Source? If I was caught in a short squeeze, this is exactly the kind of announcement I would circulate to prevent the price from going any higher.
Citadel probably gave them the cash to avoid a margin call, knowing they can later manipulate the market and the shorts would payoff in the end, and Citadel would get their share of the spoils.
Otherwise a bailout makes no economical sense, Citadel is not the FED, they can't print money just to cover someone elses losses.
What? No it wouldn't.
Melvin faced cash calls. To raise cash fast they could (a) get it from their LPs (fat chance), (b) raise it from someone else or (c) sell other assets. The last option is a fire sale. You figure out what the fire sale discount would be, say it's 50%, and then use that to get (b).
I don't know what the terms of the bailout were. If I were structuring, I'd make it a loan with a super-high interest rate triply collateralized by their remaining assets. If they pay it back, I get the super high interest rate. If they default, I get the rest of their assets for 33¢ on the dollar. Between those two, the latter is frankly the higher-payoff scenario. (I would also require all short positions be closed out within N days, with the borrower's investors bearing the losses.)
That's what I was pointing out! Melvin did not close their shorts(as they said they did), they just got more rope from Citadel, and Citadel was willing to do just that knowing they can manipulate the market.
The narative of Melvin was "Citadel gave us 3 billion dollars, we closed our shorts at a loss, you won wsb, aren't you happy, you won, now leave us alone and stop buying".
Yes. Those other assets are presumably uncorrelated to this short position. If they were fire sold, depending on the assets, they could have gotten 20¢ or 30¢ on the dollar.
That discount gives Melvin the incentive to borrow, even at exorbitant rates. It protects the rest of the portfolio. With the bailout, the GameStop loss is capped and eaten by LPs. That sucks. But it sucks less than eating that loss and selling off the rest of the portfolio for peanuts.
> Melvin did not close their shorts(as they said they did)
You're alleging securities fraud. This may be the case! But we have zero evidence of it. And if Citadel and Point72 invested $3bn to aid and abet securities fraud, that would be quite stupid.
I stare at this crap all day and I've seen no indicator that Melvin has closed a large percentage of their position, let alone all of it. I will 100 percent allege securities fraud.
"[Melvin] was rescued with a $2.75 billion cash infusion from two other hedge fund titans, Steve Cohen and Ken Griffin. Cohen was Plotkin's former boss at SAC Capital Management. SAC shuttered after the firm pled guilty to insider trading and paid $1.3 billion in fines. Cohen was not personally charged. Griffin runs Citadel LLC ...
In exchange, Citadel and Point72, the successor firm to SAC, own an undisclosed stake in Melvin Capital Management."
And what is the likelyhood Melvin had such a significant proportion of their portfolio in such assets?
@hanklazard best me to it
The answer is they didn't close it, they were trying to get the mob to back off.
And no, it technically wouldn't be fraud, they were very careful with their words...
Citadel, Point72 to Invest $2.75 Billion Into Melvin Capital Management - WSJ [0]
Read As: Melvin no longer has a short position. Citadel (edit: or like someone else said, a 3rd party) does. Citadel will handle this. Melvin is in time out.
We'll figure out who holds the chips in a few weeks time when filing deadlines are due. Thus it's dark.
Thus explains the perfectly executed short ladder today - could only be pulled off by someone with more dry powder than Melvin - but if you look at the Level II data, this is going to take a long, long time.
[0]https://www.wsj.com/articles/citadel-point72-to-invest-2-75-...
I missed this. What's this referencing?
Yes which could be called the crime of these brokers
That would be securities fraud.
I hope you have a better reason why that's not likely than "but that's illegal." Them actively committing securities fraud seems to be the most likely occurrence from where I'm sitting.
Who would save billions? For how long?
Let's assume the statement is fraudulent. Before the statement was made, Melvin's LPs were set to get hosed. Melvin's general partners, the ones making the statements, have a lot of egg on their faces. But they didn't do anything wrong. They keep their money and houses and yachts. And in all likelihood, after a few months, craft a lessons-learned pitch and raise more money.
After the statement, they have engaged in fraud. Not only is criminal prosecution a risk. All those deep-pocketed LPs can now sue the general partners, personally, for breach of fiduciary duty.
Add to that the Citadel bailout, which removed the risk of the fund going under, and there is no reasonable explanation for lying about closing out the short. If you wanted to show resilience, you'd say something like "we've fully hedged our shorts with long-dated puts, reducing our expected profit but capping our losses."
Selling a stock short is NOT illegal. It is a perfectly valid type of investment according to the SEC:
“D. Are short sales legal? Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.”
Basically – you can’t short sell a stock to manipulate the price down so you can buy a lot more of it later. If you believe a stock is overpriced and short sell it, that is legal. That is exactly what tons of retail traders and hedge funds do every day, including on Gamestop.
On the other hand, manipulating a stock price upwards to cause a short squeeze IS illegal according to the same SEC article:
“Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal.”
Unprecedented numbers of people on Reddit, Twitter, and elsewhere collaborated to intentionally create a short squeeze on GME in the last week. No one talked about a fundamental case why Gamestop the company was worth a lot of money and would be successful in the future; instead everyone made the argument that due to a very high short interest of 100%+, that a short squeeze would send the price “to the moon”. That is illegal according to the SEC.
Multiple brokerages, especially Robinhood, probably had their attorneys tell them that “Hey, you are aiding and abetting illegal activity by enabling a short squeeze and could be liable criminally or civilly if you continue to allow this blatant illegal activity on your platform”. So they decided to stop it by only allowing people to close their positions rather than open new ones in support of the short squeeze.
Another strong reason is that if the short squeeze caused the GME stock to go to 5000 in a sudden leap, tons of traders (both retail and professional) could instantly go broke, and then the brokerage (Robinhood) would be left holding the bag. For example, picture a retail investor with a Robinhood account had sold call options in the amount of $100,000 and their account was worth $200,000. If the price gapped from 300 to 5000 and those options were exercised, that trader could have a loss of $10,000,000. He would lose the value of his account, $200,000… but the brokerage would have to make up the rest of the settlement and take a loss of $9,800,000. Now multiply that by thousands of accounts…. no brokerage wants to take the risk of being bankrupted, so they shut it down.
The two strong reasons Robinhood and other brokers stopped trading was to prevent legal liability from enabling illegal activity on their platform, and for wanting to avoid potentially massive banktuptcy from traders unable to cover their losses.
All of this started on Reddit because someone made a case for their fundamentals.
Here is their Reddit account: https://www.reddit.com/user/DeepFuckingValue/
Here is their YouTube account: https://www.youtube.com/c/RoaringKitty/videos
He is considered a legend by all of the people on WSB (of which I am not one) for it and kicked the whole thing off.
My question is.. how does a guy on Reddit and YouTube giving a fundamental analysis of why he valued a stock, and millions of people seeing value and buying it, differ from something akin to Mad Money?
In the last week though, after the massive increase in GME's stock price, the arguments on WSB have all been about the planned short squeeze and gamma squeeze to convince people to hold on or buy more.
You're missing a party in that analysis. For this party, maybe it was a stupid idea for them to try and short sell in a market where the fed had pumped trillions into the economy and market activity, retail and otherwise, is at an unprecedented level of froth. But with that said, they are supposed to be professionals. It seems to be within reason to expect them to be able to hedge against the risk of a bunch of amateurs deciding to protest buy a piece of their childhood against being raided by Wall Street, no?
After all, "irrationally" holding assets that have sentimental value and allocating a large portion of whatever surplus earnings you have to it is a well known American tradition. Whatever the socioeconomic bracket, people have traditionally found ways to support causes and brands that they hold dear. Shouldn't large institutional clients be asking these fund managers why they're poking a beehive right now, and whether it might just be a little unnecessarily risky?
As the price goes up more people started to believe the thesis and piled in. At some point this just becomes momentum training which last I knew was legal.
It seems like you have taken a very narrow and biased view of the law that fits the narrative you like.
Please do not downvote me for calling out strange activity by an account which is also spreading misinformation.
[0]: https://news.ycombinator.com/item?id=25947119
[1]: https://www0.gsb.columbia.edu/faculty/ptetlock/papers/Kelley...
Do you hold any positions related the question at hand? Are you trying to pump & dump the stock?
Meanwhile you're jumping on internet message boards to try and explain how "the man" is actually totally right in this situation and everyone should really go back to dutifully enriching him without questions.
Especially when they're staring at billions of losses and maybe all it takes to save them is a carefully worded public statement that they think they can later argue is technically truthful.
There's no announcement, just a sourced rumor, and no proof they closed their trades when they said they did.
Doing this all in such a publicly-coordinated way on Reddit means you're wide open to people trying to directly play against your goals.
So much of the "proof" of things around this seems to be making big assumptions about who is on the other side that the aggregate numbers don't seem to indicate one way or another.
Lots of people are short? I know at least half a dozen people who bought puts over the last few days. Those puts hedge into shorting the same way calls turn into buying.
I'd say most of the wallstreetbets traders still believe Melvin has their position, but you're saying otherwise. Though the still extremely high short interested doesn't seem to make sense if the big losers already exited...
I do. This will make partners out of a solid suite of securities lawyers around the country. But we won't have clear answers for at least another 6 months.
Also, from what people are saying on WSB, there's no liquidity left in the market which is why some platforms halted trading for $GME.
If the early shorts were all out I wouldn't expect a lack of liquidity, since more recent short positions wouldn't be under as much pressure.
I'm a complete noob, but it seems like literally no one can agree on what's happening and why even though there seem to be valid arguments on all sides.
https://www.reddit.com/r/wallstreetbets/comments/l642ms/upda...
Naked shorts at this scale are gonna have to go away and no one will have more incentive to reach that goal than main street wall street ... ideally they can and should do this in a way that simply involves making more information public ...
Tens of billions of dollars of GameStop have been bought and sold over the past few days. If you can buy GameStop to go long, you can buy it to cover a short.
Note that there isn't a limit on rehypothecation. A share sold short by Bob can be used by Anna to cover her pre-existing short.
Yes, at prices that are several multiples above the price they shorted at.
And I am quite certain that there is no obligation that you have to truthfully tell the world your position in any one security.
So, I’d like someone with legal training to make a case for security fraud.
(It might still be market manipulation or some such).
Naked shorting to drive down the price is also securities fraud. And yet...
I find it exceedingly unlikely that Citadel has no opinion on the value of a stock that could make or break a firm they just lent massive amounts of money to.
It's also very unlikely that Melvin didn't have a short position anymore. I think that was a lie, knowing the SEC fine would be less than what they otherwise would lose. We'll see - maybe. Or maybe TPTB will cover this up.
I didn't touch this in the first place, but once it was clear it was a short squeeze, nope, not gonna play that game. Just sit back and enjoy the show.
This makes no sense, if gme isn't shorted then why then break the law and restrict buying it?
And it does feel like they are restricting buys. Seems unlikely that all the trading platforms that rely on citadel coincidentally decided they wanted to hedge against volatility by restricting user buys.
Untrue, the number of shares short is still 70 million. Nothing changed.
I’ve no dog in this race; just thought I should point that out
how long can citadel and/or other entities hold?
So many people here who have no idea what the hell is going on, and yet are so confident.
1. https://web.archive.org/web/20070228050751/http://www.alphat...
2. https://www.level2stockquotes.com/market-makers-m-list.html
Retail did nothing to Citadel securities.
Even the amount of billions being transferred here are not interesting.
People after the financial crisis liked to talk about fat tails. Risk models assuming narrow tails, reality having a taste for extreme events. This is a fat-tail event. We don't have great models for stocks as volatile and as correlated as GME is right now. Which means for even cash equities trading, we don't have a great sense around what the appropriate spread should be.
Market making has sometimes been described as vacuuming up nickels in front of bulldozers. These are bulldozin' times. You don't want to fill a bunch of sell orders in GME right before it gaps down 80%.
On exchanges. Those are buyers and sellers as well as market makers. Robinhood connects to a subset of the latter.
Nope, pretty much just market makers.
Normally internalizers have no problem competing with spreads on the exchanges, because retail flow is much less toxic than the sophisticated traders in the public venues. But with GME, the retail investors are running the show.
Therefore it no longer makes sense for internalizers to pay for this order flow.
If this is coming from Robin Hood, they could make the (very weak) argument that they are protecting their retail customers from themselves, but if it's coming from Citadel, it just looks like market manipulation to me.
Given that it's not just RH, but nearly all, if not all, brokers that outsource order flow like RH...I think it's safe to assume it wasn't RH decision.
This is a much bigger deal, some (not hedge fund!) people are going to lose a crapton of money on it, and people are probably going to sue them once that happens.
You can see this discussed elsewhere in the thread.
For trying to get some positive media coverage, after being constantly bashed and blamed by them for the uneducated retail trader boom.
That's not at all verified. Short interest is still well over 100% of float. The only thing you are going off is a poorly sourced CNBC report with wishy washy language from Plotkin.
Citadel "bailed out Melvin Capital" because Citadel essentially owns Melvin and so their loss is our loss sort of situation. Melvin Capital stated they had closed out their short position on GameStop, but those are huge losses to cover no one knows how true that is. There is a lot of rumor that Citadel/Melvin Capital re-bought short positions yesterday before Citadel restricted trades to manipulate the market. If this is true it is highly illegal, but this effectively allow Citadel/Melvin to make back their losses if they can force market prices down.
TL/DR, Citadel/Melvin are breaking the law, all the retail traders are getting fucked, but when this is done Citadel/Melvin ends up having more cash than ever.
Citadel bailed out Melvin Capital. Not its position. Melvin doesn't have a short position anymore.
Melvin made a stupid bet. Citadel bailed them out. Private sector bailouts aren't free: Citadel got its pound of flesh. Even if they bought the entire portfolio, that portfolio no longer includes GameStop shorts.
If Citadel's asset management and market making arms are colluding, that is illegal. But it's the most complicated and stupid explanation of the bunch. Market makers stop quoting for all kinds of reasons. If I were still on my options market making desk, I'd be pulling the plug on this. My traders would yell at me. This is what you make money on in market making! But the risks of loss go up with volatility, and the costs of gamma getting away can be nasty.
The chances that a fund the size of Citadel has any strong opinion on the direction of GameStop stock is vanishingly low. The chances that they stopped quoting in the name, as did almost every other market maker, and thereby broke Robinhood's system, which doesn't--to my knowledge--directly interface with exchanges to any significant degree, is high.