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Illustration: Aïda Amer/Axios

The oddest part of the Robinhood position on short-selling is the part where the company claims that problems with shorting could "potentially" be avoided by implementing "changes to the stock settlement process."

Why it matters: Currently, stock trades are settled on a T+2 basis — two days after the trade happens, the buyer transfers money to the seller.

  • Robinhood CEO Vlad Tenev — who is testifying Thursday before the House Financial Services Committee — blames the T+2 system for the fact that he was forced to curtail trade in GameStop stock last month. He has advocated for real-time settlement, where you pay for stock the second that you buy it.

Reality check: Tenev's stated aim in moving from T+2 to real-time settlement is to reduce the amount of collateral he would need to hold at DTCC, the central clearinghouse. But such a move would be far more likely to vastly increase his collateral requirements.

  • As the DTCC explains, the current T+2 system only requires brokerages like Robinhood to put up the net amount of money they owe at the end of the day. Since on most days in most stocks the amount of purchases is very similar to the amount of sales, the total transferred can be surprisingly small.
  • Real-time settlement, by contrast, would require that "all transactions in the U.S. market be funded on a transaction-by-transaction basis, thus losing the liquidity and risk-mitigating benefits of today’s netting features."
  • The total number of transactions needing to be settled would explode, and therefore the number of failed transactions — including failed short-selling transactions — would also soar. Collateral requirements would skyrocket.

The bottom line: It makes a certain amount of sense to move from T+2 to T+1 or even T+0.5, where trades are settled on the same day that they're made. Those changes would have negligible effects on the DTCC's collateral requirements.

Go deeper:

Go deeper

Citadel and Robinhood CEOs will call for new stock trading rule at GameStop hearing

Co-founder and CEO of Robinhood Vladimir Tenev. Photo: Noam Galai / Getty Images

Players central to the GameStop market bonanza will call on Congress to shorten the time required for stock trades to settle, according to testimonies released ahead of their appearances at a Congressional hearing on Thursday.

Why it matters: A typically obscure part of stock trading is set to be among the issues at the forefront — as Robinhood and others look to deflect the anger that stemmed from the Reddit-fueled stock frenzy.

Dion Rabouin, author of Markets
Feb 17, 2021 - Economy & Business

Hedge funds will be the villain at GameStop hearing

Illustration: Annelise Capossela/Axios

The House Financial Services Committee will convene a hearing tomorrow on "recent market volatility involving GameStop stock and other stocks" to continue the whodunnit of the current state of financial markets, especially U.S. stocks.

What's happening: Chair Maxine Waters will question the CEOs of Reddit, Robinhood, Citadel Securities, Melvin Capital and Keith Gill, also known as Roaring Kitty or u/DeepF--kingValue.

Reddit user behind GameStop saga releases opening statement ahead of hearing

Wall Street protesters. Photo: Tayfun Coskun/Anadolu Agency via Getty Images

Keith Patrick Gill, known on YouTube and Twitter as Roaring Kitty, released his opening statement ahead of testimony before the House Financial Services Committee on Wednesday about his role in the surge of GameStop's stock price.

The big picture: Gill will join the CEOs of Reddit, Robinhood, Citadel and Melvin Capital at Wednesday's hearing. The committee plans to "examine the recent activity around GameStop (GME) stock and other impacted stocks with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors," per a statement by Rep. Maxine Waters (D-Calif.), chair of the committee.