Yesterday there was outrage over the Robinhood inventory buying and selling app briefly halting purchases of GameStop (GME) and some different shares. The GME value went from $18 two weeks in the past to $330 as we speak following exercise on the WallStreetBets message board on Reddit.
The explanation why Robinhood and different brokers stopped permitting trades wasn’t some conspiracy collusion with hedge funds. Robinhood explained that the driving force was “SEC web capital obligations and clearinghouse deposits.” Inventory trades take two days to settle, which is the explanation behind these guidelines. So a spike in buy quantity requires Robinhood to place up extra capital, which it raised yesterday. Additionally, whereas the retail dealer would possibly make prompt funds, Robinhood doesn’t obtain the cash instantly.
If funds had been in digital foreign money through a blockchain in trade for tokenized stocks, there might be prompt settlement or supply versus fee, which might make this problem disappear.
Quick promoting and inventory lending
Retail investor animosity in the direction of hedge funds and quick sellers has been a characteristic of this saga. Nevertheless it seems that Robinhood income from quick sellers. Whereas a fundamental Robinhood account is free, it has a worthwhile business model that’s fairly clear. A significant revenue supply is rebates from market makers, however it additionally earns cash from inventory lending.
And it lends its buyer’s inventory to short-sellers for a big return. As Mark Cuban identified, the present charge for lending GME inventory is 30% per yr.
With blockchain, the investor has the potential to have higher management over the inventory they personal. They may select to not allow shorts by not lending the inventory. Or doubtlessly earn the inventory lending revenue themselves.