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Thursday, Mar 04, 2021

Robinhood CEO says US markets need major system upgrade

Robinhood CEO says US markets need major system upgrade

Securities transactions are currently settled in two business days
Robinhood Markets Inc. cofounder and CEO Vladimir Tenev says it is time for U.S. financial markets to adopt a real-time settlement system.

The current system, T+2, means that securities transactions are settled in two business days. The antiquated system says that even if a broker like Robinhood has the money, it must still put up more cash as collateral.

The system “exposes investors and the industry to unnecessary risk and is ripe for change,” Tenev said in a Robinhood blog post on Tuesday following an intense week of market volatility that put the firm in the crosshairs with clients and politicians.

The Financial Industry Regulatory Authority [FINRA], which ensures market integrity, declined to comment.

Robinhood was forced to restrict customer trades in some highly volatile securities over the past week as a surge in trading volume in highly volatile stocks strained its abilities to cover clearinghouse deposit requirements. The online broker was forced to raise $4 billion from early investors in order to meet the requirements.

The Robinhood debacle demonstrates a “glaring weakness in our financial system,” said James Angel, associate professor of finance at Georgetown University’s McDonough School of Business.

Angel said the settlement system should at worst operate on the T+1 system that the U.S. Treasury market and futures markets have used for some time. However, he agrees with Tenev that a T+midnight system would be ideal.

“You have the money in your account today, you buy it and you become the beneficial owner tonight. That's where we need to be going,” Angel said.

However, he concedes a change to real-time settlement won’t be easy. There are 4,000 broker-dealers in the U.S. and they would all have to update their systems, which costs time and money.

“The big savings to the industry is they don't have as much money tied up in collateral and they don't have as much risk,” Angel said. “But they're not in any hurry to upgrade their back-office systems because those are not profit centers.”
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