ICYMI... But that's unlikely. On Friday, we covered how social-fueled stock surges have thrown the market into uncharted territory. Last week, underdog “meme” stocks like GameStop, AMC, and Nokia skyrocketed, thanks to Reddit-inspired buying campaigns. From Wednesday through Friday, multiple brokerages limited — and in some cases, paused — the buying frenzy.
- Robinhood, E-Trade, Webull, and others temporarily restricted certain trading activity in symbols like GME. Disclosure: Robinhood Snacks is owned by... Robinhood.
- Some brokerages raised margin requirements for those stocks to mitigate risk. Margin = the percentage of the purchase investors need to fund themselves (rather than borrow).
- Unsurprisingly, the price of those restricted shares dropped. Some investors were angry, shocked, and confused. And retail investing dominated the social conversation like never before.
Demystify the jargon... Brokers cited financial and regulatory reasons for these moves. Here’s what actually happens when you place a trade, and some of the requirements brokerages face (for a Robinhood-specific explainer, check out Robinhood’s blog):
- When you buy a coffee with your card, you see the transaction on your account right away. But Starbucks still hasn’t received your $$$ — it can take a few days to move. Similarly...
- When you buy a stock, you may see the transaction immediately. But you actually pay and get the shares two days after you buy. That’s because...
- All transactions have to go through "settlement" to make sure that sellers actually get paid, and buyers receive securities. AKA: to ensure everyone involved can really deliver.
- Clearinghouses, which are regulated by the SEC, ultimately ensure that trades get settled. Brokers often need to deposit cash to meet day-to-day collateral requirements with clearing firms, in order to back customer trades.
- When buying becomes concentrated in a handful of volatile stocks, risk increases for everyone involved. So clearinghouses can ask firms for more cash deposits, to mitigate risk to the system.
- Those deposit requirements for brokers can dramatically jump based on how many risky/volatile stocks customers are buying. Wild stat: industry-wide collateral requirements reportedly rose to $33.5B on Thursday, from $26B on Wednesday.
Last week surprised nearly everyone... because it was unprecedented. Mass “meme stock” buying campaigns significantly increased collateral deposit requirements on those stocks, which led to industry-wide trading restrictions... on those stocks. And retail investing reached a new level of social relevance. As the “mainstreamification” of investing continues, the “plumbing” powering the system will become more and more relevant to individual investors, too.