Markets and Market Infrastructure

At about 5:11 on the morning of Thursday 28 January 2021 (time as reported; verify), the National Securities Clearing Corporation told Robinhood that it needed to deposit about $3.7 billion of collateral by the opening of the market. Robinhood had about $696 million on deposit. For two weeks its customers had piled into GameStop, a struggling video-game retailer whose shares had risen from under $20 to an intraday high of about $483 that day (reported), along with a handful of other heavily shorted stocks. Because US trades then settled two days after they were executed, the clearing house required brokers to post collateral against the risk that their customers' trades would fail before settlement. Most of Robinhood's requirement was an "excess capital premium" of more than $2.2 billion, charged because its collateral need had outrun its capital. The NSCC waived the premium, and Robinhood paid about $1.4 billion. To limit its exposure, it stopped customers from buying GameStop and a dozen other stocks, then about 50 (reported), while letting them sell.

The restriction caused an uproar. Users, members of Congress and commentators accused Robinhood of protecting hedge funds that had bet against the stocks, among them Melvin Capital, which had received $2.75 billion from Citadel LLC and Point72 three days earlier. Robinhood raised about $3.4 billion of new capital in the following days. The House Financial Services Committee held a hearing on 18 February titled "Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide." The SEC's staff report of October 2021 found no evidence that Citadel had instructed Robinhood or of coordinated short-side manipulation. Robinhood's restriction had been forced by the clearing system. This chapter explains how that system works, who earns money in it, and why the least visible part of the market sets its limits.