We often think about “corporate resilience” in the context of business continuity planning and downside events, but despite the disruption caused by the global pandemic in the last 12 months we have seen several examples where rapid upside outcomes have challenged the resilience of beneficiary businesses.
The traditional thinking on resilience comes to mind when we hear a story like last year’s full-day outage of the ASX when a faulty software upgrade caused the market to close just 24 minutes after trading commenced. Traders and regulators were quick to question the integrity and redundancy that existed in the platform and making things worse was the “logic” issue that caused the system failure in the first place had also contaminated the ASX’s back-up system, eliminating the ability for to flip the market to the secondary system and restore trading.
But if we look closely, there are some obvious and not so obvious examples in recent months where corporate resilience has been left wanting as businesses have been challenged by a sudden increase in demand for their products.
If we go back to 27 January 2021, Gamestop was on a tear following the social media frenzy that has short squeezed a number of Wall Street hedge funds and left a few on life support. Robinhood, the commission free trading platform that was founded with the purpose of democratising access to the share market, was forced to take the unprecedented action of suspending all new buy order in Gamestop after what we have now come to understand was a capital call from its Prime Broker.
If we look at what actually happened in this example without the overlay of the broader Gamestop saga, we see that Robinhood benefited from a rapid growth in activity on its platform, similar to what happened in April 2020 as COVID lockdowns came into force. However, as market trades are settled 2 days after the transaction has been completed there is “default risk” in the system which is mitigated by the requirement for trading houses to place risk capital on deposit with their clearinghouse to cover any such losses that may occur.
Note: A clearinghouse is an institution that is responsible for settling the payment of buy and sell orders between parties.
Obviously, when the total value of buying activity on any one platform increases so too does the value at risk and clearinghouses require the capital deposits to grow proportionately. For Robinhood this was problematic, as not only did the clearinghouses see the growth in volume, they also considered the concentration of activity in a single stock to increase the risk which drove a significant increase in the deposit requirements imposed by the clearinghouse.
Robinhood didn’t have sufficient capital reserves to meet the deposit requirements and was forced to temporarily suspend buying activity in Gamestop shares to reduce its settlement risk whilst concurrently activating its corporate advisors to raise US$1b as quickly as possible. Luckily, the business was able to set a record for the fastest billion-dollar capital raise in known history the following day and trading was restored within the week but the event caught the attention of the media, regulators and class-action lawyers alike with the full implications yet to be seen.
If we roll forward to 15 February 2021, Slattery Auctions was hosting one of Australia’s most anticipated online motoring auctions with the sale of 9 highly prized collectable Australian muscle cars that were formerly owned by the infamous Perth businessman, Chris Marco. In the final minutes of the auction, just as things were getting exciting and bids on the coveted 1971 Ford XY Falcon GT-HO Phase III were quickly approaching the A$1m mark, the screens of observers and bidders alike displayed the feared “504 Gateway Time-Out error” as Slattery’s online auction platform crashed. A few hours later, bidding recommenced in a limited “invitation only” auction once the platform had be resuscitated and taken off life support.
The auction still set records for an Australian muscle car with the 1971 Ford XY Falcon GT-HO selling for A$1.15m but we will never know if the result might have been higher if the momentum in the pre-crash auction continued and the embarrassment of having it plastered across news outlets the following day is not something any business wants.
So in an IT-enabled world where demand can move rapidly, we need to start spending as much time thinking about how to build upside resilience into businesses as we do building downside resilience.