Citadel has no short positions to speak of in GameStop. They bailed out Melvin, which means they made money, not Melvin's positions per se. Also, by the time that happened Melvin had already closed out its short [1].
The conspiracy hypothesis might have legs if Citadel's asset management and market making arms colluded. Absent evidence, however, it's a suspicion at best.
Robinhood is between a rock and a hard place of its own making. Market makers stopped making markets in an increasingly-volatile stock. Robinhood, having relied on market makers for execution, likely has sub-par exchange connections, so their execution quality started degrading.
They're also staring down almost-guaranteed lawsuits regardless of what they do. If they badly execute, lawsuit. When the bubble pops, lawsuit for having been induced to trade through their gameified UI. If they block, lawsuit for interfering with trading.
[1] https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddi...
It's a few short sellers who got wrecked. The rest of the institutional guys are fine and don't care about this except for how much money they're making.
Yes, that must be why trades are restricted, wsb got infested with bots and banned from discord, and the media is in full shit flinging mode against wsb.
I have been in frequent touch with my wall street friends. Many are "fine" and the general feeling is that long term this will get sorted out, but many of them took some hits and are watching this very carefully. Many firms had to move out of long positions to get capital, so this had trickle down effects elsewhere in the market.
Things that undermine the credibility of the market and bring congressional oversight hearings into the conversation aren't just being ignored.
Even they agree, it feels like "something is off" but who might be doing bad things is still unclear to everyone, even guys I know with 15+ years in the industry.
The reason trading was stopped is that if a stock price suddenly gaps then the retail investors can lose more money than they have in their accounts. Then the brokerage or their clearing firm have to take the losses. They are not willing to do so, so they stop allowing trading. The brokerages are not somehow colluding to make hedge funds money, they are just trying to make sure that they do not lose money themselves.
I don't really have an opinion on whether the GME thing is a pump and dump scam, or a real opportunity to enforce a classic "The market can remain irrational longer than you can remain solvent" lesson to those shorting these stocks.
But I do have a real issue with removing just the "buy" side of the equation. Price is always a function of supply and demand, and I don't understand how anyone could justify halting just buy orders. The obvious impact of artificially reduced demand is that the price will drop.
Further - if this price drop was designed to protect these firms from possible losses (and I don't really care whether that loss was by allowing unvetted shorts by investors who don't have the capital to cover, or whether it was collusion to protect other parties) then I still don't see how you can reasonably come to a conclusion that looks good for these firms here - They're manipulating stock prices to avoid losses.
Robinhood would have legal liability for aiding and abetting an illegal short squeeze had they continued.
The illegal part is a scheme to collude and manipulate the availability or price of the stock to intentionally cause a short squeeze. I'm not entirely sure I agree with you that posts like that are "collusion" (Cornell def here is interesting as a refresher - https://www.law.cornell.edu/wex/collusion), but I can certainly concede there's plenty of shades of gray here.
OP mis-spoke. Most institutional investors do not short sell [1]. But the ones that do short in greater volumes than retail [2].
[1] https://scholarship.law.ufl.edu/cgi/viewcontent.cgi?article=...
[2] https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfile...
I think this supports my point. This user is spreading misinformation and arguing against a point their past blogging and commentary would not suggest them to be an expert about nor impassioned by.
This is surely against the HN community guidelines.
"Please don't post insinuations about astroturfing, shilling, brigading, foreign agents and the like. It degrades discussion and is usually mistaken. If you're worried about abuse, email [email protected] and we'll look at the data."
> most short positions are actually held by retail investors
That is an unsourced lie, told at a time to cause maximum confusion about what is happening in a situation where large financial entities are colluding to mitigate a situation wherein large amounts of capital are at risk.
These illogical comments are, via Occam's razor, literally most easily explained by astroturfing.
> most short positions are actually held by retail investors
Shilling doesn't mean you haven't used this account before.
Yeah, uh, they do that all the fucking time. It's a Soviet fiction that they keep a firewall between those two businesses.
I used to be an options market maker. Different animal same game park.
If I saw a stock doing what GameStop is doing, I'd pull the plug. One, we'd have already made a ton of money on it. More importantly, with this kind of volatility (and correlation), we'd be well outside the parameters of our risk models.
Usually, cash equities don't have this problem. But there is a realistic chance that a desk will fill a bunch of sells, turn around, and within those microseconds watch the market gap down 50%.
It's unlikely. But how unlikely? We don't know. We're too correlated, and too volatile, to predict that. You do something like that, particularly after the amount of press coverage this is getting, you are going to lose your job.
> I hope RH is burned to the ground after giving up whoever coerced them into doing this
Between the gameified UI that encouraged day trading, their reliance on payment for order flow and margin-lending / options trading model, I won't say this was bound to happen. But it was an identifiable risk.
The warning signs were clear when their systems went offline under large volumes. Concerns were dismissed then. I expect this will be forgotten by much of their user base soon enough as well.
I know its pretty clear my current personal opinions on this topic lean rather hard in one direction but I am truly open to hearing the counter argument and could be convinced otherwise. Some of your posts here and in other threads have changed my view on other parts of this whole mess already so I'm asking because it seems like you're willing to discuss sanely.
This is a great question.
Short answer: they shouldn't. When a market maker signs up to make markets on an exchange, they commit–contractually–to providing quotes in good times and bad. Payment for order flow contracts can vary, and I don't know what Robinhood's terms are, but they typically carry a similar requirement.
There are reasonable exceptions. If your systems are having issues with a stock, e.g. the intern entered a dividend wrong into the database, you can declare "self help" and stop quoting for some time. This is occasionally abused. But exchanges are decent at policing it.
In this case, though, yes--a lot of market makers made a ton of money, got scared, shrugged and then put their hands up. (Again, caveated to Robinhood's agreements.) Fortunately for them, the crowd has been distracted by this Ken Griffin called Robinhood to screw over /r/wsb story, so they won't get much more than a slap on the wrist.
https://twitter.com/justinkan/status/1354853920762253315
?
If Ken Griffin put in GME shorts before ordering his market making desks to quit in it, yes, that would be criminal.
If a fund manager bought puts a few hours before the market makers put up a white flag, I'd want a thorough investigation to rule out collusion. But by itself, suspicious--nothing more. If a long-short value fund bought puts based on an algorithm keyed in months ago before market makers fled the scene, it's almost certainly innocuous.
And if the options desk was hedging the puts they just sold by selling short while the cash equities desk called it quits on the name, that would be perfectly normal.
Market makers typically would pull out of the name, not out of one side.
My guess is Robinhood didn't want people opening new positions--long or short--in the name. Blocking people from selling an asset you sold them raises all sorts of issues. But denying them the ability to enter into a new position through your services is on more-stable ground.
You have made these claims dozens of times today without citing sources. Are you spreading insider information, lying, or just incredibly lazy and don't care if people believe you?
Added source for Melvin Capital making public statements on its short position. They could be lying. But then that's securities fraud.
More than what? GameStop was the most traded stock in the country for a few days.
Intentionally making unambiguously false, material and self-serving public statements like that is well beyond fine and lawsuit territory.
Why would they bother to make such statements early in the AM if they had actually closed out their shorts?
They said before they do not comment on their positions. Why would they do so now if it wasn't a serious situation?
"We have closed out our position in GME (GameStop)" isn't ambiguous.
> Why would they bother to make such statements early in the AM if they had actually closed out their shorts?
Most likely: Citadel required them to. The bailout was going to be announced. Citadel didn't want informed observers speculating on whether Citadel had just ponied up to an unhedged falling knife.
Otherwise, Melvin is a hedge fund. Its LPs are nervous, and assuring them the worst is over could sow doubt in would-be defectors. This could also be done by way of confidential notice, however, so on its own it isn't enough. The other factor is, perhaps, to get the people prank calling and such off their backs. That was a stated factor for Left at Citron.
The market making unit is in a totally different part of the org chart, with its own PnL lines, than the hedge fund. In fact Citadel Securities is a separate company than Citadel Investments.
But most importantly there’s a legally mandated Chinese firewall between the two. Employees on one side are not allowed to discuss operations with employees on the other. This is enforced to the extent, that an employees access card won’t let them enter the other side of the division.
Citadel makes a shit ton of money as it is. Nobody there is going to risk major jail time with an easy to unravel scheme involving dozens of co-conspirators, just to make a few extra bucks on a tiny short position.
Additionally, they're both owned (mostly) by Ken, who is know for being a bit "detailed" (to put it nicely) when it comes to his businesses. He almost certainly has live second by second pnl updates for all parts of all of his business, he almost certainly was the one who made the decision to invest 1.4+ bn into Melvin, and he almost certainly knows that retail flow (esp robhinood) is a huge part of citadel securities business.
Honestly I think reddit has some grounds for a case here, but IANAL.
[0] https://www.wsj.com/articles/citadel-point72-to-invest-2-75-...
At least one Wall Street firm has taken heavy losses — Melvin Capital Management, which was shorting GameStop, among other bets. It’s been bailed out by Citadel, which, confusingly, is not the same thing as Citadel Securities. (Citadel is a hedge fund, not a market maker.)
I have pretty low confidence in the detailed specifics here, but I saw some discussion on Twitter that naked shorting being legal could have actually prevented the squeeze we're seeing. [0]
The reason for the extra >100% has to do with how the stock lending works (Matt Levine wrote a bit about this recently). [1] Quoted below.
--
"This does not necessarily mean a lot of people are doing evil illegal nefarious naked shorting! Really, I promise! There is no special limit on shorting at 100% of shares outstanding! Here is an explanation of how options market makers (discussed below) are allowed to short without a locate, but I want to offer an even simpler explanation. 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, but 190 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."
--
I still think what Robinhood did here is both wrong and a stupidly short-sighted that will damage their brand, but there's so much over confident misinformation about what's happening surrounding this that it makes it harder to understand.
The NYT is no better - another dumb Taylor Lorenz article got less right than most random Twitter threads.
[0]: https://twitter.com/simoj_/status/1354664677364609026
[1]: https://www.bloomberg.com/news/newsletters/2021-01-25/money-...
A owns 90 shares, B owns 10. A lends 90 shares to C who sells them to D. D lends 90 shares to C who sells them to E. E lends 90 shares to C who sells them to F...
C in this hypothetical is borrowing and selling the same shares over and over again to various 3rd parties. Shorting the same shares twice is truly naked short selling.
If there's three people in a room, and only one pair of pants, what would you call it?
Suppose there is 1 share in existence, A promises to sell it to B and to C if price reaches X. If price gets there, A is on the hook to pay up. So now A has to buy the share if not held, or have it already. A sells out to B, fulfilling the contract to B. Now A needs that share again, so has to offer B a price to buy it, and does so. Now A closes out with C.
It's vastly easier when there's lots of shares, because it's easier to find a seller each time you have to close out multiple contracts.
This is done in pretty much every part of the economy. When you put money in a bank, it can be lent. Now the bank has a debt (to you) and an asset (money owed to them by the lendee) that balance. That lendee can also lend the same money, again incurring a matching debt and asset.
None of this is voodoo back market evil. It's common sense used to allocate resources, has been done for millennia in many forms.
It's funny watching naive traders get upset over it simply because they don't understand how their own markets work. It will be funny and sad watching them learn even more about how markets work in the coming days.
Whereas in public markets, a random hedge fund should not be able to essentially issue new shares / increase the float.
My point is simply a ban on “naked shorting” is obviously useless if you allow chain lending, therefore a ban on naked shorting implies a ban on chain lending.
As you wrote, the rules were created because this activity is the whole intent.
Go carefully read the SEC rules regarding this, specifically the exemptions which are written in law.
As I posted above, there is nothing illegal, immoral, evil, or deceptive about these practices. It's only when people don't understand the rules and most importantly why the rules are what they are that those people get upset.
It's like watching natives throw rocks at the moon to scare it off.
I would imagine that Citadel can simply force one of their partners like Robinhood to do anything by threatening to cut them off from the market entirely.
I think their main goal now is to make sure that the lawsuits and fines they will be hit with will cause them to loose less than a short squeeze in this stock would eventually have.
But all of this is just speculation. I don't actually know anything about the stock market, I started reading about it two days ago. I don't want to "conspire" or anything like that, just my theory.
Though at any rate, I am not convinced Citadel had much of a stake at this point - Melvin had supposedly closed its shorts and the current short sellers were very possibly different actors.
Amusingly, them blowing up Robin Hood made me put up an order for $GME. If their position is so valuable that Citadel would destroy a business worth billions, then I am convinced this is an amazing speculative play.
I don't have the answer but its something to think about.
The answer is the same in both cases, law enforcement needs to investigate and catch it. If they can't, too bad, there are a lot of undetected crimes in the world, doesn't mean that we have to prohibit normal activities to stop them at any cost.
Are you suggesting the licensing and regulation does nothing? Do you think the big firms should be treated the same way as retail investors because crimes will be caught either way?
I'm in no way a proponent of big firms but I think its important to think about what kind of under regulated trades are happening.
- Final Fantasy Tactics
Well, if someone said something on the internet, then it must be true!
Since Robinhood doesn't collect commissions there's no loss of revenue on trade volume. But driving GME's stock price down is definitely saving Citadel billions, and the class action lawsuit is unlikely to cost them billions.
I would love to have a free investment market where the money is made when the companies succeed, not a casino that kicks you out for counting cards.
It then becomes the same thing as buying and selling useless paper. In order to make the system truly a market you have to restrict the size of the portions. Something like 1% is the smallest cut someone can own.
But then that would stop the huge amount of cash companies tend to receive during an IPO thereby restricting the growth of the actual business.
Webull's clearing firm forced their hand.
Do you have any evidence for these claims?
This is a list of stocks that have been sold, but the seller failed to deliver those shares. AKA naked shorting.
GME has been on this list for a month now.
SEC call this "Reg SHO". https://www.sec.gov/investor/pubs/regsho.htm
Of course, this list isn't indicative of the amount (i.e. coud literally be one share undelivered) but the mere existence of it is mindblowing! Someone should be paying massive penalties and/or be in jail (as I'm sure would happen to "retail investors" if they were unable to deliver...)
That said, https://www.investor.gov/introduction-investing/investing-ba... notes you only get listed as a threshold security if a few criteria are met, one of which is that the amount failed to deliver must be:
> equal to at least 0.5% of the issuer's total shares outstanding
Based on 70M outstanding shares, that means at least 350,000 undelivered shares. We don't know _why_ there was a failure to deliver, though. Not all failures may be related to short selling - someone's system screwing up for mundane reasons could cause such a thing, with no malice required.
EDIT: apparently multiple lending of shares does happen and Overstock sued over this [1]
[1] https://www.courthousenews.com/overstock-com-settles-short-s...
So you have 1 share, that's shorted twice. But it's impossible for A and C to both have their loan repaid, because there's only 1 physical share.
That all sounds perfectly ordinary, as long as it doesn't happen on a deadline. If you tell D or B that they have to buy that stock right now at any price, they're going to take it in the (ahem) shorts. But if they were permitted to take their time, they'd buy it up at the market price, which would on average be pretty near the price they sold it.
It just so happens that there is a mechanism by which they can be forced to buy that stock right now, which is when F decides just on a whim to pay 100x the market price, and protection measures kick in. That's a screw-up on the part of B and D; they got sloppy and deserve to get raked over the coals for it. Everybody who wants to play that game needs to be aware of that scenario, and now they are.
But I don't think it's because there's anything impossible about having more shorts than stocks. It just takes an already risky thing and makes it super subject to manipulation.
Naked shorting is not "re-lending", it's a very specific technical thing where you sell the stock without owning or borrowing it at all. Naked shorting results in failure to deliver.
Stock trades settle a couple of days after execution, so what it means in practice is that Alice "buys" the stock from Charlie, then 2 days later when settlement should happen and the share and money are supposed to actually change hands, Charlie goes oops I don't actually have the stock. Then the trade is undone.
In effect Charlie duped Alice into a fake trade that artificially depressed the market price.
It's an egregious market manipulation tactic and has nothing in common with the practice of lending or re-lending shares, in fact there is not a single share involved at all.
If you fail-to-deliver enough you'll get booted by other market participants and/or the SEC.
Actually my example kinda sucked. What's more likely to happen is that B borrows the stock from A, then sells it to C.
C then lends the share to D.
C doesn't know or care that the share was already borrowed once, and the only way to prevent re-lending it that way would be to make shares non-fungible, which would break more-or-less everything (then again maybe that's your goal).
Will be interesting to see where this lawsuit will go, since it looks like a clear coordinated manipulation of heavily shorted stocks and blocking everyone else from buying them.
Rigged from the beginning. But we'll see what happens with this lawsuit.
I guess someone is only letting the hedge funds trade rather than their own customers. [0]
[0] https://twitter.com/RobinhoodApp/status/712708069369782272