Class Action Lawsuit Filed Against Robinhood
yumpu.com
yumpu.com
The earlier thread about class action is https://news.ycombinator.com/item?id=25945447. Not sure if these are the same class action or just the same class action class.
The current thread is paginated like all the other big threads. If you want to see all the comments you'll need to click through the More links at the bottom, or like this:
https://news.ycombinator.com/item?id=25947814&p=2
https://news.ycombinator.com/item?id=25947814&p=3
(and so on)
Citadel and gang operate this casino. If they think they're losing, they change the rules so they aren't.
What it tells me is that they're getting increasingly desperate if they're willing to brazenly manipulate the market like this. Seems like they didn't close out their short position, like they claimed they had 2 days ago. It'd be interesting to see if the casino wins this game.
This will be the end of wall street. Or at least, the end of companies like Robinhood. Faith in American systems were already at all time low after last four years and now with this kind of market manipulation at the expense of retail investors, American stock market will be bust. There is zero reason to play in this casino.
Gambling socially, I enjoy. Playing poker with the guys, typically. But the stakes are absolutely tiny, so we really are just playing for fun.
However, I believe that everyone has a sacred right to destroy themselves in any way they like. If they choose to ignore conscience and indulge in gambling, it is on them.
People say this and chuckle about how witty they are but it's the only "tax" that we let billionaires extract from the poor and act like we're okay with it.
If you got a bunch of spare money, enjoy the stock market.
pension funds arent going to stop putting money into private equity, today will just make people less inclined to go retail
I could see a lot of money leaving wall street for emerging markets over the next 10 years but I dont think a full divestment from american markets will happen in my lifetime
At the root it’s nation state currency being manipulated.
Like in 2008. Privatize the gains and socialize the losses.
The entire ledger needs a wipe. It’s pure emotional bias to suggest the future is obliged to carry the debt of the past. There’s nothing in science suggesting such a truth exists.
[0]: https://www.fool.com/the-ascent/research/online-brokerage-st...
[1]: https://www.brokerage-review.com/investing-firm/assets-under...
EDIT: Added concession in last line that not all in the top 5's AUM is retail, but the point still stands.
Personally, not a fan of the casino metaphor.
Market manipulation is not new, and it's not impacting most retail investment strategies, which are much longer term. This is exposing inequities in the market that have existed for a long time, but I would be shocked if it has a significant impact on the assets of retail investors. As others have said, what other options are there? The game is imperfect, but that doesn't mean everyone stops playing all the sudden.
I was able to trade GME all day on E Trade without a single issue.
I think SEC greenlighted what in my view amounts to a highly illegal action by Citadel/Robinhood (as i think Citadel still has exposure, probably indirectly, on the short side). The situation in its nature does look like the CDS calls which caused the 2008 crisis. I think some "too big to fail" players wrote a humongous amount of GME/etc. uncovered calls (and similarly structured contracts) in the previous months which now threaten to take them down. I mean writing the $100-200 GME calls were practically free money back then while these days it has materialized as the tens of $B liability. Similar to CDS - the statistics practiced on Wall Street permits to have tremendously huge potential liability if it is at a very low probability. When such a low probability event happens though ... hopefully you're too big to fail and the system would then step in to save you by socializing your losses in some way.
So, before going outright bailout road which would be tough politically, i think big people decided to try to spread/socialize that "too big to fail" players' loss among the retail investors, and thus the stock buying block for retail investors (i'm voting with my dollar - have a bit of long of AMC).
People have been attempting a short squeeze all week. Short squeezes are illegal. By allowing a short squeeze to continue with no action, Robinhood would have been taking on massive legal liability for aiding and abetting illegal activity.
Shorts got greedy and got caught out. Should short sellers not have any downside to their trades?
I guess the billion dollar question is, legally: does buying stocks in anticipation of a short squeeze, and communicating the same to others, count as manipulation?
> Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal.
Also, can you use Clojure to cause a short squeeze, or... [ducks]
The question I think would rotate around whether this is 'a scheme to manipulate', or simply identifying an opportunity to capitalise on Melvin's greedy position.
Oh please. As if whoever has their thumb on the social media scale isn't greedy. Greed runs the street in longs and shorts. You can invest modestly by diversifying and avoid all that.
I heard (from a non-authoritative source) that the coordination on reddit, etc. is not manipulation.
Also: If a big hedge fund shorts a stock, expecting to drive its price down, that's cool. (Search "big short drives down stock price")
But if regular people buy a stock expecting to drive its price up, that's terrible.
Sorry, this position just isn't credible.
I don't know if it is or should be illegal but I can see why it raises some questions.
No, you're betting on the stock's future performance, not the company's future performance. There's an ocean of difference between the two.
If the company does poorly, but the stock price rises, or stays the same (Say, because we're in the middle of a COVID recession, and the printing presses are working overtime), you're going to lose a lot of money.
How do you know that everyone who bought it actually doesn't care about Gamestop's worth? There isn't really any way to prove that every single person (or even a majority of people, or really even a good portion of the people) don't care about GameStop's success and are solely doing it as a metagame.
Sure, there's threads on WSB about this, but there's no real way to tie that to actual transactions, and not everyone who has bought stock even contributes to that subreddit, let alone the specific threads about this.
Furthermore, all it really takes is someone saying "I bought stock because I believe in the company". We don't have thought police; unless someone explicitly posts "I, RH account XXX, bought the stock in a concerted effort to short it" there's no real way to prove intent.
It says market manipulation is illegal. It is not particularly clear whether a message board getting excited about a short squeeze does not count as something that "may occur naturally".
Please source the following comment:
> by continuing to allow trades, Robinhood was taking on major legal risks
There is no one else sharing this talking point that I can see.
I will continue to call you a shill. Please see my comment history to understand that this user is quite interested in spreading misinformation, and given their previous topics, looks to be being compensated for doing so.
Obviously not the reason, since they posted a blog saying they did it to protect consumers from volatile stock.
(Many said they'd never fly United again, and most people wouldn't... United share price dropped a bit, then went straight back up to where it was and beyond. Well, until COVID-19.)
Edit to add: BTW, the point is not that you should always read the TOS. The point is that you should read the TOS before complaining if something unexpected happens.
There is also the problem that reading every ToS is a denial of service attack on customers.
Evidence? The interview below (with CEO of broker Webull) claims that the clearing firms cannot (or don't want to) cover the increased cost when clearing these trades, and told many brokers that they won't open positions anymore, due to the two day settlement delay.
In other words, an entirely innocuous explanation.
it is short-sellers who need to pay up the margin calls etc. the way short selling works, it can create crazy leverage
it is definitely a lie
Yes. DTCC changes collateral requirements on securities all the time [1]. The collateral requirements they put on GME aren't even that egregious. Robinhood just didn't want to pay up.
[1] Literally, every day. But the haircuts they apply to the last day's market prices are also quite variable.
Stopping margin trading, absolutely. Stopping short selling, of course. But we’re not talking about either of those things. We’re talking about cash-funded limit Buy orders on a duly listed publicly traded stock.
See [1].
Long story short: Robinhood lets you buy and sell a share instantly. In the real world, those trades take days to settle and clear. To bridge the gap, Robinhood loans you the difference. And Robinhood, in turn, is "loaned" [2] some of that difference by the DTCC.
So when the cost of that loan goes up, their costs go up, and they responded to that cost pressure by turning off trading. (There are other options.)
[1] https://news.ycombinator.com/item?id=25950361
[2] In quotes because it's technically a collateral requirement. If you sell $100 of stock, DTCC may tell Robinhood it only needs to put up $2 of stock as collateral while Robinhood gets the rest from wherever it's getting it from so it can pass it along to the next person. The $98 is "loaned," as in it's owed to DTCC. If Robinhood fell down, DTCC would sell that collateral and buy the rest of the shares in the market. In this case, DTCC said "these shares are super risky, and may lose all their value in a heartbeat, I need you to hand me 100% of the shares you say you are selling when you sell them." And Robinhood said no. Because that's expensive.
[a] DTCC says put up $100 per share because DTCC is not a lender either! It has lines of credit with various banks. And the banks bear the risk of the loan defaulting. So they're setting their rates and then DTCC draws from the cheapest line.
Question, why are we operating near-real-time settlement systems for securities if it doesn't eliminate such risks? I don't understand why these transactions aren't being netted and conducted as close to real-time as possible.
This aspect of the economy seems like a significant vulnerability.
I don't see the lack of real-time-settlement as a vulnerability so much, but more the mismatch. But I'd suggest fixing it not by increasing the frequency of settlement, but by decreasing the frequency of trading (Tobin tax (which, funnily enough, is also called Robin Hood tax [1]); replace continuous trading with a couple of auctions a day; ???).
Side note, I am against the Tobin Tax. I think public markets are more important than most folks believe.
I do believe that frequent trading is a good thing, as is retail participation in markets. One of the amplifiers of income inequality, I suspect, in the past few decades has been the fact that high-growth companies that normally would have gone public sooner have stayed private for longer, denying participation from the public market.
For example, a well chosen index of Dot Com stocks that included Amazon, Google, E-Bay etc. picked in 1998 would have, provided there was continuous investment and a long-hold, injected a large amount of capital back into the public and retirement systems, which would have helped lift all boats so to speak.
AMZN was originally at around $4/share (adjusted for splits, provided this data source is correct, https://www.macrotrends.net/stocks/charts/AMZN/amazon/stock-... ), if you had bought 1k stocks of the company in pre-2000, and held until now. Your originally $4k position would be worth 3.2M.
That's quite crazy. And it's retirement money for a lot of people.
Amazon's growth has occurred in the public, giving retail investors the ability to tap into the formation of new wealth. SpaceX's, AirBNB's, DropBox's etc hasn't. They're playthings of the well heeled. Not the gumshoes.
We need to re-orient public markets in such a way that everyone gets to participate in wealth creation. Not restrict it even further.
On the frequent trading, let's agree to disagree.
On retail participation, agreed. But I don't think that the Tobin Tax would inhibit it, but rather HFT and maybe day trading.
Fully agree that this new thing of companies staying private longer and longer is a bad development, with the best deals available only to the few connected and wealthy.
The firms that provided instantaneous-seeming settlement got the orders. And settlement failures were rare and correlated enough that avoiding them wasn't a differentiator. Then we got centralized clearinghouses and deposit insurance and the risk fell so far into the background that it's entirely novel to many market participants today.
> why these transactions aren't being netted and conducted as close to real-time as possible
It is technically difficult. It provides less room for correcting errors. And because real-time payment rails are fundamentally more expensive than batched rails, and if your payments aren't in sync with your settlement you've got a credit component somewhere.
> seems like a significant vulnerability
It does, but I don't think it is. Clearinghouses spread risk across a lot of people. They also help early identify daisy-chains, e.g. a single broker sold ten shares to ten brokers who then sold it to ten more fifty times and that single broker hasn't settled yet, and loops, e.g. I owe you and you owe Larry and Larry owes Bob and Bob owes me, of settlement risk. That's why Dodd-Frank moved many derivatives onto centralized clearinghouses.
That said, we've only had these since the 1970s. Counterfactual: we didn't have the technology to do this until the 1970s.
A part of the reason why the Automated Clearing House system was setup was the collapse of Herstatt, which was a settlement failure that led to the global push for RTGSes.
It is not that difficult to imagine another such storm. A heavily shorted stock, where retail traders "rally" to stick to the man and buy + hold on to the majority of the stock in circulation. And then the shares left in pools + the open market aren't enough to cover everyone's position. Creating a cascading failure.
I’ve been looking at settlement also and am particularly interested in overnight Interest rates. https://en.m.wikipedia.org/wiki/Overnight_indexed_swap
This past years changes at the Fed for Central Bank Interest Rate Swap Lines and 9 new banks, which included Sweden and others. https://www.federalreserve.gov/newsevents/pressreleases/mone...
The dollar is running the world right now. Lots of demand even as, or maybe why, the value has been weakening. https://www.marketwatch.com/investing/index/dxy
Curious when the dollar running the world will begin to change. The US dollar and CN Yuan are the only countries keeping us with positive, basically zero, interest rates globally (See IMF SDR) https://www.imf.org/external/np/fin/data/sdr_ir.aspx
Lastly, Power to the Players! Still looking for more short squeeze on the GME shorts, would like to see them get pushed down to a reasonable level of the float (5-20%?). I’m holding.
I don’t think the problem here was with too many trades. Very few Robinhood accounts overall have over $25k balance.
I guess I can’t see where the risk is. Shares are moving electronically between different ledgers as orders are fulfilled. Shares aren’t being created or destroyed, nor is money.
I can definitely see how you could end up with large net cash flows that need to settled over the next 48 hours, if Robinhood accounts are collectively gaining or losing huge percentages of their value from one day to the next. But I don’t see, absent allowing margin or naked options, how they could ever end up owing more than they actually have on hand in their custodial accounts.
I would possibly believe that Robinhood didn’t have the technical controls the fix the problem that they were having the “right” way, and had to resort to their “least worst option”.
For example they should have the technical controls to flag specific sales to prevent those funds from being reinvested until the particular sale settles. By free and clear settled cash should be able to buy any publicly listed share it wants.
Ah, this is the disconnect.
They're not. Shares and payment for them move within two business days [1]. In the meantime, both sides must post collateral as a guard against their failing to deliver.
You're a broker. Suzy has $20 in her account. Suzy sells a share for $10. She buys another share for $10. With the first trade, you have to post--today--collateral against that $10 for two days. With the second trade, you have to post--again, by close of business today--collateral against that $10 for two days. To keep things simple, let's assume Suzy did not use the proceeds from the first sale to finance the second. That leaves you with $20 of liabilities and $20 of cash.
Next day, Suzy sells all her shares for $40. Now you're putting up collateral against that $40 for two days. The $20 from yesterday still hasn't arrived from JPMorgan--they have until tomorrow. You now have collateral against $60 of liabilities. At the end of the day, Suzy makes a withdrawal request because she's a little shit. So now you have $80 of liabilities from someone who deposited $20 in her account and never had more than $40 of assets.
Clearinghouses use the last day's closing price to determine how much collateral you need to post. They then multiply that by some value that ranges between 2% and 100%, depending on what their line-of-credit lenders offer them. That is leverage. To manage that risk, the clearinghouse adjusts that multiplier. Going from 20% to 100% in the above example would mean going from $16 of collateral required to $80. That's $64 of cash you need to come up with before the end of the day or you're out of business.
If Robinhood operated with zero clearing leverage, they would not be able to offer the instant-trading experience their competitors have offered since the 1990s.
[1] https://www.investor.gov/introduction-investing/investing-ba...
I could be off here, but what I'm asking is getting at like if they are on all the sides of the transaction as market maker, participating or allow others to participate in 'betting', and clearing the trades themselves? Does a trade even need to clear if it's just moving internally changing col A owner ID from 1234 to 9999?
Sure looks like a rigged game to me.
https://www.bloomberg.com/news/articles/2021-01-29/for-robin...
Wait, is Citadel a big enough player as to influence the regulatory system, like on the level of JP Morgan or Goldman Sachs?
No. They barely avoided going out of business the last time around.
I don't think JPMorgan needed any government intervention. Goldman didn't directly, but if AIG had gone under so would they. (To be fair, so would the entire financial system.) But in the end, both of them got help.
Citadel didn't. It wasn't in that club. It is not now. If Citadel failed tomorrow, it would make headlines for a week, and then we'd move on.
Meaning 'too big to fail' applies to hedge funds now just like investment banks. Ala LTCM
LTCM wasn't making markets and it was done in by leveraged bets on Russian bonds.
The term you are looking for is systemically important financial institution (SIFI) [1]. BlackRock, with $9 trillion under management, is a SIFI. Citadel, with under $40 billion, is not.
[1] https://en.wikipedia.org/wiki/Systemically_important_financi...
JPM received $25B in CPP funds on October 28, 2008 and repaid it on June 9, 2009.
Aside from CPP, any bank that had assets affected by TARP purchases -- or by the potential that follow-on programs could affect those assets -- had its balance sheet ballasted in one way or another by government intervention.
All of the banks that survived will say they didn't "need" government intervention, for the same reason that they don't like to borrow from the discount window: it looks desperate to take help from the government. But technically both of those banks received an injection of liquidity via TARP.
They had the, "we didn't avoid the mortgage mess, we just made more money on shorts than we lost" and "we are very well positioned" emails that became evidence in the Senate investigation into the GFC. The ones are the namesake for the book/movie The Big Short.
There isn't, but I think one can make the case that there should be. At the very least, communication from Robinhood, from the exchanges and from regulators was piss poor. As a result, we have half the internet wrapped up in some Ken Griffin as Gordon Gecko Batman conspiracy theory.
Robinhood was criticized for marketing day trading to people who, to a large degree, didn't know better. The counterargument was people knew what they were getting into and were free to do it. Fair enough.
This adds a new wrinkle. It wasn't ever a day trading platform! A day trading platform should be able to handle high volumes. It should be able to handle increased collateral requirements. It should be able to handle some market makers going offline. What Robinhood did is contractually allowed. But it flies in the face of what they held themselves out to be.
Robinhood sold a turd doughnut, folks said "it's fine, I want a turd doughnut," and then the turd turned out to be uranium.
What they did was effectively form a public stock pool for the purpose of disrupting the orderly function of the market, and drive up the price beyond all reason. This kind of thing used to happen regularly a century ago until regulation was enacted in order to stem that kind of abuse. If the SEC weren't in what appears to be a coma, they should have enforced those rules days ago by completely halting trading in the stock. But it seems that falls on private companies now for some reason.
> Rigging quotes, prices, or trades to make it look like there is more or less demand for a security than is the case.
By restricting only buying, they effectively rigged the prices to make it look like there's less demand than is the case.
Legally this is nothing at all like not serving a specific brand of alcohol at the local bar.
IANAL, and I’ve only dipped my toe into studying FINRA while doing research on decentralized exchanges, but as I understand it, FINRA regulations impose a lot of requirements on brokers, particularly around fair dealing and around preventing market manipulation.
Do you know what short selling more than 100% of the available stock does? It's the same as if every single stock owner collectively decided to sell their shares. Worse 140% of the float was shorted which means the amount of people that sold their shares was bigger than the entire market. That's an extreme example of market manipulation and that is what happened to GME. It was trading at $4 per share when its fundamentals would value it at $20.
You're also forgetting that this started with the Chewy CEO buying a 13% share in the market because he wanted to turn Gamestop into a growing company. That was the day when short sellers should have started sweating but they kept shorting more and more. They could have made a lot of money by closing their positions. If they had done so they could have shorted Gamestop again once its digital business turns out to be a dud and short it again with almost no risk. Why on earth did they not do the responsible thing? Come on. It's extremely crazy what they did and it can only be explained by greed. When you short a stock from $20 or more to $4 the only upside left is that the stock literally goes to $0. That's a measly $4 when you already have safe $16 gains per share.
Unfortunately they failed to close their shorts and become rich. I don't know exactly how much Melvin Capital had in shorts but they probably could have made $3-6 billion off reasonably safe shorts. If they started at $3 billion they would have basically trippled their starting capital. That's a bitcoin bubble level of return with a fraction of the risk. It was almost guaranteed money.
Now enter greed. They never exited their shorts until recently and they probably didn't exit all of them. Other hedgefunds still keep shorting the stock even though it is going up astronomically.
How does wall street bets enter the picture? Wallstreet bets is just a place where your average retail investor posts some memes about how much money they have lost. They've grown thick skin and are willing to trade $300 or $600 with the full expectation of losing the entire investment. They absolutely love household brands. They shill Nokia, Blackberry and also Gamestop. Here is the thing. They know that short sellers are holding the bag and completely "overshorted" the market and put themselves into a really bad position of their own making. They started buying the stock because it fits with the WSB theme. They value the stock like a beanie baby. The stock itself is what they care about, not how much it costs and that means they will not sell their precious stock. It's like any other consumer good. They are basically decorating their broker trading apps with stocks and the accompanying losses. It's purely about fun.
Okay now lets go back to what you said.
> The only manipulation anyone is engaging in are the WSB people,
As I said they basically buy shares and hold them. What I haven't said is that WSB is a tiny fraction of the buyers of GME. There are lots of large institutional traders investing into GME. The only difference is that WSB types tend to be slow and just end up holding the stock way too long. Either by accident or intentionally. This idiotic slowness is actually very bad for short sellers because they bank on desperate people selling their shares in a panic. It's a situation in which the disadvantaged retail trader somehow does not suffer from his weaknesses.
>and they should be prosecuted to the full extent of the law,
They aren't breaking any laws. The short sellers are potentially doing illegal naked shorts. We don't know but considering that more than the 60 million shares are shorted its not impossible that 5 million of them are naked.
>and should be made to forfeit any and all profits made from this criminal scheme
What about the act of selling all shares in a market to artificially drop the value of a share below its fundamental value? Why is that not a criminal scheme? I'll repeat, if you let the short sellers get away with this then they can get away with anything. They can tank any stock simply through the act of shorting. If shorting 100% isn't enough then they'll go for %200. If that isn't enough they will short %300. There is no limit to how many shares you can short just like there is no limit to how much debt banks can create if it wasn't for reserve requirements. With this strategy you can reduce the market cap of any stock to zero. Think of destroying Apple overnight. That's what you can do with naked shorts.
>plus penalties and a permanent ban from trading securities.
The only counter strategy against an over shorted stock is to just buy it. There is absolutely nothing illegal about buying stocks. However, if you make it impossible to buy it then you basically make the short selling scheme self fulfilling because it has no natural predator.
It's pretty simple really: If you want to sell short a stock, you need to borrow it first. You can only borrow it from someone who owns the stock. But each short sale also creates a new corresponding long position that can again be lent out for more short selling.
Example: Let there be a stock with a float of 100 shares that you own. You are a long-term investor L1 who loans out these stocks (for a fee) to a short seller S1. S1 borrows the stock, and sells it to another long-term investor L2. There is now a short interest of 100 shares, or 100% of the float. But L2 can again lend out those shares to another short seller S2 who sells the shares to yet another investors L3. Now you have a short interest of 200 shares, or 200% of the stocks float. But absolutely nothing illegal like naked short selling has happened, because the sum of all short and long positions still equals the float of +100. That's simply who this works.
But now we have a bunch of ignorant amateurs spreading conspiracy theories while pumping up a largely worthless company to a ridiculous valuation. And that is market manipulation, because there is no fundamental reason why this stock should be this expensive. What's more, transacting in a security for the sole purpose of raising or depressing its price in an attempt to induce others to buy or sell that security is a violation of 15 U.S. Code § 78i. As hundreds or even thousands of posts on reddit and other sites will confirm, that is exactly what these people are doing. They are publicly admitting to the crime.
Regulators cannot let this stand, because otherwise you are encouraging more of this kind of market manipulation and abuse. An example needs to be made out of those who are responsible.
On top of that it turns out that the one person bidding is part of a museum that has a significant stake in the auction house.
Of course comparisons like that break quickly. But it is very obvious that market-makers (or other players behind the scenes) were extremly worried about the coming squeeze and did that to stop the stock from going higher.
Especially for something as complicated as security law, I'd expect to see an entire section on market manipulation laying out what the precedent says they need to allege to substantiate their claims and then detailing enough facts (or beliefs to be made good on in discovery) to make that claim credible. Without it, the complaint comes across less as "Robinhood clearly broke the law" and more as "I'm whining because I don't like the contract I signed with Robinhood."
[1]https://cdn.robinhood.com/assets/robinhood/legal/Customer%20...
This exact point turned up 4 hours ago in another thread:
Of course you might not always win. In the case of Robinhood, since people could still close their existing positions there might not be a very strong case to be able to prove damages. But to me it's still not a crazy lawsuit to attempt based on how many people were expecting to be able to use RH to buy this stock today, and that's what the legal system is there for.
Also the creation of the SEC was essentially to protect retail investors from speculative investments (that typically cleaned them out). It would be less likely to see a trade halt as going "against the people" but as a consumer protection practice, so it's doubtful it will be wagging too many fingers at RH.
Retail investors are RH's biggest customers. They're diminishing their risk of suits they'd likely lose/regulatory scrutiny by halting buys. The SEC will more likely hit you for allowing pumps rather than preventing them.
Trading halts are at the exchange level and stop _all_ buys and sells
What happened here is some brokers/clearing houses prevented _retail traders_ from buying, but not from selling
This is a specific broker—-one with direct financial ties to this trade, by the way—-totally shutting down the ability to enter an opening order for a specific ticker. Pretty unprecedented artificial suppression of demand.
Several did it. I heard WeBull did the same. I know I got a TastyWorks notification when they did it (and a little while ago when they turned it back on).
The more I hear, the less convinced I am that RH in particular did something nefarious.
Robinhood has no set rules, and it was impossible to predict when or if they'd halt purchasing shares. It was also not possible for Robinhood traders to know when trading of the stock would resume.
Also; Robinhood didn't halt the trading of GME, AAL, AMC, BB, and others. They just halted the purchasing of new shares. Robinhood tried limiting who could buy shares of those stocks to only the hedge funds. That would drive the stock price down, thus manipulating the stock price in the favor of Citadel / Melvin and their short positions.
Best investment money can buy is after-dinner speakers fees to people who then show up at the regulators.
Is the society already working this way?
Maybe the lawsuit will fail, but they will obviously take a giant reputational hit and it is fascinating to me that they chose to do that. What is the upside? The only thing that makes sense to me is that the owners of Robinhood have too much conflict of interest with the hedge funds that were losing money (and so are acting against the best interests of Robinhood itself in favor of their funders).
Alternatively, maybe they're being honest about it and what's going on at this point has nothing to do with hedge funds and everything to do with what appears to be a scheme to pump up the price and the people that are controlling the narrative sell first.
It's unclear what hedge fund is getting it stuck to them at this point, didn't they say they covered their position already?
If that is true, then it really does start to look like what started as an interesting way to penalize hedge funds doing this has turned into a bitcoin-style bubble. Which can also be a useful point to make, but a point that is completely disconnected from the desire to screw over hedge funds.
I personally am going to switch away from them to some other brokerage. Their app is very well made though so I hope the competition catches up
Lesson: don’t have an evil business model because it will catch up to you.
1. The problem with RobinHood's behaviour here, is that they are doing price manipulation (By only allowing sells, instead of buys.)
2. Price manipulation isn't really a crime against their customers, it's a crime against the stock market. Their customers will sue them, but probably won't get much. It's a bit hard to make a case for "You stopped me from trading, when I was planning on making a lot of money from trading, by cashing out right before a bubble popped."
3. The SEC is supposed to deal with crimes against the stock market. They may or may not sanction RobinHood, but I doubt the sanctions will be serious.
4. The SEC might look into the obvious collusion problems, where the owners of the GME shorts may have reached out to the exchanges/settlement networks, and tried to block retail traders from buying GME. This may or many not result in financial penalties. Even if sanctioned, this may be worth it for the owners of those shorts, because the alternative is bankruptcy, complete financial ruin, and the sale of their children, their grandchildren, and their great grandchildren into sixty years of bondage.
5. Your thesis is sound, but the SEC works with, and for large players in the market. Those players want a mostly-fair market. If the counterparty on the other end of these trades were not retail morons on reddit, the SEC might be a bit more heavy-handed in their enforcement. The thing is, most price rallies are not driven by retail morons on reddit... So, if your business plan consists of "Short a stock to 100%, then call up all the exchanges and settlement networks, and tell them to only allow you to buy stocks," there's going to be a lot of really wealthy counterparties to your trades, who are going to be really, really pissed, and you will probably lose all your money and go to jail.
#5 is unlikely to happen here, because the narrative around this is 'Ha, look at all the dumb retail money driving a bubble, we are just deflating it before retail traders get burnt.' And that narrative is partially true, which is why it's making the news cycles, and serious talking heads on the television repeat it with a straight face.
... Also, I would like to point out that there is nothing wrong with shorting a stock, or shorting a stock past 100%. Yes, it can trigger a short squeeze. No, I don't really think there should be rules against it, or against short squeezes. These are institutional investors, who surely must understand that short-selling a stock carries unbounded risk. If they wanted bounded risk, they should have bought puts.
They identify (possible) crimes, the Justice Department deals with them.
The SEC only “deals with” civil wrongs, not crimes.
There, fixed that for you.
> As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.
> To be clear, this decision was not made on the direction of any market maker we route to or other market participants.
I smell bullshit. These are long positions, these aren't options, or trades on margin. Robinhood, and its settlement network (As well as other exchanges, who have stopped retail traders from buying GME) carries effectively no risk for settling buys and sells in them.
Basically so many shorts were sold, way more than what exists when trying to cover them, the cover would fail, the clearinghouse would raise the margin rates of Robinhood so much if this kept happening that it would cause them to go out of business.
It sounds like nonsense, because what she's describing is not Robinhood's problem. The shorts are predominantly being done by hedge funds (with only a few retail investors here and there). Hedge funds aren't trading on retail platforms, like Robinhood. It's not Robinhood's problem that the hedge funds are being eaten alive on margins, or if the hedge funds are having problems with the clearing houses.
If margins, and the Robinhood/clearing house relationship were the problem, then Robinhood would stop people from opening new margin positions on GME. But that's not the case, here. They are preventing people from entering non-margin long positions.
Do you have a different take on this?
Edit: https://news.ycombinator.com/item?id=25951475 seems to be a different take on this. One that makes a lot more sense then the lady on television. The tl;dr of it is that even for a simple, non-margin stock trade, RobinHood needs to put dollars up as collateral... And they ran out of dollars.
Order books have been nationally integrated since 2005 [1]. This is how independent HFT firms got their start.
this would be illegal. Any evidence this happens?
Remember "too big to fail"?
This kind of blatant manipulation is the first time. And yes if they get away with it, chances are that they will do more of it.
IDK... I'm probably missing something about norms or precedents, but allowing selling and not buying is not just brazen. It's straightforward enough that the average person is incensed and understands specifically why. This isn't systemic risk and turtle stack complexity.
This is probably my info-bubble, but nihilistic rage of WSB seems to be spilling out into the world. The social media (dischord/reddit) aspects, hedge funds, markets/brokers... it all adds up to symbolic whole that has ordinary people cheering on a bunch of maniacal gamblers. The SEC is looking more like a belligerent than a regulator.
Remember that the SEC is, first and foremost, a bunch of cowards.
I think it’s the other way round - there are millions of people who feel disenfranchised, cast away, left behind. Their rage has been manifesting in events such as Brexit & the election of Trump. Currently the most visible expression is the GME saga, but the undercurrent of rage is the common factor & I expect it will be more common & more obvious over the next few years, as the elites try to pretend it’s back to business as usual.
I want to agree with you, but I have to say that some of the most rabid Trump supporters I know are fellow software engineers earning at least $150K a year, and sometimes much more. What do they feel disenfranchised about, cast away, or left behind?
I agree that it's part of the explanation, but it seems to me like there's far more than that going on.
Not all BLM supporters are black.
That's the Congress of ten years ago. Today we have both parties reeling from a populist revolt and anxious to avoid another one (even as they cynically try to get as many points in as possible). Case in point: among the usual suspects tweeting we heard from one Donald Trump Jr.
I doubt that they'll do what WSB wants (whatever that is) but I think there's a relatively good chance of some significant legislation coming out of this.
Robinhood seems to have reversed on buying GME, though, at least for now, which pretty much invalidates the lawsuit (but doesn't prove it was useless).
And we're seeing politicians jump on the bandwagon so they can get-- so they can start trending on Twitter. But in reality, what's going on is that there is a two-day settlement between if you buy the stock today, those brokerage firms that you bought that stock on have to fund that trade with the clearing central house called DTC for two whole days. And because of the volatility of stocks, DTC has made the cost of the collateral of the two-day holding period extremely expensive.“[1] from the CEO of Webull.
[1]- https://finance.yahoo.com/video/heres-why-robinhood-restrict...
Edit: Non amp link.
https://finance.yahoo.com/video/heres-why-robinhood-restrict...
The Depository Trust & Clearing Corporation settles most listed securities transactions in America; in 2011, it did $1.7 quadrillion [1]. You've never heard of it unless you're a professional trader, but it's actually quite fascinating to read up on.
Trading looks instantaneous. But settlement takes a few days. In between are a series of credit agreements. From your broker to you. From the clearinghouse to the brokers. DTCC is the clearinghouse. Robinhood is the broker.
There are clear rules and contracts between DTCC and its members, including Robinhood [2]. Those contracts ensure that when you buy shares through your broker from a Robinhood customer, if Robinhood falls down two days later, there is collateral sufficient to make you whole. Those collateral requirements change in reference to, amongst other things, the volatility of the security. (If something goes up and down more, ceteris paribus, small mistakes are more likely to become firm-ending ones.)
Again, these are well-known formulas. Unusually, however, Robinhood didn't build this into their fee model. Given market makers, their revenue source, stopped making markets in GME on account of how volatility effects their risk profile, executing GME trades would leave Robinhood sending orders to an exchange, which may cost money, and ponying up collateral, which also costs money.
In my opinion, that's what they should have done. Most brokers have policies for these situations. Higher brokerage fees for securities on a schedule. Not making shares and cash from trades available until the trade settles, sort of like what banks do for large cheques. But I don't know if Robinhood is able to do that quickly. So instead they pulled the plug.
[1] https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...
[2] https://www.dtcclearning.com/products-and-services/settlemen...
Also, another user shared a link above where Robinhood claims there are two types of brokers, introducing and clearing, and describes themselves as the latter[0]. Is that at all relevant here? If I understand correctly, "clearing house" is still a distinct concept that is very much involved.
[0]: https://robinhood.com/us/en/support/articles/whats-clearing-...
> Robinhood claims there are two types of brokers, introducing and clearing
Clearing brokers interface directly with the the clearinghouse, i.e. the DTCC. Introducing brokers clear through a clearing broker. (Who in turn interacts with the clearinghouse.)
Isn't this meant to be the reason for the "Chinese Wall"? In theory, Citadel as a brokerage is meant to have no insight into the operations or needs or desires of Citadel Hedge Fund. The technically correct answer here seems to be "not my problem", however... not so much.
And when they have literal billions on the line a slap on the wrist fine is preferable.
If I'm understanding (i might not be) this is why it feels like fraud/not following fiduciary responsibility to their clearing partners.
--
Does citadel clear their own trades? I could be off here, but what I'm asking is getting at like if they are on all the sides of the transaction as market maker, participating or allow others to participate in 'betting', and clearing the trades themselves? Does a trade even need to clear if it's just moving internally changing col A owner ID from 1234 to 9999?
I don't think you understand how the options market work. Several of the large spikes on Friday and the past week is the result of MM (like Citadel Securities) having to purchase shares to cover the naked calls they sold.
If you think options dealers go around taking massive unhedged directional bets then you are very misinformed. I don't have any inside knowledge but i'd bet a pound to a penny the options desks have been making out like bandits this week.
More money quotes:
ANTHONY DENIER (CEO Webull): [...] our clearing firm simply cannot afford the cost to settle those trades. We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can't afford the cost of that trade clearance. That is the reason why these stocks are coming off. It has nothing to do with the decision or some sort of closed room cigar-- smoke-filled cigar room of Wall Street firms getting together to the dismay of the retail trader. This has to do with settlement mechanics of the market.
ZACK GUZMAN (interviewer): [...] We had the CEO of Robinhood on yesterday kind of talking about why they were taking a different tact [sic] and not restricting trading because, you know, they wanted to leave it to their individual retail investors to make these decisions. Didn't want to step in and fuel into the nanny state idea. But what about maybe curbing this a little bit earlier? Because the fact of the matter is, you're going to have retail investors who are now kind of on the hook, who might want to dump some of these shares, who are stuck. And it seemingly looks like some of these moves have now triggered the bubble bursting. So what do you say to that?
ANTHONY DENIER (CEO Webull): Well, that's absolutely false, actually, Zack. There is no way that a customer would not be able to sell a position they hold. We are simply stopping opening of new positions. Liquidations can happen at any time. This is general market mechanics. We have customer protections in place. We would never stop a customer from being able to get out of a position.
[...]
I think when you say the regulators stepping in, it will happen on both sides. It's going to happen on looking into should a hedge fund be allowed to get a 10 times leverage and short 140%, 150% of a company. Should that be allowed in a regular-- you know, in a healthy market.
And then, on the other side, should it also be allowed to have mob and herd mentality of rolling into stocks? And should these things be curbed? Look at the examples that happened overnight in Australia, where a mining company, GME in Australia, was up 100% overnight because people just blindly went in on anything GME without reading below the headline.
Edit: screenshot from reddit: https://pbs.twimg.com/media/Es1pb5KWMAE19CD?format=jpg&name=...
In fact, when I look at the stock chart on Yahoo the lowest value $GME had was $126!
It looked more like, what happened was you had retail investors that couldn't buy securities, but Robinhood was allowing them to sell them to make them available to customers in order to clear leveraged short positions.
This seems unconscionable given the >300 point volatility today and the large number of brand new investors.
It’s hard to imagine how these actions didn’t benefit wallstreet at the expense of regular people.
Sounds like market manipulation to me.
This is a problematic statement. Because to sell your position there has to be buyers, and the only buyers who were allowed at the table suddenly were those who wanted to pay significantly less then the stock had recently been trading at.
But still, I think that there are legitimate factors for why Robinhood stopped taking buy orders for those stocks, like ensuring liquidity through clearinghouse deposits while trades are underway.
If one is not the customer, then they are the product!
Any valid argument that would cause another clearing house to not be able to afford to handle these orders would seemingly-equally apply to Robinhood's own clearing house; no matter who owns it, the clearing house can't afford to go broke.
If someone is arguing that Robinhood should have the risk tolerance and reserves of a larger financial institution in order to service high volatility trades.... then maybe that person should use a larger financial institution to place these high volatility trades.
It seems that Robinhood does its own clearing (maybe not for everything?), cf. https://robinhood.com/us/en/support/articles/whats-clearing-..., so the story is probably a bit more complicated there. Could still be a similar dynamic, of course.
That is another explanation beyond the 2 day settlement window that Webull published.
It's absolutely unclear if that's the case here, and in fact based on the few extreme times short selling has been illegal I'd say this definitely does not get there.
Nope.
If some dude in an expensive suit gets on TV and says a stock will fall then buys a couple billion in shorts and you do the same because you like his style the two of you aren't scheming to make it happen.
Likewise, if some guy in his basement posts on an internet forum about how he's sure a stock will go up and you feel compelled to buy some too you're not scheming.
Finally, if millions of people are collectively motivated by the idea that they just really dislike hedge funds, want to make some money, and maybe want to watch the world burn, so they buy into an increasingly ridiculous idea they're _still_ not scheming because they all made the independent decision to do so after doing what amounts to each individual's 'due diligence' and are not entering or exiting the position in concert.
The risk was there when these funds shorted 140% of the stock. Retail folks noticed the potential for a naturally occurring squeeze and shared the info with world.
By contrast preventing a million people from buying a stock at a critical moment is clearly manipulation.
"Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal."
If your "short squeeze" is dependent on people buying more in order to create a short squeeze, then you are just coordinating to create a short squeeze, not dealing with a "natural occurring" one.
Obviously the blocking of buys will have an effect on the price and availability of the stock. Not that it provides any reasonable justification for RH either way.
> If your "short squeeze" is dependent on people buying more in order to create a short squeeze, then you are just coordinating to create a short squeeze, not dealing with a "natural occurring" one.
Even if you want to buy the stock because you know there is a short squeeze ongoing, that is not illegal. That is just analysing the market conditions and seeing the obvious.
Who said that was the situation though?
The problem is that buying the stock became something that was largely barred from retail investors, while institutional investors faced no such issue. Indeed, when a stock can only be sold, that means it can only go down, so the pressure of the short squeeze was alleviated as a natural amount of selling occurred while buying was artificially deflated by multiple brokers and entities preventing retail investors from purchasing a stock that was > 100% shorted.
This was guaranteed money for these traders too, the short squeeze was already on - the shorters were on the hook for this money.
The fact that there are huge financial relationships across the chain from one of the biggest shorters of the stock all the way to Robinhood makes this the controversy it is today. The market prevented natural market mechanics dictating a short squeeze that was already on.
I'm honestly having trouble grasping what you and others think could possibly be illegal about this. Short sellers aren't prohibited from losing money by law.
This is the first time in all this crisis that I see anybody say that short squeezes are illegal. Can you elaborate? What's illegal about them?
They have happened many times. I rememeber the VW one a while ago, and I don't rememebr anybody saying they were illegal.
Edit: Right, I saw the link now. Very interesting, thanks.
[0]: https://news.ycombinator.com/item?id=25950680 [1]: https://news.ycombinator.com/item?id=25950493
If you wouldn't mind reviewing https://news.ycombinator.com/newsguidelines.html and sticking to the rules when posting here, we'd be grateful.
If that's true (never assume something coming from Twitter is true without verifying, so it's still a rumor by now) then I don't see how "it's too risky" explanation holds. And of course selling somebody's property against their will is a fraud, at least on the face of it (IANAL).
Edit: screenshot from reddit: https://pbs.twimg.com/media/Es1pb5KWMAE19CD?format=jpg&name=...
By preventing people from buying shares, the short-sellers have less competition to buy the available shares, and will have an easier time getting them, while paying less for them. Robinhood seems to be manipulating the market to make it easier for Melvin Capital to cut their substantial losses.
Could it be that other trading platforms use the same clearing firm?
For a small brokerage, they would have to work with other brokerages to help them trade, as they wouldn't have enough shares they already hold to trade them within their users. So Robinhood asks Apex for more shares, and Apex has to ask HSBC/Fidelity/JPMC/Goldman if Apex doesn't have any. At some point, all the other institutions also don't want to give up their shares because they need to satisfy demand from their own users. Trading with other firms tends to be really slow too.
It's a short squeeze too, by definition there's not enough stocks available for everyone who wants to buy. So some firms ran out and couldn't get more.
Same with doing your own clearing, there's complexity involved with clearing and maybe you don't want to implement it all yourself when someone does it better for cheaper.
It's like asking why we don't all program in assembly all the time, or even have the option to mix assembly into our high level code. It's just nice having layers of abstraction that handle the annoying stuff for you, even if there's a minor cost. Why have complexity you don't expect to need?
That's... not how stock markets work. For every buy there must be a seller. If there are too many buyers but not enough sellers the price simply goes up.
https://blog.robinhood.com/news/2018/10/9/introducing-cleari...
Jesus, it kind of shows how corrupt the US really is. We're all basically watching a bunch of people commit crimes that from my quick Google carries a max sentence of 10 years with billons of dollars on the line and we're all pretty sure they're going to get away with it.
Though, I do think if Biden makes sure the justice hammer comes down on this, it'll win over a bunch of Trump supporters.
[1] https://www.reuters.com/article/us-gamestop-melvin-idUSKBN29...
I'm not sure anyone who still can be considered a “Trump supporter” is swayable; on the other hand, if Biden is seen as politicizing prosecutorial decisiones it’ll lose a bunch of Biden supporters.
It's also questionable how much influences Biden’s preferences have at Justice since his AG nominee hasn't been confirmed and everyone at levels requiring Senate confirmation there is a Trump carryover (though, to be fair, the Acting AG was appointed from within by Biden and wasn't out of order of seniority, IIRC, so he has exert what influence he can to select leadership given the constraints he faces.)
There was someone claiming to be a robin hood employee, that the White House got involved. Obviously I would take this with an extreme pinch of salt but with those numbers there is every motivation from the powers that be
https://twitter.com/AstralTrading/status/1354884246389874689...
No, Citadel does not own Melvin Capital. Melvin Capital received an investment from Citadel (the hedge fund, not the market maker) and Point72 this week.
> Robinhood seems to be manipulating the market to make it easier for Melvin Capital to cut their substantial losses.
Melvin already cut its losses this week, as was widely reported. There is no evidence for the counter claims that they're lying, which themselves originate on reddit. In particular: all the widely cited short interest figures on reddit which purport to show this are out of date (usually by weeks), and even if they were true, they would not be proof the short positions weren't closed.
As far as I can tell they started the year with ~12.5B AUM, and have lost ~30% on the year and received a 2.75B cash infusion from Citadel et al, which I assume was at a discount given their position. So my rough estimate is around ~25-35%, given the uncertainty around those numbers.
This was widely reported, and Melvin might not be the big bag holder anymore, but the short interest hasn't subsided. It's actually grown.
The squeeze never happened. The squeeze never happened.
https://www.zerohedge.com/markets/we-have-some-bad-news-game...
And there is no proof Melvin cut their losses. There is no way to know for sure. The shorts are still there, whether they're Melvin or anyone else.
As for the proof about cutting losses - no, there's no proof. You can question every single fact you read about this story in the media if you want. The reasons most people have given for why they would lie about it instead of just do it kind of strain credulity for me. There are a lot of conspiracies being spread around with much regard for whether or not they are true instead of whether they could be true.
Melvin announced they had cleared their position in GME days ago so is unlikely to be the driver for brokerage behavior today.
Citadel does not buy user data from Robinhood, they are one of Robinhood internalizers. They pay for the privilege of either trading against Robinhood based orders or routing them to an exchange.
Not allowing buys can happen for a wide variety of reasons from technical, business to legal to counterparty demands and isn’t necessarily signs of collusion.
That said there is certainly the appearance of a conflict of interest and I’m sure Robinhood will be addressing that in court and to investigators presently.
> "Robinhood partners with institutional investors and lets them spy on what the average joes are buying and selling. Sometimes, this is just "market intelligence" ("Hey, people like fidget spinners") but the main event is front-running."
> "If you're paying Robinhood to tell you what assets its customers are about to buy, you can go out and buy them up first and sell them for a profit to Robinhood's customers."
> "Or you can buy some of that asset up because you know its price will go up once Robinhood's customers orders are filled."
> "Citadel Securities is Robinhood's main institutional investor partner."
Internalizers do not go out and buy the things they’ve peaked at during the internalization process.
https://twitter.com/justinkan/status/1354853920762253315?s=2...
https://twitter.com/justinkan/status/1354853920762253315?s=2...
https://www.reddit.com/r/wallstreetbets/comments/l747eg/cita...
This seems, at first glance, to be clear and blatant market manipulation by Citadel and Robinhood.
The complaint is largely framed around "Robinhood prevented us from executing trades against GME, and it is contractually required to execute all trades." However, the actual contract explicitly says the opposite: Robinhood can choose to limit execution at its own discretion. So in order to win, plaintiffs basically have to get the relevant clauses of the contract to be ruled illegal. The extent to which this is possible is dependent on securities law which I am very unqualified to comment on, although I will note that the complaint does at least include some relevant allegations to what they need to do, which is better than other lawsuits I've seen (oh hi Parler).
Meaning RH took it on themselves to enforce a rule that its users had no idea of, hence the outrage.
If it was well known (with clear warnings on the splash screen of RH highlighting their "special" rule) then the case might be different.
If it gets rejected at this level then almost certainly SEC will be involved. If they side with RH then it would certainly destroy the trust of the retail trading industry. We also now seem to be witnessing a political opportunity for the Biden administration (ex. AOC's tweet throwing support for WSB).
Essentially what we are seeing is a payback by the people who got outsmarted by a bunch of redditors and arguing that they cannot be allowed to fail for their own stupid trades (like shorting over 100% of the stock available), so they pulled all the tricks in the book to once again bend the market to their will like they always have.
Anybody who thinks things will go as they have before are mistaken; We are in a very different political environment and stuff like this is the perfect opportunity for the Biden administration.
Yes. And intentionally interfering with supply and demand is the textbook definition of market manipulation — it appears in SEC powerpoints and everything!
https://www.sec.gov/files/Market%20Manipulations%20and%20Cas...
1- RH, Etrade, etc are not manipulating anything. The ones who manipulated were the reddit and other chat rooms. If Costco doesn't want to stock your favorite item any more do you get to sue because you still want to buy it?
2- If the customers had no idea of the legal documents they signed when they opened their accounts, their bad, not the broker.
3- 'the trust of the retail trading industry' Certainly not retail investors (who are not the people doing this stuff). And I doubt also retail traders who are not engaged in mob trades based on what is coming out of internet chat rooms/boards. There was day trading prior to the advent of Robinhood and Covid-19, right?
4- First off, the shorts are done. That is a large part of why the price went to where it did. Second, the brokers are protecting themselves from default on margin loans as well as the headache and aggravation of closeouts when 'traders' moan about the fills.
5- Why on earth should the Biden administration go to bat for a retail trading mob? Many of whom are on record in the press as having used their stimulus and unemployment checks as capital?
6- Shorts are not only necessary for a market to function well, they are a common part of the market having nothing at all to do with a view on a company. The largest example of that are fund managers selling the stock of an aquiring company against a position they own in the company being purchased. Fund manager could mean pension fund manager, mutual fund manager, or, gasp, a hedge fund manager.
I don't know how you could possibly argue that when RH is preventing the purchase of a stock, but not the selling (Which pushes the stock price down), and trying to use the argument of "we're trying to protect you from volatility!"
> If Costco doesn't want to stock your favorite item any more do you get to sue because you still want to buy it?
This is such an apples-to-oranges comparison here that I really don't feel you're arguing in good faith.
> 2- If the customers had no idea of the legal documents they signed when they opened their accounts, their bad, not the broker.
As others have said, EULA doesn't trump the law.
> 3- Certainly not retail investors (who are not the people doing this stuff).
Either I'm misunderstanding what you're saying here, or you are 100% incorrect. It is absolutely the retail investors that are buying the GME stock and doing this.
> 4- First off, the shorts are done
We don't know this yet.
> Second, the brokers are protecting themselves from default on margin loans as well as the headache and aggravation of closeouts when 'traders' moan about the fills.
Defaulting on margin loans is prevented by issuing a margin call. Some traders are moaning about their GME being liquidated because they bought on margin while going all-in on GME, but even on WSB, most traders understand that's how margin works.
> 5- Why on earth should the Biden administration go to bat for a retail trading mob?
For the same reason Ted Cruz is. RH is impeding the free market. It's pretty crazy right now. Ted Cruz, AOC, Ben Shapiro, and Donald Trump Jr are all upset with RH right now, though for different reasons. The leftists are upset that the hedge fund managers are pissed that the poors are beating them at their game, while the right is upset that RH is interfering with the free market.
> 6- Shorts are not only necessary for a market to function well
If it was merely a matter of investors being able to say "I think this company is going to fail, so I'm going to short it", then yes. But then that quickly creates extremely perverse incentives. Now, it becomes "I have invested my money into the failure of this company, so I'm going to short it even more and publish articles about how this company has no future."
GameStop got a new CEO and had a path to recovery, and the hedge funds didn't like that since they were already shorting, so they doubled-down on the shorting. The funds are using their money to kill a company. While this is technically legal, I think it's incredibly immoral and unethical.
If this isn't market manipulation then I don't know what the hell is the point of having SEC and regulatory enforcement.
The whole system is in existential crisis. This is now a spin zone: If the Biden administration shows leniency towards Wall Street, his popular base will revolt, especially after AOC has sent out that tweet.
I'm not really savvy on the complete details, but there have been a smattering of comments pointing out that the actual financial details of what goes on when you buy something could be putting Robinhood in substantial counterparty risk that doesn't happen when you sell something.
> The funds are using their money to kill a company. While this is technically legal, I think it's incredibly immoral and unethical.
And, quite frankly, the short squeezers are trying to do the same thing to the hedge funds. I don't think you can condone one and criticize the other; to me, everyone involved in this fiasco have some ethical shortcomings they should look at.
2- It is NOT an EULA. Your agreement with a brokerage is not a software license. It is exactly like a mortgage or credit card agreement. Good luck in court trying to claim your were damaged and want to walk from one of those because you did not bother to read the terms.
3- An "investor" is not a pattern day trader. An investor does not take positions with a time horizon of minutes and hours. The kindest would be to call those involved in GME speculators. If these individuals bought GME because they really believed in the recovery story they would have a long time horizon and would not care about a temporary halt in new purchases at a handful of brokers.
4- The biggest short is in the press saying they are out.
4a- Ex: Margin call is triggered on account at GME price of $290. The first bid that RH can hit is at $265. Who is eating the difference? Suppose not all is filled and balance is at even lower price? This is not an orderly liquid market. Try to recall trading in index futures during March. Moves that would typically take weeks happened in moments.
5-Politicians latch onto anything that will get themselves in front of a camera. RH is not impeding the free market. You are free to DTC your entire account to another broker at any time.
6-Are you out front with the same critique when Joe Hedge fund is on Squawk box saying how great the new iWhatever is and how we should all buy Apple even at record highs? Even though he is long and has an interest in it going higher? But it is bad when a short seller publishes why they think a company may eventually fail because of mismanagement or other trends? And the nerve of them to suggest others should sell before it does fail.
6a-Unless GME needed to raise funds by an equity sale, the price of their stock is irrelevant to day to day operations. Do you look at the price of Pepsi shares before buying Doritos? If the new CEO of GME has a legitimate and convincing recovery plan he should be able to persuaade banks to lend... unless the debt load is already so high that even a recovery makes it dubious that they can service their debt.
The failure on the brokers then was in not gradually raising the margin requirements the past two weeks when it became obvious that this was a volatility disaster in the making.
The failure of the regulators was, if correct, allowing shorts to be > 100% of the float. They were asleep and should have had a hammer on any dealers who were lending fictious shares.
> Upon information and belief, Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial intuitions who were not Robinhood’s customers.
And even then, there aren't enough other facts in the complaint itself for me to feel comfortable justifying discovery. For example, they never mention that Robinhood allowed only sales, instead alleging that Robinhood disallowed all trades with GME.
The best route plaintiffs have to win the lawsuit is to argue Robinhood's illegality here. They don't do that effectively in the complaint, which hurts their case (though they could, and probably should, amend their complaint accordingly).
My understanding is the forum members were colluding to drive up the price of particular securities? How is that not manipulation?
Although I guess I would have preferred the relevent stock markets to step in with a complete trading halt on those securities if intervention was required.
If Robinhood is doing what they claim, ie: is having issues fulfilling orders and/or is legitimately trying to protect retail investors by limiting purchases of a volatile asset, wouldn't it be worse if they prevented people from selling as well as buying? Is there some detail I'm missing that makes only limiting buy orders "blatant" proof of market manipulation and not the best possible option they had if they were acting in good faith?
Note: even if my counter argument here is correct, I don't think that necessarily means nothing fishy going on since there are a lot of other questionable factors at play and even if they were acting in good faith within the "stock market game" that doesn't mean the game as a whole isn't rigged.
Why did they all come to the same conclusion at the same time?
It's blatant protection for short positions. These brokers are hamming up the "we need to protect retail from volatility" narrative when they're clearly trying their best to stop their business partners from going bust.
It's sickening.
Let's be clear about a few things. Brokerages do not care about protecting retail investors, they only protect their customers when forced to do so by regulators. What brokerages do is protect themselves from liability, financial losses, and scrutiny. They have no problem screwing over their customers when it suits them. They will raise margin requirements and force customers to take a loss as soon as their risk models say that they should do so. They will restrict trading whenever it looks like there is a scam, simply because it wards off possible investigations into their business.
What they can get in trouble for, and RH did get a slap on the wrists for already, is working against their customers' interests for the benefit of their business partners. One brokerage I could believe, but I doubt that half a dozen would all do it at the same time and with the same securities.
I can see the nice narrative of allowing retailers to sell ("capture gains"), but it's indefensible to only allow selling.
That's _blatant_ market manipulation.
I'm not talking about edge cases with margin calls.
I want other examples where it's appropriate for some brokers to restrict _buying_ but not selling, especially in the context of a short squeeze, with potential conflicts of interest.
I understand that brokers can restrict trade on risky items as yes, it impacts their risk model. I'm failing to find justification for RH and others to restrict buying but not selling of GME.
Your first link is for penny stocks, and the restrictions revolve around the usual pump-and-dump. You're allowed to go long, and can trade between days.
Your second link is for OTC, and I fail to see how this is relevant to GME. GME is traded on formal exchanges, and brokers that haven't arbitrarily restricted buying aren't having any liquidity issues.
We'll see how it worked in the coming weeks.
My guess is that market makers that these brokers sell orders to said no. Brokers make a lot of money selling retail orders to someone else.
This is what I couldn't understand about what the endgame of this would have to be. Because you can't really have a situation where all the shares are bought up sending the shares to infinity. At some point something breaks. Someone has to pay money for those shares.
That could be that retail investors bolt for the door just like a bubble popping and because its difficult to maintain steadiness when you're looking at huge gains that aren't realized. And that is what they thought would happen.
What would be more reasonable would be to liquidate Melvin Capital and anyone stupid enough to invest in them and the holders of GME shares would become creditors against that bankruptcy proceeding somehow. SEC would have to manage that unwinding somehow.
But the problem is that the clearinghouses like Citadel are counterparties to Melvin Capital and they've privately bailed them out, taken over their shorts and will now hugely profit by suspending trading and riding those short positions down. This now entirely makes sense to me as what was inevitable, because while WSB was trying to destroy Melvin Capital they didn't understand that the implications of that were going to be destroying the clearinghouses through counterparty risk. And they were never going to let that happen, so they shut it all down and will eat the SEC investigation.
This is a very interesting outcome just due to the moral hazard it creates with shorting.
It is also a very interesting outcome because a lot of "little guys" just learned an object lesson in what happens when it looks like you are beating the "big guys". They won't let that happen. There's going to be a lot of political rage as a result of this. We're going to have to make a decision in the next 10 years or so if we'd like to funnel that rage towards socialism or fascism, the status quo is going to continue to enrage people.
Clearing and settlement involve counterparty risk - if a brokerage can't hand over the money come settlement, the settlement firm may be on the hook. The risk of this is proportional to volatility. Due to high volatility, DTC increased its settlement costs. This isn't usually a big deal to a clearing firm or a brokerage because retail brokers don't usually have huge exposure to a single equity.
My bet is with the entire world suddenly memed into buying GME, settlement for retail brokers suddenly became very expensive and there wasn't an existing mechanism to pass on this cost down the chain, so halting orders was the only option on short notice.
Also, I don't think any of these people crying foul consider that those who short stocks do so at constant peril of forced close outs because shares are no longer available to be borrowed. The notice involved can be minutes to hours.
[1] - https://twitter.com/joemccann/status/1354859879337320452
I don’t take RH’s side but it’s hard to see a winning play for them, it’s damned-if-you-do-damned-if-you-don’t.
People are typically given a choice to sell other assets, deposit more or close in these situations rather than getting their stock sold at the brief lowest possible price driven by the very broker closing the position. Also, typically it's only a portion that gets liquidated rather than everything on margin.
If you run a super discount brokerage platform, you don’t have the luxury of reaching out to all your customers to find out what course of action they want to take.
I’m not sure if RH violated their own terms here, if they did then sure, they deserve a lawsuit. I suspect they didn’t, and this is just a case of people being in over their head.
However, very few people use full service brokers. Everything is now automated. The best you can hope for is that the broker provides a mechanism prior to the need to close any position to signify which should be the last one hit to pay the margin loan. As a specific example, Interactive allows their clients to pre-select one holding as the absolute last one to close.
(edit spelling)
It also seems pretty scummy to not make this very clear that they can sell without asking.
To a normal person this comes off really wrong (and really it is, let's be honest).
Brokerage accounts, mortgages, credit cards are not click-thru agreements. There is real money involved and real risk to both parties. Not reading the terms before signing and using is an unacceptable excuse for future loss or hardship.
Just because something is in the fine print doesn't make it okay, especially if its marketing completely differently.
I wouldn't do business with Robinhood for a number of reasons that go back before this recent spat of issues, I am just not sure preventing purchasing GME is the worst aspect of this.
So if I am long on a stock that gets delisted from an exchange, can I sue that exchange because they are making it more difficult for people to buy that stock?
>They are making the price of what you hold fall...they deserve to be sued good and hard for this.
That logic applies to a number of entities and not just brokers. If I can sue a broker for this reason, can I sue anyone for that reason?
I am not saying what the case is for brokers today, but regardless, appealing to some notion of proof by contradiction because of generalizing a behavior is not a valid way to analyze the situation.
I realize that. That previously quoted answer was in response to me asking "Does a broker have a legal obligation to allow you to purchase any stock?" Someone answered that with a broad response without referring to any laws. I'm not sure how that leaves me with a responsibility to do a full legal breakdown of the issue.
I thought you were saying in principle their was no basis for users to feel wronged by RH. But this is silly, because you and I both know without a shadow of a doubt that RH shut down buys to protect the underwater hedge funds. It's obvious to anyone with a brain. And I'm confident it's obvious to you. And would be obvious to any judge, jury or lawyer. But does it matter that its true? No. Is there some legal basis that would encompass "you can't shut down trading to protect some hedge fund that you are connected with". I'm certain there is, but it probably won't matter. Because "the law" and "rule of law" is a meme. Power is what matters. And the sovereign power decides what the law is... average joe traders don't have the power and hedge funds and finance in this case do.
It is similar to a lot of the complaints in the wake of 2008. You can't just lock people up for seemingly unethical behavior. You need to find evidence that specific laws were broken. If no laws were broke we need to move on and create new laws to prevent it the next time.
No, I have seen all sorts of seemingly arbitrary restrictions since I started investing (back in college), on everything from mutual funds to ETPs to penny stocks.
Of course not. This is any number of SEC violations
First, Robinhood does not make the market or fulfill the orders, so if their market-maker has no one selling a stock they have little option other than stopping people from making purchase orders. You need both sides for a liquid market.
Second, IF these are margin positions then it is not only allowed and legal but also typical for the broker lending on margin to close out the position unilaterally. IF these are cash positions it is a completely different story.
No warning from Robinhood on the current issue either or I would have pulled my sell order.
If this wasn't a corrupt rigging to benefit the hedge funds, they wouldn't be doing it.
Preventing opening buys hurts everyone who is long -- including a large number of Robinhood customers -- by barring trades that would provide liquidity to sellers and thus dampen the sellers' stock impact. So essentially, Robinhood chose a course of action that disproportionately imposes losses upon its own customers.
The concept of price impact is part of the reason that stock buybacks are able to "return capital" to investors. Demand from buyers pushes prices upward.
No idea if that is a central argument of the case.
Just allowing selling of a stock makes, free markets a joke.
I am seeing analogies like will apple store sell me a pixel 3a etc. This is not a product robinhood buys or sells , they make my transaction with a bigger shark (Citadel) who is in bed with the hedge fund who shorted ~112% of outstanding shares. When a group of people took advantage and created a squeeze, they block their ability to buy more to strengthen their squeeze.
Yes. Blocking opening buyers essentially means that closing short-sellers don't need to compete for supply.
[1]https://www.cnbc.com/2021/01/28/gamestop-cruz-ocasio-cortez-... [2]https://www.cnbc.com/2020/12/16/massachusetts-sec-o-commonwe...
Moreover, this narrative that people are betting with mortgages and retirements is simply unfounded - most people are in on call contacts or with their "stupid bet" funds, or a few thousand at most. Please remember with WSB, and other 4chan-diaspora communities, to seperate the memes from reality.
But what I heard so far was, that the fond was for high risk investment.
"Some people are absolutely going to lose their homes / retirement savings at the end of all this."
So people who will indeed loose their homes, would have lost with high risk investment. Which would be sad for them, but high risk is called high risk for a reason.
If you want to play safe, there are low risk options.
So I don't see need for regulation because of this. For other reasons, yeah, but not that one, unless I am missing something?
> So people who will indeed loose their homes
This is a rare example of spelling de-correction.
So I misspelled lose with loose. But loose in this context can also be a play of words with lose? What are de-corrections?
They are also, however, not letting people buy a selected set of stocks the regular way even if they have a large enough balance in their accounts.
They are both valid problems, and don't necessarily contradict each other. Add to that their massive conflict of interest with Citadel's involvement in this entire thing. The fact that you can still buy Bitcoin on Robinhood kinda puts the whole "we are only looking out for you" argument to bed.
Yeah I think that definitely warrants more scrutiny.
The backlash seems so severe that I'm very curious about the rationale behind backroom decisions made that led to all this.
RH requires much more SEC scrutiny really. A brokerage cannot go broke by facilitating trades, it supposes to be a risk-free business.
Robinhood has in effect cleared all its trades since 2018 as you can see based on their own page.
https://robinhood.com/us/en/support/articles/common-tax-ques...
Good, trades are not zero cost and should not be treated as such.
They should have stop trading completely on those stock instead they stopped some people / service to purchase it but you can still sell, it's insane.
AMC - AMC Entertainment Holdings Inc.
BB - BlackBerry Ltd.
EXPR - Express, Inc.
GME - GameStop Corp.
KOSS - Koss Corporation
NAKD - Naked Brand Groups Ltd
NOK - Nokia Oyj
I guess they don't want to get sued (the biggest fear of most companies)
https://cdn.robinhood.com/assets/robinhood/legal/Customer%20...
Customers: "We want to sue you."
Company: "Sorry you can't do a class-action, we have a binding arbitration clause."
Law firm representing customers: "Ok, here is the paperwork for 1500 arbitrations, have fun with that. We can do this all day."
[1] https://www.latimes.com/business/story/2020-02-11/doordash-a...
If not, it's probably safe to assume the consumer has to pay the fee.
Seems like something any financial lawyer would have checked the box on prior to making a HUGE announcement, so it's pretty plausible that Robinhood has no ideas about FINRA's laws about arbitration...
[1] https://www.forbes.com/sites/ronshevlin/2019/01/02/the-robin...
Edit: It was a company announcement material to the fund's prospects, if they lied it would be grounds for a securities fraud suit from their investors.
Sometimes the world is not a big conspiracy out to get you.
The company that is Robinhood's customer and pays for order flow is Citadel Securities, which is the market maker and is definitely not short GME.
Citadel (hedge fund), is not short GME as they generally sell boring complicated solutions to rich people (fixed income, insurance, hedges etc). They do invest into other funds (like Melvin Capital), which may give them indirect exposure to the shorts.
Citadel technologies, sells their tech.
The simpler explanation is that the current price point is clearly unsustainable and thus shorting GME is a crowded trade. As one fund exits another fund enters. If GME goes to $1000 people would still be shorting because, again, this price is unsustainable. It would be new people shorting though as most of the funds shorting at $300 would exit by the time it goes to $1000 (hypothetically).
At the same time there is no world in which GME is worth more than $100 in 3 months, so the question now is who will be the greater fool holding the bag when it goes down. Whatever money shorts will lose now they will regain on the way down (although the short sellers losing money and making money might be different funds as some exit and some enter positions). Of course, the real money makers here are MMs that will be collecting a huge bid-ask spread on both directions.
I don't think there is much good news for the retail investors though. As with all bubbles the people who got in early and had the acumen to sell before it pops will make boatloads, but the vast majority will lose.
When was the last time the SEC sent anyone from these hedge funds to jail? When was the last time they imposed penalties that actually hurt?
"Citadel owns Robinhood" however is completely false.
ROFL
https://www.courtlistener.com/recap/gov.uscourts.nysd.553175...
That said, for Robinhood's business model, you're the product, not the investor. Outside of reputational damage they DGAF about the outcomes of individual investors as long as they don't have skin in the game.
https://www.investopedia.com/articles/professionaleducation/...
I'm not alleging a conspiracy or anything, it just seems odd to me that this kind of action comes preemptively from a broker. I would have expected the brokers to do nothing until the SEC indicates something one way or another, or for nothing to change if the SEC doesn't take a position either way.
I feel like there's some part of this I'm missing.
Robinhood might be protecting their largest customer.
Edit: it's possible Citadel pays Robinhood for something else instead. And it's possible they don't fully own but only invested in Melvin. Still, there do seem to be pretty clear ties.
Citadel also owns a non-controlling interest in Melvin capital, a hedge fund that is/was massively short GME. Citadel gave them $2.7 billion earlier this week.
It seems very likely that Citadel pressured RobinHood to stop all purchases so that Citadel’s investment is secure.
There are additional rumors that Citadel went short GME right before the brokers stopped allowing people to buy, only allowing them to sell.
https://news.ycombinator.com/item?id=25943676
Next prediction: obviously Robinhood can kiss their IPO goodbye. They are hated by both sides now - bankers and investors. Frankly, I hope they will go under, get shut down but not before 20 AG and DOJ/SEC takes them to bleachers.
Its either a free trade market , or its not!
1) transactions between Robinhood and Citadel (even some % of their GME trades would have gone to Citadel) 2) The deal between hedge fund and citadel
If you can prove that its because of #1 and #2 , RobinHood arrived at this decision, its game over?
or is it?
I am currently in a country where robinh does not operate, but I'd be absolutely reluctant to use them now even if it became available.
Robin hood had the most affected customers, so go the lawsuit and most of the bad press.
I can't be like "Rust is a shit language" and then expect someone to write a treatise in response. It ain't never gonna happen.
Well fine, by the sounds of it, you're the sort of person who also makes those Rust threads unbearable by commenting despite having never worked with or near Rust but calling people names because they have experience and have formed opinions. Let's just put it this way, the way the HN commentary has come across right now is like a guy in a bar telling your about a horse you should place a bet on. That's the level we're at, and that's why I talk about the mass hysteria as the more relevant point, because your average Joe has no business reasoning about dynamics of stock prices of fairly illiquid crappy retail stocks.
Trading securities and/or advocating for a free & fair market in which to trade those securities =/= literal violent insurrection.
It's true that it could legitimately be considered an exceptional situation requiring exceptional mesure.
But in that case the only way to do that while simultaneously respecting your obligations would have been a complete halt on that instrument.
So the market manipulation accusations seem legitimate.
There are lots of really good reasons why RH would want to try and get their clients' net positions flat. Since they are exposed to an aggregate risk that individual clients aren't exposed to - and obviously, those clients won't think about this, but they have operational risk that RH can't execute trades.
Also, considering 99.9% of people jumping on the bandwagon have absolutely no idea what they're doing, they'll probably thank RH down the road for preventing them from losing all their money.
But it's definitely risky. You could lose a lot of money. Many of the people buying are also doing it to stick it to the hedge funds and give them a taste of their own medicine.
Can you be more specific? Robinhood & Webull are the only two that I'm aware of.
That's my understanding. What happens afterwards? No ideas. Some people want to see hedge funds burn, I would not mind that either.
Nobody is going to make the hedge funds burn. At this point the hedge funds are fleecing whoever was buying shares or options yesterday (who do you think they bought them from?).
Imagine there are only two shares GME.
You buy two GME for $1ea. Two short sellers needs 1 GME each lest they hemorrhage money on fees. You loudly announce your plan to hold half your GME forever. The short sellers trip over each other to pay you stupid money for the one GME you are selling. You then sit on the other GME for awhile, maybe sell it in a year or two for a buck. In any case despite buying two and selling one you've made a ton of profit.
Now scale this up to several million people.
And many more shares, most of them hold by corporate and institutions (some of those institutions will be happy to lend shares as well). Also more shares can be issued.
There's so much discussion on HackerNews today about people who are going to lose out on these stocks where I've seen a healthy amount of comments on Reddit in the last week of people buying stock merely "for the lulz". I think there's a non-insignificant amount of "investors" who have tossed paltry sums at $GME with no plans on making a return.
Honestly, I'd have done the same, but I don't do any form of stock trading so I don't have accounts on any platforms to do it. I've done the same with various crypto shitcoins and made a few bucks off throwing $50 or $100 at something I don't expect to ever see return on too.
if the stock price is higher when they borrow and sell, and lower when they buy and return, they make a profit equal to the difference. they lose money if the stock price goes up. all these people buying GME and driving the price up will hold GME stock, and the shirt sellers will be forced to purchase back the stock at premium prices. even if the stock price goes down slightly, the people buying up all the GME will still profit.
but more importantly a lot of people's goal is to f over a major firm that constantly over leverages itself.
And to add to that, a company (Citadel) that pays Robinhood a large amount of money for their data is one of those with the short positions. So Robinhood itself has a stake in this.
Disclaimer: I have no idea what I am talking about and this is only my opinion.
That’s quite a claim. Got a source on that?
https://www.equities.com/news/robinhood-is-said-to-get-40-re...
https://twitter.com/justinkan/status/1354853920762253315
I'm no market expert, but I know that when cash is flowing between two companies, they generally have shared interests.
Likely because it has the most impacted users. I suspect other platforms will get lawsuits as well in time if this one proceeds.
I'm on a cash account because I like to avoid their "pattern day trader" protection.
blocking purchases of shares from accounts that have enough to cover the contract: highly sketchy and worthy of deep scrutiny
some broker did 1, some did 2, but form screenshots alone is hard to tell which did which
Edit: And I just found out my platform (Binck) doesn't accept trades anymore.
Edit: Apparently they do accept trades, but only if your limit is close to the current price. I was increasing mine because it wasn't executing at the lower price. Eventually I did get in at the lower price. We'll see where this goes.
On the one hand it's great that anyone who wants it has access to the financial markets. But I mean, you should probably know what you're doing before you start speculating. Are people really going to make a moral issue out of not being able to sell their bad bets to a greater fool?
It's like everyone wants access to swim with a dangerous group of man-eating sharks and then complains when they get bitten.