2nd February 2021: $GME, $AMC, $NOK buys now enabled

Freetrade Chat đŸ”„
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TL:DR: Our US execution partner has restricted buys on $GME, $AMC, and $NOK today.

We are sorry for the inconvenience. As soon as they can enable buys, we will notify you.

For more details on this, please read below.

The DTC - the Depository Trust Company in New York, the clearing house for US shares - has made the decision overnight to raise capital requirements by more than 250%.

What does this mean?

  • Our US execution partner has been forced to restrict $AMC, $GME and $NOK to sell orders only.

  • If you have placed a buy order overnight, these will be cancelled by 3 PM today.

To be clear, this is not a decision we at Freetrade have made.

As a result of the extremely high margin requirements, our US execution partner has taken the difficult decision to not support these stocks at this time.

US regulation requires clearing houses to hold cash on hand from brokers, known as collateral or margin. The amount of collateral required is determined by a variety of factors including the volatility of the individual shares that the clearing house holds on behalf of a brokers’ clients.

If shares are volatile, the amount of collateral that is required can change significantly.

Our US execution partner is exploring alternative solutions, but none of them can be made operational in time for today’s trading day.

We want to give you full access to the markets as soon as possible. We will provide updates as soon as we have them.

UPDATE 1: While we are waiting for any updates, we wanted to give some more detail on why our US execution partner, had to take the difficult decision to restrict trading on the above companies.

To understand why this was done, we want to explain some of what happens after you hit ‘buy’ on your app.

When you buy or sell a stock, it takes two working days for the cash to be transferred from buyer to seller. This is why you see ‘unsettled cash’ in the Freetrade app for two working days after you sell shares.

Sitting in between the two parties to the transaction is often an intermediary known as the clearing house.

Clearing houses facilitate transactions between buyers and sellers in the stock market.

In doing so, they have to take on counterparty risk - the risk that one party won’t deliver the money needed to complete the transaction.

To reduce the likelihood of this happening, clearing houses will make broker-dealers such as the clearing broker of our US execution partner put down a lump sum of cash. The collateral, often referred to as ‘margin’, is there to make sure they pay.

Normally, this isn’t a problem.

Due to the volatility in the given stocks in the last few days, Depository Trust Company (DTC) advised clearing brokers last night that margin requirements for GameStop, AMC and Nokia will be raised, causing the collateral requirement to increase by 250%.

Our US execution partner is looking into ways to get these stocks back online.

In the meantime, please accept our apologies for this inconvenience. We will update you as soon as we hear from them.

UPDATE 2: We are pleased to say that our US execution partner has just confirmed that buys have now been enabled for $GME, $AMC, and $NOK.

Please remember that there are additional risks associated with investing in such market conditions and that your capital is at risk.

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Thanks for the update :+1: good clear communication again

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It has to be said that the FT team have really impressed me during the past week, the comms, the decisions being made, the tweaks over a weekend(!), the way they’ve all pulled together
 Amazing.

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Very clear description @Viktor.

Thanks for sharing such a detailed response. And also the TL:DR :wink:

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So am I correct in understanding that essentially the clearing house has raised the amount of capital required to be able to trade in these stocks, and your US executor doesn’t have enough on hand to allow these trades to continue without endangering themselves?

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Is there anything fundamentally stopping clearing and settlement from being instant? Or is it just a lack of modern use of technology? I imagine there are a lot of super wealthy people who stand to lose out if this convoluted system was to be replaced.

Anyway, thanks for the prompt and transparent update!

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Find a new partner, you’re gonna lose members

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As a non expert can someone explain: All FT orders are placed with cash, so why is extra margin needed to cover these orders? Or is it because the US partner also has other partners who have highly leveraged customers and so Freetrade are losing out because of this?

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I don’t know if you spotted the figure 250% - that is a dramatically higher capital requirement, and while we want this to be resolved as quickly as possible, it’s reasonable that they need a bit of time to try and resolve this.

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Thanks for letting us know. Sounds like a good news to me :slight_smile:

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I must admit, its good to see a company so transparant with its community. Thankfully, I bought my shares in $GME yesterday using Freetrade. Hopefully i’m not too late to the party :slight_smile:

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No absolutely. Was just trying to put it in blatant terms to understand a little easier. Thanks (as always) for the transparency and constant updates. We all appreciate it!!

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Thanks for the update.
I feel for the FT team who have worked their socks off to develop a solution to the FX issue only to wake up the next day to find that other powers have flexed their muscles. I hope that the DTC did this for the stability of financial systems rather than to oppress retail investors.
In the long run I imagine the novel solution in grouping FX orders will save FT a lot of resource so time not wasted!

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Appreciate the honest communication and all of the hard work the team has put in to try and look for and implement alternatives.

I think this education is definitely helping people understand the situation and the flow of an order.

You’ve done a much better job here than robin hood that’s for sure.

I can’t help but wonder how this would have played out if the retail investor in as able to trade freely and in whatever volume they wanted.

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Thanks for the transparency on this FreeTrade Team!

The frustrations that we had last week were born out of the (literally) last minute decision not to process orders. This however, is up front and clear communication.

I’m curious, is this market manipulation by the clearing house? Are they being lobbied? Surely, by making it unattainable for execution partners to put up 250% additional capital requirements is unrealistic and prevents people like us from ever being able to access what should be an “open” market?

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Not that this affects me, but the clear the communication over this issue is something the team should be proud of. Obviously it flags up there should be contingency plans for these sorts of issues in the future, but I’m really happy the Freetrade team are essentially doing all they can. Keep it up!

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Yeah because it DIDN’T AFFECT YOU if it did I’m sure you would have a different opinion

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It’s due to settlement risk. All US trades settle T+2, this is when cash and stocks get exchanged. Clearing houses asks all the participants to post collateral, so there is no settlement risk, e.g. once someone has recorded a trade, the other side can be sure they they will get their money/stock.

Some background here: What happened this week — Under the Hood
Although not implying that the Freetrade US partner is in the same boat as RH, just sharing as that blog entry defines some important terms.

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It’s not FT restricting anything. But the higher-powers do seem to be doing exactly that.

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