A different view on why GME was restricted in some brokerages

[terr]

(I asked a broker friend of mine. This was his explanation, paraphrased)

This happens because of internal in-house shorting. Meaning that the short borrowing may happen internally. When that happens, you may have a situation where if your Client A is long, he might not be able to sell before your Client B who is Short covers.

Scenario:

Client A – Long 5 shares
Client B – Short 5 shares
.. to your clearing firm you are net zero position.

If your client A wants to sell but client B is holding, you would have to short to the street. When there are no locates for the short (as probably happened with GME), you cannot allow your Long client to sell - which means he can lose huge $ and will sue you (and win).

If you as a broker are (as is more likely) "net long" - that is you have, among your clients, more long shares than short, then your longs can sell but only up to the level where your internal book goes flat. After that, if there are no outside locates, you have to restrict longs selling, or buy those shares yourself. In the first case, you invite big litigation which could bankrupt you, and in the second case (this is me guessing here, not my friend talking) you have to be an MM - which Robinhood isn't and, I think, neither is TD Ameritrade - although I think IB is. But in any case, it forces you into a long position on the stock at probably its top, which is a pretty bad move.

You can kinda see why the brokerage would restrict trading in the stock to reduce risk to itself. Outwardly, it definitely looks like a d*ck move. But it's better to survive and be thought a d*ck than to go bankrupt.

 

[zdreg]

. After that, if there are no outside locates, you have to restrict longs selli

It doesn't follow. Firms that get paid for order flow just sell the stock to firms that pay them for the order flow.
There has not been one report of a firm restricting closing transactions

The client who is short receives a buy in notice,

 

[ktm]

Not surprisingly the media seems to be missing lots of the nuts and bolts of how all this stuff works. They are giving the public the impression that "the little guy" (whoever that is) should just be able to short out of thin air in order to stick it to "the man" (whoever that is) - or vice versa through synthetics/derivatives etc... All these lawyer types are raging on about suing Robin Hood for restricting trading. Those same people would be threatening to sue Robin Hood for letting those "little guys" blow up their accounts. Robin Hood could easily be left holding the bag for massive losses for these accounts. IB had a better solution by letting trading continue (assuming they had the shares) with significantly enhanced margin requirements.

Definitely a no-win spot for the brokers.

 

[JSOP]

(I asked a broker friend of mine. This was his explanation, paraphrased)

This happens because of internal in-house shorting. Meaning that the short borrowing may happen internally. When that happens, you may have a situation where if your Client A is long, he might not be able to sell before your Client B who is Short covers.

Scenario:

Client A – Long 5 shares
Client B – Short 5 shares
.. to your clearing firm you are net zero position.

If your client A wants to sell but client B is holding, you would have to short to the street. When there are no locates for the short (as probably happened with GME), you cannot allow your Long client to sell - which means he can lose huge $ and will sue you (and win).

If you as a broker are (as is more likely) "net long" - that is you have, among your clients, more long shares than short, then your longs can sell but only up to the level where your internal book goes flat. After that, if there are no outside locates, you have to restrict longs selling, or buy those shares yourself. In the first case, you invite big litigation which could bankrupt you, and in the second case (this is me guessing here, not my friend talking) you have to be an MM - which Robinhood isn't and, I think, neither is TD Ameritrade - although I think IB is. But in any case, it forces you into a long position on the stock at probably its top, which is a pretty bad move.

You can kinda see why the brokerage would restrict trading in the stock to reduce risk to itself. Outwardly, it definitely looks like a d*ck move. But it's better to survive and be thought a d*ck than to go bankrupt.

Like I said before this is just casino houses refusing to pay up when everybody is cashing in their chips. For all the money that they've made from us before for their crappy service and crappy software, they need to pay up! They have the money. Cry me a river to see if I care.

 

[Pronto24]

Like I said before this is just casino houses refusing to pay up when everybody is cashing in their chips. For all the money that they've made from us before for their crappy service and crappy software, they need to pay up! They have the money. Cry me a river to see if I care.

LOL, I bet they have your number blocked.

 

[userque]

Not surprisingly the media seems to be missing lots of the nuts and bolts of how all this stuff works.

Especially considering all the "elite traders" that are also missing the crux of it all.

 

[VicBee]

Like I said before this is just casino houses refusing to pay up when everybody is cashing in their chips. For all the money that they've made from us before for their crappy service and crappy software, they need to pay up! They have the money. Cry me a river to see if I care.

I knew we could find a subject to agree on
The fact remains that these brokerages should be transparent, allowing buying and selling at will, except for rules/parameters that apply to all equally, such as margin requirements and such.
What happened over the last couple of days with a handful of stocks is far from transparent, especially when restrictions came down in unison. Applying measures to hinder the purchase of shares while applying none on the sell side created an instant sell off.
I know, I was staring at my screen live when AMC dropped from 16 to 7 in less than 45 mn. But even the climb to 16 had been interrupted twice with breakers to stem the market opening momentum of 8 to 16 in about 15 mn.
TD cannot honestly state they did not throttle buying.

 

[Sprout]

(I asked a broker friend of mine. This was his explanation, paraphrased)

This happens because of internal in-house shorting. Meaning that the short borrowing may happen internally. When that happens, you may have a situation where if your Client A is long, he might not be able to sell before your Client B who is Short covers.

Scenario:

Client A – Long 5 shares
Client B – Short 5 shares
.. to your clearing firm you are net zero position.

If your client A wants to sell but client B is holding, you would have to short to the street. When there are no locates for the short (as probably happened with GME), you cannot allow your Long client to sell - which means he can lose huge $ and will sue you (and win).

If you as a broker are (as is more likely) "net long" - that is you have, among your clients, more long shares than short, then your longs can sell but only up to the level where your internal book goes flat. After that, if there are no outside locates, you have to restrict longs selling, or buy those shares yourself. In the first case, you invite big litigation which could bankrupt you, and in the second case (this is me guessing here, not my friend talking) you have to be an MM - which Robinhood isn't and, I think, neither is TD Ameritrade - although I think IB is. But in any case, it forces you into a long position on the stock at probably its top, which is a pretty bad move.

You can kinda see why the brokerage would restrict trading in the stock to reduce risk to itself. Outwardly, it definitely looks like a d*ck move. But it's better to survive and be thought a d*ck than to go bankrupt.

So then the current media cycle painting RH as a villain appears to cuts both ways.

On one hand RH is now perceived to be aligned with the axis of hedgefund evil, therefore wsb is recommending to close accounts and take funds off the platform.

This action would have the opposite intended effect of what wsb wants to do to the shorts. It releases shares to be located to close those positions.

Is anyone else amused that this saga is wrapped in ‘GameStop’ , ‘wallstreetbets’ and that they approach markets like a video game and embrace ‘retard?’

 

[userque]

So then the current media cycle painting RH as a villain appears to cuts both ways.

On one hand RH is now perceived to be aligned with the axis of hedgefund evil, therefore wsb is recommending to close accounts and take funds off the platform.

This action would have the opposite intended effect of what wsb wants to do to the shorts. It releases shares to be located to close those positions.

Is anyone else amused that this saga is wrapped in ‘GameStop’ , ‘wallstreetbets’ and that they approach markets like a video game and embrace ‘retard?’

Retardation is sweeping the country.

 

[JSOP]

So then the current media cycle painting RH as a villain appears to cuts both ways.

On one hand RH is now perceived to be aligned with the axis of hedgefund evil, therefore wsb is recommending to close accounts and take funds off the platform.

This action would have the opposite intended effect of what wsb wants to do to the shorts. It releases shares to be located to close those positions.

Is anyone else amused that this saga is wrapped in ‘GameStop’ , ‘wallstreetbets’ and that they approach markets like a video game and embrace ‘retard?’

It's too bad RH is not a public company yet. If it is, what wsb should've recommended was to short RH and all of the brokerages that are restricting trading of GME and AMC and other heavily shorted stocks. That way they can even raise some cash to buy MORE of GME-like stocks/options at the same time take vengence on the brokers that are restricting trading.