It's interesting watching /r/wallstreetbets oscillate between "We did nothing wrong!" to "Well okay, some people were doing some things that were wrong, but hopefully no one will notice."
(I don't personally believe that anyone did anything that should be prosecuted here, but what I believe is irrelevant to courts.)
There is one thing that (in my un-humble, ignorant opinion) should be prosecuted: according to https://www.youtube.com/watch?v=4RS4JIEVyXM&ab_channel=Benzi... the reason that trades were suspended is that the clearinghouse changed their requirements from 3% to 100% for GameStop specifically. And that clearinghouse settles 95% of all trades on Wall Street, so they effectively have a monopoly. Therefore that's why all the exchanges had to suspend GME training; no one had 100% collateral to cover GME for 3 days.
Everything else -- Gill getting rich, WSB posts, Citadel's bailout of Melvin, etc -- is just a distraction. I hope one day they bring that clearinghouse to heel, since it was seriously uncool for them to change the rules of the game with the justification of "we said so."
They didn't change the rules of the game. The volatility and risk changed, thus the collateral requirements changed. Note: I am not a financial professional.
I'm not sure if anyone from wsb should be prosecuted; but I will say that if another hedge fund had tried to do what wsb did, it would have been clearly and unambiguously illegal market manipulation.
I do think it is quite likely there were some financial professionals posting on wsb that were breaching some laws or technical requirements. I have no evidence, but I would not be surprised.
Institutional investors did do what people suspect wsb of doing. Retail investors where net sellers of GME during this event. The short squeeze happened because other institional investors went in hard under cover of the WSB memes.
> Institutional investors did do what people suspect wsb of doing.
Buying based on observing market conditions or seeing the posts in reddit wouldn’t have been questionably legal afaik. Only actively coordinating e.g. through posts on Reddit or phone calls or a Smoky back room could be argued to be market manipulation I think? If they were posting in Reddit to feed the squeeze that’s when stuff may get problematic.
The sentiment on WSB from what I can tell is that they can’t coordinate which thread to sticky, let alone which stock to buy. My impression of observing it for a couple of weeks is that this is true. They aren’t capable of truly coordinating anything.
Best I can tell, Roaring Kitty/Deepfuckingvalue basically had been buying more and more GME stock for like a year and every month showed screenshots to prove this saying a short squeeze was coming. Eventually in January something happened and everyone else was like “he might actually be right, I’m buying”. Then the news picked it up and it hit a positive feedback loop. Robinhood stopping buy orders put a wet blanket on things and after they lifted the restrictions enough time had passed that the frenzy slowed down. The short squeeze might still happen but lots of WSB participants bought at $300+ and I suspect will never recover that loss. But also because of this specific crowd it seems a good chunk of them are not selling on the idea that if you buy at $300 and sell at $50, you definitely lose. And if you hold the stock it might some day rise back to above $300-400. Mark Cuban did an AMA there where he basically reaffirmed this point of view which they took and ran with.
Part of this behavior is that WSB wasn’t really focused on going long on stocks until now. They mostly traded options which have specific deadlines. They simply aren’t used to the idea of an open ended investment. I saw people talking about how GME is a solid company and how they believe it’ll transition to digital successfully. How it might grow from fundamentals, etc. Nevermind their EPS, or the fact that their valuation currently sits at 10x what it was with no justification as to how their fundamentals might have changed to account for this. The difference with this crowd is that they for the most part acknowledge that this is gambling and that you are likely to lose all the money you invest so don’t worry about losing it. They also acknowledge that they don’t know what they are doing vs pretending like this is all based on research, experience, or education. Makes them a sort of dangerous crowd, especially as some there do accumulate a good amount of wealth, IMO.
But also because of this specific crowd it seems a good chunk of them are not selling on the idea that if you buy at $300 and sell at $50, you definitely lose.
So close! You're almost completely correct, but remember that a loss is considered a win on wsb, because you get to post loss porn. Can't spell trader without retard.
Your comment is excellent. But I just wanted to chime in with a "yes, but remember that they don't take themselves very seriously" type reply. It's necessary for preservation of their culture. People who act like they know a thing or two tend to get immediately jumped on, which I found quite refreshing. "But will a gamma squeeze happen?' is usually met with "stfu and go read a book rather than drop terms you don't understand."
Which ... seems unhelpful and awful, until you realize that it preserves the important property of letting everyone feel like they can participate. You, me, anyone. And I don't really see how that's a dangerous group; it's more like a virtualized casino meme factory.
> People who act like they know a thing or two tend to get immediately jumped on, which I found quite refreshing. "But will a gamma squeeze happen?' is usually met with "stfu and go read a book rather than drop terms you don't understand."
Maybe this is how it was 6 million subscribers ago. Based on my (extensive) reading of WSB the past few weeks, this is no longer true.
I've read just about every WSB post (and its comments) about GME with over ~1000 upvotes. People asking when the gamma squeeze is going to happen were definitely not being told to read a book, they were being told things like "this Friday!" And people acting like they had intimate knowledge of this fact weren't exactly downvoted either...
That’s a really interesting take. The way they seek the lowest common denominator of communication does seem to create a strong sense of community.
What I mean by dangerous is this: as more people flock there more capital will enter the market through that gate. And that’s a lot of money to be directed by whims of a fickle and undereducated community that tends to ride whatever is popular at the time. This time they pump and dumped GME, AMC, and BB. What happens when they do this to a different company like say Amazon? Anything good/bad?
Their counterargument would be "How can we have insider knowledge when we have no knowledge?"
I get what you're saying, and it's a valid perspective. But, this gets back to the root of the issue: the older I get, the more it seems like there is a class division in society, and the upper class will do whatever it takes to ensure the lower class stay low.
I hate phrasing it like that, because you can't even say it without sounding like a loon. But think carefully about what you're saying. You're essentially saying that it's dangerous for uneducated, unsophisticated people to band together.
I'm not saying you're wrong. I'm saying, rich people aren't so different, and they are equally dangerous. Moreso, since they have the resources. So I personally find it hard to worry about some people collectively throwing around a few hundreds of millions.
My effort here is to try to convince you -- only you, not whoever's reading this -- to aim your worry "up the chain," so to speak, and to take a hard look at how the rest of the industry acts, and why the structures are in place. It seems false to say that these protection mechanisms are to prevent another 2008 from happening; after all, the 2008 crash wasn't caused by unsophisticated investors.
I think I wasn't clear in what I was saying. I made it sound like them being dangerous was a bad thing. I am placing no value judgement on WSB, just acknowledging that they are on the way to becoming a serious player in this game, with the ability to cause serious damage to other players (hedge funds, public companies, etc.). This is a quality that I already attribute to the hedge funds, the SEC, the big corps, etc. as inherent. Whether WSB becoming a serious player is a good thing or not is really not clear to me. I would expect that it results in a lot of collateral damage, first and foremost to some percentage of retail investors. At the same time, the fact that you can short stocks in the manner that GME got shorted is a much clearer and much more immediate problem, IMO. And I share your view that the haves seem to want to keep the havenots out of their clubhouse and will do all manner of things to keep the separation.
But overall, no I don't think that we should do anything about WSB. The GME situation is at best a symptom of a broken system, it's just that this time hedge funds got (theoretically) hurt not by other hedge funds but by retail investors so everyone noticed. If anything, let's fix the rules of the game so it's closer to fair for the little guy, and fix the SEC to keep those rules properly enforced.
> What happens when they do this to a different company like say Amazon? Anything good/bad?
What do you mean? AMZN has 3 million of 500 million shares sold short, less than 1% short interest. It would take one day for shorts to cover at average volume. Shares are also $3,277 as of Friday’s close, a lot of WSB people can barely afford one or two shares.
They cannot do this to a company like Amazon because the short interest isn’t there and the share price is too high. A weekly at the money call is $3,250 right now. WSB doesn't have enough capital to buy the shares or options.
They can’t do this particular thing to Amazon. But that doesn’t mean they can’t do something else. What if Amazon’s supply chain is found to be dependence to heavily on some other publicly traded company that can be manipulated more easily? What if they find some pattern in how hedge funds trade Amazon that is exploitable? It’s like saying that we found and fixed a bug so the attacker who exploited that particular bug can never find another one.
A market so susceptible to mania is maybe in the need of brakes that are used judiciously and without bias. We clearly do not have that, and in fact have been stripping them away since the 80s.
You can't blame this on "unsophisticated" investors breaking norms but ultimately playing by the rules.
I’m not blaming anyone. I think it’s an interesting situation in the same way that oxygen rich atmosphere becoming a thing on earth led to interesting results. The market system is clearly broken. You need not look further than GME for evidence of that. Either GameStop has been undervalued by everyone for years at $5/share and is really worth $50/share (where it is today), which would mean the market is broken. Or GameStop is currently worth 10x what is its true value which means the market is broken. Its sole purpose is to help us efficiently determine how much each company is worth and allow us to trade them. And here we have a situation where nobody can argue (I don’t think) that the market is doing a good job at efficiently determining how much GME is worth, and trading it has a decidedly one-sided advantage towards hedge funds vs retail investors.
My only observation is that while I don’t know what long term effect WSB will have on the market, I think in the short term a lot of retail investors will lose their shirts as collateral damage.
that wsb is gone. maybe it'll come back after the dust settles.
it isn't all bad though - old timers migrated to a myriad of other subreddits where quality content is more popular. it may take a while to get back to late 2020 level of memes, though.
There are formulaic requirements based on volatility and risk, but those aren't specific to one stock. The clearing exchange exercised discretion in applying a new collateral requirement, and in doing so put its thumb on the scale.
This episode of Planet Money should shed some light on it. What I understand from this episode is that there's a 2 day delay in settling trades, that's why clearing house exists.
There is a two day closing period for stock sales. During that period the exchange needs colateral to ensure when the transaction closes it will be paid for.
Typically this collateral is small, like 3% because most stocks aren’t volatile and buyers almost always pay up.
But when a stock gets incredibly volatile, there is a risk that buyers of $480 shares may refuse to pay when the price is $90 two days later. Especially when the buyers are a bunch of new retail investors who just opened accounts.
You could buy GME from most brokers because they didn’t have the GME volume Robinhood had, and they had more collateral, so the 100% collateral requirements for GME were manageable.
And the inverse; if you buy at $200 and the stock is at $400 two days later there's a risk that the person you were buying it from has disappeared (maybe they were a short seller and went bust; maybe they got seller's remorse). So RH has to reserve not just the $200 you paid for it, but also another $200 to buy the share on the open market when the counterparty fails to deliver. That's why collateral requirements are based on volatility, not momentum.
Think of it like a pyramid: the clearinghouse sits at the top, the brokers are in the middle, and the rest of us dirty peasants sit at the bottom where we belong.
The clearinghouse covers 95% of trades on Wall Street. So the clearinghouse issued a decree: "we are no longer able to support opening positions for GME, AMC, and KOSS."
Since most brokers use this clearinghouse, that means almost all brokers were forced to prevent customers from buying GME.
Not quite right. There's the DTC (which carries out 95% of the trades), then there's clearing houses (sometimes a seperate entity, sometimes part of the broker: the larger ones all do their own clearing. e.g. Robinhood has their own clearing house), then there's the brokers, then the traders. The DTC said 'we need 100% collateral on these trades' (probably because they viewed there being a significant risk that someone, somewhere, would not be able to pay up for the trades they're making in a big way), and then APEX clearing (which is the clearing house used by a lot of smaller brokers but not 95% of the market) said 'we can't support opening new positions' because their liquidity would be sucked up by the requirement, blocking most of the smaller brokers. Robinhood did similar for similar reasons independently of APEX, but some other brokers not using APEX could still trade (either because they had more cash on hand or because their customers weren't buying as much of affected stocks).
> The DTC said 'we need 100% collateral on these trades' (probably because they viewed there being a significant risk that someone, somewhere, would not be able to pay up for the trades they're making in a big way
This sounds like nonsense to me. After all the job of the Clearing House is to make sure the cash is balanced correctly after the transactions. Or realistically speaking a never ending chain of transactions, thus correctly moving the cash behind back and forth in time. It's the secret of the clearing house why they have no problems that their institutional customers have single digit equity ratios (speaking about Basel II/III/...) all the time while most individuals deal with 100% equity ratio. Maybe the more reasonable explanation is that they were overwhelmed by so many small transactions.
Well, if that's what people want. At that point in time it's about buying, not selling.
> and being bought in a large part by brand new retail
> investors who had just opened accounts.
> That’s a perfect storm for nonpayment issues.
Ok but they need to go through some sort of payment processing that checks the credit rating. Even if the credit card is close to the limit, we are probably talking about amounts smaller than 1000 $. Anyone able to visit the Reddit homepage and installing the Robinhood app should have that amount of cash in hardware. FWIW, normal eCommerce payment processors deal with nonpayment issues in the sub percent range.
To be more clear DTCC gets its collateral from the broker, ie Robinhood, not the actual clients. And the broker is not allowed to use client funds for collateral.
So the DTCC has to worry about Robinhood, and Robinhood has to worry about their clients.
The NYSE is one of the stock market centers in the US (yes, there's more than one). It's a place where you (usually virtually these days) go to agree with someone on the specifics of the trade - buy 100x GME at $420. The DTC is involved with what happens next - actually exchanging the stock and cash. In particular, they keep the records of which brokers hold how many shares of which stocks.
I highly recommend https://youtu.be/4RS4JIEVyXM?t=60 -- I didn't understand any of this myself till watching that. (Still don't! But I'm less confused.)
My understanding is that the clearing firm informs everyone "Hey, we no longer support opening positions in three stocks specifically: GameStop, AMC, and KOSS."
Literally everyone, including Robinhood, was forced to only allow people to sell GME.
Somehow Fidelity was the only market maker to avoid this -- you couldn't buy GME anywhere else due to the clearinghouse's decision.
(Why was Fidelity the only broker able to sidestep the clearinghouse's decision? An interesting mystery; perhaps someone here knows the answer.)
There's more than one clearing firm in the market. The more money the clearing firm has, the more likely it'll be able to continue trading highly volatile stocks at high volume. Fidelity, as a huge financial firm that's been around for a while, had the assets to afford to keep trading it (and/or their customers weren't trading enough to put strain on them), robinhood (which has its own, small, clearing firm) couldn't, simple as that.
Or rather because the trades could be done internally (Fidelity could sell off the stock they own)
EDIT: It seems my assumption was incorrect. This link posted by grandmczeb shows that RH needed more capital by a downstream dependency to ensure those trades: https://archive.is/GFtf2
They owned 13% of the company; now they own only 87 shares; they sold 9.3 million shares in 1 month.
So, during the Robinhood GME debacle, Fidelity could sidestep the issue, since they wanted to sell their own GME shares anyway, and also managed to look good in the process (no GME buying restrictions compared to Robinhood etc); win win for them
Interestingly from what I’ve read it seems like the hedge fund community overall views the GME event as fair play. ‘Maybe Melvin got burned but they should have known better’, kind of attitude.
The hedge fund community isn't really homogenous that way. Basically all the long/short equity hedge funds with appreciable AUM lost significant money in January, because most of them were short the...well, obvious short candidates, like AMC, GME and BBBY. Other kinds of funds which trade on monentum or which shorted near the top tick made an absolute killing.
Personally I don't think it's unfair when any fund loses money - that's the game. I do think it's unfair Melvin in particular has outsized attention. The only reason Melvin is in the spotlight now is because the WSB zeitgeist just happened upon Melvin's public short and fixated on it without looking at other funds' 13Fs showing the same position. Melvin was far from the only fund short GME. This in turn led the media outlets to hyperfocus on Melvin, which has in turn led the mainstream lay community to hyperfocus on Melvin.
Can someone please explain the situation to someone with no competence how these markets work?
As far as I understand, no one is allowed to trade on stock exchanges directly. Everyone has to go through a broker. Orders has to be settled in 2 days. So there are counterparty risks involved in both steps here. Is this where there was a problem? But the retail trading platform takes zero financial risk as long as they don't allow their customers to trade on credit (which is an entirely different issue).
As a retail customer I am entirely confident that I own whatever stocks has been purchased, even if the trading platform used should go belly up, as long as the stock in question is traded in a public exchange, which was the case here.
So what exactly was the problem? Some posts led my to believe Robin Hood and other apps extended some credit to its users in order for customers to be able to speculate immediately with their money and not have to wait for the trade to be settled. But surely the appropriate response to that would be to halt that credit, not suspend trading?
There is also the question how it is possible to limit buys or not sells? For every sell there is also a buy. If some platforms are limited to sell orders, someone must be on the other side of that trade, and will have an advantage in the market. How is that legal?
Or did this not concern stock trading at all? Some articles mentions options trading, which is a financial instrument issued by a counter party. But those kinds of orders are stopped all the time for all sorts of reasons. That is in itself hardly newsworthy.
I'm thinking it was a decision guided by their current application architecture. My guess is that there was no easy way to disable the purchasing of stock on credit, and preventing a stock from being bought was probably the easiest mitigation.
>Is this where there was a problem? But the retail trading platform takes zero financial risk as long as they don't allow their customers to trade on credit (which is an entirely different issue).
From matt levine:
>This means that the seller takes two days of credit risk to the buyer. I see a stock trading at $400 on Monday, I push the button to buy it, I buy it from you at $400. On Tuesday the stock drops to $20. On Wednesday you show up with the stock that I bought on Monday, and you ask me for my $400. I am no longer super jazzed to give it to you. I might find a reason not to pay you. The reason might be that I’m bankrupt, from buying all that stock for $400 on Monday.
>Generally if you buy a stock on Monday you still want it on Wednesday; even if you don’t, we live in a society, and you’ll probably cough up the money anyway because that’s what you’re supposed to do. But at some level of volatility things break down. If a stock is really worth $400 on Monday and $20 on Wednesday, there is a risk that a lot of the people who bought it on Monday won’t show up with cash on Wednesday. Something very bad happened to them between Monday and Wednesday; some of them might not have made it. You need to make sure the collateral is sufficient to cover that risk. The more likely it is that a stock will go from $400 to $20, or $20 to $400 for that matter, the more collateral you need.
Yes, so I take it to mean that indeed the retail trading platform (the actual term may be something else), takes zero financial risk. The broker that the retail trading platform uses to access the trading exchange takes this risk.
But the counterparty risk here is quantifiable (by way of audits of said retail trading platform) which usually in society makes it a case for insurance, not security payments. That is my question. Is the premise misstated, and if not, why is this not settled by insurance?
The three replies posted to the question above seems to disagree what the problem actually was.
In the financial industry collateral is normally used as the primary means of mitigating counterparty risk as it avoids adding an additional counterparty that you then have to evaluate for creditworthiness, and you have to pay them money instead of just temporarily handing over collateral and getting it back 100% later on.
That being said the collateral doubles as a sort of insurance; if one party's collateral is insufficient to cover the loss, the excess is spread across other market participants. This is one reason why client funds can't be used for this collateral.
The DTC changed the collateral requirements to 100%. The WeBull CEO said that. That requires way more cash on hand to handle settlements compared to the norm which I think is 2-3%.
IMHO the DTC and prime brokers are all pals playing in the same fixed game. My baseless assumption is they’re manipulating the market by selling uncovered shorts to each other and since everyone is in on it / accustomed to it, no one ever comes to collect so there’s no risk of having to cover their uncovered shorts. They could be shorting 2000% of the float and no one would know if all the trading happens between complicit participants with the sole intent of driving share prices down.
The issue is that the volatility had been unprecedentedly high for a week, but they jumped up the collateral requirements overnight. It would be one thing if they'd stepped it up in time with volatility, but by the timing, it looks less like a protective and more like a punitive step.
“Therefore that's why all the exchanges had to suspend GME training”
As far as I know, no exchange suspended trading in GME. It’s only some brokerage, due to collateral requirements and risks involved, that imposed limits on their clients.
People should educate themselves about investing and trading before starting. I blame Robinhood for this circus - it’s pure gamification - I guess 90% of guys trading on it don’t understand what they doing, let alone what’s really happening when they hit this “buy” button. This is the point that should be investigated - do we really want people to be able to loose all their money in a matter of days and sometimes hours, trading options with leverage ?
Some brokerages put a complete stop on trading the share - no buying or selling. Fair enough.
Others (this includes Robinhood, which I believe had the largest number of GME shareholders) stopped allowing purchases but continued to allow selling. One of their excuses is that they didn't want to take people's ability to exit their positions. This of course, played into the hands of anyone trying to cover their short, as it artificially increased the number of sellers compared to buyers.
Finally, Robinhood allegedly closed out positions of people who'd purchased GME "on margin" - the thing is, if you sell a share in company A, and buy a share in company B on the same day, you might be buying shares in company B on margin, because it takes two days to settle company A's share sale. So, even though you may think you bought shares of company B fair and square, RH could still have closed your margin position.
> How a clearinghouse judges these risks, and therefore when it makes demands for more upfront funds, is typically formulaic. Margins can be based on equations such as value-at-risk. Exactly how the formula works, and who is responsible for losses in what order, are important elements. In the case of National Securities Clearing Corp., losses would be covered by the defaulting member’s funds before the clearinghouse’s own funds or other members’ funds would be used.
I'd say it's very likely that it wasn't formulaic this time, since Robinhood's CEO said in an interview with CNBC that we was called at like 4AM, well after markets closed, to deal with the new requirements.
I've only been sorta paying attention so i could be wrong but trades were not suspended or halted? only buying was prevented, and only for some brokerages?
> Only buying was prevented, and only for some brokerages?
The first part of that has been a common bit of misinformation. Opening new positions (either by attempting to buy shares of the stock, or entering into a new short position) is what was prevented. Closing positions (selling for owners of shares, or in the case of short obligations buying shares) was still allowed as closing reduces credit risk for the broker.
The brokerages that did restrict, were smaller firms and did so to maintain liquidity for all assets, instead of allowing a vast amount of their capital to be consolidated largely into a few assets, due to the increased capital cost of clearing.
It's a fair question. A bunch of the larger guys like Charles Schwab and TD did implement restrictions as well.
In their case, it may not have been a necessity to maintain liquidity for other assets, but capping the exposure to how much capital they were putting down for it probably still made sense.
> “The bottom line is that clients are still able to trade in GME, but we’ve put some restrictions on certain types of transactions in the interest of helping mitigate risk for our clients,” Schwab said Wednesday in a statement.[0]
They very much did 3 weeks ago. Not to the same degree as the smaller brokerages, but they still put limitations on margin trading, and restrictions on options.
1. Increased margin requirements for GME
2. Restrictions on naked strategies
Both of these are pretty much acceptable on a very volatile stock. They never prevented you from buying the stock or options. I think including Schwab or TD in this is near misinformation because 99% of users wouldn’t make use of the features that Schwab ended up restricting
I think people may be mislead because they are looking back at the published restrictions, but those don't reflect immediately prior, when things were going nuts and brokers, not just Robinhood, were doing stuff without notifying customers.
TDA is a subsidiary of Schwab and was blocking some purchases for some period of time during the week, before they put out a statement that said they "will not prevent clients from making basic buy and sell transactions".
The string "put" does not occur in the article referenced.
Existing restrictions became sizable due to the market volatility. This impacted certain clients of the brokerage that had significant exposure to the names relative to their account.
Not the same thing as the brokerage implementing new restrictions.
Exchanges repeatedly halted for brief periods, based on predetermined rules. That part was nothing special, it's something like 5 minutes at a time,
Buying to open new positions was blocked by some brokers in response to the the bump in collateral requirements they were required to fulfill. Some brokers were capable of blocking only margin account trading, but RH sounds like they blocked all buyers (plus their target market is margin account holders)
DTCC is basically interested in ensuring that trade settlement occurs. They eliminate a lot of counterparty risk, but the flipside to that is that they clearly have discretion that surprises brokers.
It's the collateral increase that caused Robinhood and other no-fee brokerages to halt trading. Brokerages which had the ability to charge for trades simply required more cash on hand and charged slightly more for the trade.
Stock purchases are settled after 2 days. If the buyer goes broke before that, the seller would be left holding to bag. To mitigate this risk you need to post collateral.
But it's not the brokerage's money on the line, it's DTCC's. From the perspective of the DTCC, there's no difference between a retail brokerage buying $10M of GME and lehman brothers buying $10M of GME.
But if the brokerage already has your money they can use it to post collateral. And yet they banned everyone from buying. A lot of stuff doesn't add up here.
The "alleged fraud" described at the end of that post is not fraud at all. That poster either doesn't actually understand options or is misremembering the post in question.
NSCC collateral rules are widely believed to follow directly from Dodd-Frank requirements. It's also hard to understand the supposed conspiracy you'd be prosecuting NSCC for. Is the idea here that NSCC was somehow corrupted by agents of hedge funds short on GME?
"widely believed"? Believed by whom and why? Dodd-Frank is not a secret. There either is a requirement in Dodd-Frank act or not. If there is, you or the persons believing it could just quote the relevant text.
According to Vlad from Robinhood, as said in Clubhouse interview with E. Musk, there is discretionary (i.e. arbitrary) part of the collateral requirement set by NSCC.
Initially NSCC asked RH for $3 billion in collateral which RH didn't have and they managed to negotiate it down to $700 million, which they did have.
Which begs the question: if $3 billion was required by Dodd-Frank, then did NSCC commit securities fraud by agreeing to lower it to $700 million?
And if $700 million was enough to satisfy Dodd-Frank, then why did they ask for $3 billion initially?
And what if $500 would be enough? Or $200 million?
Or maybe Dodd-Frank doesn't dictate collateral requirements on an individual stock at all?
Nitpick: your comment implies that the DTCC is representing Wall Street, but it is an understatement: DTCC for all intents and purposes is Wall Street. DTCC is owned by (quoting wikipedia here - sic!) "banks, brokers". It's a 6 minute walk from NYSE to DTCC (which shouldn't be surprising).
Given that, it isn't outside of realms of possibility that raising of collateral requirements had additional objectives other than simply limiting risk on the system (which, I should mention, was very, very real - in case RH went bankrupt). Normal people won't have any way to know.
Nah, no conspiracy. I just don't like that they can change their collateral requirement from 3% to 100% for specific stocks in one day, regardless of the reasons.
To turn it around: should they have the authority to enforce a 33.3x collateral increase with no oversight simply because they feel it's necessary for the world to stop trading GME? This is the heart of what I hope will be regulated.
BTW, playing whiskey slaps was fun. It was nice to see the crazy pentester world, even if I had wrong expectations going in. Hope you've been well!
this one's easy: the financial world experienced a 7-sigma event for which institutions were unprepared for and somebody figured that it is worth pulling the emergency brake lever. for a few days GME was almost perfectly reveresly correlated with SP500 - there was a lot of derisking happening all at once. this couldn't all have been retail moving from SP500 to GME.
> It's interesting watching /r/wallstreetbets oscillate between "We did nothing wrong!" to "Well okay, some people were doing some things that were wrong, but hopefully no one will notice."
I feel like it’s mischaracterization to say that “/r/wallstreetbets” is either a single entity, or that the current group is at all connected to the “pre-GME” group. They had 1.7M users in Dec 2020, and are now over 9M. As well, there are undoubtedly bots, shills, and actors with their own agendas that were drawn as a direct result of the publicity.
"Therefore that's why all the exchanges had to suspend GME training" thats not accurate very few did. it's just that those few had oversized exposure on GME. They were also not part of some huge entity that could post extra money without even noticing like say Etrade (Morgan Stanley) etc.
The clearinghouse requiring more margin should definitely be investigated, but it’s not unreasonable. Robinhood offers margin accounts, and may have lent money to all the traders by GME at 300-400 dollars, over 10 times what it was trading at previously. It was completely plausible that Robinhood could have gone bankrupt, which means the clearing firm would have been on the hook for all of that money.
In my opinion, what needs to be investigated more is the “payment for order flow” business.
He continued to post daily updates of his held options until I believe 5 February, but I'm not sure what he did after that. I'm not sure if anyone but him knows, since that was around the time he was summoned by this committee.
As of that last update he was still holding most of his options, but it is believed that he had converted at least some of them and profited more than $10 million.
I don't have a better source than random Reddit comments, though.
Outside of WSB memes, how well known is DFV as a monicker vs roaring kitty. To the regular person, both are not household names. To anyone who is really invested in the story, they'd know both. The very small niche of people who know one but not the other isn't worth Reuters having to include profanity (not that I object to profanity).
To anyone, like me, who has observed this from a safe distance : DFV is a widely-reported username. Like, you'd read it in a short news piece about the whole debacle. This post is the first time I see "Roaring Kitty".
I don’t think that’s true. Yes, anyone aware of or involved in the story knows DeepFuckingValue, but I often see people online—even people who worship him as their hero—surprised that he’s not some mysterious figure, but had been putting out YouTube videos for months. His videos still have shockingly low view counts considering how famous and pivotal a figure he’s become.
What about Musk making tweets about bitcoin whilst his company has a large investment. Isn't that market manipulation or maybe does not apply to rogue billionaires.
Promoting something that you own isn't illegal. Jack Dorsey and thousands of others are promoting BTC while simultaneously owning it on social media. Musk also promotes TSLA and SpaceX to his benefit (since he holds equity).
It may be a bit of a grey area ethically since he didn't disclose his ownership until later, but if he was doing it because he really believes in crypto and it's not just a cynical attempt to pump something he's holding and then close the position into the buying frenzy a day later, then I have no problem with it. Of course, though, it's not possible to read this intention from a distance.
One interpretation is that this is in the same ethical category as Instagram influencers who get paid to flash products in front of their users without disclosing that they're being paid.
It is not legal in the US. If you're being paid to show or use something and there's no reasonable expectation that you would be, it must be disclosed. The FTC has guidelines on this and has gotten involved in the larger cases of this happening (such as the CS:Go skin gambling scandal where big streamers were being paid to stream gambling on the site, often a fake version with no actual risk and/or distorted rewards). You'll find most larger 'influencers' are aware of this and take steps to mention when something is sponsored, but there's a huge number of smaller ones where there's little enforcement.
There's also a more charitable interpretation though. It's not clear to me that the lack of disclosure benefited Musk.
Compare these two sequences of events:
1 - Initial purchase followed by disclosure followed by promotion
2 - Initial purchase followed by promotion followed by disclosure
In either case, Musk bought BTC at around 35k.
Do we have reason to think that the BTC price is higher now because Musk followed path (2) than (1)? It's not clear to me that that's the case here. And if it's not the case, then why on a first principles basis are we upset?
I agree though that "best practice" is to disclose upfront, if for little other reason than pump and dumpers (which Musk is not) have muddied the waters and this has become a generally good tradition to uphold as a result.
All company assets need to be auditable, ie an auditor can physically verify their presence. There is no way to do this with Bitcoin, which is a huge problem for public companies buying it.
As Matt Levine likes to say - everything is securities fraud.
> contributing to global warming is securities fraud, and sexual harassment by executives is securities fraud, and customer data breaches are securities fraud, and mistreating killer whales is securities fraud, and whatever else you’ve got.
Nah, every bad thing a company does is securities fraud. With regards to this, this quote is more relevant.
Maddeningly, people continue to think that it is somehow illegal insider trading? “You bought a thing without telling anyone, and then you told people that you liked the thing and it went up, that’s illegal.” I don’t even understand that intuition. No! You can trade when you know your own intentions, even when nobody else does! Also, man, it’s Bitcoin, there’s no such thing as insider trading.
Can you imagine being called to testify before Congress and the news citing the username you chose at 2am when all the other usernames were taken? “Next they’ll the calling to the floor Preston Claghorn, also known as analmudflaps247.”
Is this investigating Robinhood's halting of trade? That's mentioned towards the end of the very short article, but nowhere does it explicitly specify what is being investigated and why.
The article says this:
"The House Financial Services Committee is examining how an apparent flood of retail trading drove GameStop and other shares to extreme highs, squeezing hedge funds like Melvin Capital that had bet against it."
Which is a sentence that answers it's own question.
The political ripples of this will be very interesting to watch.
And potentially nothing more than that. House committee hearings are usually little more than a show for the media. Politicians turn up to get their sound bites, the media gets a couple of photos of public figures looking uncomfortable while being questioned, then everybody goes home and nothing else happens.
Older RoaringKitty YT spreadsheet videos (before he became all about GME and before much of anyone watched his streams) are interesting to watch for a person casually interested in finance. They are very nerdy in discussing his approach to investing, tools etc. and don't present any clear recipes. He had/probably still has a biggish public portfolio of stocks and seemed to base it on financial analysis applying the value investing style. I thought this style is pretty much dead, because market efficiency has increased compared to the times when Benjamin Graham analysed securities by hand. (Unless you have the name recognition and capital of Buffett.)
I don't know if all this was completely sincere on RoaringKitty's part. Personally I believe that he mostly was at that time. Possibly he got carried away by money and fame later. But I 1) don't have to decide it for any official body 2) was never long GME, it was already too expensive (risky) compared to fundamentals when I learned of the story. What I'm trying to say is: fraudsters tend to want to sell you something, and at least it seemed that you weren't sold anything by RK.
I can get recommendations on in-depth (practical), interesting, non-pushy financial content for casual viewer. Please don't say Matt Levine, he's a (great) commentator not a practitioner.
Also, I think everyone interested is aware that no one should expect money from active investing, you should use something like index funds first while already having a comfortable amount of money in safer assets etc. That's why I say casually.
> ...applying the value investing style. I thought this style is pretty much dead, because market efficiency has increased compared to the times when Benjamin Graham analysed securities by hand
Do you mean the manual part has gone out of style or fundamental analysis altogether?
My knowledge on finance/accounting is extremely limited and after watching some of his videos back in November, I took for granted that this is how this type of investors operate.
use a financial model like Discounted Cash Flow for finding companies that are "objectively" severely undervalued -> buy them -> wait X years until they reach their "fair price" that you calculated at the start -> sell for a profit
Aswath Damodaran has some online academic content on valuation in that style.
The main problem nowadays is the "severely undervalued" part. People in general know too much to severely undervalue companies. The RoaringKitty's GME thesis was based on strong fundamentals, but also on his contrarian belief that they can still flourish despite being a brick-and-mortar business. It's interesting to see if he was right, but it's still a gamble. Anyway, the Reddit frenzy turned the whole story of his GME thesis into the craziness that we all know.
(Another problem is market reaching the "fair price", good luck with that?)
edit: Okay, so to better answer your question, RK at the beginning said that he is inspired by value investing but he doesn't apply it purely. As to fundamental analysis, I think most people do it but rarely use it in the specific way outlined above.
No that model of investing is still very much alive. It's the basis of every long/short equity hedge fund. The successful ones do it in a more sophisticated way with some additional quantitative and data-driven analysis. But it's essentially the same model.
> use a financial model like Discounted Cash Flow for finding companies that are "objectively" severely undervalued -> buy them -> wait X years until they reach their "fair price" that you calculated at the start -> sell for a profit
The math for discounting future cash flows may be objective, but every investor will come up with a different estimate of future cash flows. People in general don't "know too much to severely undervalue companies", because this implies future risks and growth are knowable. People may know how to read balance sheets, but very few are any good at forecasting risks and growth.
What's missing from your flow chart is "produce a quantifiable thesis for growth/risk that gives you a current valuation, judge the precision of this valuation and the uncertainty of the price/value gap closing, make your bet".
> ...applying the value investing style. I thought this style is pretty much dead, because market efficiency has increased compared to the times when Benjamin Graham analysed securities by hand
I thouhgt this style is pretty much dead, because the Fed is out of control stimulating the markets. Even purchasing bonds and ETFs. As if they embraced the "stonks only go up" meme.
In my understanding, the fact that growth/expensive stocks rise has only an indirect influence on value/cheap stocks being worse investments. Nowadays, anyone can easily access and scan in aggregate financials and financial indicators. In the middle of the 20th century, you had to do it on paper with each stock. It was a bigger edge. So it was easier to notice something that others didn't.
Still (again, in my understanding) there's some sense in assuming that lots of cash and low debt in the company (compared to the ticker price) at least limit your downside a little, when the price is at the rock bottom. Doesn't mean there's a potential for profit, because stock prices are irrational.
This is true. What I meant is that he writes about interesting stuff that happens on markets and thought experiments, and less about the practice of investing. That's because he himself does the correct, boring thing (index funds) and who wants to read about that every day. So maybe I had in mind more 'investing' than 'finance'.
The elephant in the room that I don't see much discussion about is the use of options by small retail accounts.
There are piles of rules around trading in accounts < $25,000.
But then those same guys are allowed to trade options.
An option has a 100x built in leverage.
A simple solution to this problem is to require the underlying amount of margin or cash in the account to purchase the option. ie. If you want to buy a $3 option for BBBY (costing $300) then this will take $2800 from your initial cash or margin.
Yes, this effectively puts options out of reach to small investors, but... maybe that's a good thing.
> What a fantastic way to ensure that only The Right People (TM) can make money off of anything
To be fair though, this is why the regulators exist. And they've got their post government careers to worry about so they will have to do something behind this supposed calamity. But don't worry, like the owner who crams their cat into a brightly colored sweater, they're doing it to protect you.
This argument is equivalent to supporting the IRS going after small-time tax cheats because the big boys - with billions in public revenue lost by their fraud every year - are "too difficult" to prosecute.
Regulators exist to prevent the most dire threats to a system - the system being the American economy, not simply financial markets (and their profits). They should act like it.
If a crisis manufactured by Wall Street hubris and capitalized upon by retail traders functionally crashes the system by way of a massive wealth transfer, so be it. Regulators should be concerned with the setting up of the earthshaking domino set in the first place, not with taking a chainsaw to the hand that goes to knock everything over.
> But then those same guys are allowed to trade options.
You act as if they are allowed to so symmetrically. I'm pretty sure they can only *buy* options, in which case there is no "extra" risk outside of what they paid up front.
Why would you hinder that from a false risk/margin perspective, if not but just to block the little guy.
Not really my point that selling options is the problem.
imo, allowing < 25k account holders to buy short dated options should not be allowed due to their outsized effect on stock price. And the tendency for that price rise to snap back like an overstretch rubber band. It's just creating more volatility.
He was a securities broker registered with FINRA. FINRA representatives have a whole lot of regulations placed on them.
To me, the main things he did wrong were, not disclosing that he is a securities professional on his channel (as opposed to just, some guy), and not disclosing his youtube channel to his employer.
> MassMutual, officially known as Massachusetts Mutual Life Insurance Company, also informed regulators that Mr. Gill gave his notice on Jan. 21 but was technically still an employee of the firm and its securities and investment advisory arm, MML Investors Services, through Jan. 28 — the week when GameStop shares surged the most.
This doesn't imply that he did anything illegal. It's standard in hearings to get any/all prominent people/corporations involved to testify to paint a clearer picture for law makers to then potentially act on. It's more research than anything.
Yes, personally I think he's in for some trouble with MA, but I was speaking to the congressional hearings which, like you said, aren't a prosecution.
I do think he purposefully downplayed his financial history in an aim to drive up hype, and as you stated, violated his professional obligations. At best, he walked a very thin line which will be scrutinized. At worst he broke the law and will face charges, and WSB will add a new chapter to their lore either way.
Because there were no offenders. DTCC raising collateral requirements on an ultravoltile stock with a high chance of price collapse is just... a reasonable thing to do?
Do they have a prepublished volatility-collateral chart that applies for this and all similar scenarios or was this an adhoc rule change made arbitrarily this one time? Can you show another volatile time where similar action was taken?
Can you point to a GME like price action of a non-penny stock ticker? Of course we both know the answer is no. Things shot up, things shot down, of course people who bought the hype lost money. There is nothing surprising here.
Evidently you don't know what you're talking about - of course I can. $VW 2008, $ACB 2019, $TLRY 2018 to name a few. There is much more, simply go through tickers on D1 chart and you'll see.
Evidently you don’t understand difference in the size of this run up?
VW, the mother of short squeezes driven on unexpected Porsche purchase went from $200 to $1000, eg 5x
$ACB had no short squeeze, they had some run ups, with biggest in 2018 of $66 to $194
$TLRY peaked at $300 with historic low of $21 and it took months.
$GME went from $4.2 to $482 in about 5 months, none of the previous tickets you mentioned moved literally >100x. Even in 2021 GME went from $17, so over 25x in one month, this has no precedent. It leaves VW and TLRY entirely in the dust, they are not even close.
Yes, the relative action was lower on other stock - we know this was a unusually large event - but it's absolutely false that "nothing like this" has ever happened. If you compare the post-squeeze prices, there's only few dozen of percentage points of difference in that same timeframe. The specific price before the squeeze doesn't really matter.
GME squeeze is significantly larger in percentage points, that’s exactly my point. Nothing of this size went 100x previously. The short volume was large back when GME was $4. GME moved in 2 days as much as entire VW squeeze. It is entirely reasonable that a bubble of this sizes crashes just as spectacularly and dtcc didn’t want to hold the bag after all the bankrupt retail late comers. In fact that in reality it has been defaulting as slowly and non-destructively is kind of a miracle, in many ways thanks to dtcc quick action.
GME went up more than %10000 (100x) in 5 months. The geometric difference between GME and some 10x stock is the same as difference between 10x and no growth.
No, you’re wrong even in this narrow sense. GME had a weekly move from $61 to $483, or 8x. $VW went $201 to $1005 (actually split over two trading weeks, in a single trading week it was $324 to $1005). So between 3 and 5x. The weed stocks are even less.
But the thing is what makes GME an especially big risk is not any weekly move, it is the repeated weekly moves. It is the 100x growth in a stock that has essentially no chance of justifying its valuation. This was not the case with your other examples.
A great deal of GME's move before last month was fighting back against a short attack that had artificially pushed the price down. $5 was not the natural price. $5 was the price as hedge funds attempted to drive Gamestop out of business, in the midst of the COVID crash. I would accept $20, which was what the stock price climbed to before a positive earnings report and moves to restructure increased positive sentiment. The squeeze we saw was, then, 10x at best. This is in line with the 12x I mentioned earlier. VW was less, but had started at a higher point and moved similarly to GME over several months before the major event.
The 28th WAS that event for GME, but it was cut off. It's impossible to say how the differing circumstances between GME and VW's squeeze would have changed the magnitude of its peak, but they're similar enough that we could expect similar movement from $300-$400 to the actual peak if major retail brokerages hadn't prevented traders from opening positions. Go look at a chart of those two weeks. GME's looks similar to VW's, except there's a massive hole on the 28th. When buying resumed (however limited) the price shot back up to match sentiment, above $300, and then mirrored the trend over the following days. That hole is where the squeeze would have been.
Finally, the valuation during action like this is not based on the company's fundamentals but on the magnitude of the bets placed against it. Shorts piled on at extremely low price levels; the more the market decided they were wrong, the more they lost, theoretically without limit.
Then why disable buying and not selling, if things were volatile the exchange could have stepped in and stop the trading. There was really no reason for DTCC to increase the margin to 100%.
They disabled buying because they need to put up collateral on buys, not on sells (on sells you just pledge the shares you hold). They increased collateral because if a bunch of people buy and go bust by the time settlement time hits (because of GME price collapse) then dtcc would be on a huge hook.
> They increased collateral because if a bunch of people buy and go bust by the time settlement time hits
No that is not true, there are many people who have the money in the account to buy, the broker can lock that money so the question of buyer not paying does not arise.
So the hedge funds are free to do anything yet the little guy who has the money cannot even participate. Do you understand why people think its a rigged system?
> Then where is the right place for that? (rehash in political theater)
Within the SEC or at a performing arts center, depending on what level of scrutiny, the discussion of the topic is to be given. A congressional hearing is the equivalent of a discussion between a beat cop and hostile witness at a coffee shop.
> 2008 should have demonstrated that SEC is virtually powerless to take on the big guys.
They are the ONLY organization mandated to do so. Lacking specific power "to take on the big guys" (whatever that means) is a different issue. The SEC has the awareness of the market manipulation, as this monitoring and analysis is what they do. Congress should be speaking to them, not holding some theater.
> The purpose of a congressional hearing is to create awareness.
The awareness comes from media more than any other source. Are you implying that there is a lack of awareness for any individual interested in this topic? I feel like I'm talking to someone who participates in a different reality. GL with whatever.
I don't actually see much institutional abuse. Some hedge funds got squeezed, but that happens. Robinhood faced capital requirement issues, but considering the circumstances, it seems fair. Market makers kept trades happening.
The only abuse I see is Robinhood encouraging retail investors to make risky trades and possibly some people on WSB organizing a pump and dump. Institutions acted pretty responsibly.
DTCC blocked buying for the little guys and changed the rules without any notification, I dont know why you dont think that is not institutional abuse.
> but considering the circumstances, it seems fair.
No its not fair, if it was really serious the exchanges could have stopped trading in GME but they did not.
We don’t need congressional hearings to carefully explain to WSB newbs how the stock market works, why collateral requirements are important, how you can easily short the same shares multiple times, and why the institutions did their jobs in this kerfuffke if their own creation.
HN is about hacker news, there are various viewpoints. Not everyone has to believe in the long-disproven invisible hand.
I think crypto is a dangerous destabilising factor. If not reigned in, it will come crashing down on all of us when it begins to destroy the public finances of (first) smaller countries and enables he usual suspects to evade all taxes, store value in non-localisable assets, etc.
One of the main features of crypto is that it enables tax evasion. No need to worry about carrying suitcases of cash, gold or jewels onto an airliner anymore and getting caught when you want to move money across a border without a recorded transaction.
Supposedly that’s one reason it’s big in China since miners can generate coins to move wealth outside of the country more easily than moving their Chinese fiat.
Crypto is breaking the financial establishment and ruining Wall Street's never ending party. DeFi is bringing the same synthetic assets that Wall Street creates out of thin air to everyone. If you're not bullish on crypto, you haven't studied it closely enough.
I would call this action to be directly related to the economy... Albeit GMC was small stock. There could be some open questions of market stability that were clearly under-covered. It is reasonable to look into this and if similar situation could lead to larger market impact.
Sure, and that’s what the SEC is for. I’ve been unemployed for a year and couldn’t care less about wall street.
Congress has exactly two issues they should be focusing on: stimulus and vaccination. This is just another piece of theatre designed to distract us from the bigger picture.
https://www.reddit.com/r/wallstreetbets/comments/lj8djx/day_...
(I don't personally believe that anyone did anything that should be prosecuted here, but what I believe is irrelevant to courts.)
There is one thing that (in my un-humble, ignorant opinion) should be prosecuted: according to https://www.youtube.com/watch?v=4RS4JIEVyXM&ab_channel=Benzi... the reason that trades were suspended is that the clearinghouse changed their requirements from 3% to 100% for GameStop specifically. And that clearinghouse settles 95% of all trades on Wall Street, so they effectively have a monopoly. Therefore that's why all the exchanges had to suspend GME training; no one had 100% collateral to cover GME for 3 days.
Everything else -- Gill getting rich, WSB posts, Citadel's bailout of Melvin, etc -- is just a distraction. I hope one day they bring that clearinghouse to heel, since it was seriously uncool for them to change the rules of the game with the justification of "we said so."