Interesting explanation. I wonder if hedge funds that short enormous amounts of stock include this scenario in their risk calculations. I expect that yes, they are well aware that if the price of a stocks runs away too much, these mechanisms will force brokerages to disallow buying, so that they can buy back the stock at lower prices.
However, there is one thing I still don’t understand from the article. Why were hedge funds allowed to still buy the stock? If this liquidity problem really happened as described, shouldn’t the trading be halted completely? I suspect the answer is that they don’t use a brokerage to buy and sell stocks. They probably have some kind of direct access to stock exchanges so they are not bound by the limitations set by brokers.
> Why were hedge funds allowed to still buy the stock?
They use a prime broker, which is a fancy way to say Goldmans, JPM, Citi, etc's institutional brokers, which also have the same relationship with the DTCC. And their prime brokers did not leave too little cash at the clearinghouse.
That's if you buy the story here. I'm still mulling it over. I used to run hedge funds, and indeed PBed with these big names.
Whether or not you were able to buy gamestop was more about how wealthy the broker you used was. If you were a retail investor on Fidelity, you could even buy options still.
Hedge funds tend not to use shady brokers who don't have strong balance sheets and competent risk managers and technologists. The list of better brokers is long.
However, there is one thing I still don’t understand from the article. Why were hedge funds allowed to still buy the stock? If this liquidity problem really happened as described, shouldn’t the trading be halted completely? I suspect the answer is that they don’t use a brokerage to buy and sell stocks. They probably have some kind of direct access to stock exchanges so they are not bound by the limitations set by brokers.