GameStop Saga one year on: a stark difference between the US and European financial market infrastructures but…

Javier Hernani, head securities services at SIX, writes exclusively for The TRADE.

Today marks the one-year anniversary of the GameStop saga – when retail brokers halted the buying of the stock citing the inability to post sufficient collateral at clearing houses to execute their clients’ orders. As explained by analysts, this event was driven by the Reddit bloggers WallStreetBets pumping up the price of GameStop which put a short squeeze on hedge fund Melvin Capital as a result.

But as the investment management world continues to mull over ways to avoid being caught on the wrong side of the next meme stock trading frenzy, is the wider industry any closer to achieving the holy grail of faster settlement times? After all, the less time there is for potential volatility between trade orders and settlements, the less collateral a financial firm will have to put up as margin. Since sellers are not settled until two days after the trade, clearing houses need clearing members to post collateral for the net amount of money owed across all their transactions. For these millions of buy and sell orders that fall in between diverse investment strategies, investors are protected by a highly advanced risk mitigation infrastructure that ensures brokers can back up the trades they make.

This begs the question, 12 months on, does a two-day period to settle trades really leave investors and the wider industry exposed to unnecessary risk?

Well, the short answer is no. While a market event like GameStop could well happen again, it is important to recognise that the clearing and settlement framework worked perfectly in this case and, what is more important, through all the pandemic. Moreover, it is crucial to understand that there are nuances between the US and European post-trade infrastructures and regulations.

Firstly, it is key to note that millions of buy and sell orders are efficiently processed everyday across both markets. The difference is that in Europe, unlike the US, there are multiple countries reliant on the inherent strength and stability of the clearing and settlement market infrastructure underpinning securities trading. Secondly, the two frameworks cannot be compared as within Europe there are various jurisdictions and regulations.

Therefore, regardless of when the next stock frenzy hits the markets, expect that the shortening of the settlement cycle to T+1, or even T+0 to be a question “when” not “if” it happens. Certain post trade technology is now already on a level to adapt smoothly to any future changes. There has been a significant amount of risk reduction that has already taken place over the last years – thanks in large part to technology improving post-trade processes from an efficiency point of view.

Moving forward, the biggest challenge is expected if all relevant market participants are ready to adapt in a certain point in time, what the implications to the respective interfaces and stakeholders are and if such changes are implemented as a “big bang” or if there will be “parallel processing phases” where infrastructures need to handle different regimes at the same time.