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.

https://www.cnbc.com/2021/02/05/gamestop-mania-may-not-have-...

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.

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.

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.

https://www.reddit.com/r/wallstreetbets/comments/ljde34/rip/

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.

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...

But! You can preserve the culture yourself. Try to make things a little better when you see problems. It's all we can do.

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?

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.

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 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.

You can't blame this on "unsophisticated" investors breaking norms but ultimately playing by the rules.

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.

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.

https://www.npr.org/2021/02/02/963466346/robinhoods-very-bad...

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.

[1] https://archive.is/GFtf2

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.

Everyone: pikachu face

The brokers have no choice. https://youtu.be/4RS4JIEVyXM?t=96

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.

That’s a perfect storm for nonpayment issues.

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.

So the DTCC has to worry about Robinhood, and Robinhood has to worry about their clients.

What is the relationship between the NYSE and DTC?

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.)

Not literally. I was able to buy w/Schwab when it was restricted by RH. I tested this specifically to see if I should change brokers.

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

https://www.wsj.com/articles/fidelity-cashes-in-most-of-game...

https://www.bloomberg.com/news/newsletters/2021-02-11/why-ga...

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

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.

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.

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.

https://www.bloomberg.com/opinion/articles/2021-01-29/reddit...

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.

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.

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.

Or is there something else that WSB did beyond squeezing the shorts?

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.

Trading halts in response to massive movements aren't unusual either.

https://www.wsj.com/articles/how-clearing-demands-grounded-t...

WSJ says that it is formulaic.

It's quite possible that this time it wasn't.

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.

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.

Edit: OK, I think the list I looked at is wrong. I meant Charles Schwab, but I don't know which one is _actually_ the largest.

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.

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.

[0] https://www.thinkadvisor.com/2021/01/29/gamestop-lawsuits-hi...

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

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".

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.

Trades by certain brokers or apps were also notably halted on a Thursday due to lack of liquidity.

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.

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?

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.

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!

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.

In my opinion, what needs to be investigated more is the “payment for order flow” business.

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.