Last week, citing cash flow issues, trading app Robinhood temporarily halted users from buying popular stocks such as GameStop and AMC as Reddit-using day traders drove up trading volumes and prices hit record highs.
Robinhood’s CEO wants consumers to know he’s just as upset about the stoppage as they are.
In a blog post today entitled “It’s Time for Real-Time Settlement,” Robinhood CEO and co-founder Vlad Tenev proposed a change in industry regulations that would allow securities trades to settle near instantaneously, meaning money would change hands in minutes rather than days. Though he never mentions decentralized finance (DeFi) or blockchain technology, that’s exactly what such technology allows.
It’s time for T+2 to go. (1/9)
— VLAD (@vladtenev) February 2, 2021
“There is no reason why the greatest financial system the world has ever seen cannot settle trades in real time,” Tenev wrote.
Tenev finds fault in particular with the securities clearinghouse system. A clearinghouse is an intermediary that matches buyers to sellers, collects payments, and finalizes trades. The current system, overseen by the Securities and Exchange Commission and the private Depository Trust and Clearing Corporation, requires a two-day settlement period.
“Investors are left waiting for their trades to clear, and the clearing brokers have their proprietary cash locked up, until the settlement is final days after the trade,” Tenev wrote. “The clearinghouse deposit requirements are designed to mitigate risk, but last week’s wild market activity showed that these requirements, coupled with an unnecessarily long settlement cycle, can have unintended consequences that introduce new risks.”
In contrast to traditional financial settlement, blockchain-based decentralized finance applications disintermediate trading. As a result, the trades on a DeFi platform settle quickly.
“Decentralized exchanges on Ethereum, like Uniswap and SushiSwap can’t be censored, and settlement can occur as quickly as a block can be mined (about 13 seconds),” Tom Bean, founder and principal of margin trading platform Fulcrum, told Decrypt. “Recent events show the need to modernize the antiquated technology and processes in place in traditional financial markets. TradFi is just playing catchup to what DeFi solved a long time ago.”
Rob Rosenthal, CEO of blockchain project RevPop and a former Goldman Sachs VP who specializes in clearinghouses, told Decrypt that it’s possible for clearinghouses and real-time settlements on a blockchain to co-exist—and that RevPop was created to address just such an issue.
“The systems in traditional finance are indeed antiquated,” he said. “Atomic record keeping with a decentralized guarantee fund (or even an atomic clearing house that employs a traditional guarantee fund model) solves this problem!”
Robinhood needed multiple cash infusions in the last week totalling $3.4 billion—not because it was doing poorly, but because it didn’t have enough on hand to cover all the trades. It also borrowed money from banks to raise the cash needed to get stock trading up and running.
Even so, it’s still maintaining share limits on five stocks that remain popular: AMC Theatres, Express, GameStop, Naked Brand Group, and Nokia.
That hasn’t stopped members of the House Financial Services Committee, including Chairwoman Maxine Water and Alexandria Ocasio-Cortez, from calling for investigations into Robinhood’s trading halt.
Tenev made it clear he wants everybody to get together and work it out.
“The industry, Congress, regulators, and other stakeholders need to come together to deploy our intellectual capital and engineering resources to move to real-time settlement of U.S. equities,” he wrote. “Technology is the answer, not the oft-cited impediment.”