Broker Deal Collateral Requirements: Gamestop, Citadel, Robinhood, Melvin Capital
The strangest thing about the Gamestop issue was the conspiracy theories around payment for order flow, Citadel and Melvin Capital boss Gabe Plotkin. Some assumed that Robinhood had conspired against their users because their biggest customer, Citadel, was bailing out Melvin Capital.
In fact, the issue was one of collateral. On 27th January 2020, Robinhood had a letter received from the NSCC setting out its daily collateral demands. Such letters go out to around 100 brokerages at 7 a.m. ET or am in Mountain View for Robinhood’s headquarters. This is received every day, but this time the operations team would have been shocked to receive a request for $3bn. On February 1st, Robinhood subsequently raised $3.4bn to fund this collateral.
The underlying mechanic is one of very bored day-traders spending time on message-boards and coordinating short squeezes on target securities. As such, hedge funds and other buy-side firms were required to readjust margin requirements for a range of assets due to higher implied volatility levels.
Vlad Tenev has suggested a range of solutions for this, including moving from T+2 to real-time settlement.