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Right, Gamestop / Robinhood explainer for those confused or outraged. I'm not 100% bc I don't deal in US products but here goes:
So there are two ways to trade: shares or derivative products. Shares are when you own a part of the company, derivatives are contracts based off that
So there are two ways to trade: shares or derivative products. Shares are when you own a part of the company, derivatives are contracts based off that
For example, you might buy a contract that allows you to buy the share in future at a fixed price (a call) or sell it at a fixed price (a put). Those are relatively safe, you pay upfront and just lose the premium if you're wrong.
But, you can also buy "spread bets" - trickier...
But, you can also buy "spread bets" - trickier...
Spread bets are a very leveraged bet on a market going one way or another. You need to post collateral, esp if it moves against you. In theory you can lose way more than you originally bet, unless you have proper controls.
Very dangerous, I (professional) wouldn't touch them.
Very dangerous, I (professional) wouldn't touch them.
Some of these bets seem to be spreads or similar trades. As the vol goes up, the risks go up, and brokers start thinking, "if the client can't actually pay, I'm in trouble." So they ask for more collateral. That has now happened, and it's causing outrage. It's also sensible.
Very little sympathy here if you get caught, frankly. Spread-betting is highly risky and that fact is very widely publicised and in the various contracts you should have read (because financial markets are not a game and your money is at stake.)
So, shares. This one is actually /more/ complex. When you buy a share you don't instantly own it.
You place a buy order, the broker passes it to an exchange, and a clearing house sorts out the paperwork of transferring you the asset and running checks, etc...
You place a buy order, the broker passes it to an exchange, and a clearing house sorts out the paperwork of transferring you the asset and running checks, etc...
While it's at the clearing house (for 2 days in the US), the brokerage firms have to fund the trade. Because the stocks are so volatile, the exchanges make the collateral requirements extremely expensive. Regulation stops them using customer funds, so the brokers have to pay.
Eventually that reaches a breaking point where the brokerages simply can't pay, so they are forced to suspend the opening of new positions to avoid becoming flooded with risk.
Positions can still be sold at this point, by the way, because that's de-risking the trades.
Positions can still be sold at this point, by the way, because that's de-risking the trades.
In guessing territory, I'd say firms like RobinHood who offer "free trades"* are particularly on the hook. Obviously it's not free, the cost is hidden in spread charges. But if the volatility spikes, calculating a spread becomes incredibly difficult, and they probs couldn't cope.
Anyway, so to wrap up, traders flooded into shares and deriv positions, the volatility kicked in risk-protection measures designed to help avert systemic collapse, and the spiralling costs forced brokers to suspend share trading and close open derivs where margins couldn't be met
Oh, important thing I missed out: institutional investors face the same risks (counterparty risk), but they employ teams of lawyers and PhD risk analysts to identify those problems and navigate them safely - and sometimes even that isn't enough.
Tldr; there's no overarching conspiracy, it's not actually a market failure, and the people who've lost money played a very dangerous game and lost, as someone was always going to from the moment this started.
