GameStop GME and AMC Stocks short squeeze explained
Hi again, this is Viram from Vested. A lot of us have heard about what happened in stocks like GameStop and AMC. We know how the retail investors battled against the hedge funds that had short positions in these stocks.
But today, we wanted to talk about why certain brokers, including our partner Drivewealth, had to halt buying in these securities, something which is a very rare phenomenon.
A lot of people thought that the brokers halted this buying because they wanted to side with the hedge funds, but that is not true. The broker had to stop buying because their clearing firm told them to do so. Now the clearing firm had to instruct the brokers because the DTC, which is the primary settlement company in the US, overnight increased the capital requirement from these clearing firms by up to 250 percent. That means that overnight these clearing houses had to scramble to arrange for billions of dollars.
So, why did the DTC suddenly increase the capital requirements?
Well, this was to make sure that the brokers operate within the confines of their balance sheet. In volatile markets, deposit requirements can vary significantly and depend on different factors such as:
- The imbalance between buys and sells offer of a security
- The volatility of a security
- And the volume of that security being traded
As we all know with stocks like GameStop and AMC all of these factors were out of the ordinary.
So that was a quick download on why brokers faced widespread disruption over the last couple of weeks.