Posted this a couple of days ago. Seems relevant again in light of Robinhood's recent comments about moving towards T-0 settlement. There's also an attached whitepaper for the more curious: https://www.dtcc.com/~/media/Files/downloads/Thought-leaders...
Instant is a bug not a feature. If I want to transfer a big number like 10k, its good to take a while to settle in case there was fraud or a mistake. The last thing I want is to leave my phone unlocked and someone can empty my account immediately with instant settlement.
They only look instant. Behind the scenes, settlement is taking more time, and if settlement fails, the transaction could be reversed.
They do this by taking on the settlement failure risk, which is exactly what Robinhood does, and is exactly why Robinhood ran into potential trouble when GME became so volatile.
Zelle does have a B2C solution which has significantly different limits. Also it was my understanding that Zelle was a multi bank collaboration to provide a better transfer mechanism than ACH and to avoid a lot of the legacy cruft built into the ACH standard.
This is apologetics for the status quo, which by design benefits the financial sector at the expense of consumers.
Give me safety over freedom, says every hegemonist when putting words in our mouths.
Your corner case scenario should not determine behavior for the market. That it is used to excuse behavior that is rammed down our throats anyway is, well, inexcusable.
Maybe banks & brokers could add an extra delay. I'm kind surprised how you can be so passionate about 2 day settlement though, does it really affect your life so much? I can't see how it really helps the financial industry.
Nah, your right - it does not affect my life that much. It is the principle. The financial system is set up to have a power asymmetry that I find abhorrent. Guess I studied Econ under “the wrong professors” for to long as a kid.
I tried to be generic about who was adding the delay. I’m always short on time. Sorry if I missed a detail there.
Another way is to admit that we, as humanity, have very low tolerance to situations where people acting in good faith lose money to fraudsters through no fault of their own.
This is not "corner case scenario". This may not happen much, but the tolerance for when it happens is very low. The systems are designed with that low tolerance in mind.
I would say the fraud protection from T+2 is very minimal and there are better ways to implement reversible transactions. Nearly all of the large banks have their own instant payment methods to send cash to friends. If you receive alerts on withdrawals & transfers those happen nearly instantly so if you are going to notice a suspicious transaction it will either be the same day or at the end of the month when people log in to their bank account. Plus, you have to hope that the bank/etc. is going to actually use the T+2 delay to your advantage.
A fairly easy way to add fraud protection would be to have T-0 or instant settlement only for previously used accounts/routing numbers. A lot of services already implement this on their end such that new bank accounts take a few days or a week to transfer but future transfers appear instant or within a day. Other options include allowing the first $X-thousand to be instant and the rest settles in T+2. This is pretty common if you get automatic deposits over a certain amount or use a phone check scanning feature.
I guess my point is that a lot of edge services (services that people interact with) already cover the T+2 delay in their own manner but that leads to confusion when some middle service provider decides to change the rules. Making the system itself adopt those strategies would just distribute the risk not increase it.
There's also settlement and reversibility of transactions. A check might be cleared and settled, but later discovered to be a fraudulent check, reversing the transaction.
The question then is what to do when you can’t locate the other party, or the other party took the money and fled the country, or the other party declares bankruptcy. Who sucks the losses up in the end? (In the current system, due to T+2, it does not happen.) Please do not assume the other party acts in good faith—actually assume malice.
Settlement isn't an effective fraud mitigation, or even operating in the right part of the system for it.
By all means allow users to set such delays if they want them, but the technology enforcing T+N really isn't a feature for customers so reframing it as such is probably a bad approach.
Not only that, settlement delay can cause fraud or the appearance of fraud. In the robinhood case (if they are telling the truth), then the exchange had to front its own cash for unsettled transfers.
Furthermore, if there was instant settlement the idea of “shorts” changes: you could still borrow a stock but it is super clear who is holding it at a given moment, and how many are held by whom.
I want bank transfers with a progress bar like in the movies. And if you interrupt the transfer before it's completed only part of the funds will be transferred.
I think this is a bit silly but +1 for the dramatic effect.
The progress bar should also have ominous music like those films where the infiltrators download the contents of the secret stash of info from the computer onto some driver while the clock is running out on them being discovered.
There also needs to be a display of the account number that locks in one by one. This should finish locking in about halfway through the progress meter.
Should it be like in The Jackal where they just press CTRL to transfer the money or in Independence Day where the aliens are wished a nice day at the end of the on0the-fly implemented GUI - https://twitter.com/JeKalifa/status/1096709404710309889
Europe has SEPA which is still not instant but a lot better than it used to be. Now the money appears in your account (for banks that support it) immediately and the official transaction date is the next working day. So the speed is technically 1 business day, which is a lot better than it used to be, and 0 business days for a lot of practical purposes.
All those Blockchain stuff are T-0, borderless and censorship-resistant. If the recent Robinhood saga can't change people's mind about Blockchain, I don't know what will.
A couple years ago the DTCC was doing a PR push about introducing blockchain, but it kind of died down. If you search for 'dtcc blockchain' you can find it. It's unfortunate there's been so much hype and work put into applications of blockchain that aren't necessary when we have this problem.
There's a lot of people that aren't comfortable with change and have cause them to build up cognitive dissonance around anything blockchain. They could be presented with all the information they're looking for to be proven wrong and they will just dismiss it as "yeah well the source is from someone in crypto, of course they'd say that they want their investment to go up".
Exactly, the securities industry doesn't even need a decentralized blockchain, Quorum with its hot-swappable consensus models and EVM-compatibility for all existing smart contracts would be good enough!
All the last week has really showed us is that the market is not prepared for modern realities. We could avoid 100% of this finger pointing by simply upgrading the technology. Instead we have Congress using precious time on our dime hauling in the wrong people (as usual) just because they are the face, while DTCC is laughing at them and won’t even issue a statement that could help clear things up.
>Exactly, the securities industry doesn't even need a decentralized blockchain, Quorum with its hot-swappable consensus models and EVM-compatibility for all existing smart contracts would be good enough!
Right, but I still think the comparison is good because blockchain should establish the minimum performance, and the financial industry, which can allow centralization, should be able to do much better. In terms of securities, it doesn't. Bitcoin is settled within an hour (6 confirmations), without the requirement to put up collateral that scales O(n) with the value of the transaction (and volatility).
I assume you are talking about Europe here? At least the word on the street I hear about their banking system is that transferring ~$1000 is lightyears ahead of the US in terms of speed, cost, and ease of use. BUT transferring ~$30,000 (or some cutoff) is much harder than the US and bogged down by regulations.
Do you have any personal insight into this in the EU?
In NZ, I can transfer up to 500k online and inter-bank settlement is hourly. That’s just the limit on my account ( which I could raise, but haven’t).
More than that and it’s a paper form. Settlement is still hourly but because humans are involved it takes longer to get the transaction into the system.
Oh, and I should mention that you wouldn’t hesitate to publicly give out your bank account number here either.
Some accounts have a limit of 10000€ per day for transferences. I've never had to transfer more than that but I guess you can do it over several days or visit your bank. I've done transferences with 4 different banks and never had to pay anything for them.
> there’s also the financial reality that not all trades are done with the immediate availability of the seller’s security, or the buyer’s cash, to achieve real time trade by trade settlement so a margin call is essential.
I thought settlement was just swapping money for securities; I did not realize that the margin call was key part of the process.
JumpCrisscross' comment [1] in a previous thread [2] is required reading as to why real time settlement is unlikely and undesirable, but end of day settlement is reasonable and likely where the industry will end up (if regulators and participants encourage the clearinghouse).
I take these type of responses you are linking to as someone trying to protect the establishment. I'm required to have enough money in my account for transactions that I wish to make. If I don't have it, I don't get to buy it. If I want to pay later for something I want to buy today, there is forms of credit.
If a clearing house doesn't have money to do the transactions that they are offering, then that is their problem. If they need to dip into a line of credit, then they can do so at their expense. If you "need a minute" at the end of the day to figure out what you have done during the day, then you are doing something wrong.
You’re probably not aware of what is actually going on with your bank account. You can, and likely do enter into all kinds of transactions where money in the account being required is an illusion. You can write checks all day long against an empty account. You can use a debit card against an account with say $1000 in it, and then transfer the money out before the charge hits in many cases. Debit and credit card transactions have up to 30 days to post to handle things like network outages and billing work with vendors. We’re slowly getting to faster clearing transactions, but there is a lot of work (much of it social and business process) that needs to happen before it actually works that way most of the time. Folks like RH and retail shops swallow the risk involved in this (and do have problems from time to time) because individual transactions are small and they make up for it with increased revenue by streamlining the process.
Clearing houses are intermediaries that make sure both sides of the transaction are protected from brokers intentionally or unintentionally doing the equivalent of this, but with billions of dollars at stake.
A type of escrow service, essentially.
There is little benefit to making this go super fast, and plenty of potential scary side effects.
The clearinghouse in this case wasn’t short cash - it was asking Robinhood to pay in it’s portion of the common insurance fund ALL brokers pay into in proportion to the risky things they are doing.
Robinhood didn’t have the cash, so they negotiated doing less risky things instead.
I can't believe how many took a margin call as some nefarious conspiracy. Kyle Kulinski, just as an example, said that Robinhood was given a billion dollars by hedge funds to disallow transactions of GameStop. https://twitter.com/KyleKulinski/status/1355573696119889921
It's a silly theory, but I wouldn't say I'm surprised, because the entire idea just doesn't make a ton of sense from first principles. If the NYSE has some stocks for sale, and I have money to spend on those stocks, why is it more complicated than buying a water bottle off Amazon or a Netflix subscription? There are good answers, sure, but they're long and complicated and it's entirely fair to be suspicious when you first hear them.
I think this is really under-appreciated as an argument in favor of lower settlement times. There's a lot of indirect societal costs in having the financial system look so strange.
Since neither Amazon or Netflix allow you to pay cash, the transaction settles much later. You get the appearance of immediate settlement, not unlike the stock market in normal conditions.
I'd assume if one were to check out from Amazon with say several millions of dollars of goods, there would be some phone calls being done in the back offices.
> water bottle off Amazon or a Netflix subscription
The first is a trivial item, the second an item of zero marginal cost that doesn't matter if payment fails.
A better example is settlement time of a car or house. If you buy a car maybe you can drive away today, but it takes a while before your ownership is fully registered.
I once bought a car, but did not have a check for the deposit on me. They let me drive off the lot with the car and I dropped off the check the next day so this is a pretty decent analogy. If for some reason I was unable to deliver the check I would be returning the car to them at a reduced value.
why is it more complicated than buying a water bottle off Amazon or a Netflix subscription?
It's not. This is one of those "tell me what happens when you navigate to a URL" interview questions. What really happens when you order something off Amazon? Is there a float? Is there delayed settlement? Does Amazon at some point have to settle with another party? And the answer to all of those questions is "yes". We could continue to deconstruct your analogy, but I think the point is made.
Sibling comment made an analogy to buying a car. I believe if one really tore into the question, one might find that just about the only financial transaction that doesn't work with many similarities to the stock market is handing a fiver to the clerk at your local convenience store. (And someone that knows more about retail than I do can tell me how wrong I am about that.)
You're very much on the point, I'd just add that a fiver in a cash register is both an asset and a liability, as anyone with a gun-like object might come through the door and take it. It's only when that fiver, together with the rest of cash, is taken at the end of the day to the bank and deposited there that your $5 grocery transaction can finally be considered settled.
>I can't believe how many took a margin call as some nefarious conspiracy
Why? We have the intersection of 3 things:
1. A financial system with opaque and often counter-intuitive inner workings (from an outsider's perspective)
2. A history of financial firms "innovating" (sometimes outright fraud, sometimes legal but leading to new legislation to restrict the "innovation"). Also the industry is not exactly known for being guided by strong moral principles.
3. A lot of money at stake.
If this is not a perfect breeding ground for conspiracy theories, I don't know what is!
I think the problem isn't necessarily how people immediately believed the conspiracies at face value (although that's still kind of bad), it's that
1. almost a week later, there are still people in certain communities (eg. wsb) that still believe in the conspiracy, and haven't bothered to inform themselves of at least the counter-arguments (eg. DTCC deposit requirements).
2. prominent politicians decide to jump in themselves without doing due diligence on their part, for some cheap political points.
> 2. prominent politicians decide to jump in themselves without doing due diligence on their part, for some cheap political points.
Erm, the politicians who jumped in (Cruz and AOC) kind of do this crap all the time. Its no surprise to me. No different than Cruz jumping in to the "stolen election" crap a few weeks ago.
That's the thing about "Populism" today. Its about following and agreeing with meme arguments without having any deeper analysis. I think its fine when the memes are stupid / joke level (ex: Bernies mittens is kinda funny). But even in joke/stupidity levels (ex: Bernie's mittens), there's a level of conspiracy and unreasoned / counterfactual / direct lies that aim to shift public opinion. (On the right: Bernie's mittens represent how the pandemic has closed shops, believe it or not. Which is why the right is willing to meme the Bernie's mittens, corrupting the left's interpretation of the image)
Its how things operate in today's political atmosphere. I can only hope that we Americans grow up and learn to see how stupid this strategy is eventually. Welcome to meme warfare. (At least in my social circles, the Bernie mittens meme seems to be leaning towards the left-interpretation of the story. But there's constant meme warfare to change the meaning of these images).
I often think of political spin. Great politicians don't need to lie or even to misrepresent facts. They just have to present actual facts that highlight some narrative.
It seems to be a fact that limiting or preventing buy orders would benefit hedge funds. So we can spin the fact that they prevented buy orders because it benefited hedge funds.
Another fact seems to be that Robinhood needed to cover its margins and required capital to do so. So the new spin is that Robinhood prevented orders because it needed to cover margins.
There is no real truth anywhere, just competing narratives. Slowly the prevailing narrative is changing from the first to the second. Some people are choosing one story over the other as the Truth. There is no doubt some actual paid PR going into both stories. My own opinion is that in cases as complex as this, there is no real Truth that fits any promoted narrative.
These narratives don't even appear to be mutually exclusive. Both can be true. Neither can be true. Several other unstated narratives can also be true. I think it's a common fault to believe only one thing can be true, when there are clearly many possibilities. I don't think it's exactly a false choice, but I'm sure there's a name for it.
It just bugs me when people don't consider that, and it's hard to tell if they're speaking in bad faith, have poor logical deduction skills or something else.
> I don't think it's exactly a false choice, but I'm sure there's a name for it.
It's a false dichotomy [1] and that is exactly how these narratives are spun. Another technique isn't forwarding your own narrative, but belittling the opposing narrative. "Only a fool could possibly believe A when it is possible that B is the reason". They don't even have to say that B is the reason, just suggest that it is a possible reason and believing anything else is foolish.
We're seeing exactly that. People are too stupid/ignorant to understand how complex this subject is, so they should just shut up and trust us when we say B is the reason. Do you even know how B works? Clearly you don't. If you did you would understand your own foolishness in even considering that A factored into any decision related to this subject. You idiot. Maybe you're a conspiracy theorist!
Regardless of the financial minutiae being specifically discussed here, the financial transaction regulation needs to slow everything way down and add randomized jitters. It needs to be somewhat plausibly in the range of human perception and response. The jitter needs to be an unknown as well.
Essentially this will undermine the undercut advantage the bastard big traders have, disincent/delay manipulations further into the chaos uncertainty windows, and many other things.
It may take blockchain technology to decentralize and enforce this, one of the few actual uses for this that the famous "blockchain? probably need a database instead" article debunked.
One thing I haven't seen answered but which I think would be enlightening is, how often do DTCC collateral requirements change such that trading in the stock is restricted? Although the answer may throw more fuel on the fire if it's a rare event.
I work in payments and I suspect that real reason we don't have real-time settlement has more to do with legacy batching systems than any political reasons. It's incredibly expensive to certify these systems, so once they work, nobody wants to touch them.
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[ 12.1 ms ] story [ 1269 ms ] threadThey do this by taking on the settlement failure risk, which is exactly what Robinhood does, and is exactly why Robinhood ran into potential trouble when GME became so volatile.
Give me safety over freedom, says every hegemonist when putting words in our mouths.
Your corner case scenario should not determine behavior for the market. That it is used to excuse behavior that is rammed down our throats anyway is, well, inexcusable.
I tried to be generic about who was adding the delay. I’m always short on time. Sorry if I missed a detail there.
Another way is to admit that we, as humanity, have very low tolerance to situations where people acting in good faith lose money to fraudsters through no fault of their own.
This is not "corner case scenario". This may not happen much, but the tolerance for when it happens is very low. The systems are designed with that low tolerance in mind.
A fairly easy way to add fraud protection would be to have T-0 or instant settlement only for previously used accounts/routing numbers. A lot of services already implement this on their end such that new bank accounts take a few days or a week to transfer but future transfers appear instant or within a day. Other options include allowing the first $X-thousand to be instant and the rest settles in T+2. This is pretty common if you get automatic deposits over a certain amount or use a phone check scanning feature.
I guess my point is that a lot of edge services (services that people interact with) already cover the T+2 delay in their own manner but that leads to confusion when some middle service provider decides to change the rules. Making the system itself adopt those strategies would just distribute the risk not increase it.
By all means allow users to set such delays if they want them, but the technology enforcing T+N really isn't a feature for customers so reframing it as such is probably a bad approach.
Furthermore, if there was instant settlement the idea of “shorts” changes: you could still borrow a stock but it is super clear who is holding it at a given moment, and how many are held by whom.
I want bank transfers with a progress bar like in the movies. And if you interrupt the transfer before it's completed only part of the funds will be transferred.
The progress bar should also have ominous music like those films where the infiltrators download the contents of the secret stash of info from the computer onto some driver while the clock is running out on them being discovered.
All the last week has really showed us is that the market is not prepared for modern realities. We could avoid 100% of this finger pointing by simply upgrading the technology. Instead we have Congress using precious time on our dime hauling in the wrong people (as usual) just because they are the face, while DTCC is laughing at them and won’t even issue a statement that could help clear things up.
Right, but I still think the comparison is good because blockchain should establish the minimum performance, and the financial industry, which can allow centralization, should be able to do much better. In terms of securities, it doesn't. Bitcoin is settled within an hour (6 confirmations), without the requirement to put up collateral that scales O(n) with the value of the transaction (and volatility).
a much more scalable private distributed ledger with kind of shitty chain security would be good enough to satisfy this industry.
would be faster than now, and faster than bitcoin, and brokers wouldn't have to put up collateral for multiple business days.
It’s funny to watch all the plethora of payment options springing up in the US when it’s just such a simple fix from the banks.
You don’t need a blockchain to do T-0 settlement.
Why don’t they just do it. I don’t understand.
Do you have any personal insight into this in the EU?
In NZ, I can transfer up to 500k online and inter-bank settlement is hourly. That’s just the limit on my account ( which I could raise, but haven’t).
More than that and it’s a paper form. Settlement is still hourly but because humans are involved it takes longer to get the transaction into the system.
Oh, and I should mention that you wouldn’t hesitate to publicly give out your bank account number here either.
Aside: some blockchain is in practice T-? which isn't desirable here.
I thought settlement was just swapping money for securities; I did not realize that the margin call was key part of the process.
[1] https://news.ycombinator.com/item?id=26007414
[2] https://news.ycombinator.com/item?id=26005457
If a clearing house doesn't have money to do the transactions that they are offering, then that is their problem. If they need to dip into a line of credit, then they can do so at their expense. If you "need a minute" at the end of the day to figure out what you have done during the day, then you are doing something wrong.
Clearing houses are intermediaries that make sure both sides of the transaction are protected from brokers intentionally or unintentionally doing the equivalent of this, but with billions of dollars at stake.
A type of escrow service, essentially.
There is little benefit to making this go super fast, and plenty of potential scary side effects.
The clearinghouse in this case wasn’t short cash - it was asking Robinhood to pay in it’s portion of the common insurance fund ALL brokers pay into in proportion to the risky things they are doing.
Robinhood didn’t have the cash, so they negotiated doing less risky things instead.
I think this is really under-appreciated as an argument in favor of lower settlement times. There's a lot of indirect societal costs in having the financial system look so strange.
I'd assume if one were to check out from Amazon with say several millions of dollars of goods, there would be some phone calls being done in the back offices.
The first is a trivial item, the second an item of zero marginal cost that doesn't matter if payment fails.
A better example is settlement time of a car or house. If you buy a car maybe you can drive away today, but it takes a while before your ownership is fully registered.
If the title transfer took 10 days, your transaction settled in T+10, even though you might think it's instantaneous.
It's not. This is one of those "tell me what happens when you navigate to a URL" interview questions. What really happens when you order something off Amazon? Is there a float? Is there delayed settlement? Does Amazon at some point have to settle with another party? And the answer to all of those questions is "yes". We could continue to deconstruct your analogy, but I think the point is made.
Sibling comment made an analogy to buying a car. I believe if one really tore into the question, one might find that just about the only financial transaction that doesn't work with many similarities to the stock market is handing a fiver to the clerk at your local convenience store. (And someone that knows more about retail than I do can tell me how wrong I am about that.)
Why? We have the intersection of 3 things:
1. A financial system with opaque and often counter-intuitive inner workings (from an outsider's perspective)
2. A history of financial firms "innovating" (sometimes outright fraud, sometimes legal but leading to new legislation to restrict the "innovation"). Also the industry is not exactly known for being guided by strong moral principles.
3. A lot of money at stake.
If this is not a perfect breeding ground for conspiracy theories, I don't know what is!
1. almost a week later, there are still people in certain communities (eg. wsb) that still believe in the conspiracy, and haven't bothered to inform themselves of at least the counter-arguments (eg. DTCC deposit requirements).
2. prominent politicians decide to jump in themselves without doing due diligence on their part, for some cheap political points.
Erm, the politicians who jumped in (Cruz and AOC) kind of do this crap all the time. Its no surprise to me. No different than Cruz jumping in to the "stolen election" crap a few weeks ago.
That's the thing about "Populism" today. Its about following and agreeing with meme arguments without having any deeper analysis. I think its fine when the memes are stupid / joke level (ex: Bernies mittens is kinda funny). But even in joke/stupidity levels (ex: Bernie's mittens), there's a level of conspiracy and unreasoned / counterfactual / direct lies that aim to shift public opinion. (On the right: Bernie's mittens represent how the pandemic has closed shops, believe it or not. Which is why the right is willing to meme the Bernie's mittens, corrupting the left's interpretation of the image)
Its how things operate in today's political atmosphere. I can only hope that we Americans grow up and learn to see how stupid this strategy is eventually. Welcome to meme warfare. (At least in my social circles, the Bernie mittens meme seems to be leaning towards the left-interpretation of the story. But there's constant meme warfare to change the meaning of these images).
It seems to be a fact that limiting or preventing buy orders would benefit hedge funds. So we can spin the fact that they prevented buy orders because it benefited hedge funds.
Another fact seems to be that Robinhood needed to cover its margins and required capital to do so. So the new spin is that Robinhood prevented orders because it needed to cover margins.
There is no real truth anywhere, just competing narratives. Slowly the prevailing narrative is changing from the first to the second. Some people are choosing one story over the other as the Truth. There is no doubt some actual paid PR going into both stories. My own opinion is that in cases as complex as this, there is no real Truth that fits any promoted narrative.
It just bugs me when people don't consider that, and it's hard to tell if they're speaking in bad faith, have poor logical deduction skills or something else.
It's a false dichotomy [1] and that is exactly how these narratives are spun. Another technique isn't forwarding your own narrative, but belittling the opposing narrative. "Only a fool could possibly believe A when it is possible that B is the reason". They don't even have to say that B is the reason, just suggest that it is a possible reason and believing anything else is foolish.
We're seeing exactly that. People are too stupid/ignorant to understand how complex this subject is, so they should just shut up and trust us when we say B is the reason. Do you even know how B works? Clearly you don't. If you did you would understand your own foolishness in even considering that A factored into any decision related to this subject. You idiot. Maybe you're a conspiracy theorist!
1. https://en.wikipedia.org/wiki/False_dilemma
https://www.bloomberg.com/news/articles/2021-01-29/what-s-th...
(caveat: source bias)
Essentially this will undermine the undercut advantage the bastard big traders have, disincent/delay manipulations further into the chaos uncertainty windows, and many other things.
It may take blockchain technology to decentralize and enforce this, one of the few actual uses for this that the famous "blockchain? probably need a database instead" article debunked.