GameStop chaos shines a spotlight on Wall Street’s vulnerabilities

The early movers who cashed out – ironically, a number of hedge funds among them – will walk away with massive profits but the latecomers are likely to be wiped out when the GameStop bubble implodes, as it inevitably will. Much of the trading last week was via call options and on margin, which suggests the wash-up could be very nasty, with a lot of recriminations and litigation.

The US Securities and Exchanges Commission and other securities regulators are already investigating what happened and senior figures in Congress – including Elizabeth Warren and Ted Cruz are – muttering about holding hearings, with particular reference to the freezes Robinhood and other brokerage placed on trading by their retailer investors last week.

Robinhood was caught unprepared for the nature and volume of the activity on its platform last week, when there was, for instance turnover of almost $US25 billion in GameStop shares, or more than 100 per cent of its wildly-inflated market capitalisation.

The mobile app-based platform might have outraged its customers, and others, when it halted some trading but if it hadn’t the consequences for the investors and the market-at-large might have been even more damaging.

When a trade is executed it doesn’t get settled immediately. In the US it takes two days. Brokers like Robinhood are required by their clearing house (which effectively guarantees the trade) to post collateral – cash or securities — to protect the clearing house from that exposure to the transaction until it is completed.

This content was originally published here.