Interview: TradeZero Exec Details $GME Battle with Clearing Firm

Daniel Pipitone is a co-founder of TradeZero. As a platform with tools and technology specifically designed for short selling, TradeZero is largely considered one of the top brokers to short stocks.

Naturally then, Dan took to reddit in a live AMA to discuss his take on the recent $GME saga when trading was halted by most brokerages. The AMA has soared in popularity, gaining more than 17,000 upvotes.

In late January 2021, TradeZero’s team was contacted by its clearing firm to halt trading on $GME, $AMC, and other select securities. While many brokerages did halt such trading—most notably Robinhood—Dan and his team at TradeZero fought back.

The Tokenist reached out to Dan to get the insider scoop as to what that chaotic time was like. The following is the result of our conversation.

Tokenist: You said you were pushed by your clearing firm to limit trading like so many brokers have. How did TradeZero manage to avoid imposing restrictions on GME and other “meme stocks”?

Dan: We pushed back and ultimately prevailed. When they called and emailed we said sorry, we were not at risk and we were not complying. This started a 3+ hour back and forth with them. Our decision to push back cost us in that the clearing firm doubled our deposit with them. 

Tokenist: The popular subreddit community, r/wallstreetbets, is doing something that’s never been done before by organizing independent retail traders to influence the market in a very, very major way. How do you see this changing the way stocks are traded and settled?

Dan: I think that there will be some regulatory guidance that hits firms as a result of this community and the price action of these stocks.

Tokenist: Do you think that WSB is disrupting the economy in a negative way, as we sometimes hear in the mainstream media?

Dan: I think that the media thrives on sound bites. I think that there were many folks that made lots of money on these stocks’ rides over the last few weeks, in the same way that there were also many losers. 

Tokenist: Robinhood CEO, Vlad Tenev claims that RH had to restrict buying GME and many other popular stocks because of unprecedented trading volumes. Is this something all brokers need to deal with? How does TradeZero deal with this?

Dan: All brokers do in some way. I feel that it is the firms’ responsibility to get ahead of these capital calls and their requirements before the end of the day. 

Tokenist: If you cannot meet your clearinghouses’ deposit requirements, what happens? Can they stop a brokerage from operating properly?

Dan: Yes, they can restrict margin trading, which essentially shuts a firm if many of its customers are margin accounts.

Tokenist: How much of the clearinghouse deposit / margin requirements is discretionary? In other words, to what extent can the finance establishment (i.e. hedge funds, market makers, banks)  influence volatility by arbitrarily increasing broker deposit requirements?

Dan: Hedge funds and market making banks do not really have an impact on deposit requirements of a clearing firm. Clearing firms will base their deposit decisions based on the risk profile of a firm. These decisions may seem arbitrary, but I would assume that they have models that determine these decisions. 

As it relates to the margin requirements of individual stocks, the clearing firm has a lot of flexibility in determining what the requirements are. What that means is a clearing firm can increase the amount of equity or cash someone has to have to get into a trade. For example, lets say a stock is Regular Reg T and has a 25% requirement. That means that if you have $5k in your account, you should be able to buy $20,000 of that stock. Clearing firms can update those requirements if they choose. For example, GME was raised to 100% requirement by Apex (our clearing firm) which means that with that same $5k you can only buy $5k in stock.

Tokenist: Elon Musk had an online chat with Vlad Tenev a few days ago where Elon asked Vlad whether he thinks the clearinghouses were influenced by the hedge funds, as clearing houses are generally private companies. What’s your take on this? 

Dan: I think that there is a sensational aspect to this headline that will sell newspapers, if you will. I don’t think that that was the driver of any action in this case. I think that RobinHood got themselves into a situation where they were unable or unwilling to meet the call demanded of them. I think that they made a bad business decision for restricting stocks and not getting ahead of their requirements to keep trading moving.

Tokenist: What do you think these clearinghouses stand to gain by helping hedge funds?

Dan: That would depend on the clearing firm and hedge fund, but many times hedge funds are customers of a clearing firm, and if they are a good customer, maybe there will be some benefits or perks for doing so.

Tokenist: It seems like this entire situation is unprecedented—at least when it comes to brokers limiting trading like this and leaving their customers holding hot potatoes. Do you have any knowledge of something like this transpiring in the past?

Dan: Stocks are routinely precluded from trading on the short side based on lack of availability for borrows. I have never seen non penny stocks being stopped for trading due to margin requirements or volatility.

Tokenist: Are there any solutions that can be implemented to make sure that a situation like this doesn’t happen again? Is there a technology available, perhaps Distributed Ledger Technology, which could facilitate real-time execution, clearing, and settlement—as opposed to the two-day period which currently burdens the industry?

Dan: Instant settlements would eliminate this entire dynamic. Firms would not be required to post $ for multiple days while a trade settles, even if the customer is no longer holding the stock.

Tokenist: Do you think this year is a turning point for investing? How do you think investing and trading are going to change in the future?

Dan: I think it has gotten the retail trader a level of respect that they never had, I know that trading models are actively being adjusted to handle the new look that is the retail trader. I think this will be a time that is referred to and referenced but I don’t think it is a major turning point of any kind.

Tokenist: To finish off this interview, is there a message you would like to leave for the WSB crowd?

Dan: Keep doing what you guys do! Wall Street has been dumping on retail since I have been in this business. As an owner of retail firms, my customers were always talked about as being the last to know. The order flow generated from our client base was always referred to as “dumb flow” by industry insiders. WHO’S LAUGHING NOW?????