As for this thread, it's got 1500+ comments. If you want to see them all you'll need to click through the More links at the bottom, or like this:
(Use your imagination after that.)
Why do Robinhood, Reddit, Discord, etc feel like they have to respond to this? Whether the investments being made are responsible or not, it doesn't seem like it should be their place to intervene.
If the hedge funds over-shorted GME and WSB recognized that and traded against that bad analysis, then that's great! If the pendulum swung the other direction and WSB is trading into some momentum, how is that any different than the hedge funds doing the same with shorts? Why should Robinhood pick a winner (siding against their own customers)?
Robinhood doesn't actually execute any trades. They sell user's trade orders to Citadel, a trade executor. Citadel then buys the shares on the market, and sells them to Robinhood for a slight markup. It's how Robinhood offers trades for $0 fees. You pay pennies more per share, but don't have to spend $5 per trade.
Citadel, and other trade executors, are refusing to buy shares for retail traders. Coincidentally, Citadel also bailed out Melvin fund for their short position in GME. So, Citadel has an interest in not letting the price go up any further. And citadel controls trade execution for dozens of firms.
This is definitely illegal. But Citadel is betting that the resulting SEC fines from this illegal manipulation will be less than the loss they would get if they didn't suppress the price.
Citadel bailed out Melvin Capital. Not its position. Melvin doesn't have a short position anymore.
Melvin made a stupid bet. Citadel bailed them out. Private sector bailouts aren't free: Citadel got its pound of flesh. Even if they bought the entire portfolio, that portfolio no longer includes GameStop shorts.
If Citadel's asset management and market making arms are colluding, that is illegal. But it's the most complicated and stupid explanation of the bunch. Market makers stop quoting for all kinds of reasons. If I were still on my options market making desk, I'd be pulling the plug on this. My traders would yell at me. This is what you make money on in market making! But the risks of loss go up with volatility, and the costs of gamma getting away can be nasty.
The chances that a fund the size of Citadel has any strong opinion on the direction of GameStop stock is vanishingly low. The chances that they stopped quoting in the name, as did almost every other market maker, and thereby broke Robinhood's system, which doesn't--to my knowledge--directly interface with exchanges to any significant degree, is high.
Source? If I was caught in a short squeeze, this is exactly the kind of announcement I would circulate to prevent the price from going any higher.
Citadel probably gave them the cash to avoid a margin call, knowing they can later manipulate the market and the shorts would payoff in the end, and Citadel would get their share of the spoils.
Otherwise a bailout makes no economical sense, Citadel is not the FED, they can't print money just to cover someone elses losses.
What? No it wouldn't.
Melvin faced cash calls. To raise cash fast they could (a) get it from their LPs (fat chance), (b) raise it from someone else or (c) sell other assets. The last option is a fire sale. You figure out what the fire sale discount would be, say it's 50%, and then use that to get (b).
I don't know what the terms of the bailout were. If I were structuring, I'd make it a loan with a super-high interest rate triply collateralized by their remaining assets. If they pay it back, I get the super high interest rate. If they default, I get the rest of their assets for 33¢ on the dollar. Between those two, the latter is frankly the higher-payoff scenario. (I would also require all short positions be closed out within N days, with the borrower's investors bearing the losses.)
That's what I was pointing out!
Melvin did not close their shorts(as they said they did), they just got more rope from Citadel, and Citadel was willing to do just that knowing they can manipulate the market.
The narative of Melvin was "Citadel gave us 3 billion dollars, we closed our shorts at a loss, you won wsb, aren't you happy, you won, now leave us alone and stop buying".
Yes. Those other assets are presumably uncorrelated to this short position. If they were fire sold, depending on the assets, they could have gotten 20¢ or 30¢ on the dollar.
That discount gives Melvin the incentive to borrow, even at exorbitant rates. It protects the rest of the portfolio. With the bailout, the GameStop loss is capped and eaten by LPs. That sucks. But it sucks less than eating that loss and selling off the rest of the portfolio for peanuts.
> Melvin did not close their shorts(as they said they did)
You're alleging securities fraud. This may be the case! But we have zero evidence of it. And if Citadel and Point72 invested $3bn to aid and abet securities fraud, that would be quite stupid.
I stare at this crap all day and I've seen no indicator that Melvin has closed a large percentage of their position, let alone all of it. I will 100 percent allege securities fraud.
"[Melvin] was rescued with a $2.75 billion cash infusion from two other hedge fund titans, Steve Cohen and Ken Griffin. Cohen was Plotkin's former boss at SAC Capital Management. SAC shuttered after the firm pled guilty to insider trading and paid $1.3 billion in fines. Cohen was not personally charged. Griffin runs Citadel LLC ...
In exchange, Citadel and Point72, the successor firm to SAC, own an undisclosed stake in Melvin Capital Management."
And what is the likelyhood Melvin had such a significant proportion of their portfolio in such assets?
@hanklazard best me to it
The answer is they didn't close it, they were trying to get the mob to back off.
And no, it technically wouldn't be fraud, they were very careful with their words...
Citadel, Point72 to Invest $2.75 Billion Into Melvin Capital Management - WSJ 
Read As: Melvin no longer has a short position. Citadel (edit: or like someone else said, a 3rd party) does. Citadel will handle this. Melvin is in time out.
We'll figure out who holds the chips in a few weeks time when filing deadlines are due. Thus it's dark.
Thus explains the perfectly executed short ladder today - could only be pulled off by someone with more dry powder than Melvin - but if you look at the Level II data, this is going to take a long, long time.
I missed this. What's this referencing?
Yes which could be called the crime of these brokers
That would be securities fraud.
I hope you have a better reason why that's not likely than "but that's illegal." Them actively committing securities fraud seems to be the most likely occurrence from where I'm sitting.
Who would save billions? For how long?
Let's assume the statement is fraudulent. Before the statement was made, Melvin's LPs were set to get hosed. Melvin's general partners, the ones making the statements, have a lot of egg on their faces. But they didn't do anything wrong. They keep their money and houses and yachts. And in all likelihood, after a few months, craft a lessons-learned pitch and raise more money.
After the statement, they have engaged in fraud. Not only is criminal prosecution a risk. All those deep-pocketed LPs can now sue the general partners, personally, for breach of fiduciary duty.
Add to that the Citadel bailout, which removed the risk of the fund going under, and there is no reasonable explanation for lying about closing out the short. If you wanted to show resilience, you'd say something like "we've fully hedged our shorts with long-dated puts, reducing our expected profit but capping our losses."
Selling a stock short is NOT illegal. It is a perfectly valid type of investment according to the SEC:
“D. Are short sales legal?
Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.”
Basically – you can’t short sell a stock to manipulate the price down so you can buy a lot more of it later. If you believe a stock is overpriced and short sell it, that is legal. That is exactly what tons of retail traders and hedge funds do every day, including on Gamestop.
On the other hand, manipulating a stock price upwards to cause a short squeeze IS illegal according to the same SEC article:
“Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal.”
Unprecedented numbers of people on Reddit, Twitter, and elsewhere collaborated to intentionally create a short squeeze on GME in the last week. No one talked about a fundamental case why Gamestop the company was worth a lot of money and would be successful in the future; instead everyone made the argument that due to a very high short interest of 100%+, that a short squeeze would send the price “to the moon”. That is illegal according to the SEC.
Multiple brokerages, especially Robinhood, probably had their attorneys tell them that “Hey, you are aiding and abetting illegal activity by enabling a short squeeze and could be liable criminally or civilly if you continue to allow this blatant illegal activity on your platform”. So they decided to stop it by only allowing people to close their positions rather than open new ones in support of the short squeeze.
Another strong reason is that if the short squeeze caused the GME stock to go to 5000 in a sudden leap, tons of traders (both retail and professional) could instantly go broke, and then the brokerage (Robinhood) would be left holding the bag. For example, picture a retail investor with a Robinhood account had sold call options in the amount of $100,000 and their account was worth $200,000. If the price gapped from 300 to 5000 and those options were exercised, that trader could have a loss of $10,000,000. He would lose the value of his account, $200,000… but the brokerage would have to make up the rest of the settlement and take a loss of $9,800,000. Now multiply that by thousands of accounts…. no brokerage wants to take the risk of being bankrupted, so they shut it down.
The two strong reasons Robinhood and other brokers stopped trading was to prevent legal liability from enabling illegal activity on their platform, and for wanting to avoid potentially massive banktuptcy from traders unable to cover their losses.
All of this started on Reddit because someone made a case for their fundamentals.
Here is their Reddit account: https://www.reddit.com/user/DeepFuckingValue/
Here is their YouTube account: https://www.youtube.com/c/RoaringKitty/videos
He is considered a legend by all of the people on WSB (of which I am not one) for it and kicked the whole thing off.
My question is.. how does a guy on Reddit and YouTube giving a fundamental analysis of why he valued a stock, and millions of people seeing value and buying it, differ from something akin to Mad Money?
In the last week though, after the massive increase in GME's stock price, the arguments on WSB have all been about the planned short squeeze and gamma squeeze to convince people to hold on or buy more.
You're missing a party in that analysis. For this party, maybe it was a stupid idea for them to try and short sell in a market where the fed had pumped trillions into the economy and market activity, retail and otherwise, is at an unprecedented level of froth. But with that said, they are supposed to be professionals. It seems to be within reason to expect them to be able to hedge against the risk of a bunch of amateurs deciding to protest buy a piece of their childhood against being raided by Wall Street, no?
After all, "irrationally" holding assets that have sentimental value and allocating a large portion of whatever surplus earnings you have to it is a well known American tradition. Whatever the socioeconomic bracket, people have traditionally found ways to support causes and brands that they hold dear. Shouldn't large institutional clients be asking these fund managers why they're poking a beehive right now, and whether it might just be a little unnecessarily risky?
As the price goes up more people started to believe the thesis and piled in. At some point this just becomes momentum training which last I knew was legal.
It seems like you have taken a very narrow and biased view of the law that fits the narrative you like.
Especially when they're staring at billions of losses and maybe all it takes to save them is a carefully worded public statement that they think they can later argue is technically truthful.
There's no announcement, just a sourced rumor, and no proof they closed their trades when they said they did.
Doing this all in such a publicly-coordinated way on Reddit means you're wide open to people trying to directly play against your goals.
So much of the "proof" of things around this seems to be making big assumptions about who is on the other side that the aggregate numbers don't seem to indicate one way or another.
Lots of people are short? I know at least half a dozen people who bought puts over the last few days. Those puts hedge into shorting the same way calls turn into buying.
I'd say most of the wallstreetbets traders still believe Melvin has their position, but you're saying otherwise. Though the still extremely high short interested doesn't seem to make sense if the big losers already exited...
I do. This will make partners out of a solid suite of securities lawyers around the country. But we won't have clear answers for at least another 6 months.
Also, from what people are saying on WSB, there's no liquidity left in the market which is why some platforms halted trading for $GME.
If the early shorts were all out I wouldn't expect a lack of liquidity, since more recent short positions wouldn't be under as much pressure.
I'm a complete noob, but it seems like literally no one can agree on what's happening and why even though there seem to be valid arguments on all sides.
Naked shorts at this scale are gonna have to go away and no one will have more incentive to reach that goal than main street wall street ... ideally they can and should do this in a way that simply involves making more information public ...
Tens of billions of dollars of GameStop have been bought and sold over the past few days. If you can buy GameStop to go long, you can buy it to cover a short.
Note that there isn't a limit on rehypothecation. A share sold short by Bob can be used by Anna to cover her pre-existing short.
Yes, at prices that are several multiples above the price they shorted at.
And I am quite certain that there is no obligation that you have to truthfully tell the world your position in any one security.
So, I’d like someone with legal training to make a case for security fraud.
(It might still be market manipulation or some such).
Naked shorting to drive down the price is also securities fraud. And yet...
I find it exceedingly unlikely that Citadel has no opinion on the value of a stock that could make or break a firm they just lent massive amounts of money to.
It's also very unlikely that Melvin didn't have a short position anymore. I think that was a lie, knowing the SEC fine would be less than what they otherwise would lose. We'll see - maybe. Or maybe TPTB will cover this up.
I didn't touch this in the first place, but once it was clear it was a short squeeze, nope, not gonna play that game. Just sit back and enjoy the show.
This makes no sense, if gme isn't shorted then why then break the law and restrict buying it?
And it does feel like they are restricting buys. Seems unlikely that all the trading platforms that rely on citadel coincidentally decided they wanted to hedge against volatility by restricting user buys.
Untrue, the number of shares short is still 70 million. Nothing changed.
I’ve no dog in this race; just thought I should point that out
how long can citadel and/or other entities hold?
So many people here who have no idea what the hell is going on, and yet are so confident.
Retail did nothing to Citadel securities.
Even the amount of billions being transferred here are not interesting.
People after the financial crisis liked to talk about fat tails. Risk models assuming narrow tails, reality having a taste for extreme events. This is a fat-tail event. We don't have great models for stocks as volatile and as correlated as GME is right now. Which means for even cash equities trading, we don't have a great sense around what the appropriate spread should be.
Market making has sometimes been described as vacuuming up nickels in front of bulldozers. These are bulldozin' times. You don't want to fill a bunch of sell orders in GME right before it gaps down 80%.
On exchanges. Those are buyers and sellers as well as market makers. Robinhood connects to a subset of the latter.
Nope, pretty much just market makers.
Normally internalizers have no problem competing with spreads on the exchanges, because retail flow is much less toxic than the sophisticated traders in the public venues. But with GME, the retail investors are running the show.
Therefore it no longer makes sense for internalizers to pay for this order flow.
If this is coming from Robin Hood, they could make the (very weak) argument that they are protecting their retail customers from themselves, but if it's coming from Citadel, it just looks like market manipulation to me.
Given that it's not just RH, but nearly all, if not all, brokers that outsource order flow like RH...I think it's safe to assume it wasn't RH decision.
This is a much bigger deal, some (not hedge fund!) people are going to lose a crapton of money on it, and people are probably going to sue them once that happens.
You can see this discussed elsewhere in the thread.
For trying to get some positive media coverage, after being constantly bashed and blamed by them for the uneducated retail trader boom.
That's not at all verified. Short interest is still well over 100% of float. The only thing you are going off is a poorly sourced CNBC report with wishy washy language from Plotkin.
Citadel "bailed out Melvin Capital" because Citadel essentially owns Melvin and so their loss is our loss sort of situation. Melvin Capital stated they had closed out their short position on GameStop, but those are huge losses to cover no one knows how true that is. There is a lot of rumor that Citadel/Melvin Capital re-bought short positions yesterday before Citadel restricted trades to manipulate the market. If this is true it is highly illegal, but this effectively allow Citadel/Melvin to make back their losses if they can force market prices down.
TL/DR, Citadel/Melvin are breaking the law, all the retail traders are getting fucked, but when this is done Citadel/Melvin ends up having more cash than ever.
Melvin Capital closed out their short position yesterday with a large loss - and Citadel helped cover that loss.
As far as I know, Citadel and Melvin Capital no longer are holding any short positions in Gamestop. So what do they have to gain, by your narrative, from suppressing the price?
Citadel is probably making bank off of this actually, like a lot of other sell-side firms.
Today, there is still a 122% short position on Gamestop. There are still many funds hedged against GME. Melvin might have had one of the larger positions, but there are many more funds with this position. Source: https://finviz.com/quote.ashx?t=GME
As you say, they would make money by running the orders, regardless if GME goes up or down. So - why would they stop? It is most likely that Citadel is still exposed to other funds holding short positions in GME.
There is literally no evidence that Citadel has stopped serving GME orders. That is entirely the conjecture of this thread and ignores the much more likelier option that it was Robinhood that limited the stocks.
Why wouldn't you short GME after the price has risen so high? I'm sure there are plenty of hedge funds shorting now at a much higher price.
Hell, I shorted AMC yesterday and have made quite a bit off of that already.
Because the stock is already over 100% short and an army of retail investors is purchasing it
Because that is also often when it is a good time to make money.
It's entirely unsurprising to me that short pressure on the stock would increase after this.
The risk to a company that processes trades is that many of these retail investors accounts would turn negative and the company that processes the trades would take giant losses they did not plan for. To prevent that, they stop processing trades.
If you have to buy by EOD Friday and the price starts skyrocketing Thursday, you might want to buy a little earlier even if it means eating a huge loss, because you don't know if that skyrocket will continue into the next day.
e: Why is that downvoted?
Put options do expire, but the worst case for puts is that they expire worthless. Regular shorts can have unbounded losses.
Melvin Capital's short position was in the form of puts, I think.
Since they would expire worthless, better to sell them when it is skyrocketing than to wait and see it skyrocket further and lose all of your money.
This is incorrect.
You don't need an "emergency infusion of 3 billion dollars" if you just bought put options that are now deep OTM. As you mentioned, the total downside is capped at 100%.
They clearly had real exposure and serious panic. If they were using put options they were leveraged or had non-standard terms (not the same as typical retail investors)
If it were just puts, then their exposure to a run-up would have been 55 million, not billions. Puts can only go to zero. The filing merely hinted that they were shorting the stock because they also had some puts on it.
Think about it, if you buy a $9 put for $10, the most you could lose is $10 when the stock goes way above $9. The unlimited loss scenario with options is writing (selling) a naked call, where you receive a premium but if the stock price rises above the strike price your loss rises.
Melvin's position must have been mostly short equity. Perhaps only a few million shares of a $3 stock.
But honestly I doubt it was even possible to be short so much with options alone on such a low cap company (as it was before this blew up)
There is no ambiguity in what "closing the position" means. Stating on CNBC that you have closed the position when in fact you only bought shares to cover 1% of your short would put you in jail.
Your mental model for how the world works is wrong.
Is it equally illegal to say on CNBC that you closed it out, but to email your investors and tell them you didn't?
Is the legal issue that you're misleading your investors or that you're manipulating the market? Both?
And despite how it seems from outside Wall Street, hedge funds are definitely scared of the SEC. Banks worry less because their money is sourced differently. Hedge funds have to worry about legal action not just for the fines but also for scaring their investors. When individual investors are so large it only takes a few redemptions to significantly impact AUM.
I am not trying to conspire, genuinely curious.
Also potentially new shorters getting in? I shorted AMC yesterday and have made quite a bit today.
If this is accurate then your question makes sense. Why? But how do we know this is real though? They could play games as well and I'm sure they do. Stock trading is gambling.
Melvin Capital has already stated they have closed out their position, think it would probably be fraud if they hadn't.
IANAL but I doubt this would be fraud -- they arent a public corporation making statements about themselves. They did have LPs, but i'm not sure what restrictions there are around speaking -- would anyone know?
You wouldnt communicate to your LPs via CNBC or Twitter.
Maybe, the problem was just transferred to someone else so they can remove it from their statements. And now that someone is trying to deal with this.
Unless we have trustable source with all the details on how that position has been closed, I don't think it's safe to assume anything.
Sure, there is some risk in liquidity provisioning, but I think you are really not understanding what market makers do and conflating it with hedge funds.
1. As I understood it, they closed *A* position, not their whole position, and announced that in the hopes it would deflate the stock price so Melvin doesn't crater.
2. And what, exactly, would be the punishment for this fraud, assuming they even get prosecuted and convicted? Can you put a dollar figure on it? Now put a dollar figure on how much they would lose if they didn't make that announcement, and compare the two numbers.
You recall incorrectly. I encourage you to Google before commenting your recollections, it's quite easy to find.
"Melvin Capital has repositioned our portfolio over the past few days. We have closed out our position in GME (GameStop)," the spokesman said in a statement. 
If it's true they refused to process for certain securities for their downstream clients, then I believe "When?" and "Why?", specifically in relation to other actions, become legally relevant questions.
This is something many people are claiming is false. As far as I can find, Melvin have not issues any formal statement on the matter - this claim is purely based on a CNBC "source".
I'll be closing my RH account soon. For now, I'll be holding the line on GME.
Not only hedge funds and brokers colluding against the retail investors, but the government as well. Yeah...sounds about right.
I think there must be laws that say the CEO and the board must get prison terms (preferably life, with no possibility of parole) for these crimes.
No, I will not listen to hogwash like "you shouldn't be responsible for the actions of people you hire". BS. They report to you. Even if they did it on their own, why didn't you reverse it? If you are not responsible for the actions of your employees or contractors, don't hire them. Close down. See if I care.
Like. I understand your point but a lot of people really don't think that is punishment really
These people who are gambling with peoples lives and livelihoods just to get richer need to start going to jail.
Nothing will change until proper punishments are handed out that makes people reconsider being a greedy, selfish, morally reprehensible piece of shit.
The war on drugs sucked, but it was still mostly a war against dealers.
That all said, for all of the negative PR Nixon has received over the years he was a rather progressive and surprisingly egalitarian executive who has been praised by Indian Country Today and appears to have stuck pretty close to his quaker upbringings. I think a lot of people conflate Nixon and Regan - which is pretty ridiculous when you look at the policies those two presidents actually pursued during their terms... And even more folks are getting second hand vibes from Nixon's infamous presidential debate which pitted a rather uncharismatic man against JFK and led to a pretty obvious outcome.
3. https://www.youtube.com/watch?v=-9cdRpE4KKc Just FYI - if you've never seen this I'd suggest giving it a go sometime. Given recent politics it's almost fantastical to listen to two folks come into a debate focused on the issues and minimizing the ways they attacked each other.
Hard to laud Nixon in my view, he was pretty clearly a racist man and was the originator of the "welfare queen" rhetoric (and the corresponding cuts in SNAP, etc.).
We can be as cynical as we like about boomers and then going on to be Reagan voters, it doesn't change Nixon and Kissenger's status as unprosecuted war criminals.
I'm not overly familiar with Quaker orthodoxy, I'd be surprised if dropping bombs killing 500k Cambodians is consistent with it. Nixon wasn't all bad because no human is, even he who must not be named was kind to (some) children, we're told.
Not all bad can still be utterly horrific.
I just don't think it is accurate to say that people are getting super long sentences for possession anymore and I don't think it is right to use that as justification for longer sentences for other people.
#2: I completely agree.
three strikes laws still exist, it is still possible to push possession into felony territory. if there's a gun anywhere near the arrest you can probably tack on firearms charges, etc.
if you're reasonably white and middle class those extras will be ignored for a lighter sentence. if you're black or for whatever other reason they just don't like you then they'll tack those extras on and three strikes you.
there is a lot of "prosecutorial discretion" still, and if you dig into it hard enough that's a code word for racially biased prosecution. the fact that they we reasonable with you or your college buddies who got busted with some MDMA or something is not the same experience that lower income black people get.
Because nothing ever happens to the rich when all you do is take a bit of their money away. They have so much that they will get it back merely for being wealthy, and as we just saw with the recent pardons, they won't even serve their entire sentence even when they're stealing the life savings of hundreds.
Fines can mean something, if scaled correctly:
If I had a billion dollars and could get 2 billion dollars but I'd go to jail for 5 years, I would absolutely NOT do that thing.
Your objection doesn't even make sense.
Here's my perspective.
I spent my childhood around kids from broken families, most of whom had parents in prison on long sentences for nonviolent drug charges. I saw lots of my friends lose their houses in the 00s. I entered a job market that treats just about everyone as disposable; unworthy of training, investment, benefits, time off, bathroom breaks, ppe, or a livable wage.
Wall sts focus on the short term has been like napalm on these issues and made fixing them political suicide. I don't say this lightly; wall st has enslaved America for profit.
>The Top 1% of Americans Have Taken $50 Trillion From the Bottom 90% 
The proletariat is showing their heads and nipping at the ankles of everyone. Some are misguided, but beating a hedge fund at their own game, trying to convince boomers that black lives matter enough to not be executed by police, or Medicare for All or forgiving student loan debt are all extremely well studied solutions to systemic issues in America that will not be meaningfully addressed until the root problems are addressed: money in politics, racism, trickle down economics, class inequality, asset inflation, health care, employee rights, war on drugs, etc, etc, etc.
This specific incident was a fluke of luck that required ridiculously overpaid bros in cushy hedge fund jobs to count past 100% while shorting gme/nok/AMC which is playing with the lives and livelihood of the people that work in each of those companies. Needless to say, but watching billionaires repeat '08 with gamestop, amc, and Nokia ruffled a lot of feathers. Gme especially brought out some whales with money to burn in the chase of infinite gains.
Maybe this was an elaborate psyop to manipulate people into doing things they wouldn't. If so, great job, if not, well maybe the fat cats on wall st and in Congress should come around my hood and experience the hopelessness for themselves, that's an open invitation for as long as this account is active for any billionaires or US politicians not already arguing against the same issues I am to come and walk in my shoes.
Hopefully this incident spurs some change in wall st and the culture there. Congress certainly doesn't have the courage to.
They sure made it sound like it was their choice. https://blog.robinhood.com/news/2021/1/28/keeping-customers-...
The question I have is, can this be prosecuted criminally and can those in charge be threatened with actual jail time from this?
Even if there had been some kind of illegal collusion, it doesn't seem likely that stopping trading would have helped Melvin to cover their short position, which they ended up doing.
There is probably no conspiracy here.
It's not really a bet when they're 50% certain they can get away with no fine, 99% certain the SEC fine will be < 10% of the profit, and 100% certain the fine won't be > 100% of the profit.
This would be front running and is fundamentally not how citadel or other MM function.
So, more or less as described, but the order is a little different, right?
What Citadel and others are doing is they are saying to RH "your order flow is uncorrelated and we'd like to make markets for it, we will charge your users slightly lower bid-ask spread (price improvement for user) and we will also give you a slice of the bid-ask spread we do collect, in return the uncorrelated nature of the orders will ensure that we won't have to do much trades in order to maintain a neutral position."
This proposition is actually good for
1. RH users (they get price improvement relative to NBBO)
2. RH (they get to make money and get a user base)
3. Participating market makers (they get much steadier cash flow from MM activity).
It is bad for
1. Big institutions, they get to pay larger spread than they would if the market was more diluted by retails
2. Non-participating MM (they increase the bid-ask spread to make sure it's still worth their time but there is more volatility and it's a competitive market so mis-pricing the spread is a real problem).
Also, current GME shenanigans are net good for MM since MM is a business that makes money on volume, not direction.
I assumed Citadel would actually be cleaning up market making GME with all the trading and volatility, but maybe the trades are too coordinated. What they're paying for is order flow from unsophisticated investors; they don't want to deal with hedge funds and the games they play. Maybe these trades are close enough to something a hedge fund would do, so the orders aren't worth it?
There is nothing but the market makers.
> I assumed Citadel would actually be cleaning up market making GME with all the trading and volatility, but maybe the trades are too coordinated
I suspect they are still making bank. The demand for liquidity has increased, so there is a higher premium on liquidity provision.
Any evidence on this? RH said the opposite:
>To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to. We’re beginning to open up trading for some of these securities in a responsible manner.
IMHO, I'm concerned about this because this is a 1st amendment problem. Let grown adults gamble. Let them be responsible for their dumb actions (hedge and retail alike). If someone is 'too big to fail' then they are 'too big to exist'.
Gambling isn't even legal in most states. Good luck arguing that.
What States are you not allowed to short or long? Using your logic, this is cognitive dissonance. How free people spend their money is an act of speech, PACs and SuperPACs are emboldened by this current legal fact.
Maybe you need explicit help to understand my position. If hedge funds can short/long stocks, there should be nothing preventing a retail investor from doing the same.
As for it being speech, well, corporations are people and PAC/SuperPAC political donations (read: blackbox donations) are speech. These are current USA facts.
From there, I extrapolate that it would be unfair to regulate Main Street instead of Wall Street. This wouldn't be such a massive problem if Wall Street wasn't allowed so much leverage (and short 140% of the company shares...how is that even legal. That's literally fraud). I can't sell you 100% of my property and then sell 40% to someone else.
It's that simple, stop obstructing discourse.
It makes a perfect kind of sense. Nonsense.
To clarify: you will never pay more than market price (i.e. you will never have to pay more than the best order sitting on the book). Citadel or whoever will only internalize your order if they're willing to offer you a better price than market price. Otherwise RH is obligated to match your order with the best price currently available.
They are willing to do this because they would prefer not to leave orders sitting on the books, and there's a fee for taking orders off the books which they would prefer not to pay.
Most clearing firms aren’t clearing GME or AMC anymore. It’s not just RH.
the best financial advice I ever got was to never ignore conflicts of interest.
Plus time in prison.
Robinhood is a margin-lending options-trading broker. If a customer falls down on a trade, it is ultimately liable. If a retail customer loses money and makes a FINRA complaint that Robinhood induced them to buy through its gameified interface, it is liable. Risk and compliance likely made this call.
Also, Robinhood makes its revenue from market makers. They are the customers. Clients are not. So when trading these equities gets unprofitable, they will pull the plug. (Though anecdotally, everyone I know on the sell side in equities and equity derivatives is making a killing on this.)
What I can guarantee is nobody shorting GameStop got Robinhood to pull the plug.
Why would robinhood be any more liable than other online traders like Fidelity or etrade?
> What I can guarantee is nobody shorting GameStop got Robinhood to pull the plug.
How can you guarantee that? Robinhood likely routes most of it's trades through citadel, which has informed partners it will not be fulfilling GME or AMC or BB trades.
And it turns out Citadel is also a hedge fund that has massive short positions on GME.
Every brokerage house ultimately vouches for their clients.
Robinhood has extra exposure because clients could claim its interface induced them to overtrade.
> Robinhood likely routes most of it's trades through citadel
Do we have a source for this?
Also, Citadel just made money bailing out Melvin Capital. The short squeeze let them buy assets at dimes on the dollar. Assets which do not include GameStop shorts.
> which has informed partners it will not be fulfilling GME or AMC or BB trades
Former market maker. When trading got crazy we'd take profits. When it got inexplicable, we'd pull the plug. If we didn't, risk would. In this case, there is the additional factor of political risk--you don't want to be making millions of dollars off GameStop at its peak when that's going to cost you tens of millions of legal fees in front of Congress.
A simple explanation for Robinhood's behavior might be that their customers, the market makers, backed away from paying for this order flow.
All this said, I'd be highly pissed if my broker did this to me. But Robinhood customers have known since the beginning they weren't the customer.
>Do we have a source for this?
I find it nuts how this has transformed into a populist thing.
Normally, a market maker might then close it by buying a share from someone trying to sell. But in a massively one-way market like GME, it's quite likely that they build up a large enough unhedged massive short position that they say "no, we're not taking on any more risk" and communicate that to Robin Hood.
> they say "no, we're not taking on any more risk" and communicate that to Robin Hood.
Maybe, although they would probably do that when their ability to hedge started breaking down, not when they'd already acquired massive short positions.
More likely, to me, is that they would just increase the bid-ask price spread continuously as their ability to hedge degrades.
This assumes continuous liquidity. Dangerous assumption to make in choppy markets.
It is not uncommon for markets to gap up or down discontinuously. You look at the market and see bid 899 at 901, buy some shares for 898, offer them at 890 and find the market is now 125 at 901.
Corporate risk controls are also not a hard science, different risk teams can and do come to different conclusions on the same issue.
Not sure how you could possibly gaurantee that. Also given that Robinhood edit got a huge chunk of cash from a shorter makes that pretty weird to "guarantee"
 https://cdn.robinhood.com/assets/robinhood/legal/RHS%20SEC%2..., https://news.ycombinator.com/item?id=25945258
I'm seeing one tweet from Adam Hackney claiming this . Do we have a real source?
But Citadel MM is more likely to pull the plug on making markets in a name for risk reasons than to benefit a hedge fund position. To say nothing of the fact that Citadel got to bail out Melvin Capital, which is traditionally a profitable trade.
In particular, I believe Citadel would gain more from continued trading on Robinhood than they would lose from their hedge fund positions.
Market makers always win.
Additionally, other retail brokers selling to Citadel Capital have done the exact same (Schwab comes to mind, but not only).
Other brokers however (fidelity), have not. If the short squeeze is to happen tomorrow, this seems an unlikely coincidence that those retail brokers affiliated with Citadel Capital tool positions that would ultimately deflate the stock.
I don't see how GP can assure that no short sellers is behind those moves.
FINRA arbitration, and the FINRA complaint process, is highly sympathetic to retail clients. When these clients lose money on GME et al, there will almost certainly be a class-action lawsuit for some fraction of their collective losses. And Robinhood's lawyers will almost certainly recommend they settle. That is the risk, beyond margin lending and options settlement, they are seeking to mitigate.
(Also, when that money is lost, there is a decent chance Robinhood will be fined by half the regulators on this planet for inducing people to overtrade through its gameified interface or something like that.)
If their customers - the firms that pay them, not app users - see the RH platform as a threat to their business they could pull the plug. Or if this prompts regulators to examine RH and similar products.
The risk isn't in the outcomes of options/trades; its risk to their business model.
 RH's customer are actually market makers, who by and large will be profiting heavily off of this.
This point has been made repeatedly elsewhere but it bears repeating. Market makers are getting rich off this trading. Robinhood's customers are not hurting from this.
Still, as far as risk to RH is concerned - if this kicks off a change via their customers, regulators, or legal action the change is probably not in their favor.
On one hand, you could say RH shouldn't let people buy options if RH doesn't believe those people can pay up when the option expires. On the other hand, you have people buying options who maybe don't understand that you need cash to buy the shares if the option expires in the money.
There could is also the concern about new accounts trading in GME with funds that might be suspect. It's a risk you don't want to take if you don't know your customers and the bubble is ready to burst at any moment.
Interactive Brokers hiked the long margin to 100% (and short to 300%) which is a reasonable way for a broker to behave.
Killing the ability to buy is not.
The answer is no.
No, people / pundits / the media were widely proclaiming that the healthcare system would be overrun and the next great economic depression was upon us. Most people assumed the stock market would continue to fall.
This is a very tenuous argument. By law, options customers in the US have to receive an information packet and accept an Options Agreement, wherein it's clear that they could lose 100% of their premium outlay (or more). Options trading is approved based on levels; not every account can buy options, and not every options account can sell naked options.
If we are assuming good faith from RH, maybe they are trying to prevent margin-call suicides. But I don't assume good faith from RH.
Not to mention that they turned off all opening trades -- not just large trades, margin trades, or options trades.
I can assure you there are very few cattle, bison, or caribou near the exchange.
While writing, I was thinking of the thundering herd problem and imagined that individual users is more literal (than many processes), more like the thing for which the problem was named.
If I'm not not mistaken, I think you can also refer to a group of humans literally as a herd. But I very rarely think such prescriptivism (saying one should not use terms inappropriately) provides value, especially on a word that is so far past being used correctly with any consistency.
Market makers buy order flow. Hedge funds don't. The only major hedge fund affiliated with a market maker is Citadel.
Melvin and Citron placing shorting GME is an anomaly in the hedge fund world. Most institutional short views are expressed through options and structured products. (Market makers convert those options into shorts, the same way they convert calls into stock purchases.)
Market makers are making tonnes of money on this. It's the low-information non-directional trading their models are built for. (Source: former options market maker. My former colleagues are making annual targets in a week.)
Some hedge funds are getting screwed. But that is mostly over. Few funds' risk tolerances let them extend a 10x loss on an outright short. With respect to their puts, their maximum loss is the premium. That's generally baked into the risk model ex ante.
The only sophisticated parties holding the bag are brokers. Margin loans at risk. Uncovered options sales at risk. Most significantly, when the scheme inevitably crashes, almost-inevitable class-action lawsuits from clients claiming to have been misled by their interfaces.
Aren't these market makers sitting on a ton of stock to cover call positions?
They may have picked up a lot of pennies these last two weeks, but the bulldozer is getting bigger and faster. This is a truly unprecedented situation and I doubt they have confidence that their models can handle it.
> Aren't these market makers sitting on a ton of stock to cover call positions?
The whole purpose of delta hedging is to make them immune to the first-order effects of market moves. The first-order derivative of the value of everything they hold with respect to price moves in any one stock is constantly kept near zero.
In the old days, many options traders would put off hedging their books until near the closing bell. Smart equities traders would watch the options market to see which way the traders would be rushing to hedge in the cash equities market. These days, there are systems that automatically hedge out the positions throughout the day.
How many shares of Melvin Capital were bought by Citadel when they injected $2.75B? Is there a way to know how exposed they are?
Isn't there a conflict of interest in them floating a hedge fund losing money due to flow orders they are buying (or, potentially, not buying anymore)?
a) most of the platforms are doing the same
b) it's hard to imagine that with half of RH currently holding GME they're not going to come out of this having gained more in users than they lose over trust issues
Discord, not so. Looking at the financial backers of Discord, you can pretty quickly draw a link to the short sellers. Presumably some phone calls or dinners were had last night and strings were pulled to shut the discord down.
That's one theory. Another would be that the gaining media attention caused an influx of users to join a group that equates itself to 4chan, causing moderation issues.
I'm not personally associated (not a member on the boards) but I've seen a lot of discussions float my way over the years and if it became that way now it's unlikely to be from 4chan itself (or a community like it).
But your insinuation here gives credence to many that the internet is eating itself, when it's much more likely to be manipulation from those who stand to lose.
I say this as someone who frequented both communities at one time or another: they are very very very alike. I wouldn't be surprised if this who thing is a charade to take money from 'normies' as much a wall street.
I think that it's a bit of a stretch to say that the language they use means they're mocking people with disabilities or homophobia. Using words ironically just to be edgy is completely different from believing others to be inferior or an invasive entity to be defended against. That's very apparent when you talk to, say, an angsty teenager versus an actual ethnonationalist or even just your garden variety civic nationalist.
They might use the same words, but mean them in completely different ways, and actually be expressing very different things. I think that as it pertains to the internet, certain dialects of edgy, slang filled english are as close to a global lingua franca as can be considered possible. You can't paint all of these people with the same brush. Aside from speaking the same dialect of english, they use it to express very different thoughts, no less diverse or varied as those who speak other ones. This nuance will get missed if you overliteralize what they say and take it at face value.
Stop moving goal posts its a bad look.
The problem there is that the above people are already likely quite busy, and don't want to take on an additional (unpaid) burden by trying to clean up a sub they don't really care about.
I've struggled with this in some friend groups, particularly after having a child diagnosed with an autism spectrum disorder.
Strong moral backbone ya got there.
Growing older and realizing in general that things you did when you were younger are bad is fine and dandy, and indeed is "growing up".
But only deciding things are bad when they personally effect you has nothing to do with growing older and is not a good look. It's just selfish myopia.
Being an adult with a consistent moral framework is about being able to say "this is right or wrong", regardless of if it effects you personally or not. If you only notice something is bad when it happens to you, then that's basically what kids do automatically.
Consider this: you read this anecdote and thought “I’m going to belittle this guy.”
Says a lot about _your_ morals.
> ...particularly after having a child diagnosed with an autism...
Which to me says the dichotomy in particular is "before autism personally affected me" and "after autism personally affected me".
Calling people "autists" as a joke is either problematic and worth calling out or it isn't. You being personally affected doesn't change that. At least that is what I would argue is required from a consistent moral framework.
Don't think that says much about my morals, just that I like them to be consistent / not myopic.
Think about the thread we're posting in. This is basically about a company/industry that was like "these retail investors don't need protecting, they're adults and can make their own decisions, even if it means losing money", until those retails investors started costing them money with their adult decisions, at which point they change their mind and decide "actually they need protecting from themselves".
The way you phrased your comment, it sounded like you did the same, just swap out financial shenanigans for name-calling.
Can you elaborate this some more? Are you saying that you've struggled with this because people take that 4chan attitude they grew up with into their IRL lives and are assholes to your son with ASD?
The royal "you", not you specifically.
I didn't ask out of a sense of voyeurism. More like a, "dang, is this something I need to watch out for when I get older?"
They do make a lot of autism jokes (mostly pointed at themselves) and plenty of f bombs, but neither of which is generally seen as ban-hammer-levels of problematic (whether or not it is is up to you)
Mind elaborating on this?
Discord has had significant investment from private equity funds including FirstMark Capital, Greenoaks Capital Partners, Index Ventures, IVP, Greylock Partners, Benchmark, Accel, General Catalyst, Ridge Ventures, Spark Capital, and Tencent Holdings. At least one of these firms has invested with Point72 Ventures, which recently helped Melvin Capital.
I think discord probably made some calculations on its own as opposed to pressure from Melvin/Point72. Though in this day and age it seems that the truth ends up being stranger than fiction.
this is essentially saying "discord has investors, and the stock market also has investors, so they're colluding". there isn't a real connection here
I'm on the fence whether someone influential actually called the CEO of Discord and asked to have it shut down. I'm 99% certain these people know each other. It's not a could the call be made its more of a was it made.
practically, short selling hedge funds and silicon valley investors don't run in the same circles. yeah, they're socially connected but they have separate networks and cultures. conflating the two because they both involve investing isn't accurate
That's a stretch. I think the point here is that some parties can save billions of dollars in losses, and makes them a little more likely hypothetically. Im all for dealing with the facts, but the facts are just looking at the '08 crisis a lot of Wall st funds have a track record of bending rules for profit. It's not out of this world to imagine 12 years later that the same culture exists
Behind all of these nefarious entities is CALPERS, etc. just trying to keep your pension fund solvent.
Probably just a coincidence.
They're insane (or self-interested) to pretend the same doesn't happen in cryptocurrencies.
> During the recent bitcoin bull run, Coinbase has struggled to keep itself up during stretches of heavy volume, leading to snarky comments on Twitter and Reddit that it’s only news when the exchange doesn’t go down during peak periods. Given the exchange has filed preliminary documents for a public listing of the company’s shares, fixing its infrastructure has undoubtedly taken on an even greater urgency.
What side do you think wins given the huge hole left in Citadel after propping up Melvin?
At some point the word will go out that it’s over—“we won”—and everyone will rush to sell their GME and take profits.
It’s not possible for all those people to succeed. Broker apps like Robinhood will be absolutely overwhelmed with sell orders, many of which will run into technical problems and/or no counter parties. A lot of people are going to be pissed off and blame the brokers.
People buying in late will have the most to lose and maybe the least understanding of what is going on. I mean, this story was a “breaking news” red banner on WashingtonPost.com yesterday. Not everyone buying GME today understands the social movement /r/wsb angle.
Ultimately brokers are worried about getting sued by people or companies who lose a lot of money in ways that will look preventable in hindsight.
Edit to add: the 2008 financial crisis was caused by financial firms selling a lot of crazy mortgages to people who could not afford them unless housing prices went up forever. When the crisis hit, the firms got the blame, not their customers. Companies learned that helping their customers shoot themselves in the foot can come back to bite them, even if it was all legal and what customers wanted at the time.
What a dismissive, awful, terrible way to phrase this.
Having parents that were nearly the victims of one of those upside down mortgages, it's not that simple. They didn't ask for a 400k mortgage. They asked for a home they could afford. When the bank, that they have trusted their entire life, says, 'you can afford this much per month', they had no reason to question that.
They're unsophisticated people, who trusted the system not to fuck them. And that's precisely what it tried to do.
While I get that people need to take control of their own money, when the people responsible for looking after your money, the actual, literal bank tells you you're good, why wouldn't you believe them?
The bank doesn’t have a fiduciary duty to mortgage customers.
If someone wants someone responsible for looking after money and large purchases, they need a fiduciary financial advisor, not their bank.
The fact that people think the bank is supposed to look after money is part of the problem. The bank is just a vault. Not only are they not responsible for helping someone pick a mortgage and house, they aren’t even competent to do so.
I can’t imagine some retail bank even employing people who could competently assess individual debt/income ratios.
The training is that individuals should have financial literacy enough to know what banks do and don’t do well. And to recognize cross-marketing.
I knew tons of people who made dumb decisions in the 00s and bought way too much house. The bank letting them was part of the problem. But people being stupid was a big part too. I knew families making $50k/year buying $400k houses and refinancing every six months for cash out to pay the mortgage. The bank shouldn’t have done that. But people were really stupid to do this once much less multiple times.
But some banks thought they could lower their underwriting standards and get away with it because they could shift the risk to larger financial entities by selling the mortgages. And a lot of non-banks got in on the mortgage underwriting game for the same reason.
And bank customers liked it. Who doesn't like to be told that you're in better financial shape than you thought? That should be good news.
My point above was not to defend what banks did, but to point out that, even though banks were in the legal right to lower their underwriting standards, it did not work out well for them or their customers (or anyone else, really). And a lot of the downside came later, in the form of bad reputations, burdensome regulations, etc.
Maybe there were lots of hapless old people who were misled by some bank they mistakenly trusted for years.
I don’t think so, the many examples I personally knew from that period were getting loans from specialized banks that set up mortgage shops, like Washington Mutual.
The book (and movie) The Big Short digs into this how regular people were overextending.
To clarify, the banks were bad actors by offering and participating. But reasonable people were avoiding the situation until the whole system tipped over. Someone borrowing at 40% debt to income or higher should never have done that, even if they trusted their local banker who was saying it was fine. Finance requires personal responsibility and people need education to help make these decisions (and they shouldn’t get this help from someone with a vested adversarial financial interest).
They would have terrible sales numbers and get fired in the first month. Wells Fargo's training was that the more financial instruments a customer had with the bank the better.
Shouldn't be possible. Most of the messages to the orderbook, by orders of magnitude, would be market makers doing add/cancel, which isn't something that comes from RH anyways.
How often is one particular user going to send in an order? 10 times a day if they're particularly busy? Doesn't touch the sides. The internet facing gateways can be scaled up easily if that's even needed, they aren't latency sensitive. The inside towards the exchange can be made extremely fast.
I've built systems that do this.
This is not totally correct.
2008 was caused by banks giving out extremely risky mortgages (the banks knew they were risky mortgages) and then packaging them up into giant bundles and magically calling them AAA stable real estate investments and selling them forward to other banks/pensions/401ks.
Banks are responsible for assessing the risk on a mortgage, not the customer.
If a broker has a technical problem processing a trade, they deserve to be blamed.
It’s one thing to handle “a trade.” It’s another thing to handle everyone trying to trade at exactly the same second. We already saw broker apps have issues this week just on handling the buy volume. The sell volume will be far higher.
And I mentioned counterparties too. Even if the technology works, you can’t sell if everyone else is selling too.
The risk of not finding a counterparty to which to sell is different - and real - which is why I did not disagree with that aspect of your post.
If we hold a social media company liable for not being able to scale fast enough shouldn't a company offering financial services be held to at least that level of standard?
Maybe it wasn't intended, but this comes across as particularly harsh victim-blaming.
Yes, the firms got some blame (and a bailout), the customers lost their homes.
Edit: I now see the retraction/clarification you just posted to another commenter. Cheers.
I mean read the top comments in the top WSB posts today. It ain’t about sticking it to the man. It’s about making money, fast.
That is a pretty gross oversimplification and completely dismisses the variety of "companies" that had a hand.
Subprime lending was just the foundation, but it took investors to investors to buy those securities, and ratings agencies to assign favorable risk ratings to those securities.
Actually that is impossible. This is a short squeeze. If you forget to sell your share then the short sellers are fucked because they still have to buy yours.
Doing this way ensures that retail loses, 100%. Only a retail app was blocked.
It is the asymmetry, I can't see a valid reason for unilateral action from RH here.
A couple funds with large short positions have popped, but short interest hasn't budged; they were just quietly replaced by other funds. At this point probably every hedge fund who trade equities is short GME. If your position is not too large and you have enough cash you can just keep meeting the margin calls and collect your free money when the bubble bursts.
(And stop loss orders don't save you if the crash happens fast enough.)
I agree. Anybody who doesn't think that the algorithms have locked onto GME is stupid or hopelessly naive.
You're not punishing Wall Street, they've already priced you in and are waiting to take all your money.
"One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you're going to wind up with an ear full of cider."
However why not just disable margin trading on these stocks instead of shutting them off altogether? I don't really know enough to say. Maybe there are additional risks somewhere unrelated to margins? Or maybe the upstream market makers are forcing their hand. Or maybe it's some combination of reasons, including pressure from people who are on the losing sides of these bets.
> Why should Robinhood pick a winner (siding against their own customers)
As others have often pointed out, Robinhood is in some ways analagous to social media companies. Their end users are not their customers, because it's a free service. The customers are the businesses on the other end, in Robinhood's case the market makers who are paying for the right to front-run trades. If this is no longer profitable for them due to crazy volatility, they can apparently stop allowing trades at any time.
Front-running is super illegal. You're referring to payment for order flow (PFOF), in which a sell-side party like Citadel pays Robinhood for the right to route your order to the exchange. But there's a catch: Citadel is allowed to take the other side of your trade without routing it to an exchange, but it legally has to match the exchange price or cut you a discount. If Citadel can't do either, your order MUST be routed to an exchange.
PFOF makes up a somewhat negligible source of revenue for no-fee/discount brokerages. The bulk of revenue comes from a much more mundane source: interest rate spreads. Earn X% interest on customer cash deposits while providing customers less than X% interest on their deposits.
If your order isn't making its way to an exchange, PFOF isn't your problem, and you shouldn't be day trading. Your real problem is that the professionals think you over-bid/under-asked to such an extent that they're willing to cut you a deal just to take the other side of your trade. Unless you're a professional options trader, betting against professional market makers will cost you a lot more money than the imaginary transaction costs would have.
(This is just a summary of an old HN favorite: https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...)
I'm not a lawyer, but to me, that seems like it would be very very illegal.
Yes... or simply increase the margin.
“It is not uncommon for us to place restrictions on some transactions in certain securities in the interest of helping mitigate risk for our clients,”
from Massachusetts secretary of the commonwealth
“It is very clear to anyone looking at the numbers that the whole marketplace is being manipulated here,” he said.
I imagine Robinhood's thinking is similar
I don't get this.
I didn't know anything about short selling a few days ago and maybe now is a bad time to learn... but my understanding is that short selling is only legal because it disincentivizes bubbles caused by artificial overestimation of a company. Investors took it too far and short sold over 100% of the stocks in a company, ironically creating ideal conditions for a bubble. As soon as GameStop's stock turned upward, the rampant short selling resulted in a demand for more than 100% the supply of GameStop's stock, resulting in a meteoric rise in price.
But how is this market manipulation? The rise in stock price has nothing to do with an artificial overestimation of GameStop's value. It's just fundamental supply and demand. If anything, the short sellers are the ones who manipulated the market when they started shorting over 100% of the stock supply.
Like I said, I'm a complete noob when it comes to the stock market. Maybe I'm misunderstanding something?
The "problem" here, is that the little guys noticed. Michael Burry and some unknown YouTuber saw this over a year ago and started buying GameStop, and making a case for people to buy GameStop.
This is very easy to understand. The wrong people are losing money. And that can't be allowed. That's all you need to know for this to make sense.
The only issue comes if someone notices that you've done this, pushes the price up to the point where you have to exit your position because your broker won't let you hold this short position that you can't afford to pay for. At that point you must exit, which drives the price up even further because you're creating demand for the stock.
What's important to notice about this is that the second you're no longer short the stock, no one has any incentive to hold the stock. So it'll return to $20 and all those super smart boys on WSB who were holding out for $2000 have thousands of shares of a worthless retail stock that they probably bought on margin and are going to lose everything.
But in the meantime, there are 70M short shares that need to be rebought from the 140M original+loaned shares. The idea is that forcing closing out the short position will allow you to sell some at sky high prices, hopefully enough to cover the loss from the rest of the shares that must be inevitably bagheld.
100% of float or 100% of outstanding are not super significant inflection points, just very large ratios.
Of course the above depends on the short holders to: be right; have the capital to not have to cover their shorts; and be willing to hold on for the ride. I'm not making bets on any of the above.
It's fine to have lots of people buying something, but if they discuss how they can coordinate to hurt short sellers or something like that, particularly on a public forum, despite not being a lawyer I am fairly confident this is prosecutable.
Market trading regulations are full of fine lines where the wrong side can land you in jail. For instance the difference between front-running and pre-hedging / anticipating market liquidity is basically the intent and the information the trader has. The actions are indistinguishable.
But the crazy part is that they only halted one side of the trade... the buy orders. That is manipulation.
Personally, this cost me £1k on Nokia. I went from +£700 to -£1000 over the course of about 30 mins, because the market was pulled from under me.
>But the crazy part is that they only halted one side of the trade... the buy orders. That is manipulation.
Exactly, I mean you could make the argument to stop selling:
"The current price is being manipulated and is too high so we stopped our customers from selling if they mistime the market. We will resume selling when prices return to normal."
Edit to add from /wsb:"If you try to sell you will get fucked because who are you going to sell it to if nobody can buy it?"
I hope there is some meaningful action by the SEC. It would be interesting to have all the trades reversed to the point when buying was stopped.
It's cute when they phrase it like that, though everyone understands that it should be "chosen clients that make us most money"
"The Verge meanwhile noted one hedge fund suffering amid the GameStop surge was Melvin Capital Management, which another hedge fund, Citadel, has since bailed out. Citadel's founder is Ken Griffin, who also founded Citadel Securities, a big investor in Robinhood that also works with TD Ameritrade and Charles Schwab."
I suspect they sell them the trading data just like Robinhood does, to help them front-running the retail traders.
Indeed. There's a lot of talk about Section 230 lately, and how "precious" it is to freedom of speech. That law protects them from culpability against hosting legally-dubious things like this market move -- and any malfeasant commenting about it -- but none of the big platforms are acting like it exists. They're just censoring anyway, because they are either embarrassed, or are getting their strings pulled. Either stand behind Section 230, or admit you're just censoring things for duplicitous reasons of politics, money, or the rabble.
Robinhood did not act against its customers. Its users are their product, which it sells to Citadel. As you see now, this is way more than an edgy quip: when its free you are the product.
This is a hedge fund's game as it is for WSB.
It is the regular traders that have shorted via option that are losing money just the same. They are the most likely bag holders because they they don't hedge.
Don't assume all parties are truthful.
As others have pointed out, Citadel's market making arm is their largest source of revenue + Citadel's hedge fund recently invested a large amount in Melvin Capital to help shore up Melvin's capital base after their loss.
Unfortunately unless Robinhood insiders leak or post their rationale behind this decision, we'll never really know what happened behind closed doors.
Their platform is probably inundated with open orders on these few names, as the price is all over the place. They had outages back in March 2020 and presumably there's a risk of the same if everyone tries to close their positions at the same time (eg, if u/deepf**ingvalue announces that he has exited).
Is what RH doing legal for a brokerage?
At this point, nobody cares - Reddit found a repeatable distributed exploit that cannot be patched, and the financial system's self-preservation instinct kicked in.
The entire history of the retail investing is unsophisticated investors shooting themselves in the foot and then turning around and suing everyone who allowed them to shoot themselves in the foot. It's obvious to everyone watching that for every retail investor who buys in at $10 and cashes out at the top there are going to be 20 other traders who FOMO in at $300 or $500 and then hodls all the way down to $10. People have a stated preference for Freedom to take risks but a revealed preference for paternalism (they start suing everyone around them for not "protecting" them from themselves when risks go bad). You can't blame companies for rationally responding to the legal liability they think they will incur if they let more retail traders pile onto meme stocks.
Robinhood operates a lot like Facebook. The "Gold" subscriptions and margin interest are tiny portions of their actual revenue. We are not their customers, we are the product. They offer free trades in exchange for selling order flow data to hedge funds, which in turns allows them to manipulate the markets. Of course they would protect their actual customers.
If you thought free brokerage accounts with no-fee transactions was too good to be true... you were right! There was a catch, and this is it.
This is a small part of the picture but RH lost a lot of money due to WSB advertising and exploiting the 'infinite money glitch' so it likely didn't take much convincing to act against WSB.
Though ironically it took them months to close the glitch which was their fault and a day to stop the action on WSB's picks.
There are people literally investing their rent money into GME, and it's almost inevitable that the price will come down at some point, the only question is when and how far.
It seems plausible to me that some of Robinhood's real paying customers have asked them to tame their unruly product.
Similar to Google or Facebook, if I get the service for free, the service-providers' incentives may be aligned against me in favour of their paying customers.
Someone please correct me if I am (or how I am) wrong with the following:
Bob is a broker.
Jack comes along buys 100 shares of X.
Bob lends those 100 shares of X to Amy to sell short.
Amy sells it short. Price shoots up.. Amy says “oh crap.. Sorry bill. Simply cannot buy back those shares. I am bankrupt. I physically do not have the money to do so.
Jack will still expect Bob the broker to make sure his 100 shares of X are there one way or the other.
Bob the broker has to buy back those shares it lent out to Amy so that Jack the account holder is still able to sell/trade their shares.
One is that most Robinhood users probably under-estimate how quickly they can sell if the price turns around quickly. There might not be enough willing buyers for all of the Robhinhood users who might be looking to get out at the same time.
Another thing is that I'm not a lawyer, but they could be worried that if the SCC finds the discussions on Reddit constitute a conspiracy to manipulate the market, and it's primarily being executed through their platform, and they're aware of the conspiracy and take no action...
So I think in Robinhood's POV, hedge funds are the poor.
Because Robinhood's actual customer is Citadel, not the retail people making the trades.
Citadel gave $2.7BN to Melvin Capital a couple of days ago. It stands to lose that money if Melvin (and Citron etc.) can't fully cover their short positions.
A good way to make the stock price go down and allow Citadel to make money, is for RH to only allow selling and not buying of GME.
It's utterly appalling market manipulation.
They're not siding against their customers. The median Robinhood trader that buys in at $350 is going to be left holding the bag when the price drops back down to $10. You can argue whether or not the paternalism is good or bad, but this is obviously going to on net stop more people from losing money than making money.
You can make a good argument that WSB are engaged in market manipulation. RobinHood don't want to be the broker for that for a whole myriad of reasons.
Where are the fraudulent statements causing price pumps? None of the prominent due diligence the community has provided that started this run has been found to be untrue. Their thesis still stands: GME was undervalued and shorts were vulnerable to a squeeze.
That said, WSB have been really clear that they're cornering the market to drive up the price. The fact they've done it by coordinating 1001 little retail accounts makes no difference. Short squeezes are always pretty dodgy. This one is openly a conspiracy to move a market.
Shorters got themselves in a dumb position. It seems to me someone is rigging the market to get them out of it. But that doesn't change the core action here: let's conspire to corner the market and force an artificially high price.
First, I recommend you look up the meaning of conspiracy in the dictionary: "a secret plan by a group to do something unlawful or harmful."
Tell me, where was the secret plan? Everything on WSB happened in the open, in plain view of millions of people.
Second, the market is not even what's cornered here. It's the hedge fund owners who shorted gamestop (fully understanding the risks this entailed), who are cornered. They are the ones who are driving the price up as they try to cover their short positions.
One of the dodgiest things in English Common law is the low low bar for conspiracy (see also Joint Venture).
I think we actually agree about the cornering part don't we? I say the shares are cornered, you say the hedge funds but it amounts to the same thing. I definitely agree the hedge funds are looking fucked and deservedly so.
I think we agree on this.
> an agreement of two or more people to commit a crime, or to accomplish a legal end through illegal actions.
Are you saying, though, that publishing advice or suggestions on a forum to buy a certain stock is a crime, or is illegal? That kind of stuff happens all the time in newspapers and television shows. Wall Street insiders have coordinated buying and selling for generations.
So did giving the advice become a crime by virtue of the fact that so many people decided to act on it?
Offering financial advice is a regulated activity. You should have a license and qualifications and insurance and whole crap of other stuff. You may need to declare conflicts of interest.
Advising others to buy a share you hold in the hope the price will go up (or to sell something you're short etc) is a crime. This is why you'll see or hear disclaimers from all sorts of outlets either stating the comments are not advice or declaring holdings etc. The A16Z podcast is a good source of this.
So advising people is not in any way a safe, legal activity for random commenter. "it was advice" isn't a defense here unless you're registered, qualified, insured and declared your holdings and intent to trade.
I'm not saying people don't do it anyway, or that the sec actively hunts ever reddit account that says "I like tesla". They don't. But the SEC gets to choose what it pursues so if it wants to make an example of this or to quash WSB influence or to help its friends in hedge funds, who knows?
Such is the murky nature of financial regulation.
That was the "yes" part. I would add this as "and then some":
Advise or comentory is saying "we should buy GME because its a good company, well run, profitable, undervalued, due for a change in fortune" etc. That's just an opinion or a statement of certain facts.
Saying "if we all buy it, we can break the market and force the price up" goes beyond advise. It is explicitly intended to change the price. In this case, the commenter isn't discussing whether the company is good or not. The company the shares are in doesn't matter. Instead, they're using their size to bully others and drive the price in the direction they choose rather than on reflecting the companies prospects.
That's what WSB (or rather some of its users) explicitly said they were doing. That's what they then congratulated each other on doing. We even sort of agree on this point: they cornered it. It didn't happen by accident, people didn't say "GME is a great buy". They were explicit from day 1: "GME doesn't matter, but we can form a group and coordinate to change its price and make a profit".
Now again, maybe the SEC don't care. Maybe they're too lazy to pursue it or they also think hedge funds do it (much more covertly) so fair is fair. Maybe they don't want the political blowback that comes with this. I don't really care to be honest with you, good luck to the little guy.
But it seems pretty easy to me to make the case at least that this is market manipulation, that it succeeded, that it was intentional etc
When 1 big hedge fund does this, or a few work together, it's just as bad. But they're at least quite about it. They'll discuss it offline in unrecorded meetings. They do it slowly. They're careful not to do it too often. WSB have posted about it and blasting the market. That makes it harder to ignore.
The core concept here is that you should buy or sell stock because you believe the company will succeed or fail going forwards. Doing it to drive the price is an abuse of size. It doesn't matter really who you are, how many you are, or whether someone else is shorting the stock etc.
It also doesn't matter if others are manipulating the price, you don't get to "manipute it back".
Again, I think it's hilarious they did this. I admire it in a dumb way. I'm not calling for prosecutions. I think it's very concerning that execution only brokers took it upon themselves to step in (I'd like an inquiry there).
Im just saying, they did conspire and they did manipulate the stock price. <shrugs>
Thanks for reading this and the other comment. I hope I haven't ranted too much. It's been a pleasure reading your comments!
Or is the platform assuming that its clients are doing market manipulation by coordinating on reddit to push the price up, and wants no part to a crime being committed.
Just speculating, but can think of some reasonable reasons.
But in my opinion the rationale is obvious: you buy a stock, that means you provide that company with liquidity that they can use to operate and grow their business. I guess especially in the startup scene VCs and investors are in high regard since they believe in the future value and perhaps also the product of a company.
Example: imagine I'm a hedge fund and put so much money into company x that the stock moves up. The company probably thinks I gonna fund their business for a few years (remember, stocks are long-term investments). Stock rises, they do a few risky choices. Suddenly I pull back my money. That would suck.
I think options and futures have reasonable functions, especially to stabilize investments and raw material purchase. But speculation can easily get unreasonable, you basically speculate with the liquidity/credit of other companies that actually care what they do. The irony is that futures have been invented to stabilize food production, I think since almost 1000 years. But probably you don't want a large hedge fund play with this stuff.
Also to put on another perspective. People are crazy about fairness on markets, even the super free US market has strict cartel laws. On the other hand large funds like Blackrock are so large, they have government-like powers. They even have the power to decide whether companies should stay or steer away from coal energy. That's even worse than a monopoly.
Translation: big business interests and wall street hedge funds win out. Of course, lots of retail guys and gals and r/wsb folks are losing their shirts today. It would have been next week if it didnt happen today.
Link to the video from the OP. https://finance.yahoo.com/video/heres-why-robinhood-restrict...
You misunderstand who their customers are. Who you're calling customers are users. Their customers, the ones who pay them, are the dark pools and other trade routers, or whatever they are called, who pay RH for routing trades thorough them.
You are a mall owner and 25 000 people are stampeding through your mall causing a ruckus which will in the end create no value for anyone.
This is speculative mania with no basis in any kind of market reality, people are actively acting against the best interests of the participants, especially the companies themselves.
The lack of understanding here is what is 'shocking'.
BlackBerry, Robin Hood, Citadel, NASDAQ - nobody wants to be part of this.
It's ridiculous that people think they are somehow 'doing good' or even have some kind of inalienable right to own shares in a company on whatever terms.
This is a 'market riot' nobody wants to be involved but the rioters.
CFOs are all very nervous right now and I wouldn't doubt if some of the target companies have asked for protection.
If you consume a free product you aren't the customer, the person who pays the provider money is.
The idea behind these trades is that they will not in fact suffer any losses because they bought in after the naked shorts brought the stock down to a low valuation. If they keep the stock high enough, long enough, the naked shorts will have to buy back the stock at much higher prices than the price was when this short squeeze was started. That's why short squeezes are a thing in the first place. This is no different than what Carl Icahn did to herbalife and Bill Ackman.
When companies keep these people from implementing their strategy, they expose these individuals(their own customers) to potential huge losses.
It's not a loss until you sell, and a key date to sell (tomorrow, when tens of thousands of 1/29 calls expire) hasn't happened yet.
And... The price is in freefall in the last minutes of trading today.
Fog of War is the important bit here. The big difference between this and a pump and dump is that the FOW here is retail investors not having great SI data. In theory, a retail investor could still make this work in a "safe" way (safe used very liberally); it would be a hell of a maneuver for everyone with a short position to somehow close their position in a single day before Joe Retailer is able to get any word on what the outstanding SI is. In a pump and dump, your FOW/missing information is when the party working to pump the price decides the gig is up, which is effectively impossible to know unless you are that party.
A lot of retail investors with four days of experience under their belt are going to lose their ass by trying to suss out their exit intuitively, but for those that did their homework, this could work. For many, it already has. The argument that this needs to stop because uneducated retail investors can get burned can be reduced to absurdity -- "retail traders can vaporize their life savings by going long on a company facing imminent bankruptcy, so they shouldn't be allowed to trade with even the most rudimentary of instruments."
Price being in freefall doesn't affect the huge number of people that were in well under that, the way this strategy is working, or that people somehow still think that going short on this is anything other than a lottery ticket play because of "muh fundamentals."
If you buy 10 shares at $200, that's $2k out of your bank acount, and it's gone, just like if you bought a car.
How do you lose more than that? I'm not talking about shorting and stuff, just buying shares, hoping it goes up, and selling it later.
However, and here is the problem - when the price does come down (likely after the shorts capitulate) , it will literally be a stampede to finally get out. It is unknown how sell orders will be processed... if at all at that point. So the later you get in the more likely you are to be burned, in the disordely unwinding scenario.
Early adopters will be ok. Holders and latecomers will not.
This is a short squeeze: the stock is shorted to the limit, and from the stock price, the shorters entered their positions "uncovered", so their risk is extremely high, and their losses are potentially infinite.
The WSB crowd and probably others noticed this, and bought the stock, knowing that it was going to become more valuable over time once the shorters had to close their positions.
They were right, and the shorters are loosing so much money that they are willing to buy back the stock at astronomical prices to limit their losses, which drives the price up even more.
The WSB crowd just need to hold until the stock is at the maximum price that the short sellers can pay, right before the short sellers default. That's the actual value of the stock right now.
If the stock climbs too much, and the short sellers default, the stock is worthless.
TBH, this is the short sellers own fault. They made the assumption that the market was "fair", and that they were going to buy back the shares for cheap when they needed them as a consequence.
That assumption was wrong.
In particular, I've seen a lot of speculators spreading the idea that margin calls will force everyone shorting Gamestop to buy stock at market price on Friday. This is wrong, and pretty unequivocally so, but I've had multiple friends come to me and explain that this is why they bought some.
This is simply not true at all.
I've had my trading on RH restricted specifically because of the PDT rule. As in, I was about to make a trade, and the site told me that the trade would cause a restriction because of pattern day trading.
It's users are the product.
I'm sure this started with a call from a "concerned" board member.
This is the natural evolution when censorship as we've recently seen is given a pass.
The ACTUAL different is that since it doesn't cut across political lines, you want to treat the situation differently.
Do we need market makers to let us always take a position in every single option when no real market for that option exists? I would argue no. It's completely artificial and they profit from it. If companies want to be market makers and profit from every single transaction, they need to be prepared to take a loss when the math doesn't swing their way.
I am not a finance professional but I thought RH is just like a custodian and facilitator of trades. It's not on the other side of any of these trades. It never holds any positions. Why does it have to manage its risk and why does a GME event create extra risk for RH?
I thought this kind of risk is only for the MM's like Citadel.
1. SEC is protecting the little guy and being paternalistic
2. Institutional collusion
However, 1. could be likely because this GME frenzy is reducing confidence in the overall market. S&P500 lost 100 pts this week. By stifling buys, they