As I understand it, even for executing regular buys, the settlement houses require RH to maintain a large deposit of dollars as collateral.
This collateral requirement goes up when a stock becomes heavily traded, or more volatile.
Because of the insane volume & volatility of GME, RH's cushion of collateral was exhausted (And they've now replenished it, by borrowing & raising money.)
The reason that sells were permitted to execute was because each sell by one of their users reduces the collateral requirements in their settlement accounts. (So the settlement houses allowed sell orders to go through.)
The tl;dr is - when you are trading through a discount broker, you get a discount service. Serious brokerages, that are used by institutional investors don't have these problems, but they also charge a lot more for their services.
So this seems like a pretty easy way to stop a stock - change the collateral requirements.
From what I heard from the WeBull CEO, what you described sounds right. And he said the whole market could not function.
So in order for other stocks to trade (which have much lower requirements) they had to shut down several stocks.
So I'm sure the big shorts would know that if they get super screwed (price going higher and higher) this collateral requirement would cause this (and the stock to drop big like it did to $112 the other day)?
And this is basically all because of the risk that some hedge fund may not be able to pay (which causes collateral requirements to change)? Seems like the rules should change for these big shorts.
No, the risk is that Robinhood's users won't be able to pay, which would put Robinhood on the hook. The settlement house will only trust Robinhood as far as Robinhood has collateral.
This is not a problem for most stocks, because they have a balanced flow of orders (for every one of RH's customers buying, there's another one selling, which raises and then lowers their collateral requirement.) This is not a problem for bigger brokerages, who have larger cash reserves, to keep as collateral.
The tl;dr is that if you're going to do an uncoordinated mob short squeeze, with unprecedented volume and volatility, don't use a discount broker to do it.
My serious money is invested through Morgan Stanley. They have institutional investment services I do not qualify for, but I'm on their registered investor account, and it's usually $7 to $15 for simple trades. It's not that much more if you're actually planning on executing in volume.
This collateral requirement goes up when a stock becomes heavily traded, or more volatile.
Because of the insane volume & volatility of GME, RH's cushion of collateral was exhausted (And they've now replenished it, by borrowing & raising money.)
The reason that sells were permitted to execute was because each sell by one of their users reduces the collateral requirements in their settlement accounts. (So the settlement houses allowed sell orders to go through.)
The tl;dr is - when you are trading through a discount broker, you get a discount service. Serious brokerages, that are used by institutional investors don't have these problems, but they also charge a lot more for their services.