Ultimately, a few medium-sized hedge funds were caught doing something stupid and the market has rightfully taught them a lesson. It's great that retail investors got in on a high-level play like this and made money.
I've heard from a former colleague at a major HFT firm, that they hit their entire revenue target for the year, just in the past week.
Robin Hood, by stealing from the rich and giving to the poor (in a period with commodity currency with no monetary policy), would be encouraging deal-flow (as the rich traders stolen from need to send the same goods again to fulfill their contracts; and the poor now have money to spend to purchase exotic goods, requiring more be imported by traders), in turn increasing travel on the toll-road/through the customs office, in turn making the toll-road operator/customs officer money. It would make perfect sense for the mythical Robin Hood to, in fact, be a toll-road operator/customs officer — or at least to be in cahoots with them.
(In fact, come to think of it, he wouldn't even need to steal from the rich, per se. He could just destroy trade caravans, and collect a cut of the revenue from the toll-booth operators; or destroy goods already imported but not yet sold, and collect a cut from the customs office; and then distribute said cut to the poor. The same virtuous(?) cycle would occur.)
1) they are lying to you. Look at how much the stock has traded, Its alot but its nothing compared to how much SPY trades in a year. There just wasn't' anywhere near enough trading volume to make an entire year in one week even if they participated in every trade that Gamestop had this past week.
2) they lost money last year so any profit beats last year's pnl?
I’m in the industry. I stand by what I said:)
You said something that was flagrantly wrong, I’m just trying to help correct you.
Average PnL per share traded for a firm doing okay is about $0.001. A decent size firm might do 4% of ADV. Tape A trades about 1.5 billion shares per day. That’s 21 million annual trading revenue.
GME traded 1 billion shares in the past week. PnL per share has been averaging close to $0.40. At 6% ADV (HFT market share spikes during volatile periods), that’s 24 million in revenue.
I can tell you're in the industry because you say pnl instead of p&l haha.
They don't need much capital, and I'd say that many have no outside investors. So, their trading PnL minus cost of running the operation is the net profit.
On the other hand, the trading PnL will typically be a tiny part of their total trading volume (maybe a few bp).
This is like that scene in 300 where Leonidas makes Xerxes bleed. The point isn't that Wall Street has fallen. It's that, for once, Wall Street is fallible.
Even if the fund tanks, they can set up a new one, probably with sympathetic money or just cruise off into the sunset with their millions.
The problem is bigger than originally conceived then.
The existence of billionaires isn't even good for the free market, let alone free society. In order for a market to be rational, the threat of losing money has to actually mean something, which it doesn't for the ultra-rich.
The problem is systems that resist merit. You make terrible investment decisions with the portfolio but it doesn't matter? (I think it will matter FWIW.)
In the meantime, the billionaire owner of Citadel (the company that just made tons of money by front-running all these retail investor trades via their data harvesting contract with Robinhood) just used some of that freshly-acquired cash to buy a stake in Melvin (the company that those retail investors just tanked) for pennies on the dollar. The feel-good rage of WSB serves as a convenient smokescreen for the rich getting richer.
You're starting to get it.
On Money: Plotkin's fund lost money for his investors, all of whom are rich people who will be upset with him. There will probably be some redemptions, and AUM will go down -- not just because he lost some of it, but because investors will pull out some of what remains.
On Reputation: Plotkin ends up with egg on his face because he held the bag for a bunch of mom-and-pop investors on Robin Hood. You know how Soros is known for famously breaking the Pound Sterling? Plotkin is now known for infamously being broken by GME.
On Relationships: Plotkin lost even after getting an injection of liquidity from Cohen and Griffin. That can't be good for his standing with those two power players.
I don't buy it.
Also the collateral damage is going to be more interesting to follow than the financials themselves. Already Discord and RobinHood painted themselves as enemies of the people - whether this was their least bad option legally, or they were influenced by Wall Street is immaterial - it's already viewed as the latter. Couple that with other high-profile bans by social media platforms this year (and it's not even February!), and I can see a lot of regular people all across the political spectrum who feel abused by big, rich companies. I think the last time we saw this kind of energy on the Internet, it led to Scientology protests, Occupy WallStreet and the Arab Spring...
It's government intervention no matter how you look at it. Just because it's not a direct capital infusion does not make it any less bad
There was an immediate and emphatic appeal to the regulators, and the way the SEC works is often by encouraging self regulation. The CEO of the NASDAQ even went on air to ask for more SEC regulation.
This isn't unusual, it's pretty much how "government intervention" via the SEC, and a lot of other regulatory bodies, actually works.
There are very occasional "landmark" regulations, often legislated, that are explicit. EG Sarbanes-Oxley.
Day-2-day, the SEC works mostly by signalling. They might make a policy declaration, or send letters to CEOs. They'll note things in periodic firm reviews. Publicly raise an eyebrow. Take action against or investigate one firm and publish findings. Rarely are specifically worded edicts issued.
Regulating bodies are designed to work largely through pressure instead of (ironically) through regulations. This is by design. Regulators are usually created in response to firms having won the loophole cat and mouse games, and the prohibitive complexity of actual regulations. If government wanted rules, they can just legislate directly instead of delegating to a regulator.
"Compliance" is often about staying away from trouble by playing a sort of guessing game. It doesn't mean that it's "hands off."
> Regulators are usually created in response to firms having won the loophole cat and mouse games, and the prohibitive complexity of actual regulations. If government wanted rules, they can just legislate directly instead of delegating to a regulator.
Large motivation to create regulatory bodies is expertise and focus on one (or more related) subject, and these regulatory bodies often simply recommend to the government/legislators and do the management the law mandates.
IMHO this 'suggestive' mode of operation is not usual outside of finance. (I might be wrong though, I have never seen a full list of regulatory bodies.)
For shorter term and more operational issues, pressure is the main toolkit.
There are hedge funds on both sides of this bet. So this intervention is both helping and harming "hedge funds" in equal measure depending on what side they have taken.
Is it? Do we have some information on that yet?
Why does disabling purchases help?
(It also prevents J. Naive Trader from buying into this train wreck and losing a bucket of money when the bottom falls out, which it will.)
The whole idea of the short squeeze is that the hedgefunds can't buy anything anymore and the lenders want their stuff back. And if they are still overshorted and the lenders don't like to bleed them first, before initiating the squeeze I don't think that this somehow hurts retail investors. Maybe it benefits the lenders who can nicely bleed both shortsellers and the WSB+muskalike-crowd, but at the current price, where the stock has actually gone up quite a bit but stabilized, it seems quite clear that this thing is decided by the lenders now. Do they want to play the crazy game for a near bankrupt company and demand their loans from Melvin or Co. (which would probably result in fast default and them not seeing a substantial amount of their shares again with the others reduced to a pennystock) or do they just sail along, taxing the narcissistic sociopaths on one side, while slowly selling off their actual stock to then be bought by those and returned to them. I guess they decided for option 2 and I think they are not as dumb and chaddy as they look to you ;).
Just take a look at the shareholders and count how many shares those institutional have:
It's Wall Street vs Wall Street - redditors were just the catalyst, and will be left holding the bag.
The rest (presumably greedy) are either making money or losing money because they're either riding up with the market or down. That's a feature of the zero-sum game that the financial system has been reduced to both the benefit and the detriment of the greed that's on all sides of the table.
There's no distinction between the two, if you have that mindset you will be left holding the bag even if you think you won.
But not everyone is going to be able to sell it at $400... or even $100 in some cases. It will be interesting to see how everyone feels after the sell off.
Guess what's changed in the 56 minutes since you posted this?
Though I think it had dipped into around $380 by the time of parent post, and heading down. But someone bought at $430 this morning.
We won’t know for days who makes money and who doesn’t. It certainly won’t be everyone.
> Short interest as a percentage of float above 20% is extremely high
> A high NYSE short interest ratio means that the stock market as a whole is vulnerable to a “short-squeeze.” It could rise quickly if new economic data, political news, or other types of information are released that make investors more optimistic.
GME was shorted 140%.
No idea if 20% being risky is sage advice but it seems like you're totally right: some hedge funds took on a massive risk, the market saw the opportunity and played the other side.
There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.
Now there are 240 long positions (100 A, 80 C, 60 E), and 140 short positions (80 B, 60 D), for a net 100 long, as before.
Short interest is 140/100 = 140% of the shares outstanding.
Now assume that entity E is redditors/RobinHood/financial justice warriors that pledge to hold, and not let anyone borrow their shares, to squeeze the bad bad shorts B and D. So, FJW/HODLers control 60% of the shares now, and will never ever lend or sell!
A: 100 long (=20 shares, 80 lent), B: 80 short (=0 shares, 80 borrowed), A+B together net 20 long (the rest is held by C, D, E)
Well, so no A can sell, say 10 shares to B:
A: 90 long (=10 shares, 80 lent), B: 70 short (=10 shares, 80 borrowed), A+B together net 20 long (the rest is held by C, D, E)
And now, B returns those same 10 shares to A:
A: 90 long (=20 shares, 70 lent), B: 70 short (=0 shares, 70 borrowed), A+B together net 20 long (the rest is held by C, D, E)
Well, so no A can sell, again, say 10 shares to B:
A: 80 long (=10 shares, 70 lent), B: 60 short (=10 shares, 70 borrowed), A+B together net 20 long (the rest is held by C, D, E)
A: 80 long (=20 shares, 60 lent), B: 60 short (=0 shares, 60 borrowed), A+B together net 20 long (the rest is held by C, D, E)
As you see, with only 10 shares circulating, and 60 shares in the hands of HODLers, B can happily reduce their short exposure. Let those shares circulate in this manner a bit more, and you end up with:
A: 20 long (=20 shares, 0 lent), B: 0 short (=0 shares, 0 borrowed), A+B together net 20 long (the rest is held by C, D, E)
Now, B is out of their short and flat, A has the same 20 shares it had at the beginning, and only a 20 long position now, and C, D, E keep holding their 80 shares net together.
Now, C,D can also drive down their position, we end up with A holding 20 shares, C holding 20 shares, and E holding 60 shares.
TL;DR: as long as 1 share is circulating, the shorts can reduce their position to zero, even if the majority of shares is held by never-lenders, never-sellers.
And now the market can collapse, and E is left holding the bag.
If the person who bought the shorted share lends it to someone else to short, one share has been shorted twice.
Liquidity is not usually the primary benefit. That’s usually the argument for high frequency trading firms.
It's almost like they forgot who Christian Bale portrayed in that movie.
Being on the short side isn't a problem per se. Having 140% short float is.
There's a term, 'Zombie Corporations' for businesses that are both stagnant and also generally aren't very beloved by their customers, but are still able to stay in business due to some localized monopolistic factors. Those kinds of companies exist in every sector and still 'make money' but they're usually the kind of companies short sellers target.
Getting rid of them is not some fundamental ill of society - yes it could in theory make some people lose their jobs, but it also keeps the economy going. If this kind of things didn't happen it would be impossible for new businesses to come up and with those new businesses new job creation, new ideas, etc.
Suppose you see an ongoing pump-n-dump---sketchy pseudoinformation being passed around to raise the price of a stock someone has already bought, so they can sell later. If you short the stock, you act to reduce the price excursion and potentially help the eventual victims.
Suppose it's not a pump-n-dump, but rather "irrational exuberance"---people buying a stock and raising the share price for non-economic reasons. Short selling applies alternate pressure on the stock price, reducing the effects of a subsequent correction.
Given more capital and a reasonable amount of time, the short sellers in this instance will be correct. The value of the GameStop stock using commonly accepted valuation methods of our day is much lower than $300 or even $100 per share. Unfortunately brick-and-mortar companies with declining revenue and no visible growth prospects are valued differently than high flying tech stocks. Keep in mind that I understand the rules of the game dictate that shorts can be squeezed and the share does not have to trade at the commonly accepted valuation.
short sellers have also discovered a lot of fraud companies because they have a monetary incentive
and for society as a whole, we should want the markets to price things accurately. things that are overpriced just means capital that isn’t being used somewhere else efficiently
it may seem ugly but capitalism is creative destruction. it’s an evolutionary system, the weak need to die so the strong can thrive
Individually, what they were doing (shorting that stock) might have been perfectly sensible. That they collectively overshorted made them vulnerable. I'm not convinced yet that it was stupid.
Stock market crash is only a big problem for leveraged over commited entities, very small inconvenience for people beyond accumulation phase (as they may need to sell very small % of assets in coming months) and huge opportunity for everyone else.
Stocks crashing is fantastic for a little guy. It's the same with real estate prices and it's the reason entrenched players do everything to prevent it.
Shorting a company that sells a physical product in malls during a pandemic is stupid? It seems their intuition is correct but there was a black swan event.
Would I start a company to sell physical video games, in malls, in a pandemic? Hell no.
Would I short it to the extent that it the shares become ‘rare’ enough to induce a lot of demand? Also, hell no.
Both extremes are....not clever.
I think it's interesting that "accredited investors" (e.g. 1MM in assets) can unionize to play in the stock market (e.g. hedge funds) but that the majority of Americans aren't permitted to unionize due to SEC rules. They are stuck with index funds. It's like we only allow top earners to be wolves and force everyone else to be sheep.
That's not a fair statement. "Wall Street" isn't viewed as a monolithic entity. It's viewed as an entity, or industry. In fairness, Wall Street is even more insular than other industries that we happily refer to as a group: Petrogas, real estate developers, silicon valley, etc.
We really need to get those vaccines out, people are going insane...
Why did Discord ban their server on a flimsy pretext right at the height of the attention? Why is there a sudden flood of articles about how this is all so very concerning in the mainstream financial press? Why are they mobilizing the universal weapon of calling everything they don't like Nazis?
Same mentality when companies that try to fight unions forming, even those forming at their competitors. A few Amazon employees want to form a union? The entire retail industry will suddenly show their support for Amazon. Can’t set the president of allowing the little guy anywhere to get used to being able to band together and take collective action.
Has it? What leads you to believe that THIS is the time investment firms will stop being reckless?
How is this not evidence of a corrupted free market system? A CEO of one company can call up his connections in retail trading platform firms, CNBC, and Nasdaq and protect his profits? Why is Reddit the scandal and not that?
Reddit is full of rocket emojis and YOLO jokes. But what we see here, especially with the moralizing about gambling, is an elitism on full display.
The people are sick of it.
Trading is still ongoing at the exchanges. It’s just the free platforms, where it’s shut down. If someone wanted guaranteed access to the exchange, then they shouldn’t have used a free broker. Are you saying that Robinhood should be forced to continue providing a free service at a loss?
If they can’t, then some advance notice is needed. Making this decision instantly without giving customers time to move their holdings elsewhere is not okay.
That being said, I’m surprised people are still using them for day trading. They don’t have a great track record.
Read the TOS. This was never promised.
They may be legally entitled to do what they've done. That doesn't make it right.
My comment is an "ought" comment, more than an "is" comment. Regulation should moot TOS's that allow this kind of rug-pulling.
You should be aware that if you're citing the TOS in any context other than a court case, most people are going to like you less as a result.
As I see it, regardless of how it should be, one needs to accept that trading with RH has limitations/trade-offs compared to a "proper" brokerage. I get your statement, but like you said, their track record already speaks for itself.
If you have direct access to the market, you go directly to the market (i.e., have a seat on the exchange.) Also, you very much aren't a plebe in that case.
"You" (well not you but you get what i'm saying) picked the service...
If folks are capable of investing directly in stocks they should be expected to understand the ramifications of picking a free service like Robinhood.
They ESPECIALLY should with all this populist banter going around...
But apparently Interactive Brokers is now doing the same. Much stronger argument to be made there. They're a pay service, with supposedly big-boy ideas about their clients, right?
EDIT: Also, note that Robinhood's decision isn't just affecting their own clients. They're screwing the wider market by restricting the pool of buyers. People who have no relationship with RH are now seeing their holdings lose value because fewer bids are making it to the books. I'm a TDA client. I didn't agree to Robinhood's TOS.
And pretty much every other broker on the planet who made trading stocks free?
How is a user, no matter how "capable", supposed to predict this?
I'm a casual investor at best. I have some investments as savings through the bank, and use WealthSimple Trade here in Canada. It charges fees. It hasn't gone down. I still wouldn't trust it for any volatile action as they alert me well in advance that they have a delay of about 15 minutes. I don't expect anything more from that. I also wouldn't buy anything with the intention of time-critical sells there. If I cared more, I'd seek using a higher-performing platform. (Also worth noting, they never pinched any buys or sells during this fiasco. What's the old adage: "you get what you pay for". I don't see how this situation is any different)
If someone gave you that oil under fraudulent pretenses then it would absolutely be their fault..
Now to say that Robinhood is engaging in outright fraud, but having your service expectations subverted like this is going to rightfully piss people off whether or not the underlying service is free. There's all sorts of malfeasance that Robinhood could engage in with its free service that would clearly be unethical/illegal.
I mean, pragmatically speaking a buyer should be more wary of a situation like this. But motor oil is not the same thing as brokerages. It is very common for trades to be executed with no fee these days. It’s a market norm.
It is not a market norm at AutoZone to have $5 quarts of oil sitting next to free quarts of oil.
Add in any case, ethically speaking, it is still the fault of whoever mislabeled that olive oil.
I'm an outsider, but that's how this appears to me. They weren't lied to, they misjudged—and mainly because of a lack of understanding.
Traditionally, acting without understanding but still a high degree of confidence was called hubris.
And it appears the institutional traders expressed hubris when they over-leveraged, and this subset of retail investors expressed hubris when they didn't properly understand the capabilities and limitations of the app they decided to use to engage with the stock market.
I haven't seen people on other platforms complain in the same ways. I mean, for instance I haven't been restricted on my platform. I haven't heard anything about Questrade or E-Trade or anything.
To go back to my contrived motor analogies, it looks like a lot of people also expected a lawnmower to compete with a Tercel, never mind a Ferrari.
RH's decision here isn't an inherent limitation of their platform. It's an active decision they made. One they did not have to.
Also, what RH has done isn't harming just their own customers, but the entire market. People using Questrade or E-trade are finding that they have fewer buyers for their shares. If RH is going to act like a Tercel on the racetrack, they have no business entering the race in the first place. They're a danger to the other participants.
(BTW, analogies are fun. Thanks for the opportunity to torture them like this :)
If Robinhood (et al—sorry RH you're the de facto stand-in now) can't meet the standard of keeping up with the ... other cars in the race... then they shouldn't be allowed to enter. In that case, the analogy helps since most races have minimum qualifier rounds before you're allowed to enter.
I've got no arguments there. But that's the kind of thing RH [et al] were founded to confront or change, wasn't it? Or were they just circumventing previous regulation about market interfaces? This is where we get into the weeds and me out of my depth.
In the case of Robinhood, I can't just liquidate my money out of Robinhood and move it into a new platform and buy GME today if I wanted. I had a reasonable expectation that I'd be able to do this yesterday, and now that expectation was subverted in a way that's costly/inconvenient to me even if the service is free I have every right to complain.
Users would then know, in advance, if a particular ticker will be restricted. Either through specific advanced notice, or because they were told that all securities that exceed a volatility of X over Y time period will be restricted.
Whatever the rule, it can't be a snap decision that leaves users with no recourse.
If you're not an appropriate day-trading app, then don't act like one until you suddenly don't want to be one anymore. Make the rules in advance, communicate them, and let the market decide if you're appropriate for their needs.
I said in another comment that my thoughts on this are in the "ought" category, not the "is" one.
IB clearly is concerned about the credit risk, when the stock could literally rise or fall by a factor of ten in a day. They’re still allowing trading in the underlying stock.
Obviously if people are selling options / etc. downside can be uncapped.
Free market assumes that buyers can make their own decisions. This is a fundamental requirement. If you are "free" to decide something, but then your decision gets overridden when it doesn't suit a particular third party, you aren't really free. The mechanism of enforcement and excuses given afterwards don't change the fundamentals.
This seems like an honest framing of the situation!
I can almost guarantee you that this decision was made to protect retail clients -- not as part of some conspiracy against them. It's very clear that retail is going to lose their shirts in the end of all of this, and by blocking new buy orders, the brokerage is effectively protecting its naive clientele.
Come back to your comment in a month, and I think your perspective will have shifted.
No matter how paternalistic the intent may have been on Robinhood's end, the message is all the same to us on the outside: the game only has rules when we get to win it
The retail brokers bailed out the hedge funds!
Most of the time, WSB is a community to commiserate about losses and lie about gains.
That's something I'd say to be funny, especially on reddit.
Many of societies big issues are intertwined so hopefully addressing one partially addresses many. The golden rule is particularly nasty: those with the gold make the rules.
Those are the ones who would be left holding the bag when the music stops.
I don’t particularly care if it goes to $10 tomorrow. I don’t expect to make money here. It’ll be fun to watch for a few days, maybe weeks.
We just felt a lot of solidarity with the sentiment over there, and are happy to make a small contribution to the squeeze.
It feels kind of like contributing to a Kickstarter with low chance of success.
But you know, there’s a nonzero chance it goes to $1000 before the shorts can wiggle out. That’s what makes it exciting.
In general, since watching what they did to Tesla I have no sympathy for shorts.
Meanwhile this financial system is hardly just a monolithic monster and plenty of big institutions will make money too.
I think the populist ideas / results around this are all weirdly misguided.
I hope thinking this way about retail investing reduces the risk of YOLOing one's life savings on individual stocks.
Not anymore, they're not. Such are equities when the price becomes detached from reality. Any moorings one wishes to try and tie the price to, those are gone now.
As they say, past performance is not an indicator of future gains.
We worry about that (people's retirement savings and so on) anytime we see market corrections, a given company go under, and etc... it's not an unusual concern.
And there are a number of countries that have that philosophy in legal form. I'm glad to have a choice NOT to live in those countries and I suspect most on HN are similar.
When I see 'concern trolling' I usually think of it as just a term slapped on something to hand wave and ignore it.
nothing changed because camping out in a park for a few months without making any actionable, specific demands as a group is not a good tactic for effecting change. BLM was a bit more specific with their demands and have already received a few (if token) concessions.
Enough is enough. The only thing keeping the guillotines from coming out is a thriving middle class. Oh wait, that’s been stolen. It badly needs fixing and fast.
Ideally yes, the rest of us are a missed paycheck or major health problem away from becoming homeless and there's no mathematical reason it has to be this way, it's just how we've structured our society.
2. It was stupid.
3. It violated the principles of our society.
That is the point I’m trying to demonstrate. Solutions come from within, not without.
Well... yes? For less than what this guys did Louis XVI lost his head.
They can do what they want and suffer no consequences, of any sort. Neither economic (they get bailed out by us) nor personal (virtually nobody gets personally prosecuted and sent to jail). Why should they stop what they're doing? In their position, I wouldn't.
Voting out the incumbent breaks all these decades long (multi-generational?) relationships with the elites. They will probably reform the relationships to a degree the first time, but if congressional membership dramatically changes every 2 years, those relationships will weaken over time.
To whomever disagrees, please help me understand your reasoning.
Trade itself is no longer on technical merits (except those in early) but have you looked at valuations across the stock market these days -- everything is off given pandemic. So that line of reasoning by all the financial talking heads just proves they don't understand the moment.
It's pretty reckless behavior for sure but its more about rage and control then anything imho.
And I disagree - I do think everything is off (not just the markets being highly volatile). With many people making record money this year and human suffering being at the highest levels and considerable outrage everywhere, it feels like something is breaking down in society (at least North America). There is something very amiss right now, which I am sure we will be able to determine with the benefit of hindsight. Hopefully we can pick up and move on quickly post pandemic.
If you have a box producing 4k usd per year people may want to pay around 100k for it on normal times but when you can't find any other investments and the government is pumping money into the economy then suddenly the box becomes way more valuable. It's after all better to buy it for 150k even if it produces 3k instead of 4k than to just your money in the bedroom mattress. This same mechanism that causes stocks to rally every time a big player (EU or US) announces another QE round