We Are Preparing a Class Action Lawsuit Against Robinhood
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If Citizens United says money is speech, the financial system effectively has no guard rails
Except when it does for the institutions
Citizens United says specifically that when a bunch of people take their money and get together and start a new corporation (Citizens United) (a not-for-profit corporation in this case, though not a charity) and the corporation proceeds to engage in political speech (by filming a movie named Hillary: The Movie)...
then the corporation, as an entity, is considered to have the rights like the right to free speech, because it is owned by people who have rights, and this is a way for those people to exercise those rights together. Therefore this political speech is protected by the First Amendment, and restrictions on it are evaluated on the standard of strict scrutiny, and the FEC cannot halt this distribution just because the corporation was using money to make it happen.
(You will notice that people are not allowed to band together and exercise the right to vote, and thus corporations don't get to vote.)
This concern is relevant to GME, BB, AMC, etc. because folks are joining Robinhood, Webull, and similar apps in record numbers in a rush to jump in on these hyped-up opportunity.
https://www.bloomberg.com/opinion/articles/2021-01-28/robinh...
Go look at past instances of Robinhood going down and the amount of people who claim they're going to take action because of lost money
Platforms are there to enable interface with market, not decide what I can and cannot buy from that markets.
Regulators are (intentionally) designed to be able to exert pressure with a lot of discretion. The financial industry is having a ferocious rage fit. The NASDAQ CEO even went on air calling for immediate SEC regulation... the irony didn't even seem lost to him.
Getting on the industry and SEC's bad side is the liability, and that kind of pressure is a big part of hw the SEC actually "regulates." It isn't strictly through rules.
On the other hand, manipulating the market seems like a good way to lose a business.
But this is straight-up market manipulation. There's no justifiable reason to halt trading on GME except as a means of cooling the market long enough for Important People to exit their bleeding positions.
There's a big ass disclaimer that you sign saying that markets fluctuate and that Robinhood isn't liable for losses of capital.
Robinhood is stuck between a set of large lawsuits and a set of even bigger lawsuits. It seems like their internal counsel has decided halting trading will lead to the set containing the smaller lawsuits of the two.
You think they are legitimately scared of being successfully sued for "tricking people" into buying through gameification? That looks like CYA-BS from here. If that were a legitimate concern, why wasn't the interface de-gameified long ago?
If it was purely a halt on all trading I could see the logic, but only preventing people from buying seems fishy to me.
(I'm not involved one way or the other; I don't trade shares at all)
Buying exposes them to additional risk in the form of potential future lawsuits.
Which, lets be honest, would have more merit than a "I missed out potential gains" lawsuit.
> If a retail customer loses money and makes a FINRA complaint that Robinhood induced them to buy through its gameified interface, it is liable
This seems like an attempt to pass the buck to FINRA, and I'm fairly skeptical, but open to being convinced. Have there been FINRA complaints that resulted in substantive enforcement actions centered on a broker's gamified user interface?
It's only certain retail brokers, and, mystifyingly, mostly the ones who have hedge funds with significant ownership interests.
But the general case of “the market should never interfere with trading” isn’t true, but typically we only allow that at the exchange level.
What Robinhood has done is apparently to ALLOW trading, but only selling, not buying. At a time when a close partner of theirs is at significant risk if the stock price goes up.
Citadel wants to stop retail investors from buying so they can both buy and sell to themselves and drive the price down and scare retail investors into selling.
What is a brokerage liable for by doing their job?
>with their money
With your money. Most people are trading on margin, because they're gambling addicts.
EDIT: I'm not sure if it's most that are trading on margin. Certainly it's everyone I've seen, but people who share their trades publicly are probably not representative.
It's possible they are doing this to protect investors. It's pretty clear GME is going to crash at some point in the near future. Having thousands of investors on their platform go broke at once is just bad for everyone (who isn't short). By blocking these trades, RH is protecting investors from potential loss.
In a way, it's almost like preventing someone from investing in a Ponzi scheme. While it might piss you off, it will save you in the long run.
Of course... that's assuming RH is acting in good faith.
I can understand complaining about getting thrown out of a casino for winning too much. I can't understand complaining about getting thrown out for losing too much. The people "investing" in these companies are totally clueless and the majority of them are going to lose all their money. Cutting them off is clearly in their best interest.
Whether or not that kind of paternalism is acceptable is another matter.
Can you imagine a trading platform just outright refusing to process your orders because it was better for them?
Basically: there's a reason for these trading controls to exist. And I really think people here are getting ahead of their skis. Almost everyone screaming about sticking it to Melvin is, as I see it, a victim of a trading scam.
Melvin seems to have lost a lot of money, sure, but... so have all the WSB folks. Very, very few people are going to come out of this ahead (and realistically some of those are going to end up in jail).
That's not true. Today the stock went higher than at any point yesterday.
Edit: multiple responses seizing on what can only be called a conspiracy theory at this point that some how absent Robinhood's tiny trade volume this stock would somehow still be going up from a 500% increase.
Guys, YES, the system is kinda rigged. What happened here is that you all GOT SCAMMED. There is no magic short call coming tomorrow. The stock was pumped (starting originally with a short squeeze, but of course now it's just a regular bubble), and you were fooled into trying to buy it high. You are the victims here, not the heroes.
As for "this would have happened anyway", well that doesn't sound very free market to force the very thing you claim to be trying to stop. RH says "oh no we don't want you to lose money, so we're going to cause a crash on the stock. Feel free to sell".
It's rotten to the core.
This action is likely (at least partially) targeted to prevent new users who have never traded a stock from trying to hop on the train and follow a "How to buy GME Options to make BANK in 5 simple steps!" article from losing everything.
Do you think there would be less blow-back if Robinhood only restricted new accounts? Or maybe only people with minimum balances?
If they stopped allowing people to sell their existing positions, then a lawsuit about "Robinhood is holding my funds hostage, didn't let me sell, and now I lost money because of them" would have come in, and probably would have had a lot more merit.
I believe they are committing fraud and stock manipulation.
But yes, if I used your assumption, I would say they should have restricted options for new users, or put extra warnings up.
And to your first sentence, no, you can't just move to a new platform. It takes more than a week to move funds from one brokerage to another.
The stock is already manipulated, though. No one racing to buy GME is doing so because a genuine desire to receive dividends, exercise voting power over corporate governance, etc... They're doing it because they read on wallstreetbets that a magical "short call" was coming tomorrow which would spike the stock.
That's a SCAM. It's not going to happen that way. The owners of all those early shorts have already settled their positions (and, yes, lost a lot of money in the process) and all you're seeing now is a tulip-style pump and dump.
You got scammed. You're not a hero. Robinhood might well not be acting in your best interests but they almost certainly saved you money.
The users on WSB used publicly available data to see that the shorting was occurring. They did what "the pros" constantly do, which is pool resources and make moves collectively. That is not "manipulation" in the legal form of the word. Not like shutting down trading, in one direction only, for retail only. Since it is individual users on a public forum winning, instead of the guild of hedge fund bros, the power player (Citadel) is forcing the shutdown.
Whether or not pumped up stocks are wise is irrelevant. The fact that something that happens constantly gets axed because the wrong people are winning is the issue.
If Robinhood just wanted to make money, they would have let this continue. People like to complain that RH gets payment for order flow, but they just knowingly cut off that order flow.
It feels like Occam's Razor should apply here. Either:
1. Robinhood felt that it's long term prospects were better if it's users weren't able to gamble and most likely lose all of their money, thus being scared away from the stock market forever.
2. There is a secret cobal that Robinhood, who was previous the "bad guy" of the financial world, is now in and tricked it's users into buying a stock that would be worthless just so that Robinhood could shut of trading at the peak, and let their secret hedge-fund buddies make a ton of money.
I'm not inclined to believe the conspiracy theory when there is a more more reasonable option.
Option 3: The cabal is there, it isn't secret, and they were on the hook to lose so much money that it was cheaper to essentially sacrifice the RH brand than to let the short get fucked to infinity.
Edit: They have stated on a blog post that this was a risk management move on their part - not strictly in the interest of the customer.
The market is broken.
Since RH doesn't allow shorting, the only way to close a position is by selling shares. So yes, it is exactly the same as only allowing people to sell shares.
There is a reason for trading controls by a neutral third party. Trading controls created and manipulated by a stakeholder is market manipulation and illegal.
Not saying its moral or not incredibly corrupt, but I can definitely see Robinhood having the legal equivalent of "our platform, our rules" here.
Do you actually know the rules? Brokers are highly-regulated, and their job is to give a fair trading platform.
Brokers have been doing this for decades; it's clearly within the bounds of what they are allowed to do [0]. Maybe this lawsuit can prove that they are conspiring with hedge funds to manipulate the market (which would be illegal), but just this act alone is not illegal.
[0] https://www.cnet.com/personal-finance/robinhood-app-td-ameri...
"Fair, orderly, and efficient markets" doesn't mean that you take away someone's seat at the table just because he's winning. If it were Pershing Square driving the long side instead of r/WallStreetBets, there's no chance in hell that Goldman (Ackman's PB if I'm not mistaken) would block opening trades.
This is mostly false. trading platforms are regulated by a bunch of orgs like the SEC, they absolutely cannot do whatever they want, there are heavy regulations on these activities or it would be easy for a broker to scam their clients out of their money with backroom deals with this or that third party and create conflict of interests.
It was funny when it was just hedge funds losing millions of dollars because they shorted it, but eventually all the WSB people buying the stock are going to be stuck with something worthless once it inevitably comes back down to Earth.
Trading on GME probably should have suspended a while ago. Now we're stuck in a situation where RH has blocked purchases, and people are going to blame them when the stock tanks and they lose their money rather than themselves for buying ridiculously overpriced stock to begin with.
Or if only retail is unable to open new positions, why are institutional investors allowed to open new positions and profit from the moves while retail cannot?
This is so close to "allowing sells but not buys" that it is blatant market manipulation.
Now the hedge funds are of course trying to prevent this by calling favors from the brokers and putting out fake news that they've already closed out. Both sides are using manipulation and displaying the worst parts of our markets, our capitalism and even our character for the whole world to see.
At the end of the day, humans are greedy beings. It's totally natural, and we need to accept that. But as we accept it, we need to figure out ways to regulate that greed so that it is a force for good overall. Capitalism is based on greed, but that doesn't mean it's not the best economic system. On the whole, a group of entirely self-interested individuals can still work together in a sense to grow our economy, build new technology and make the world a better place.
Go ahead and explain how that is stealing?
https://twitter.com/555Sunny/status/1354854993946406917?s=20
Why is this the pertinent question? Even if it wasn't legal, they would just re-interpret the rules in their own favor.
Additionally, this is presented as if any of us had any say whatsoever in the writing of these laws or their enforcement or non-enforcement.
It's a distinction without a difference. It implies that "if we don't like it we should change the laws". But none of us wrote the laws in the first place, and certainly if we had the power to change the laws we never would have written them this way. If we had the power to change the laws we would change them. So it's an irrelevant point.
The entire point of the situation is "these are the laws" either officially, or unofficially but in practice.
Being cynic about it, nothing of consequence will come out of this. RH will just pay up and continue business as usual. WallStreet will have successfully crushed the little guys, ironically, doing the same they are complaining about, market manipulation. And in the future people will think twice before attempting something like this again.
Look at Facebook and Google, they keep abusing their users, but without a good alternative, there’s very little to do about it.
Edit: eloquently put by a sibling comment, the issue isn’t having an alternative today, but what would happen when those other alternatives are faced with the same conflict of interest as RH is facing, and the answer is that they would probably react the same way, here’s the link: https://news.ycombinator.com/item?id=25947300
>doubt they'll be back
Going where instead? Perhaps going to nowhere and not investing anymore, but if that's the alternative RH won't lose much on the margins vs if the "free market" wasn't really just a meme.
We live in a financial oligarchy. If we didn't, this blatant corruption with no recourse wouldn't be happening.
To another brokerage? This question doesn't make sense. RH isn't the only brokerage around, and there is a mass migration of people into other brokerages. Their app is currently at 1.0 stars.
But the fact RH would simply throw its customers away to appease hedge funds tells you something about who's in charge.
To be clear I'm not saying people won't "want" to go somewhere else that let's them trade how they want to trade (though the low friction and UX on RH itself needs to be re-implemented to equate a like for like substitution), and I agree they should and RH deserves to get ruined by users leaving en masse... I'm saying they won't be allowed to do so if another instance of this same dynamic occurs. Additionally, that there are calls for censorship of wsb, the future co-ordination on social media is also in question
They have some warnings amounting to "this thing is crazy, we'll do our best", but they haven't stopped me from trading. Other brokers are the same.
I think Robinhood cost themselves their business today. Anytime someone says "what broker should I use" the first answer is going to be "not Robinhood, they screwed everyone over" regardless of how true that statement is. I think the industry is about to come under fire too. Heads are going to roll on this one. Action across the board is widely supported by both sides of government. If it is even close to as bad as it looks, Wall Street firms just cost themselves much more than their short positions.
Furthermore, the fact that EU brokerages are not stopping trades is something to be considered, no?
Whether you agree with that ethos or not, I think we can at least agree that RH lacks the courage of its convictions.
I won’t speculate on the legal matter, but it sounds like a good witch hunt!
Really, a few rich targets may likely suffer (...or not, when it is so likely deserved).
I’m concerned that many Elanors, who’s teachers’ pension fund & retirement plans, were potentially compromised here.
I don’t think pensions belong in hedge funds is the bottom line.
(Combining unaccredited investor portfolios might look something like combining subprime loans, but...)
Yep. It's very possible that RH just knowingly violated whatever rules/regulations in full expectation that this would still be in their long-run best interest, particularly if they were financially exposed in whatever ways on the shorts that were generating losses. We'll see how this works out for them - they'll take a reputational hit but honestly most people do not have an incentive to leave the platform other than smoldering moral outrage or because they think that GME-like opportunities will continue to present themselves in the future (unlikely imo.)
If they didn't do anything, the precedent of courts and regulators giving retail investors wins because someone's gameified UI induced them to trade would leave them with untold liability. In this branch of reality, they're going to get sued--and deservedly.
For what it's worth, Robinhood was not the only brokerage that is restricting trading GME. TD Ameritrade, Interactive Brokers, and WeBull also have restrictions in place right now.
The timing of it makes it unethical.
Because someone was loosing billions because of it.
https://finance.yahoo.com/news/citadel-point72-back-melvin-2... (Citadel, Point72 Back Melvin With $2.75 Billion After Losses)
https://www.cnbc.com/2020/08/13/how-robinhood-makes-money-on...
I wonder if it's a duck?
Considering Citadel Securities makes _significantly_ more money than Citadel would stand to lose with its short positions, the thought of the two colluding to pressure Robinhood seems a bit far fetched to me.
Or, could it possibly be that these institutions implemented trading restrictions to protect their clients from the impending crash?
- Robinhood was one of many brokerages to implement trading restrictions. e.g. Bank of America/Merrill Edge also shut down buy orders for GME. Citadel does not have the same relationship with these other brokerages. So, to say Robinhood made their decision based on a conflict of interest doesn't hold water.
- Just because Citadel accounts for $xx million of Robinhood revenue, doesn't mean Robinhood stands to lose $xx million if they piss off Citadel. There are plenty of other market makers willing to fulfill Robinhood's orders. Presumably these other market makers would pay slightly less than Citadel, but Robinhood would only stand to lose some small percentage of $xx million.
Putting yourself in Robinhood's shoes, it makes little financial sense to comply with Citadel's demands even if Citadel attempted to coerce them into implementing these trade restrictions.
OTOH, in this case, it's genuinely hard to conceive of an alternative story that isn't a cabal story.
Also, in practical terms... most of the action was on robin hood. If other brokers/originators/banks didn't shut down buys then this entire wallstreetbets craziness would flood in their direction.
Q: Did BoM & Merrill Edge shut down trading on #wallstreetbetmadness stocks entirely, or just the buy side? One of the most damning things here is that robinhood only shut down buys. Seems like blatant market manipulation, but I don't really know the rules.
Actually incredibly easy. $GME isn't worth anywhere near $350 or $20B market cap. These people are in a world of hurt when you have WSB spinning stories and encouraging reckless behavior, where some are throwing their last $20,000 into it, which will eventually disappear to $100 unless they passed the buck to some other chump before it all blows up. RH could genuinely believe that the sooner the GME pump stops, the less damage is done to these extremely naive retail investors, because the future naive bagholders flooding in are prevented from throwing their little savings at it.
Brokerage execution halting or not, this story has an incredibly obvious ending, and it's that some WSB pumpers will profit huge, some hedge funds will lose huge, but the majority of WSB will lose immensely.
People will claim they had no chance to sell GME for $250, after a few days spikes it back down to $20 or so, and they'll claim Robinhood caused them to lose $50k or whatever.
Honestly I don't understand how this is even a question. WTF is supposed to happen to the price of an asset if a big chunk of the owners can only sell.
I agree, and yet I seriously doubt even 5% of people saying this have opened a short position, e.g. bought puts.
How is this not also market manipulation? Lots/most of the trades on target stocks are trading via RH. RH is restricting the access of buyers, but not sellers. How could this decision not affect/suppress prices.
I will not pretend to guess at potential liabilities of one choice or the other, but the one they made does seem to corrupt the market most.
I guess it's cliche to ask this about a financial scandal but... how is this legal? Can a broker really decide that people can either hold or sell, but not buy a stock?
Flesh this story out. Who said this to whom? How did it go from here to a decision to shut down buys (but not sells). This isn't vanguard. It's a daytrading app.
Not to mention that this is near suicidal for robinhood. That's why the Citadel story resonates with people.
The only non-cabal story I can think of (I know I said it was hard, but I thought hard... swear) is that they ran out of cash, or are hedged poorly and trying to trade their way out of a hole. Cabal still seems more likely. I wonder how reliant on Citadel Robinhood is for long tail emergency capital.
My issue is those brokerages said they were closing orders because of Apex clearing. Robinhood basically said that they chose to do it themselves: https://blog.robinhood.com/news/2021/1/28/keeping-customers-...
2. Isn't Citadel's deal with Robinhood dependent on the flow being "dumb" and not having any broad effect on the market? That's obviously no longer the case, if it ever was. Robinhood is still venture backed, so they're feeling the pressure to show growth in users and profits. Is it possible the market for their "much-less-dumb-than-previously-thought" flow has shrunk substantially?
Also, the retail traders involved and the press surrounding them have (accurately imo) painted this as a populist "sticking it to the elites" movement. What if the so-called elites really do want to disenfranchise and mitigate retail investors impact on the market? BofA, Citadel, and peers might have an interest in maintaining the status quo.
I heard that Bank of America/Merrill Edge was requiring posting a 100% margin as collateral if wanting to buy GME options. I didn't hear that they shut down buy orders for GME stock.
PR Puff Piece by Robinhood - https://blog.robinhood.com/news/2021/1/28/keeping-customers-...
Keeping people safe from themselves. Stocks where Retail investors are blocked from buying by TD Ameritrade, Robinhood, etc. yet hedge funds and others are free to continue...
Just yesterday Discord bans the WallStreetBets community.
Note: I held a few positions in some of these volatile stocks
Sounds great!
> Amid significant market volatility, it’s important as ever that we help customers stay informed.
Excellent, thanks for the information.
> We fundamentally believe that everyone should have access to financial markets.
so......
> we are restricting transactions for certain securities to position closing only
:/
>> The ones with laughably ironic names. “Robinhood” working for the rich to spite the poor.
I find this whole drama bizarre. I suspect there is going to be a huge pile of shattered portfolios at the end of this mess.
The above is what I read at first glance which seemed appropriate.
Robinhood's _purpose_ was to sell order-flow information to the hedge funds. Retail investors were never the customer, always the product.
This is like a mouse complaining about the "irony" of a mousetrap abandoning its mission of cheese-distribution.
There is a situation where retail investors don't get utterly screwed but that is a fine edge and on either side of it, thousands of them get screwed.
Will be interesting to see where this lawsuit will go, since it looks like a clear coordinated manipulation of heavily shorted stocks and blocking everyone else from buying them.
Rigged from the beginning. But we'll see what happens with this lawsuit.
I guess someone is only letting the hedge funds trade rather than their own customers. [0]
[0] https://twitter.com/RobinhoodApp/status/712708069369782272
Do you have any evidence for these claims?
EDIT: apparently multiple lending of shares does happen and Overstock sued over this [1]
[1] https://www.courthousenews.com/overstock-com-settles-short-s...
Actually my example kinda sucked. What's more likely to happen is that B borrows the stock from A, then sells it to C.
C then lends the share to D.
C doesn't know or care that the share was already borrowed once, and the only way to prevent re-lending it that way would be to make shares non-fungible, which would break more-or-less everything (then again maybe that's your goal).
So you have 1 share, that's shorted twice. But it's impossible for A and C to both have their loan repaid, because there's only 1 physical share.
That all sounds perfectly ordinary, as long as it doesn't happen on a deadline. If you tell D or B that they have to buy that stock right now at any price, they're going to take it in the (ahem) shorts. But if they were permitted to take their time, they'd buy it up at the market price, which would on average be pretty near the price they sold it.
It just so happens that there is a mechanism by which they can be forced to buy that stock right now, which is when F decides just on a whim to pay 100x the market price, and protection measures kick in. That's a screw-up on the part of B and D; they got sloppy and deserve to get raked over the coals for it. Everybody who wants to play that game needs to be aware of that scenario, and now they are.
But I don't think it's because there's anything impossible about having more shorts than stocks. It just takes an already risky thing and makes it super subject to manipulation.
Naked shorting is not "re-lending", it's a very specific technical thing where you sell the stock without owning or borrowing it at all. Naked shorting results in failure to deliver.
Stock trades settle a couple of days after execution, so what it means in practice is that Alice "buys" the stock from Charlie, then 2 days later when settlement should happen and the share and money are supposed to actually change hands, Charlie goes oops I don't actually have the stock. Then the trade is undone.
In effect Charlie duped Alice into a fake trade that artificially depressed the market price.
It's an egregious market manipulation tactic and has nothing in common with the practice of lending or re-lending shares, in fact there is not a single share involved at all.
If you fail-to-deliver enough you'll get booted by other market participants and/or the SEC.
This is a list of stocks that have been sold, but the seller failed to deliver those shares. AKA naked shorting.
GME has been on this list for a month now.
SEC call this "Reg SHO". https://www.sec.gov/investor/pubs/regsho.htm
Of course, this list isn't indicative of the amount (i.e. coud literally be one share undelivered) but the mere existence of it is mindblowing! Someone should be paying massive penalties and/or be in jail (as I'm sure would happen to "retail investors" if they were unable to deliver...)
That said, https://www.investor.gov/introduction-investing/investing-ba... notes you only get listed as a threshold security if a few criteria are met, one of which is that the amount failed to deliver must be:
> equal to at least 0.5% of the issuer's total shares outstanding
Based on 70M outstanding shares, that means at least 350,000 undelivered shares. We don't know _why_ there was a failure to deliver, though. Not all failures may be related to short selling - someone's system screwing up for mundane reasons could cause such a thing, with no malice required.
[0] https://www.wsj.com/articles/citadel-point72-to-invest-2-75-...
At least one Wall Street firm has taken heavy losses — Melvin Capital Management, which was shorting GameStop, among other bets. It’s been bailed out by Citadel, which, confusingly, is not the same thing as Citadel Securities. (Citadel is a hedge fund, not a market maker.)
Since Robinhood doesn't collect commissions there's no loss of revenue on trade volume. But driving GME's stock price down is definitely saving Citadel billions, and the class action lawsuit is unlikely to cost them billions.
- Final Fantasy Tactics
I don't have the answer but its something to think about.
The answer is the same in both cases, law enforcement needs to investigate and catch it. If they can't, too bad, there are a lot of undetected crimes in the world, doesn't mean that we have to prohibit normal activities to stop them at any cost.
Are you suggesting the licensing and regulation does nothing? Do you think the big firms should be treated the same way as retail investors because crimes will be caught either way?
I'm in no way a proponent of big firms but I think its important to think about what kind of under regulated trades are happening.
Well, if someone said something on the internet, then it must be true!
I have pretty low confidence in the detailed specifics here, but I saw some discussion on Twitter that naked shorting being legal could have actually prevented the squeeze we're seeing. [0]
The reason for the extra >100% has to do with how the stock lending works (Matt Levine wrote a bit about this recently). [1] Quoted below.
--
"This does not necessarily mean a lot of people are doing evil illegal nefarious naked shorting! Really, I promise! There is no special limit on shorting at 100% of shares outstanding! Here is an explanation of how options market makers (discussed below) are allowed to short without a locate, but I want to offer an even simpler explanation. There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but 190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine."
--
I still think what Robinhood did here is both wrong and a stupidly short-sighted that will damage their brand, but there's so much over confident misinformation about what's happening surrounding this that it makes it harder to understand.
The NYT is no better - another dumb Taylor Lorenz article got less right than most random Twitter threads.
[0]: https://twitter.com/simoj_/status/1354664677364609026
[1]: https://www.bloomberg.com/news/newsletters/2021-01-25/money-...
Amusingly, them blowing up Robin Hood made me put up an order for $GME. If their position is so valuable that Citadel would destroy a business worth billions, then I am convinced this is an amazing speculative play.
I would imagine that Citadel can simply force one of their partners like Robinhood to do anything by threatening to cut them off from the market entirely.
I think their main goal now is to make sure that the lawsuits and fines they will be hit with will cause them to loose less than a short squeeze in this stock would eventually have.
But all of this is just speculation. I don't actually know anything about the stock market, I started reading about it two days ago. I don't want to "conspire" or anything like that, just my theory.
Though at any rate, I am not convinced Citadel had much of a stake at this point - Melvin had supposedly closed its shorts and the current short sellers were very possibly different actors.
A owns 90 shares, B owns 10. A lends 90 shares to C who sells them to D. D lends 90 shares to C who sells them to E. E lends 90 shares to C who sells them to F...
C in this hypothetical is borrowing and selling the same shares over and over again to various 3rd parties. Shorting the same shares twice is truly naked short selling.
If there's three people in a room, and only one pair of pants, what would you call it?
Suppose there is 1 share in existence, A promises to sell it to B and to C if price reaches X. If price gets there, A is on the hook to pay up. So now A has to buy the share if not held, or have it already. A sells out to B, fulfilling the contract to B. Now A needs that share again, so has to offer B a price to buy it, and does so. Now A closes out with C.
It's vastly easier when there's lots of shares, because it's easier to find a seller each time you have to close out multiple contracts.
This is done in pretty much every part of the economy. When you put money in a bank, it can be lent. Now the bank has a debt (to you) and an asset (money owed to them by the lendee) that balance. That lendee can also lend the same money, again incurring a matching debt and asset.
None of this is voodoo back market evil. It's common sense used to allocate resources, has been done for millennia in many forms.
It's funny watching naive traders get upset over it simply because they don't understand how their own markets work. It will be funny and sad watching them learn even more about how markets work in the coming days.
Whereas in public markets, a random hedge fund should not be able to essentially issue new shares / increase the float.
My point is simply a ban on “naked shorting” is obviously useless if you allow chain lending, therefore a ban on naked shorting implies a ban on chain lending.
As you wrote, the rules were created because this activity is the whole intent.
Go carefully read the SEC rules regarding this, specifically the exemptions which are written in law.
As I posted above, there is nothing illegal, immoral, evil, or deceptive about these practices. It's only when people don't understand the rules and most importantly why the rules are what they are that those people get upset.
It's like watching natives throw rocks at the moon to scare it off.
I would love to have a free investment market where the money is made when the companies succeed, not a casino that kicks you out for counting cards.
It then becomes the same thing as buying and selling useless paper. In order to make the system truly a market you have to restrict the size of the portions. Something like 1% is the smallest cut someone can own.
But then that would stop the huge amount of cash companies tend to receive during an IPO thereby restricting the growth of the actual business.
Citadel has no short positions to speak of in GameStop. They bailed out Melvin, which means they made money, not Melvin's positions per se. Also, by the time that happened Melvin had already closed out its short [1].
The conspiracy hypothesis might have legs if Citadel's asset management and market making arms colluded. Absent evidence, however, it's a suspicion at best.
Robinhood is between a rock and a hard place of its own making. Market makers stopped making markets in an increasingly-volatile stock. Robinhood, having relied on market makers for execution, likely has sub-par exchange connections, so their execution quality started degrading.
They're also staring down almost-guaranteed lawsuits regardless of what they do. If they badly execute, lawsuit. When the bubble pops, lawsuit for having been induced to trade through their gameified UI. If they block, lawsuit for interfering with trading.
[1] https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddi...
You have made these claims dozens of times today without citing sources. Are you spreading insider information, lying, or just incredibly lazy and don't care if people believe you?
Added source for Melvin Capital making public statements on its short position. They could be lying. But then that's securities fraud.
Intentionally making unambiguously false, material and self-serving public statements like that is well beyond fine and lawsuit territory.
Why would they bother to make such statements early in the AM if they had actually closed out their shorts?
They said before they do not comment on their positions. Why would they do so now if it wasn't a serious situation?
"We have closed out our position in GME (GameStop)" isn't ambiguous.
> Why would they bother to make such statements early in the AM if they had actually closed out their shorts?
Most likely: Citadel required them to. The bailout was going to be announced. Citadel didn't want informed observers speculating on whether Citadel had just ponied up to an unhedged falling knife.
Otherwise, Melvin is a hedge fund. Its LPs are nervous, and assuring them the worst is over could sow doubt in would-be defectors. This could also be done by way of confidential notice, however, so on its own it isn't enough. The other factor is, perhaps, to get the people prank calling and such off their backs. That was a stated factor for Left at Citron.
More than what? GameStop was the most traded stock in the country for a few days.
It's a few short sellers who got wrecked. The rest of the institutional guys are fine and don't care about this except for how much money they're making.
The reason trading was stopped is that if a stock price suddenly gaps then the retail investors can lose more money than they have in their accounts. Then the brokerage or their clearing firm have to take the losses. They are not willing to do so, so they stop allowing trading. The brokerages are not somehow colluding to make hedge funds money, they are just trying to make sure that they do not lose money themselves.
I don't really have an opinion on whether the GME thing is a pump and dump scam, or a real opportunity to enforce a classic "The market can remain irrational longer than you can remain solvent" lesson to those shorting these stocks.
But I do have a real issue with removing just the "buy" side of the equation. Price is always a function of supply and demand, and I don't understand how anyone could justify halting just buy orders. The obvious impact of artificially reduced demand is that the price will drop.
Further - if this price drop was designed to protect these firms from possible losses (and I don't really care whether that loss was by allowing unvetted shorts by investors who don't have the capital to cover, or whether it was collusion to protect other parties) then I still don't see how you can reasonably come to a conclusion that looks good for these firms here - They're manipulating stock prices to avoid losses.
Robinhood would have legal liability for aiding and abetting an illegal short squeeze had they continued.
The illegal part is a scheme to collude and manipulate the availability or price of the stock to intentionally cause a short squeeze. I'm not entirely sure I agree with you that posts like that are "collusion" (Cornell def here is interesting as a refresher - https://www.law.cornell.edu/wex/collusion), but I can certainly concede there's plenty of shades of gray here.
Yes, that must be why trades are restricted, wsb got infested with bots and banned from discord, and the media is in full shit flinging mode against wsb.
I have been in frequent touch with my wall street friends. Many are "fine" and the general feeling is that long term this will get sorted out, but many of them took some hits and are watching this very carefully. Many firms had to move out of long positions to get capital, so this had trickle down effects elsewhere in the market.
Things that undermine the credibility of the market and bring congressional oversight hearings into the conversation aren't just being ignored.
Even they agree, it feels like "something is off" but who might be doing bad things is still unclear to everyone, even guys I know with 15+ years in the industry.
I used to be an options market maker. Different animal same game park.
If I saw a stock doing what GameStop is doing, I'd pull the plug. One, we'd have already made a ton of money on it. More importantly, with this kind of volatility (and correlation), we'd be well outside the parameters of our risk models.
Usually, cash equities don't have this problem. But there is a realistic chance that a desk will fill a bunch of sells, turn around, and within those microseconds watch the market gap down 50%.
It's unlikely. But how unlikely? We don't know. We're too correlated, and too volatile, to predict that. You do something like that, particularly after the amount of press coverage this is getting, you are going to lose your job.
> I hope RH is burned to the ground after giving up whoever coerced them into doing this
Between the gameified UI that encouraged day trading, their reliance on payment for order flow and margin-lending / options trading model, I won't say this was bound to happen. But it was an identifiable risk.
The warning signs were clear when their systems went offline under large volumes. Concerns were dismissed then. I expect this will be forgotten by much of their user base soon enough as well.
Market makers typically would pull out of the name, not out of one side.
My guess is Robinhood didn't want people opening new positions--long or short--in the name. Blocking people from selling an asset you sold them raises all sorts of issues. But denying them the ability to enter into a new position through your services is on more-stable ground.
I know its pretty clear my current personal opinions on this topic lean rather hard in one direction but I am truly open to hearing the counter argument and could be convinced otherwise. Some of your posts here and in other threads have changed my view on other parts of this whole mess already so I'm asking because it seems like you're willing to discuss sanely.
This is a great question.
Short answer: they shouldn't. When a market maker signs up to make markets on an exchange, they commit–contractually–to providing quotes in good times and bad. Payment for order flow contracts can vary, and I don't know what Robinhood's terms are, but they typically carry a similar requirement.
There are reasonable exceptions. If your systems are having issues with a stock, e.g. the intern entered a dividend wrong into the database, you can declare "self help" and stop quoting for some time. This is occasionally abused. But exchanges are decent at policing it.
In this case, though, yes--a lot of market makers made a ton of money, got scared, shrugged and then put their hands up. (Again, caveated to Robinhood's agreements.) Fortunately for them, the crowd has been distracted by this Ken Griffin called Robinhood to screw over /r/wsb story, so they won't get much more than a slap on the wrist.
https://twitter.com/justinkan/status/1354853920762253315
?
If Ken Griffin put in GME shorts before ordering his market making desks to quit in it, yes, that would be criminal.
If a fund manager bought puts a few hours before the market makers put up a white flag, I'd want a thorough investigation to rule out collusion. But by itself, suspicious--nothing more. If a long-short value fund bought puts based on an algorithm keyed in months ago before market makers fled the scene, it's almost certainly innocuous.
And if the options desk was hedging the puts they just sold by selling short while the cash equities desk called it quits on the name, that would be perfectly normal.
Yeah, uh, they do that all the fucking time. It's a Soviet fiction that they keep a firewall between those two businesses.
The market making unit is in a totally different part of the org chart, with its own PnL lines, than the hedge fund. In fact Citadel Securities is a separate company than Citadel Investments.
But most importantly there’s a legally mandated Chinese firewall between the two. Employees on one side are not allowed to discuss operations with employees on the other. This is enforced to the extent, that an employees access card won’t let them enter the other side of the division.
Citadel makes a shit ton of money as it is. Nobody there is going to risk major jail time with an easy to unravel scheme involving dozens of co-conspirators, just to make a few extra bucks on a tiny short position.
Additionally, they're both owned (mostly) by Ken, who is know for being a bit "detailed" (to put it nicely) when it comes to his businesses. He almost certainly has live second by second pnl updates for all parts of all of his business, he almost certainly was the one who made the decision to invest 1.4+ bn into Melvin, and he almost certainly knows that retail flow (esp robhinood) is a huge part of citadel securities business.
Honestly I think reddit has some grounds for a case here, but IANAL.
Webull's clearing firm forced their hand.
Having said all that...
I don't think a trading platform allowing you to buy / sell stocks should be able to arbitrary decide when you can buy and sell without some reasonable reason that applies to everyone.
Instead I see a meme forum that glorifies poor decision making, with a post saying "My friend is a lawyer and she says we have a good case?"
Don't get me wrong, I've got my popcorn ready to go on this. But I thought from the title this would be a mod-post with actual details for a real lawsuit, not just some guy saying what people want to hear.
But what is the alternative? Other brokers (eg TD) have done the same as Robinhood. So what is retail to do? It seems like anywhere people would attempt to do something like what’s been going on with GME, would respond in the same way as RH to the pressure of the powers that be.
So in a way, Robinhood is hurting all the people with existing long-delta and long-vega positions. Many of those people are Robinhood's own customers.
I guess Robinhood would have to demonstrate that the position isn't suitable for its customers, or that they couldn't guarantee orderly execution under the stress of a continued barrage of orders and new customer sign-ups.
This limitation definitely has an impact on GME stock, which is not good for RH because their own customers are largely the people who lose.
You can put whatever you want in your TOS, but if you lose money for your own customers and one of your investors (Ken Griffin) is on the other side of the trade, then you have a huge problem on your hands.
Brokerages can't manipulate markets.
It's illegal.
[0] https://www.courtlistener.com/recap/gov.uscourts.nysd.553175...
Absolutely disgusting, people need to go to jail for this, you can't get away with punitive fines that are less than what the hedge funds would've lost on the trade itself.
I hope regulators step in and preserve all correspondence + records on why this decision was made. But somehow, I don't think this will happen. They will lose documents, texts and chats mysteriously and that will be that.
Only hope is whistleblowers leaking stuff to the media.
The only other brokers where I've seen restrictions were against margin trading (which I think is fair and makes sense - gamble with your own money if you want, but not with ours).
Maybe there are some other brokers behaving just as badly, but if the net consequence of this is that RH goes away, I don't think much of value was lost.
>>"I understand that Robinhood may at any time, at its sole discretion and without prior notice to Me: (i)prohibit or restrict My access to the use of the App or the Website or related services and My ability to trade, (ii) refuse to accept any of My transactions, (iii) refuse to execute any of My transactions, or (iv)terminate My Account. "
[0]: https://cdn.robinhood.com/assets/robinhood/legal/RHF-RHS%20U...
Facebook banning you due to some vague ToS? No problem, your access to Facebook isn't protected by law. An app which can affect your investments and finances? I don't know if I'm this case it's legal or no, but that's a whole different level.
I see reports all over the place but it's hard to track whether some just blocked options or on the margin, which reports are true etc.
Edit: Best Ive found so far https://www.reddit.com/r/wallstreetbets/comments/l72tfu/robi...
E.g. like this one https://about.ads.microsoft.com/en-us/resources/policies/cla...
https://www.uber.com/legal/en/document/?name=general-terms-o...
https://twitter.com/redditinvestors/status/13548442017211965...
There's a huge chasm between "I'm friends with a lawyer" and "we are preparing a class action suit."
Robinhood customers are a small percentage of the shareholders truly harmed by these actions.
https://mobile.twitter.com/cvpayne/status/135482042821721293...
[0] https://twitter.com/convalytics/status/1354859301924438021
I don't mean that as some pithy throwaway, I mean that they lack the resource and ability. It is quite possible (and quite easy) to buy and sell crypto without ever getting involved with a KYC privacy invasion. A crypto transaction involves sending a few hundred bytes of data onto a distributed network, and good luck shutting that down.
Keep in mind that governments historically have a poor record of preventing people from sending and receiving data they'd prefer you didn't.
And it used to be the same way for bank accounts. Now it isn't, because the government decided that it didn't like that.
At some point the crypto needs to be converted into USD - either so you can pay someone who doesn't accept crypto, or so the business who accepted crypto can deposit safe nonvolatile USD into their bank account. And the government will regulate it there at the transfer point.
The other option is that a cryptocurrency replaces USD, becoming the new de-facto currency. The government and the people/corporations who are in control of the economy won't allow that to happen. I don't think that last claim needs to be backed up with any more facts/arguments, it is very obviously true.
It is not a truism that "at some point the crypto needs to be converted".
A stablecoin like DAI obviates the "stability" reason for converting back to fiat and getting further involved with the financial system, and as more people accept crypto for goods and services, there exist fewer reasons to convert out.
I'm not some BTC maximalist who thinks you'll be buying your groceries in crypto anytime soon, but for anything that can be transacted online, or between friends?
We already exist in the timeline where if I want to buy a thing, I can send (with some care) mostly anonymous value to someone to pay for the thing, and there's nothing any government or other person can do to stop it. This isn't some future goal, this is right here, right now.
This is not happening. It's been more than a decade now. I could also argue that the reason the few cases where you can actually spend cryptocurrencies have remained is simply that the volume is too small for the authorities to care, especially since they can just start regulating once it matters.
You're not addressing OP's point that in the end, you want to spend the currency within the legal system if you want to buy something other than cryptokitties. Or to go back to the main topic, you have to go back into the legal system if you want to buy shares. If the authorities declares that you have to buy your shares with USD, then you have to buy your shares with USD.
In addition, at some point your virtual money has to be turned into something physical or else what's the point? And those physical goods can be monitored and irregularities can prompt questions.
I'd call that a success for cryptocurrencies. If a portion of that success can be achieved in normal, everyday transactions, then we would be in a much better world than we are today.
For instance how do you ensure that a token representing something in the real world will still represent it when the authorities start looking at it and decide to shut down the entities guaranteeing that you can reclaim an actual share in exchange of an ERC20 token?
Or to summarize: which problem does it solve?
Then we sue Citadel & anyone else who was buying in bulk while we could ONLY sell. That is the crime.
They won’t have enough $ to cover that & cover the naked shorts they have lent out. Then we sue Citadel who we didn’t sign any contract w
https://mobile.twitter.com/LJMoynihan/status/135483683016900...
I did not authorize a cancel order.
I am not associated with any formal organization and i am an independent investor
Sheriff of Nottingham™
Wsb people knew this and exploited it, just like a hedge fund could do. However they don't have the political power of a hedge found so are now getting screwed by only being given the ability to sell not buy.
People on wsb knew exactly what they were doing. But we're stopped because some big institutional investors don't like it.
Institutional investors exploit retail investors all the time. They don't like it when it's the other way around.
Robinhood prevented buying. That is very, very different than stopping trading. While Robinhood's action might not legally be 'market manipulation', it certainly does result in the market being manipulated. People who were not using Robinhood would have their PnL significantly affected since a lot of pressure on the stock price was coming from buyers on RH.
“they’re a private company they can do whatever they want”
but now they want protection of users rights
Initially it would say the stock ticket is wrong then after trying a few minutes later I trying short selling it would say the margins are not met (however I had more than 1000% margins) and finally it said the trading is restricted because of high volatility.
It does seem like there was some outside intervention:
- Multiple brokerages making these types of decisions, not just one
- Brokerages appearing to improvise (i.e. looking strange, maybe not tested out much beforehand) technical ways to send this new message
- Brokerage messaging and decision-making policy appearing to be volatile by itself (!)
- Claims (nothing substantiated) that e.g. government heads were involved in making the call
These factors seem to add up, so it's interesting to watch this unfold.
https://www.reddit.com/r/wallstreetbets/comments/l6wrig/you_...
And attorneys wonder why we're held in lower regard than used car salesman.
Being free doesn't allow you to commit crimes.
But sure, sue Reddit too if you want.
You'd still have the RH manipulation.
The entities that altered the price were notably - the shorting hedge funds and the broker that failed to do its job ( broker trades) in a blatant conflict of interest.
A contract is only valid if its clauses are legal. TOS are regularly deemed invalid by regulators/courts and contracts made void. Ask the EU and their huge fines on FAANGS...
But besides that in many countries (idk. about the US) TOS are quite more limited in what they can contain then "normal" contracts. E.g. if you write in that the user agreeing to it must allow the company to buy their house (if they have one) for marked value anytime the company wants would be not legal, but could be legal in a contract. (And could also be non-legal in a contract under some circumstances).
Anyway it's widespread and common for TOS to contain non-legal clauses which due to the way a TOS is made are as if they are not written in there (i.e. they just invalidate themself not the whole contract).
So in the end the question is:
- Is it directly against a law/regulation, in which case TOS doesn't help at all.
- Or if it's not against law per-see is it still not legal because it's in the TOS and due to <enter TOS related laws> not legal binding (I wouldn't put hope into this in the US, but I don't know US law wrt. this aspect).
https://cdn.robinhood.com/assets/robinhood/legal/Robinhood%2...
The store owners, generally in favour of large crowds, are likely to agree because they don't want to be mobbed either.
None of the companies involved here want their stocks to go on crazy volatile ride, it benefits almost nobody.
People are conspiratorial about evil bankers pulling strings to stop this when basically everyone wants it to stop.
Why do these people stampeding through the market thing that they are helping? It's very likely that the companies on the receiving end of this volatility want nothing to do with it.
(1) If you're buying GME today, there's good (~50%?) chance you'll lose most of your money in two weeks. (Of course there's also a decent chance that you'll make out like a bandit, but I'm not worried about that.)
(2) Moreover, if you're buying GME today, there's a very good chance that you're utterly convinced that you'll make a lot of money.
(3) So, in two weeks, with high probability, these people will flood Robinhood's customer support, and something tells me that they won't take "What do you mean? You made your trade entirely on your own, and nobody can guarantee future prices!" as an answer. (Supporting evidence: see today's talk of lawsuit.)
So, given all this, Robinhood is just limiting the amount of headache it'll face when the shit eventually hits the fan. Sound like good business decision to me.
It seems classist and doesn't really line up with my concept of the free market.
I agree that it's a problem when "too big to fail" players get away with their shenanigans, but that's a separate problem, and you don't solve that problem by encouraging common folks to gamble away their wealth.
People should be permitted to buy publicly traded corporate assets. Your gambling analogy doesn't apply here. Robinhood saw fit to approve these people for brokerage accounts (and in many cases options trading). They were allowed to walk into the exchange so to speak, up until the point that they found a favorable position that they wanted to keep trading despite elevated volatility.
It's not the government's job to tell one class of people that they cannot participate in asset markets, while repeatedly bailing out a totally different class of people that blunders its role in the very same markets.
https://www.reddit.com/r/wallstreetbets/comments/l6omry/an_o...
Even IF you are to assume this is a simply speculative "greater fool" scenario Robinhood just ensured through their interference that the last buyers are less likely to profit.
Robinhood's job is not to police transactions it is to process them. That they would do this for a few million $ in potential customer support time is so naïve.
Letting them off the hook for illegal manipulation because "it is a headache" is one of the stupidest arguments I have heard.
Robin Hood is a brokerage. It is totally normal for them to have clients which (unwillingly or, in this case, willingly) have lost money - their customer support should handle this just fine. A lawsuit for allowing normal trading is going to be laughed out of court; this, on the other hand, will not be good for them, no matter how the lawsuit turns out. Not to mention that the SEC will take a nice long look at what happened here.
If customer support overhead would be their actual worry, they could've simply implemented a large checkbox saying "THIS STOCK IS HIGHLY VOLATILE. YOU _WILL_ MOST LIKELY LOOSE YOUR MONEY. Continue at your VERY OWN risk" and be done with it (you might argue this is still somewhat manipulation, but that could've easily been done in good faith).