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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.

Go deeper

Dan Primack, author of Pro Rata
Feb 1, 2021 - Economy & Business

Warren broadsides private equity following stock market volatility

Sen. Elizabeth Warren (D-Mass.) Photo: Scott Olson/Getty Images

Private equity has once again found itself in the crosshairs of Sen. Elizabeth Warren (D-Mass.), this time for "treating the stock market like a casino."

What she said: Warren's broadside was part of a letter sent Friday to the SEC, asking it to investigate and provide more information on how it plans to address the recent stock market volatility, related to shares of GameStop, et al.

Dion Rabouin, author of Markets
Feb 1, 2021 - Economy & Business

Why GameStop's stock could rise much, much higher

The meteoric rise in GameStop's stock price is being called a short squeeze by most but that's not what's happening, says an expert on short interest and the market.

Why it matters: That could mean that if and when the short squeeze does come, GameStop's price could soar significantly higher than its current levels.

Democrats' hypocrisy moment

Illustration: Eniola Odetunde/Axios. Photo: Ray Tamarra/Getty Images

Gov. Andrew Cuomo should be facing explicit calls to resign from President Biden on down, if you apply the standard that Democrats set for similar allegations against Republicans. And it's not a close call.

Why it matters: The #MeToo moment saw men in power run out of town for exploiting young women. Democrats led the charge. So the silence of so many of them seems more strange — and unacceptable by their own standards — by the hour.