More money quotes:
ANTHONY DENIER (CEO Webull): [...] our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can't afford the cost of that trade clearance. That is the reason why these stocks are coming off. It has nothing to do with the decision or some sort of closed room cigar-- smoke-filled cigar room of Wall Street firms getting together to the dismay of the retail trader. This has to do with settlement mechanics of the market.
ZACK GUZMAN (interviewer): [...] We had the CEO of Robinhood on yesterday kind of talking about why they were taking a different tact [sic] and not restricting trading because, you know, they wanted to leave it to their individual retail investors to make these decisions. Didn't want to step in and fuel into the nanny state idea. But what about maybe curbing this a little bit earlier? Because the fact of the matter is, you're going to have retail investors who are now kind of on the hook, who might want to dump some of these shares, who are stuck. And it seemingly looks like some of these moves have now triggered the bubble bursting. So what do you say to that?
ANTHONY DENIER (CEO Webull): Well, that's absolutely false, actually, Zack. There is no way that a customer would not be able to sell a position they hold. We are simply stopping opening of new positions. Liquidations can happen at any time. This is general market mechanics. We have customer protections in place. We would never stop a customer from being able to get out of a position.
[...]
I think when you say the regulators stepping in, it will happen on both sides. It's going to happen on looking into should a hedge fund be allowed to get a 10 times leverage and short 140%, 150% of a company. Should that be allowed in a regular-- you know, in a healthy market.
And then, on the other side, should it also be allowed to have mob and herd mentality of rolling into stocks? And should these things be curbed? Look at the examples that happened overnight in Australia, where a mining company, GME in Australia, was up 100% overnight because people just blindly went in on anything GME without reading below the headline.
This seems unconscionable given the >300 point volatility today and the large number of brand new investors.
It’s hard to imagine how these actions didn’t benefit wallstreet at the expense of regular people.
This is a problematic statement. Because to sell your position there has to be buyers, and the only buyers who were allowed at the table suddenly were those who wanted to pay significantly less then the stock had recently been trading at.
It looked more like, what happened was you had retail investors that couldn't buy securities, but Robinhood was allowing them to sell them to make them available to customers in order to clear leveraged short positions.
Sounds like market manipulation to me.
Edit: screenshot from reddit: https://pbs.twimg.com/media/Es1pb5KWMAE19CD?format=jpg&name=...
In fact, when I look at the stock chart on Yahoo the lowest value $GME had was $126!
Isn't this meant to be the reason for the "Chinese Wall"? In theory, Citadel as a brokerage is meant to have no insight into the operations or needs or desires of Citadel Hedge Fund. The technically correct answer here seems to be "not my problem", however... not so much.
And when they have literal billions on the line a slap on the wrist fine is preferable.
I don't think you understand how the options market work. Several of the large spikes on Friday and the past week is the result of MM (like Citadel Securities) having to purchase shares to cover the naked calls they sold.
If you think options dealers go around taking massive unhedged directional bets then you are very misinformed. I don't have any inside knowledge but i'd bet a pound to a penny the options desks have been making out like bandits this week.
If I'm understanding (i might not be) this is why it feels like fraud/not following fiduciary responsibility to their clearing partners.
--
Does citadel clear their own trades? I could be off here, but what I'm asking is getting at like if they are on all the sides of the transaction as market maker, participating or allow others to participate in 'betting', and clearing the trades themselves? Does a trade even need to clear if it's just moving internally changing col A owner ID from 1234 to 9999?
But still, I think that there are legitimate factors for why Robinhood stopped taking buy orders for those stocks, like ensuring liquidity through clearinghouse deposits while trades are underway.
If one is not the customer, then they are the product!
Any valid argument that would cause another clearing house to not be able to afford to handle these orders would seemingly-equally apply to Robinhood's own clearing house; no matter who owns it, the clearing house can't afford to go broke.
If someone is arguing that Robinhood should have the risk tolerance and reserves of a larger financial institution in order to service high volatility trades.... then maybe that person should use a larger financial institution to place these high volatility trades.
https://finance.yahoo.com/video/heres-why-robinhood-restrict...
If that's true (never assume something coming from Twitter is true without verifying, so it's still a rumor by now) then I don't see how "it's too risky" explanation holds. And of course selling somebody's property against their will is a fraud, at least on the face of it (IANAL).
Edit: screenshot from reddit: https://pbs.twimg.com/media/Es1pb5KWMAE19CD?format=jpg&name=...
It seems that Robinhood does its own clearing (maybe not for everything?), cf. https://robinhood.com/us/en/support/articles/whats-clearing-..., so the story is probably a bit more complicated there. Could still be a similar dynamic, of course.
That is another explanation beyond the 2 day settlement window that Webull published.
By contrast preventing a million people from buying a stock at a critical moment is clearly manipulation.
"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."
If your "short squeeze" is dependent on people buying more in order to create a short squeeze, then you are just coordinating to create a short squeeze, not dealing with a "natural occurring" one.
Obviously the blocking of buys will have an effect on the price and availability of the stock. Not that it provides any reasonable justification for RH either way.
> If your "short squeeze" is dependent on people buying more in order to create a short squeeze, then you are just coordinating to create a short squeeze, not dealing with a "natural occurring" one.
Even if you want to buy the stock because you know there is a short squeeze ongoing, that is not illegal. That is just analysing the market conditions and seeing the obvious.
I'm honestly having trouble grasping what you and others think could possibly be illegal about this. Short sellers aren't prohibited from losing money by law.
Who said that was the situation though?
The problem is that buying the stock became something that was largely barred from retail investors, while institutional investors faced no such issue. Indeed, when a stock can only be sold, that means it can only go down, so the pressure of the short squeeze was alleviated as a natural amount of selling occurred while buying was artificially deflated by multiple brokers and entities preventing retail investors from purchasing a stock that was > 100% shorted.
This was guaranteed money for these traders too, the short squeeze was already on - the shorters were on the hook for this money.
The fact that there are huge financial relationships across the chain from one of the biggest shorters of the stock all the way to Robinhood makes this the controversy it is today. The market prevented natural market mechanics dictating a short squeeze that was already on.
It's absolutely unclear if that's the case here, and in fact based on the few extreme times short selling has been illegal I'd say this definitely does not get there.
This is the first time in all this crisis that I see anybody say that short squeezes are illegal. Can you elaborate? What's illegal about them?
They have happened many times. I rememeber the VW one a while ago, and I don't rememebr anybody saying they were illegal.
Edit: Right, I saw the link now. Very interesting, thanks.
[0]: https://news.ycombinator.com/item?id=25950680 [1]: https://news.ycombinator.com/item?id=25950493
If you wouldn't mind reviewing https://news.ycombinator.com/newsguidelines.html and sticking to the rules when posting here, we'd be grateful.
Nope.
If some dude in an expensive suit gets on TV and says a stock will fall then buys a couple billion in shorts and you do the same because you like his style the two of you aren't scheming to make it happen.
Likewise, if some guy in his basement posts on an internet forum about how he's sure a stock will go up and you feel compelled to buy some too you're not scheming.
Finally, if millions of people are collectively motivated by the idea that they just really dislike hedge funds, want to make some money, and maybe want to watch the world burn, so they buy into an increasingly ridiculous idea they're _still_ not scheming because they all made the independent decision to do so after doing what amounts to each individual's 'due diligence' and are not entering or exiting the position in concert.
The risk was there when these funds shorted 140% of the stock. Retail folks noticed the potential for a naturally occurring squeeze and shared the info with world.
The Depository Trust & Clearing Corporation settles most listed securities transactions in America; in 2011, it did $1.7 quadrillion [1]. You've never heard of it unless you're a professional trader, but it's actually quite fascinating to read up on.
Trading looks instantaneous. But settlement takes a few days. In between are a series of credit agreements. From your broker to you. From the clearinghouse to the brokers. DTCC is the clearinghouse. Robinhood is the broker.
There are clear rules and contracts between DTCC and its members, including Robinhood [2]. Those contracts ensure that when you buy shares through your broker from a Robinhood customer, if Robinhood falls down two days later, there is collateral sufficient to make you whole. Those collateral requirements change in reference to, amongst other things, the volatility of the security. (If something goes up and down more, ceteris paribus, small mistakes are more likely to become firm-ending ones.)
Again, these are well-known formulas. Unusually, however, Robinhood didn't build this into their fee model. Given market makers, their revenue source, stopped making markets in GME on account of how volatility effects their risk profile, executing GME trades would leave Robinhood sending orders to an exchange, which may cost money, and ponying up collateral, which also costs money.
In my opinion, that's what they should have done. Most brokers have policies for these situations. Higher brokerage fees for securities on a schedule. Not making shares and cash from trades available until the trade settles, sort of like what banks do for large cheques. But I don't know if Robinhood is able to do that quickly. So instead they pulled the plug.
[1] https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...
[2] https://www.dtcclearning.com/products-and-services/settlemen...
Also, another user shared a link above where Robinhood claims there are two types of brokers, introducing and clearing, and describes themselves as the latter[0]. Is that at all relevant here? If I understand correctly, "clearing house" is still a distinct concept that is very much involved.
[0]: https://robinhood.com/us/en/support/articles/whats-clearing-...
> Robinhood claims there are two types of brokers, introducing and clearing
Clearing brokers interface directly with the the clearinghouse, i.e. the DTCC. Introducing brokers clear through a clearing broker. (Who in turn interacts with the clearinghouse.)
And we're seeing politicians jump on the bandwagon so they can get-- so they can start trending on Twitter. But in reality, what's going on is that there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days. And because of the volatility of stocks, DTC has made the cost of the collateral of the two-day holding period extremely expensive.“[1] from the CEO of Webull.
[1]- https://finance.yahoo.com/video/heres-why-robinhood-restrict...
Edit: Non amp link.