Let’s consider this for a minute:
Why do I keep harping on this? Because there are a lot of problems with our financial system, but what we have witnessed is not one of them. We will never solve the real problems if we believe in fake ones.
What is the “fake problem” here?
- The ability of hedge funds to short stocks and then use their platforms (CNBC, etc.) to trash talk those stocks, scaring out investors, letting the hedge funds buy out and liquidate the company at an artificially low price? GME was headed this way. This is not a rumor, fallacy, or supposition. Also, it is not a fallacy that over 100% of GME’s total shares outstanding are shorted, which means some of these hedge funds may have participated in naked shorting.
- The fact (not rumor, not supposition) that 35% of Robinhood’s livelihood is determined by Citadel, the same company that is the largest market maker for stocks on Wall Street, and is also the company that participated in a bailout of Melvin Capital? The SEC has already fined Robinhood $65 million because their close relationship with Citadel cost investors money — Citadel receives order flow from Robinhood and has demonstrably used it to screw Robinhood’s customers on trades. The fact that Citadel can be Robinhood’s biggest customer, and bail out Melvin Capital, is a problem because Citadel has a huge incentive and capability for market manipulation.
Those two issues seem, at least to me, to be serious and real. Also accepting the following as facts is, to me, questionable:
- The proposition that Robinhood’s inability to procure short-term financing to cover the settlement period, which was the final (though not initially stated) justification for stopping trading of GME, is almost certainly true. But, why are we supposed to accept that this inability to get financing wasn’t a reflection of more market manipulation? I’m not spinning a conspiracy theory here, just pointing out that the notion that a settlement cash crunch is just one of those things, and not a reflection of market manipulation, should be met with skepticism. Note, too, that market makers can provide settlement services. Citadel is Robinhood’s biggest market maker. Are they also functioning as a clearing house/settlement service for Robinhood? Worth a look before applying what the WeBull guy said to Robinhood. (The clearing house for WeBull is a firm called Apex, not Citadel.)
- Robinhood didn’t message this well because it takes special marketing ability and crisis management PR to state a simple fact about a settlement cash crunch, and if Robinhood were a bigger/better company, they would have messaged this better. Color me highly skeptical on this one.
John made an assumption/error in his post, which he’s corrected, but if you read my post, I think it stands up pretty well. Also, I don’t think Reddit is as big a factor in this as has been portrayed. This piece by Alexis Goldstein better explains that the Reddit stuff is a sideshow and the GME short battle is being joined by a number of different large firms. By the way, at least four people sent screenshots of Robinhood liquidating positions in GME without the client asking for the liquidation to the Verge. That goes far beyond restricting trading on margin, which is what Robinhood claimed they did.
Anyway, the real problems to be solved here are: uncontrolled short sales, lax restrictions on the practice of paying for order flow, lax restriction on high speed trading (which makes Robinhood’s order flow valuable, since they can execute trades in milliseconds to get in front of retail investors), and lack of transparency. The stock market being like a casino is not good for anyone except some folks on Wall Street.
Finally, pooh-pooing this is not politically smart. A big spotlight is being shone onto a bunch of hedge funders who would rather stay in the dark and don’t want their practices questioned. The perception that individual investors are getting screwed while hedge funders want a bailout, which is pretty much correct, can drive financial reform that we probably all can agree on. Anger towards Wall Street is, in my opinion, good for Democrats, who can respond with better regulation. Like a lot of anger, some of it is based on false assumptions, and some of it is overblown, but overall there’s something here to get angry about.
I am no market expert, but I did work as a software engineer for the stock investment division of a large insurer for a few years. I’m also a value investor, and uncontrolled shorting and high speed trading are not in my best interests, so my only dog in this hunt is trying to make the markets more fair and sensible.
chopper
having over 100% of their stock shorted doesn’t mean naked shorting was involved. if i short a stock, a short seller can borrow it from the guy i sell it to. one stock, multiple shorts.
Four Seasons Total Landscaping mistermix
@chopper: Fair enough, I updated it to “may have”.
Benw
2M, can’t you just, like, call 4M and hash this out?
Baud
We tried that with Dodd Frank, which Wall Street hated with a passion but was deemed not good enough by people who hate Wall Street.
I’m confident whatever we do next will not be good enough for some people either. The question is whether most people have matured in the last decade.
Omnes Omnibus
Is this like not being a doctor but having stayed in a Holiday Inn Express last night?
Baud
Not to speak for 4M, but the fake issue in his post was the conspiracy theories about why Robinhood shut down trading. The capital crunch sounds like a real thing.
ETA: It of course might turn out that they lied, but there’s no evidence of that yet.
Omnes Omnibus
@Baud: Hey, if the front pagers want to fight….
Four Seasons Total Landscaping mistermix
@Omnes Omnibus:
Yeah, except to write code you need to understand why you’re writing it. As I said, not an expert, but not a dolt.
jl
@Baud: I also took MMMM’s ‘fake problem’ to apply to specific issues with this case, the class warfare stuff, and what are currently conspiracy theories. If we get more information on on specific connections between flawed regulation or industry practices, then they may not be conspiracy theories anymore.
I think a lot of the talk about the Game Stop capers concerns fake issues. But problems with the current approach to regulation and industry practice and organization in financial markets is not a fake issue.
Chetan Murthy
Wanna chime in with @Baud: and 4M: both the issues 4M raises are real ones, and I would expect that esp the latter (high-frequency trading) would be high on SPW’s list of targets. We are not served well when the capital allocation of our economy is done in a casino. A financial transactions tax would do wonders here.
Also, I think we should be careful about heaping too much opprobrium on shorting. Yes, there can be excesses. But nobody, nobody, *nobody* heaps that sort of opprobrium on the naked and visible-to-all bullshit it’s-a-buy-at-all-times “reports” of most “stock analysts”. I’m betting that these hedgies were just executing a “squeeze” of their own, and not working off any information they’d discovered the hard way. So I don’t have any, ANY sympathy for them.
But there are short-sellers who do good work for us all: guys like John Hempton and James Chanos. We should want them to be able to keep on doing it. I’ve read Hempton for years, and he’s consistently been a guy who digs up frauds and uses short-selling to get those frauds wider public scrutiny. His Bronte Capital Blog’s archives are gripping reading.
Barbara
I am in favor of reforms that lessen unfair advantages because even small differences (like milliseconds) can add up to a lot of money that is basically undeserved. And you identified a practice that hedge fund managers do in fact engage in — the guy who has made a career of shorting HerbaLife, for instance, went on a prolonged campaign to trash the price of the stock. He maintains that everything he said was true, but the point is, he used a big megaphone to amplify a message that would redound to his favor financially. I think he was very up front about his position, so perhaps it’s not quite so bad.
What all investors have to realize is that there is very little neutral information available from financial firms. If you are using a broker, any broker, basically, it has a whole web or nest of relationships that can result in practices or “recommendations” that benefit some other aspect of its business, usually its underwriting divisions, the ones that make a market in stocks. This has been going on since forever, and it’s a mistake to think that RobinHood isn’t doing it to, even if it is a different web of conflicts from the traditional ones.
So Citadel stopped being able to guarantee trades in a stock at just the moment that buys in that stock would hurt another party that it has a financial interest in, who appears to have been recklessly shorting the stock. How convenient.
elm
Having over 100% short interest does not necessarily indicate naked shorting.
It’s more like fractional reserve lending acting as a multiplier.
And the reddit involvement is a fiscal sideshow but a social early warning sign. It’s the return of Qanon with all their antisemitism intact.
Chetan Murthy
@Four Seasons Total Landscaping mistermix: 4M has it right here. Being a software engineer working with software that executes trades, or even better, makes markets, means that you are plugged-into an entire ecosystem of guys who write the code that runs financial markets. Even if you don’t work in various subsegments, you talk to guys who do, and because the tech is all pretty much the same (sure/sure, FPGAs and RDMA are exotic, but they’re just -faster-, not -different-) you learn that what matters are the business rules, the -logic- that you’re coding, or others are coding, into the systems they build.
Four Seasons Total Landscaping mistermix
@Chetan Murthy:
I think you mean 2M, right? I’m the one talking about high frequency trading. Anyway, I agree with this. I’m for better regulation, not elimination:
Barbara
@Baud: Right, the capital crunch is real, but I think what the post is stating is that the guarantor in this case also had an interest in protecting a party that would be harmed by continuing high volume trades in the stock. Now, maybe there was a preset limit that was reached. Or maybe there is a firewall in place that prevents one division of that company from knowing what the others are doing. But you can see how this sequence of events could seem benign but actually reflect a choice to help one party at the expense of others.
WaterGirl
@Benw: hahahahaha
PJ
One thing I was reading about today that definitely needs to be addressed (related to the high speed trading issue) is the frontrunning of retail trades by Citadel (and presumably other market makers). When someone with a Robinhood account makes a trade, it’s apparently sent to Citadel and they can make that trade seconds before the customer’s trade goes through, so that Citadel will make slightly more money on the trade, and the customer will make slightly less. This becomes more significant when the price of a stock starts to plummet (as will eventually happen with GME) – the market maker sees what is happening and can execute all their appropriate trades (which might be hundreds of thousands of shares) before customers’ trades are executed, so that they can get sell at the top of the market and customers end up with much lower prices.
Barbara
@Four Seasons Total Landscaping mistermix: I wouldn’t advocate abolishing short selling, but I don’t think short sellers actually help anyone. Getting information out there about the prospects and financial condition of companies helps people. You can do that without shorting a stock, which could put you in a position where you might need to be less than forthright.
Chetan Murthy
First: How is what Ackman did any different from some sell-side analyst touting IBM stock? Ackman discloses his short-interest in Herbalife in his posts/columns/announcements, after all.
Second: [geez I don’t wanna but] Well, acksually, Ackman lost $1B in his war on Herbalife, and as it turns out, I watched part of it unfold on John Hempton (well-known short guy)’s Bronte Capital Blog (e.g. http://brontecapital.blogspot.com/2015/06/herbalife-very-long-post.html )
Here’s the thing: Hempton started off wondering if maybe he oughta join Ackman in his shorting of Herbalife. But before he acted, he actually visited some Herbalife clubs, and from these visits, he concluded that the business is legit, and he went -long- Herbalife instead. And he wrote loudly about it.
Was what Hempton did also (ethically/morally/whatever) beyond the pale? If not, how do we distinguish it from what Ackman did?
Barbara
@PJ:
Yep. That should be illegal. Full stop. It’s outrageous that it isn’t.
errg
I worked on Wall Street in various capacities for many years, including running a (small) high frequency trading hedge fund. One small change that would solve a lot of the problems in the market (without the scary word of tax…) would be to institute a minimum time to change orders in the system. There is no good economic reason to cancel an order a millisecond after you submit it, but if you look in the guts of the trading systems, that’s happening all the time.
If any order that you put in the market you had to leave for (say) just 1 minute, that would have zero impact on any legitimate use of capital, but would kill almost all of the spoofing and other strategies that are currently employed.
Four Seasons Total Landscaping mistermix
@elm:
I updated the post to reflect that there could be naked shorting, that it isn’t proof. However, I’ll bet you a shiny quarter there was.
Also, I spent a lot of time in r/wallstreetbets reading what these people have to say, and antisemitism is not what I’m seeing. The real conflict that’s identified over and over is between boomers and millenials. There are a lot of posts about how their families were screwed over by the crash of 2008, and they characterize CNBC as a channel for boomers who don’t understand how millenials have been screwed over by the system.
Barbara
@Chetan Murthy:
Right, he was transparent about his position. That does make a difference, indeed, it makes a huge difference in my view. That’s why I made a note of it in my comment. I don’t have anything against shorting but saying that it “helps” other investors is a bridge too far.
Chetan Murthy
@Four Seasons Total Landscaping mistermix: Sorry sorry, I thought “Four … Mistermix” == “4M”. Not 2M. Sorry. I meant you, yup.
We need a shit-ton of better regulation. @Barbara: is 100% right, that this “oh, we have an arms-length relationship with this other subsidiary that actually executes trades, even in stocks we take a position on in *our* subsidiary” is grade-A bullshit. They need to be separate firms, and regulators need to be able to verify that they’re not communicating. Too damn easy for guys working for the same firm to whisper stuff over the partition-dividers. Their -incentives- need to be disconnected from each other.
PeakVT
It’s time for an FTT, though that has been the case since at least the late 1990s. It’s also time to find ways to re-orient the American economy in general away from financial activities. Banking and investing are necessary components of a major economy, but not sufficient to guarantee widespread prosperity.
Four Seasons Total Landscaping mistermix
@PJ:
For others who are interested in this, that Alexis Goldstein piece I linked has a good explanation, with diagrams, of how Citadel does this with the order flow provided by Robinhood.
jl
@Chetan Murthy: I agree. The stock market is supposed to be a ‘price finding’ market. It’s main purpose is to enable society to identify the right prices to attach to the expected distribution of future net income streams to different industries and companies. in order to direct investment to the most productive activities. The stock market is just for outstanding shares, and doesn’t send real capital anyplace directly. So for the players, it is a kind of casino, but the casino aspect is not entirely bad.
Short selling plays a role in that. But important to remember than financial markets are inherently unstable. They blow up, or freeze, or lurch into chaotic churning on a regular basis. So, much more need for meddlesome government regulation to make the blow ups less frequent and when they happen, to keep them from spreading to impose losses on those uninvolved in activities that lead to the instability.
Why the instability? Actions by one agent always produces externalities for others in the market, usually by changing the value of accurate information, and reduces the return to anyone finding it. And unlimited leverage combined with unlimited arbitrage. I think both are at play in the Game Stop capers.
Effective regulation means telling someone at regular intervals that they can’t do what they want to do to make some dough. And since all markets have to have ground rules everyone accepts, you can always blame unpleasant market behavior on some rule someplace and say it’s all the rule’s fault. So I am skeptical of hot takes that blame everything on some regulation someplace.
In the long forgotten past, most trading was done on a few organized exchanges, and an organized exchange is ultimately responsible (as in paying $ to innocent injured parties) for problems like inability to settle accounts, or far more stock shorted than exists. So the exchanges had an incentive for effective self-regulation.
Whether there are any real issues here depends on how much potential was for players acting responsibly getting hurt, that is, systematic problems that will spread through the whole system. I don’t think we know that yet.
If not, then the hedge funds, day traders, Robin Hood, can all go bust and the whole thing is a fake problem.
I think we’ll just have to wait and see more of what the facts are before making a final judgment.
Chetan Murthy
@Barbara:
Oh, can I ask you to consider reading a few of John Hempton’s blog posts about the businesses he’s shorted? It’s clear that he’s been -instrumental- in bringing down colossal frauds on the public — Chinese companies listed on the NYSE that raised a ton of money, only to go belly-up b/c of fraud, often fraud that existed long before they went public. He’s also done work in that same vein (but I can’t remember if he actually discovered any bombshells) in the shale oil business.
James Chanos was famously a vocal doomsayer of “Chainsaw Al” Dunlap when he took the helm at Sunbeam.
Sure, these particular hedgies were just manipulators. But there is a cadre of short-sellers who do excellent work, exposing frauds on the investing public. And I would argue that the problem here is not with short-sellers, but with hedgies.
Just Some Fuckhead
Is this like Dexter killing bad guys?
Barbara
@Chetan Murthy: Individuals intent on discovering and exposing fraud help. If shorting is a technique they use to do that, great, but shorting is not inherently helpful and can be used for the opposite purpose as well.
Chetan Murthy
@Chetan Murthy: I should add that it’s been a while since he did this (at least, from his blog). But back in the day (say, 2013-15) he would regularly ask for people with thoughts on some stock to chime in, or for people who lived in some area if they could visit some particular business, report back, stuff like that. One presumes he was a (justifiably) little leery of going physically to (e.g.) the PRC for fear of getting physically attacked.
What I’m saying is, we could watch as he started his investigations, and he always reported his results (after taking his short position or not doing so). And later, he’d report whether he’d been right or wrong, too.
JMG
There’s no way to beat the game, so self-defense is the first law of investing. Dollar-cost averaging, diversification (I have a value and a growth manager, as well as a dividend one and a foreign one), and indexing are the ways to go. It’s been a 30 year bull market (with a few horrid drops like 2008-2009 mixed in). IMO they’re called securities for a reason. Invest in nothing you can’t go two weeks without looking at their current price.
Chetan Murthy
@Barbara: The problem with investigations is that they take time. Well-done frauds are difficult-to-discover: they’re concealed, after all. So if you want a guy like Hempton to work to discover them, they have to have an incentive. The profit motive is such an incentive.
I mean, sure, we’d all like for the world to run less on the profit motive. I’m a stern fanatic of confiscatory steeply-progressive taxation. Also decapitation of all billionaires [ok, ok, joke]. But we live in this world, and guys like Hempton are pretty rare. There are lots of other things they could do with their time.
Four Seasons Total Landscaping mistermix
@jl:
Whether or not someone trading on Robinhood is a “responsible player”, I don’t see why they should be subject to Citadel using order flow to screw them (ever so slightly) on trades. That’s not a fake problem IMO.
LeftCoastYankee
So another “free” app that is fully realized for the spyware component (selling user trade data to big money investors) components, but without a solid business model underneath to deliver what their “users” signed up for (covering clearinghouse capital requirements for their trades).
Seems scandalous to me. Also seems like SOP these days.
Chetan Murthy
@JMG:
Warren Buffett used to say that you should do (what was it?) 5 trades a year? Some [to the random reader] absurdly small number. He also observed that people who watch the financial news, read the financial pages regularly, are miseducating themselves. That what matters is not what happens in the short-term, but the long-term, and that by definition is something that can wait a month for you to find out.
I’d go further than you: if you need to be apprised week-to-week on your stocks, you’re timing the market. And unless you have special information, timing the market is a sucker’s bet.
BruceFromOhio
@Omnes Omnibus:
I scared the rabbit out of the room from laughing at this.
Chetan Murthy
@Four Seasons Total Landscaping mistermix:
Last time I interviewed for a market-maker firm (and was posted the problem of how to implement the “order book” system, with all the rules), it seemed pretty clear that the rules would forbid this sort of thing. It’s called “front-running”, right?
Yes, firms do it. Yes, HFT is a form of front-running. Which is why we need to come down on these fuckers like a ton of bricks. But what I’m saying is: it -should- already be illegal. Am I missing something?
P.S. At least one thing I’m missing, of course, is that too often fuckers get away with it, even when it -is- illegal.
zhena gogolia
@BruceFromOhio:
Why was there a rabbit in your room?
jl
@Four Seasons Total Landscaping mistermix: If that is what happened then I agree. So, make your case that is an issue.
I don’t know enough about the details to know how much of what the hedge funds or Citadel did was market manipulation or discrimination against certain players and was a source of any dangerous instability.
And, I’m talking about a different issue than a specific group or organization being treated unfairly by some standard.
bluehill
There already some regulations that try to prevent people from doing dumb things and that try to protect the market from panic attacks, but I think these were intended to prevent market crashes.
This was a melt up in a small group of stocks that, from what I’ve read, had the potential to spill over into the broader market if firms had to sell other more liquid stocks to raise capital to cover their short positions.
I think it’s tough to account for and regulate all the ways that independent actors can coalesce into a stampeding herd without introducing some other problem into the system.
I think the system and the regulations were “working,” but there’s a upper limit in terms of dollar volume, leverage and time. GME revealed what the upper limit is. It’s like a old car, probably works fine up to 80 miles per hour, but run it at 100 for some length of time and stuff starts to fall apart.
MagdaInBlack
@zhena gogolia:
Thank you, I was waiting to ask, hoping someone would =-)
PJ
@Chetan Murthy: In general, this is true. But there is a lot of information out there that most people never bother to look at, and if you are perceptive and/or diligent or know a business well enough, you can do pretty well. This doesn’t mean you will catch the top of the market by any means, but that you will be ahead of movements, which is good enough.
burnspbesq
@Omnes Omnibus:
You want to own the pay-per-view rights.
BruceFromOhio
@zhena gogolia: Dusty the Dust Bunny lives with us, and occasionally MrsFromOhio let’s him out of his enclosure to roam around the living room and upstairs hallway. He’s a mini-rex, and much more well-behaved now that we have all been quarantining. He was hanging out, and now he’s back upstairs in his enclosure. He is not amused by this thread, even if I am.
@burnspbesq:
LOL again.
Starfish
@Benw: This is what the front page was like in normal times! Front pagers would argue with each other.
I know it seems strange and unfamiliar, but NATURE IS HEALING ITSELF.
MagdaInBlack
@BruceFromOhio: We will of course, need pictures of Dusty the Dust Bunny. Please?
piratedan
not a financial expert, nor do I aspire to be one but I guess the part of all of this and what it brings to light is if your company exists in the public, where its stock can be freely traded and speculated upon, all it takes are some evil greedy motherfuckers to fuck you over for no other reason than to make a profit, regardless of how financially sound your company is (or isn’t), whether you’re trying to survive, retool, re-invent or what have you.
Maybe these guys only go after cripples, I guess my issue is, why should anyone profit by doing this?
Maybe I’m just a naive naif about these financial and business affairs, but we’re talking about bringing about financial ruin for a company, all because you can cut them in public, bet on making that happen in private and profit from it handsomely.. who gives a shit about those employees, the company itself, the people who still may be trying to survive financially who own it? I understand, gee whiz, it’s only Game Stop, what’s the big deal? The big deal is why do we allow people to do this shit at all?
What “work” do these hedge fund managers do? Give me something tangible… show me how you bring “value”, show me something other than I fuck over other businesses to make a profit for me and those who invest with me.
Starfish
@WaterGirl: This was the correct reply that has an awareness of existing Balloon Juice culture.
burnspbesq
@Barbara:
It would be outrageous if it wasn’t, but it is.
L85NJGT
Never open your mouth until you know what the shot is.
Starfish
@LeftCoastYankee: The Google Play Store and the Apple store are both clamping down on the spyware components that run in the apps themselves (as opposed to the ones that have to do with the companies selling your data because they are allowed to.)
BruceFromOhio
@MagdaInBlack: If you are on Instagram, go look up favoritefern. He shows up there occasionally. MrsFromOhio and I already discussed sending his picture in for the next calendar.
Scamp Dog
@zhena gogolia: I’m guessing it’s a pet rabbit. They’re not real common, but I’ve met a few people who have them.
burnspbesq
@piratedan:
They’re a highly specialized kind of yenta. The make matches between rapacious investors and fucked companies desperate for capital.
Roger Moore
@Barbara:
The price of a stock is the most important single piece of information about a company; it’s a distillation of everything else everyone knows about the company into a single number. That means affecting the price of a stock is the best way of broadcasting information about the health of the company. Short selling is a way for people who don’t own stock in a company to affect it’s price; they’re expressing a negative opinion about it in the way that matters most to the stock market. That’s critical to having a healthy market. If you don’t let people with negative opinions express them, the market becomes very easily subject to manipulation by people spreading false positive news.
Immanentize
@Barbara: I gotta say, I am your corner man. As I said before, count me as skeptical and uncertain until more facts emerge. I am definitely not in the immediately credulous with certitude about all the facts that M4 and others are.
They can discuss Oumuamua in a future thread with as much authority.
debbie
When have the markets ever been fair, let alone sensible?
PsiFighter37
Robinhood doesn’t know what the hell it is doing. The fact it is currently limiting trading in 50 stocks shows what you get when 2 tech bros with no academic or professional background in finance get too popular and are exposed in the process. No bank will want to work on their IPO after they lose most of their customers in the upcoming weeks.
Barbara
@piratedan:
Shorting doesn’t inherently hurt a company. In general, companies want to trade at higher values because they are supposed to be managed for the benefit of shareholders, who are hurt if the price goes down. There are other transactional reasons why shorting might hurt, for instance, if your pay is determined or affected by the value of the stock. It’s just a financial trade that is premised on the idea that shares are overvalued. The techniques that are used to try to manipulate the price or trading are pretty much the same ones that are used to pump up the price of a stock that you hold a long position on, and there is certainly a lot more of that than there is of shorting.
Immanentize
@Four Seasons Total Landscaping mistermix:
Agree completely. We shall see, but I imagine Robinhood’s pull back Thursday was not an automatic trigger by Citadel, rather an available trigger discretionarily pulled at quite a fortuitous moment for the companies Citadel was investing in. Too late for Melvin Capital perhaps, but maybe not too too late?
PsiFighter37
@bluehill: The problem likely stems from the fact that (almost certainly) big money got into pushing around GME and these other stocks and liquidated much else to do so. I would not be shocked if there are multiple hedge funds now trading both the long and the short side of the stock actively, intraday.
Chetan Murthy
@Roger Moore:
Until Bitcoin futures started trading on the CME (maybe COMEX — I forget — think that was in 2018) there was literally no way to short bitcoin. A few months after they started trading, people noticed that bitcoin had peaked pretty much around the time futures started trading. Some econ/finance guys pointed out that that was what we should have all expected: because now somebody who thought bitcoin was overpriced, had a way of telling the world, and putting his money where his mouth is.
This was a few years back: since then, well, bitcoin went thru a prolonged doldrums, and has recently come back up again. I don’t know what’s driving the price these days. To be clear, I think only knaves and fools use cryptocurrency, and the publicly exposed use of same by the GRU only confirms my belief.
Immanentize
@LeftCoastYankee: check out WeBull. They are working hard to get Robinhood users to switch to their similar service. It is lke Robinhood but Chinese government involved. It is ubiquitous now to harvest data like this, so does it matter?
jl
@piratedan: Suppose the hedge funds are looking into fundamentals of how much business a company will do in the future, and whether it is viable or not. And they conclude that it is not viable and want to take on some risk in order to make a profit in the course of getting that information out asap. Then short selling has a valid function. Edit: I should have said that the ‘information’ is really their opinion, but they are sure enough of it to take on some risk in acting on the info they think they have.
Suppose the hedge funds are using access to subsidized or underpriced loans, and tax loopholes, and loopholes in regs that allow them to offload company liabilities and responsibilities to stakeholders, and market power, to drive a viable business bankrupt and effectively steal some real assets. Then short selling is bad.
I think that is what the hedge fund issue comes down to.
In this case, the hedge funds were so sure of the deal that they didn’t even bother to do anything to protect themselves from the potentially unlimited risk of short selling. And they are supposed to be the sophisticated adults in the room, and they had plenty or resources to protect themselves. So, they are the parties that I have least sympathy for. Bankruptcy proceedings are supposed to try to compensate innocent injured parties as much as possible. So, too bad for the hedge funds who lost money. That is my only firm conclusion about this caper so far.
PsiFighter37
@Immanentize: I am sure it had little to do with Citadel and more to do with tech bros not knowing anything about how the financial system worked should their platform massively scale rapidly.
Barbara
@Roger Moore:
If you read my comments, I am not advocating to make shorting illegal. You can also express negative opinions about a stock without shorting it. For instance, you can sell your position or write a newsletter explaining why others shouldn’t buy it. All of which are totes cool. But when you get into shorting you can quickly get yourself into the kind of bind that can make you less than honest about your information. I mean, this also happens all the time for people trying to get you to buy stock. I just don’t find inherent virtue in shorting. I think it’s bizarre that anyone would.
piratedan
@Barbara: just making sure that I understand this properly, what we’re seeing taking place in the financial markets is more or less like watching the caddies from Caddieshack making bets on whether Judge Smails nephew not only picks his nose, but eats it too.
PsiFighter37
@jl: The dumb thing for hedge funds to do was short a stock trading at under $5/share. That is the near-definition of picking up pennies on the train tracks.
Emma from FL
All I see is a bunch of ignoramuses driven by morons (really? investment advise from Reddit?) that jumped with both feet into something they did not understand. Tulip mania for the twenty-first century.
Me, since I knew nothing about the stock market and didn’t want to take time to learn, I selected, after careful study and advice, two companies to manage my retirement funds. I didn’t become a millionaire but between that, my SS, and the equity on my house I will make ends meet fairly comfortably. I did make some investments in home upgrades that have left me in more short-term debt than I would like, but I can deal with it.
Boring and dependable is good.
piratedan
and ty to everyone for your lucid relevant explanations… it is appreciated
Immanentize
@L85NJGT: Tequila, please.
burnspbesq
Everybody should know how to read the most common SEC filings and how to get them on EDGAR. Teach it in high school.
jl
@Barbara: I can see your point. If a company is going to go under, that info will come out soon or later. Short selling on the stock market speeds the process of getting the info out to keep more capital from going to that company for no good purpose.
So, the question is, do the risks of short selling outweigh the value of getting the info out sooner rather than later? The same issues come up with insider trading, and how much of that should be prohibited.
bluehill
@PsiFighter37: I’ve seen people much more knowledgeable than me speculate the same, because of the dollars involved as GME stock rose into the hundreds, but I don’t think it started off that way.
The market is a complex adaptive system, which I don’t know a lot about, but according to wikipedia is:
Immanentize
@Roger Moore: but open time shorts don’t do that. They are not an opinion on the direction of the stock. They are an invitation to damage the reputation of the company/stock to drive down the price for profit. I understand the theory of shorting, but it is not all efficient marketplace as you suggest.
Just Some Fuckhead
Short sellers are basically intending to screw over anyone who buys the stock they borrow and sell, whether or not that person is deserving.
PsiFighter37
@Emma from FL: To be fair, the guy from MA who has made lots of money – undoubtedly way more than he ever anticipated in a best-case scenario – did a decent job of analyzing why GME was worth more. Kudos to him.
Immanentize
@PsiFighter37: They just raised 1B, yes billion, in 24 hours. Your news of Robinhood’s demise seems, … hasty.
jl
@PsiFighter37: That is evidence for me at least, that is may have been a market manipulation scheme. A couple of big hedge funds thought that they could do a short sales attack on the company and drive it under.
I have no clue what the future viability of Game Stop is, so not clear to me whether the whole circus started with anything moire than predatory hedge fund behavior or not.
NotMax
@Immanentize
Ask and ye shall receive.
;)
Four Seasons Total Landscaping mistermix
@jl:
Read the link about the SEC fine in this post and you’ll see that they have been doing it. The SEC fined them for it already. But, my point is it should be forbidden since it’s a conflict of interest.
jl
@Four Seasons Total Landscaping mistermix: OK, thanks, I go to that link.
PsiFighter37
@Immanentize: They were planning to IPO on the strength of their user base, which is going to slowly collapse. The financing is merely to keep them afloat in the here and now, not the long run.
Immanentize
@PsiFighter37:
how are you sure?
That statement makes me not trust any of your opinions. More. “Sure”. Snort.
Major Major Major Major
The whole “shadowy cabal of hedge funds pressuring Robinhood to prohibit users from buying gamestop in order to save [the one hedge fund that might be sort of in trouble but probably not really any more]” theory. I was pretty explicit about it! Thanks for writing up some of the real problems.
Immanentize
@NotMax: love that! Thanks. Why isn’t there more sax in rock n roll today? Sax and accordion.
Immanentize
Oops. Gotta go. Scary man is back.
Roger Moore
@Scamp Dog:
I know someone who does rabbit rescue. Visiting her house in the pre-COVID days was interesting. I also live not too terribly far from The Bunny Museum, which used to be in someone’s house (with their pet bunnies) but now has a proper space.
Starfish
@Scamp Dog: Hi! How is your doggo doing?
beef
These Gamestop threads keep tempting me to post. There’s a few wrong statements in particular that I feel I have to speak up about. (I can also be trolled by people expressing wrong opinions about 90s rock music, if anyone wants to try that.)
First one:
Not owning a stock is a neutral position. It’s no opinion, not a negative one. There are lots of stocks I’ve never heard of that I don’t own. Likewise, writing a newspaper article is well and good, but people can say all sorts of things. Maybe someone is trying to talk the price down because they want to buy the stock cheaply? Going long or short is putting your money where your mouth is. It’s a clear signal in a way that your suggestions aren’t.
Amir Khalid
@Immanentize:
Because there’ll never be anyone quite like the Big Man, no matter how hard his nephew tries.
Major Major Major Major
@beef: I’d love feedback on my earlier one.
sanjeevs
@jl:
How would a short sales attack ‘drive the company under’ . Unless they were planning some sort of rights issue the share price is irrelevant.
Baud
OT. Perhaps a thread on better news.
zhena gogolia
@BruceFromOhio:
Great name.
beef
Second one:
Driving a company’s stock price up or down only directly affects the company if the company owns a lot of its own stock. That’s not the norm for publically traded companies, and it doesn’t appear to be the case for Gamestop. The price of the stock affects the portfolios of people who gave money to the company in exchange for stock, which is a promise to share in future dividend payments.
Driving a company’s stock around can definitely get the attention of a company’s management though, because they’re frequently compensated with stock grants. I think sometimes that we could fix this if we compensated management with “valueless stock”, aka a profit interest, aka stock that can never be sold: They get a share of future dividend payments, maybe even a big one, but they don’t get pieces of paper that fluctuate in value with the opinions of reddit randos and CNBC hosts.
Not sure exactly how to implement this. You’d need to change culture. But it would focus CEOs on improving the long term health of their companies.
Yutsano
@Scamp Dog:
My parents have one. He’s a rescue from a rabbit meat farm. He’s not a small boy but he was deemed too small to slaughter. But instead of culling them the farm offers them as pets. He’s mostly grey with bright orange tufts. And oh his fur is sooo soft. But he hangs out in the garage with occasional forays into the yard. Unfortunately he can’t roam the house. The two border collies would love a little wabbit snack.
Jim, Foolish Literalist
You can’t fight the Seether.
jl
@sanjeevs: It affects the company’s ability to get more capital through any means. The stock market price provides a signal indicating the company’s future stream of net profits.
That is how economists think about it. But then economists are often wrong but never in doubt
Edit: I do agree that driving the price of outstanding stock, all by itself, usually does not directly bankrupt a company.
Jim, Foolish Literalist
I think Amy Sedaris has written an entire book about rabbits as pets.
Roger Moore
@beef:
To put it in a different, and extremely geeky way, the way people most strongly express their positive opinion about a stock is to buy it. The express an equally strong negative opinion, you need a way for people to buy a negative number of shares. That’s effectively what short selling is: a way for someone who doesn’t already own the stock to buy a negative number of shares.
There is one really big problem with owning negative shares, which is that they have the opposite profit possibility as owning positive shares. With a positive share, your losses are capped at the price you bought it for while your gains are unlimited. With a negative share, gains turn to losses and losses to gains, so it’s your gains that are limited to the price of the stock when you bought your negative share, while your losses are unlimited.
bluehill
@beef: Stock is a form of capital, so if the price of the stock is low issuing equity becomes more expensive vs debt.
AMC, the movie theater chain and another stock touted on WSB, was able to raise $500 million issuing equity after its stock got bid up, also converted $100 million in debt to equity along with issuing more debt. Raised almost a billion in new capital and staved off bankruptcy. Still some longer term questions about its business model, but they will have the time to try to fix it.
Not sure if GME tried to do the same or if they could do the same.
Benw
@Starfish: now that Trump’s gone we can turn on each other again! WOOT!
:)
BruceFromOhio
@Jim, Foolish Literalist:
You can’t fight this, either.
RSA
@Roger Moore: I think I have gained insight. Thanks for your explanation.
BruceFromOhio
Shout-outs to Roger Moore and Martin for patiently explaining myriad details and sharing their own investment posture.
sanjeevs
@jl: it provides a signal to the general public not to banks and other debt underwriters. I doubt you’ll find a single person who has worked in debt issuance who will support your position.
I think guys like Hempton, Muddy Waters and Chanos can be very useful. The Chinese fraudsters would have made much bigger amounts from westerners had it not been for short sellers doing actual due diligence
StringOnAStick
The real problem underlying this whole story is the same one that crashed the economy in 2008: excessive use of leverage. Some retail investors got to taste what happens when excess leverage worked against them so that’s the clickbait part of the story, but the amount of leverage being used now in the financial system is right back to those scary levels again.
Let’s have a look at Britain, the favourite place for Russian money laundering and asset hiding; having your economy be so dependent on shady money flows brought them callow politicians, Brexit and a general downward economic trajectory that appears baked in now that Brexit is a done deal. I’m sure Putin is enjoying the decline. The casino aspects of the US stock market are taking us down the same road; use of leverage in all aspects of the market needs to be reined in.
lofgren
@Major Major Major Major: Ah yes, the one specific hedge fund that controls Robin Hood’s money, had a monetary interest in stopping Gamestop from increasing, and Robin Hood has previously been fined for profiting over their own users = “a shadowy cabal.”
C’mon man. As I said in the last thread it seems at least plausible that Robin Hood really had no choice but to shut down trading, but there is more than enough suspicious behavior here to warrant appropriate suspicion from outsiders. Far as I’m concerned, your hypothesis is valid but Robin Hood needs to prove it.
beef
Last one:
<blockquote>HFT is a form of front-running</blockquote>
Nope.
Front-running is a specific crime. It means using your knowledge of the client’s orders to step in front of them and purchase before they can purchase. It’s a serious crime. Even being prosecuted for it can end your career.
This is not what HFT market makers do. They see order-flow, but they do not get to respond to it by placing trades ahead of it.
So what’s actually happening?
To explain that, we have to talk about the details of stock trading. (This will be boring. Light up if you want to.) I’m going to simplify, but will try not to oversimply. The basic problem in setting up a market (which dates back to antiquity) is this: You have a bunch of people who want to buy and sell things. You can go with the bazaar model, and just let everyone do deals with each other. But that tends to produce unfair outcomes. People buy the same product and pay wildly different prices for it. (I think the stock market has a lot of flaws, but it’s better than buying used cars.) Our experience has shown us that it’s better to centralize the bargaining.
To run a centralized trading system, there have to be some rules about who gets to buy and sell first. In the last century or so, this has been dealt with by setting up the market as a _continuous double-sided auction_. Orders to buy and sell stocks come in two flavors: _market orders_ and _limit orders_. Limit orders are orders to buy or sell at a certain price. Their priority is determined by the order in which they are received. They go on one side of the game board. Market orders are orders to buy/sell at _whatever the best limit order price is-. Market orders get priority by submission time, too, but they jump ahead of the limit orders.
Both order types have certain advantages. Market orders take the market by surprise and they almost always get filled, but they might not fill at the best price. Limit orders give away information because they’re publicly posted before they’re filled (if they’re ever filled). They are vulnerable to being taken advantage of by people who know more. (For example, we inferred in an earlier thread that a large mutual fund, which owned 10% of Gamestop on Halloween last year, had divested their position. That’s a big trade, and if you know it’s happening, you probably know more than the people posting limit orders.) But limit orders get better prices than market orders. Market orders are an agreement to meet the best limit order poster at his price.
In theory anyone can post either type of order. In practice (over-simplying here), investors post market orders and market makers post limit orders. Market makers try to post limit orders with a little price difference, called _the spread_, between their best buy offer and their best sell offer. That way they can buy and sell all day using only limit orders, and they should collect the spread.
Some fraction of the spread anyways. Market makers are, as I said, vulnerable to being taken advantage of by market participants with superior information. So they experience adverse selection when trading. But there’s only so much they can do.
Unless they can guarantee that they’re trading against uninformed participants. Which is why they are typically willing to pay money to trade against Robinhood users.
The market makers don’t front run Robinhood users. They just match their market orders to limit orders that they’ve already placed. That’s not front-running.
I think it’s perfectly fair to question this practice, and I think the behavior of market makers has to be monitored. But I strongly disagree with calling it front-running. Calling it a crime is like calling the Smashing Pumpkins a rock band. It unfairly prejudices the discussion.
beef
@Major Major Major Major:
I think you’re basically right. Not much else to say on that, I’m afraid.
Omnes Omnibus
@Jim, Foolish Literalist: You just need to use Doll Parts.
Aleta
@Immanentize: not rock but sax+Aaron Neville at least https://www.youtube.com/watch?v=zI5TA5eGwag
Aleta
@NotMax: Wardell Gray Quartet – Twisted
Chetan Murthy
@beef: Fair, I should have been clearer. HFT is a form of front-running, in every sense except the strictly legal one. HFT jocks can see what orders are coming, in various ways that have been well-documented, but the one I remember reading about is via the use of partial fills. They can figure out using quickly-placed-then-cancelled orders, whether there is a large order waiting to be filled, and if so, they can get a good idea of what price.
Maybe this has been banned, but it was the case last I looked: a few years ago.
So this is what I read a number of years ago. You want to sell 1m shares of IBM, and you want to sell for at least $100. You put in a limit order, expecting better than that, b/c the market is at $120. But an HFT firm offers $50 for one share, which doesn’t match; it quickly cancels, offers $51, cancels, etc, until it reaches $100, and at that point, it gets a match, buys that one share, and then submits orders to buy more shares at $100, which is ….. much less than the current market price of $120.
In this description, the key attributes of the unfair advantage were that other traders who were more than a few milliseconds away from the order-matching engine (computer) simply couldn’t compete — their turnaround time meant that they couldn’t use submit-then-cancel orders to rapidly discover the existence of outstanding large limit orders.
Now, that isn’t front-running, sure. But many people have called it the moral equivalent of same.
Racer X
You want to stop this shit? Throw the leadership of Robinhood into prison a nasty blue collar prison. Make an example of them. That will stop market manipulation really quick.
beef
@Chetan Murthy:
Nope. It’s really not analogous to front-running. The HFTs do their best to guess what’s coming and they use data to do this. I think it’s quite fair to ask whether it’s fair for them to use various data sources, and whether it’s fair for them to purchase desirable order flow.
But front-running is a betrayal. It’s someone who’s working for you, in a position of trust, taking advantage of you. That’s the difference. Your broker owes you a duty of care. Market makers don’t owe you shit.
Also, with regard to this nonsense:
Market makers use this speed to compete with each other, not with investors. They aren’t making the same bets as investors. The race is to be first in line to service the investors and to adjust their offers when the market moves.
NobodySpecial
I’m of the opinion burn it all down and start over from a simple premise: Buying a stock is literally a small loan to a company, and that debt should not be able to change hands. Period, end of story. There doesn’t need to be a complex system of running things as a casino, just a central record of how much money you owe whom. Otherwise, make these financial traders get honest jobs, and pay these CEO’s in boxes of Cheerios instead of stock options.
beef
A second comment:
Who the fuck are you that you’re trading a million shares of IBM? I keep seeing people HFT is taking advantage of retail participants. Small retail participants actually have the advantage here. Market makers are always trying to suss out participants’ intentions, but retail traders’ orders are so small that by the time the market makers have sussed out their intentions, the order is already done.
As for what you’re suggesting, yeah, that’d be great for the market maker if there was only one market maker. But there are hundreds of them, and they’re all scrambling to beat the other guys to be the one to do the order. And the one sure way to beat a competitor with faster tech is to offer a better price. Which is why the margins for market making have been steadily shrinking for a decade. The HFT guys were wildly profitable when Bush was in office, but their business has been commoditized.
Major Major Major Major
@beef: I guess I didn’t say too much anyway :)
Another Scott
DeLong – GameStonk:
It’s good that Congress is looking into this.
Cheers,
Scott.
burnspbesq
@beef:
That’s commonly done in partnerships and LLCs, but primarily for tax reasons (the receipt of a pure profits interest isn’t a realization event). But God help you if you get the valuation wrong, and the modeling can get wicked complicated if there are successive rounds of financing, as in biotech startups).
beef
@Major Major Major Major:
You said one thing that I very strongly agree with.
This is the crux of the matter, and it’s why I’m arguing with people about financial arcana on the internet on a Saturday night*. Misinformation is killing our society. We have to get the details right. There’s no time left for people to treat their opinions like facts.
* I’m actually of the opinion that it’s been Thursday since sometime in mid-March. But never mind that…
burnspbesq
The 90s have less memorable music than any decade since the 1860s.
beef
@burnspbesq:
And…scene!
Another Scott
@burnspbesq: Nice trolling. Not sure how one could objectively quantify that before the heat death of the universe, but …
100% Fun is very, very good.
;-)
Cheers,
Scott.
beef
@Another Scott:
Just when I thought I was out….
Matthew Sweet put out more albums in the 00ies than the 90s. I claim he’s not really a 90s artist at all.
Also I offer this amusement, without specifically endorsing the opinions expressed herein.
http://internetisinamerica.blogspot.com/2014/07/six-horrible-bands-that-shouldnt-have.html
Another Scott
@beef: That’s brilliant, and simultaneously the worst piece of trash writing I’ve ever read.
Winter is brilliant. Fight me.*
I first heard her play it live on some teeny tiny late night TV talk show (maybe on MTV?). The host looked like he was going to die of shock when she was done. I felt the same way.
To be fair, that’s the only album of her’s that I ever bought.
Thanks.
Cheers,
Scott.
* – Some other time. I’m heading to bed. ;-)
Chris T.
@beef: You left out things like Market-On-Close orders and a lot of other important mechanics…
(As a retail investor I mostly used limit orders, which I guess makes me an oddball. Which nobody should be surprised by.)
Michael_Emmett
Not knowing exactly what he did, being a software engineer could mean that he was forced to understand and capture the business logic and process in detail in the software being developed. Product designers often need to understand processes that are only intuitively or incompletely understood by those using the system. @Omnes Omnibus:
wrog
@Chetan Murthy:
this doesn’t make any sense.
Market at $120 means the highest bid is below $120 and the lowest ask is above $120.
Once you place a limit order to sell at $100 that becomes the new lowest ask and then the market’s not necessarily at $120 anymore. Now that there’s an ask that’s below some of the bids, the trade matching thing can go to work, once it’s burned off all existing market orders (all of the market-buys get matched to the $100 lot that’s on sale and all of the market-sells get matched to whatever the highest bid is), and if that $100 lot is sufficiently huge then it’ll suck up all of the remaining bids that are $100 or more, and then we’re in this new world where the lowest ask is whatever’s left of that $100 lot and the highest bid is below that (i.e., there’s nobody left who’s willing to pay $100 or more) and nothing more happens until new orders arrive.
Or the $100 lot gets used up and the market essentially bounces back to wherever it was before with the gap around $120 but with various bids no longer there (so that the highest bid is probably lower than it was before but the lowest ask is still over $120)
Placing new (limit buy order) bids at $51, $52, etc … shouldn’t be doing a damned thing as long as there are higher ($100-$120) bids outstanding because the higher bids should be taking precedence.
Or rather if someone is able to place a $51, $52,… or $100 limit buy order (whether as a bullshit probe or a legit order) and get that filled while there’s a pre-existing $119 limit buy order from somebody else outstanding, that right there is just wrong (the seller is getting cheated out of $19).