CEO of WeBull did a really good interview last night. The clearing houses shut everything down because they couldn't clear the trades. If you're putting in buy orders which get filled, but upon clearing, there is no share to buy, your order cannot be filled and the market collapses.
When a trade is requested through a broker, they go through a market maker to get the other side of the trade, that trade then goes to the clearing house to put the two pieces together with the DTC. DTC is the back-end stock swapping house. They move stock from firm to firm and keep track of everything. Due to Dodd-Frank (post-2008), the clearing house has to front part of the cost of the transaction up front for T+2 to the DTC. When a stock/bond/etc reaches a certain volatility level, D-F requires they front 100% of share px up front for 2-days to clear the trade.
What happens is that if the clearing house has to use all their cash to clear 1 or 2 stocks, they can't clear any other trades. Now all of a sudden, those other trades start failing. The clearing house can say "no more; we will no longer accept trades for that stock" at which point the broker has to front the money. Brokers don't carry that much cash, so they have to bow to the clearing house.
IF the CH kept allowing trades and the losing side blew up a margin account, the broker has to margin call the acct holder to close the gap. They will start by selling off the acct holder's positions. Any leftover due funds, the broker has to cover as a loss. If they can't cover it, it goes to the clearing house. If the clearing house can't cover it, there is no fallback and the clearing houses go under. The big banks started providing huge overnight loans to all the clearing houses so that they can stay afloat while these trades are clearing AND keep the rest of the market from breaking down.
These rules were put in place post-2008 because it's what caused Lehman to blow-up. They were the clearing house for a lot of HFs that blew up and it all fell back onto them. The new rules require the increase in cash up front for volatile securities, which allows CHs to shut down those trades to prevent a market breakdown, like in 2008.
This is effectively a microcosm black swan event. In theory, it shouldn't be able to happen. But this combination of events - excessive shorts, a short squeeze, popular momentum, all leading to a huge number of options contracts going "in the money", which in turn drove it higher, creating an upward spiral.
My guess regarding Citadel getting involved in buying out Melvin and Citron has to do with them being their broker (not sure) using it as a means to shelter them and their exposure to the leverage they had provided to those firms.
For anyone who bot and is still holding using the argument that today's contracts are leverage for a spike, know that only 36k itm contracts existed as of 9am MT today. The other ~65k were closed for cash, so there isn't nearly as much leverage there as assumed.