Justin Sullivan/Getty Images
- Robinhood is stepping up calls for the system that underpins stock trading to be sped up.
- The app last week limited trading in GameStop as volatility shook markets.
- Day traders were furious at Robinhood, but it has now lifted its limits.
- Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
Day-trading app Robinhood is stepping up its calls for the settlement process that underpins stock transactions on Wall Street to be made instantaneous in the wake of the GameStop saga.
Robinhood argues that the current system – in which trades take 2 days to settle – was at the heart of the stock-trading chaos seen at the end of January, when the brokerage made amateur investors furious by limiting transactions in GameStop and other popular companies.
The app lifted limits for trading for Friday, having put them in place the previous week when amateur traders organizing themselves on Reddit united to drive up the price of GameStop by around 400%, hitting hedge funds who had been betting against the stock.
In a blog posted to the Robinhood website on Thursday, chief operating officer Jim Swartwout said the surge in trading last week “was magnitudes higher than the norm.”
Swartwout said Robinhood "remained operational". But he said its problems came from clearing houses - the institutions that make sure trades go through - raising their deposit requirements due to "the volume and volatility of trading."
The Depository Trust & Clearing Corporation was not immediately available for comment when contacted by Insider.
"That's why we are now starting a conversation about real-time settlement to steward our industry into the future, and most of all to meet customer demand," Swartwout said.
The focus on the settlement system echoes Robinhood chief executive Vlad Tenev's comments in a blog on Tuesday, titled "It's time for real-time settlement."
Under the current system, known as T+2, trades take 2 days to be fully completed after brokers pass them to clearing houses.
Yet the system caused tensions last week when clearing houses demanded more money or "collateral" from brokers to account for the higher risk that stocks like GameStop and cinema chain AMC could plunge in value over the 2-day period, leaving them in the lurch.
Robinhood chose to limit trading in volatile stocks like GameStop as one way to smooth the situation, prompting outrage from day traders and even politicians.
Robinhood argues that a shorter settlement period would cut the risks of disruption to the system. Tenev said in the blog: "There is no reason why the greatest financial system the world has ever seen cannot settle trades in real time."
Michael McClain, managing director at the Depository Trust & Clearing Corporation, which clears and settles virtually all broker-to-broker stock trading, said on Thursday that the DTCC "has long advocated for shortening the settlement cycle to enhance market resilience."
Yet he said he does not think the industry is ready to move to instant clearing, due to the complex and costly changes the shift would involve.
In 2017, Boston Consulting Group estimated the upcoming shift to a two-day system from a three-day system would cost the industry around $550 million.