Feb 2, 2021 - Economy

The middleman's moment

Illustration of suited hand holding binoculars with negative and positive stock arrows

Illustration: Eniola Odetunde/Axios

The Reddit trading frenzy is bringing two middlemen of the financial system to the forefront.

Why it matters: The mania has exposed the inner-workings of the financial system — allowing trading platforms like Robinhood to shift some of the gaze toward at least one of these usually arcane players.

Clearing houses — the intermediary between stock buyers and sellers — are in the headlines in a way they haven't been since the 2008 financial crisis.

  • Robinhood said higher collateral requirements from the DTCC, the clearing house that settles 99% of equity trades, forced it to restrict trading of Reddit-fueled names — a move that caused an uproar among users (and lawmakers).
  • The DTCC makes members like Robinhood put up cash so the clearing house is not on the hook for customers' transactions in the two days it takes for trades to settle. The goal: to prevent widespread chaos if one broker can't pay.
  • In times of extreme volatility when volume is soaring (see: last week), the amount of cash the DTCC requires brokers to put aside goes up.

What they're saying: Robinhood CEO Vlad Tenev said on Clubhouse Monday that he got a "nerve-wracking" 3:30 am call from the DTCC, asking the company to put up an eye-popping $3 billion in collateral, thanks to the volatility in Reddit-pushed stocks.

Market-makers — a middleman that pays brokerages to direct trades their way — were the subject of a widespread, misleading theory tying Robinhood with Citadel.

  • Citadel Securities, the market-maker, handles the bulk of Robinhood trades — not Citadel the hedge fund (which bailed out another short-seller), though both are owned by Ken Griffin.
  • There were allegations that hedge funds pressured Robinhood to limit trading, which Tenev has vehemently denied.

One notable pivot that's come as a result of the Reddit mania: Free stock-trading app Public.com said it will nix the market-maker middleman altogether, instead pushing trades directly to the stock exchanges.

  • It's moving to an optional "tipping" method to make up for the revenue lost from pushing trades to market-makers.

Driving the news: Robinhood raised a total of $3.4 billion from investors in recent days — capital that will help it meet onerous DTCC requirements. (And Reuters reports the company is considering raising another $1 billion in debt.)

What to watch: The House Financial Services committee will hold a hearing on Feb. 18. Tenev will testify, Politico scoops.

  • Rep. Maxine Waters, who chairs the committee, told MSNBC she wants to investigate whether the trading restrictions were the result of "collusion" between Robinhood and hedge funds.
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