unnecessary risk and is ripe for change,” says Tenev.
According to the CEO, every day, clearing brokers like Robinhood Securities have to meet deposit requirements imposed by clearinghouses to support customer trades between the trade date and the date the trades settle.
Tenev believes investors are left waiting for their trades to clear, and the clearing brokers have their proprietary cash locked up until the settlement is final days after the trade.
The clearinghouse deposit requirements are designed to mitigate risk, but the wild market activity showed that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that introduce new risks.
Tenev comments: “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. Indeed, real time settlement would have allowed Robinhood Securities to better react to periods of increased volatility in the markets without restricting the purchasing of securities. It has been four years since the securities industry moved from a three-day to a two-day settlement cycle.”
Additionally, Tenev suggests that DTCC has recognised the benefits of an even shorter timeframe, leveraging technology.
Meanwhile, millions of new investors have entered the market for the first time as technology transforms the world. “It is time for the financial system to catch up,” Tenev says.
He adds: “The industry, congress, regulators, and other stakeholders need to come together to deploy our intellectual capital and engineering resources to move to real-time settlement of US equities. Accomplishing this won’t be without its well-documented challenges, but it is the right thing to do and Robinhood is eager to drive this critical effort on behalf of all investors.”
Tenev is not the only one to support a movement to a T+0 platform. Kenneth Griffin, founder and CEO of Citadel, an American multinational hedge fund and financial services company, also voiced his opinion in a pre-prepared statement on the matter before the Committee on Financial Services US House of Representatives.
Griffin outlines that recent events have highlighted “clear opportunities” to improve the market.
One takeaway, says Griffin, is the importance of modernising the settlement process, including shortened settlement cycles and transparent capital models.
“As we have seen, longer settlement periods expose firms to more risk in the time between execution and settlement, requiring higher levels of capital. Settlement cycles should be shortened from T+2 to T+1,” Griffin comments.
Griffin concludes: “Transparent clearing house capital requirements will enable brokers and market makers to better prepare for potential capital demands and minimise the risk of associated market interruptions. Both of these enhancements are well within reach today.”
← Previous clearing and settlement article
T+0 settlement is a 'non-starter', says industry consultant Tony Freeman
T+0 settlement is a 'non-starter', says industry consultant Tony Freeman
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