Did GameStop Put Congress on the Right Track to Improving Trading Regulation?
Written by Jasmin Sethi for SCA client, Morningstar.
The hubbub around GameStop (GME) has given politicians an opening to define a problem that can best be solved by their preferred market reforms.
At a U.S. House Financial Services Committee hearing last month, lawmakers examined whether the market volatility and subsequent trading halt warranted policy reform. And at a more recent Senate hearing, where former SEC Commissioner Mike Piwowar testified, senators dug deeper into some of the policy proposals.
We believe that some policy ramifications of the GameStop/Robinhood uproar are likely. Here's a look at some of the possibilities and trade-offs.
Real-Time Transaction Clearances
Robinhood CEO Vladimir Tenev suggested in his congressional testimony that instantly clearing securities sales could promote more activity and possibly liquidity in the market than with the current T+2 system. In this system, trades are settled within two days from the initial transaction date. A financial system with the infrastructure to support instant clearing has less risk of system outages and trading halts, which means investors can be spared the types of losses sustained during the GameStop trading halts.
That said, faster trading clearance allows no time for recoverability and no room for error, giving all transactions a degree of risk that's similar to blockchain transactions now--that is, they're irreversible.
Moreover, it would take years for U.S. trading settlement infrastructure to handle real-time transactions because of the technical complexity of getting every party in a transaction to perfectly sync their clearing systems, as Citadel CEO Kenneth Griffin said during the House hearing.
However, a recent Depository Trust & Clearing Corporation, or DTCC, report notes that one-day settlements could consolidate the costs of a firm's daily trades to a single net debit or credit. This intermediate change could smooth out the market risk that brokerages see on especially volatile days, as Robinhood experienced with GameStop. The focus on this area in the Senate hearing, in addition to the report by DTCC, makes it likely that some reform will occur.
