Comment by zenbane | Hacker News Reader

Comment by zenbane | Hacker News Reader

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The big problem is a retail broker shutting down trading to protect hedge funds who were short. Confirmed in Congressional Testimony: "NSCC examined the market activity and clearing member margin requirements to consider whether it would be appropriate to adjust or waive the capital premium charge, as permitted under the applicable rule. NSCC determined that the spike in market volatility, particularly in the so-called meme stocks, was a material contributor to elevated VaR charges for several clearing members, including most of those subject to capital premium charges. NSCC determined that it would be appropriate to waive the capital premium charge for all clearing members, using the discretion provided in the rule to reduce or waive this charge.4 Just after 9 a.m., prior to the market opening at 9:30 a.m., updated daily margin statements reflecting the waiver were released in NSCC’s portal and revised excess/deficiency notices were emailed to clearing members. All clearing members timely satisfied their clearing fund requirements...NSCC’s role in the market is a neutral one. It does not impose trading restrictions upon its clearing members or their customers, and it did not instruct any clearing member to impose restrictions during the market volatility events of late January." - https://www.dtcc.com/-/media/Files/PDFs/DTCC-Statement-Febru...

There's no evidence at all that any retail broker --- many besides Robinhood applied the same restrictions --- did anything to protect "hedge funds that were short", and substantial countervailing evidence. People have weird ideas about how settlement works.

What countervailing evidence would that be? Do you have any links which explain what you mean?

eg. https://finance.yahoo.com/video/heres-why-robinhood-restrict...

> People have weird ideas about how settlement works.

Just to be clear... I too am not aware of any evidence that this was the case. HOWEVER, there is a clear link of stakeholders between Citadel and Melvin Capital. Citadel provides the settlement for RH and it's entirely plausible that Ken Griffin reminded Robinhood who's paying their bills. RH had the shroud of legitimate direct financial reasons to stall order flow - so it was a win-win at the loss of PR/customer service.

There's a lot wrong with this argument, but one of the most obvious problems with it is that lots of brokerages imposed limits on GME trading, including Schwab.

I use Schwab. They only limited option trading, but I could freely buy and sell GME. This was true for many of the other major brokerages.

By all accounts, RH was the most restrictive and had the highest number of users placing non-sell orders. Very different ball game.

What else is wrong?

>Just to be clear... I too am not aware of any evidence that this was the case. HOWEVER, there is a clear link of stakeholders between Citadel and Melvin Capital. Citadel provides the settlement for RH and it's entirely plausible that Ken Griffin reminded Robinhood who's paying their bills.

In other words, "there's no evidence that they did it, but they stood to benefit so they probably did it"?

I’m not even convinced there is evidence Citadel stood to gain from Melvin doing well.

The terms of their deal weren’t disclosed but a lot of the news stories suggested Citadel got a slice of Melvin for a line of credit. That’s a pretty good distressed asset price!

> Citadel stood to gain from Melvin doing well.

Not sure, but Ken Griffin personally would.

> In other words, "there's no evidence that they did it, but they stood to benefit so they probably did it"?

Right. Speculative, but plausible.

It's not plausible! Among many other problems, it effectively asserts that Griffin somehow muscled Charles Schwab at the same time as Robinhood. Citadel is a big company, but it's not that big. It's just a silly claim. People know one thing about this whole situation --- that Robinhood uses Citadel for execution --- and incessantly try to derive every other thing from first principles based on it.

>Citadel is a big company, but it's not that big

Nice try, but Citadel is the largest market maker and if it were an exchange (ostensibly, it might as well be one!) then it would be almost as large as the CBOE!

Source: Image from Quartz: https://i.imgur.com/SBzQn5C.png

You can just look up the relative sizes of those firms, you know. It's funny that you came up with CBOE as your reference, because you can look up how big CBOE is, too.

I'm not sure what you are trying to say here, but consider it noted - I'll take a look at some more up to date statistics soon.

He’s trying to say that cboe is a particularly funny reference as they process minuscule equity trades. Which makes sense given they are an options exchange…

I'm more just, CBOE is not that big a company.

> it effectively asserts that Griffin somehow muscled Charles Schwab at the same time as Robinhood

I didn't assert that. Any brokerage that uses a provider for settlement was taking on additional untold risk (including Schwab). Schwab, in theory, has enough assets to cover something of that size of trading GME introduced but their clientbase isn't the same as RH, so the reputational risk was much lower. It was a precautionary move, not a "our company might go under and we're gonna piss off our key partners" type of move.

See my other note - you're wrong about the nature of restrictions and level of impact on Schwab vs RH (and other brokerages for that matter).

I think you need to clean up your vocabulary. For instance Citadel doesn’t settle Robinhood trades. Further during this instance Robinhood cleared for themselves.

Providing payment for order flow neither means you are the settler or the clearer.

Effectively every entity that trades securities in the US has to be either a client of a member or a member of DTCC.

Here are the facts:

- Ken Griffin owns 85% of Citadel

- Citadel handles 40% of stock trades in the US

- Citadel has $38 billion of assets under management as of March 2021

- On January 25, it was announced that Griffin's Citadel would invest $2 billion into Melvin Capital, which had suffered losses of more than 30% on account of its short positions, particularly on GameStop

- On January 28, Robinhood, an electronic trading platform favored by many traders involved in buying GameStop stock and options, abruptly announced that it would halt all purchases of GameStop securities except to cover shorts and would only allow these securities to be sold if already held (but not sold short); the price of GME stock declined steeply shortly thereafter.

This is not a silly assertion.

EDIT: PS - I know US Senators can be silly, but here is the implication from a US Senator and former law professor: https://www.warren.senate.gov/imo/media/doc/02.16.2021%20Let...

It is entirely silly, as, for what it's worth, is Warren's letter. Virtu handles a comparable amount of stock trading in the US; maybe you think they can strong-arm Schwab, too? You can pretty easily pull up a list of firms ranked by their AUM to put that scary-sounding "$38 billion" in perspective, too.

You keep saying it's "silly" and provide no specifics (the one you did was incorrect) and keep saying things like "they aren't even that large" without provide comparable numbers.

> maybe you think they can strong-arm Schwab, too?

I never said that, did I? I think its well known that PFOF is a controversial business practice because it can create conflicts of interest. That's not a new thought.

It's well known on message boards that it's controversial. It's a universal practice in the industry.

So are S&P/Moody ratings yet those got us in trouble in 2008. Just because something is a universal practice in the financial industry doesn't absolve it from conflicts / potential legalities.

PS - fun fact, PFOF was pioneered by Bernie Madoff https://archive.fortune.com/2009/04/24/news/newsmakers/madof...

What's the point of this "fun fact"? I guess the implication you're trying to make is that PFOF is bad by association with maddoff. It's easy to see the flaw with this logic, eg. the autobahn was "pioneered" by hitler, therefore it's bad.

> I guess the implication you're trying to make is that PFOF is bad by association with maddoff.

Read the full article and maybe you'll understand better? If you're lazy here ya go:

> Call it shabby if you want. Payment for order flow was legal, and Madoff fought to keep it so. Under pressure from the SEC, the NASD, the securities industry's self-regulatory body, assembled a panel to study the issue in 1990. At the time, payment for order flow was highly controversial, and opposition was intense.

I don't understand why you guys are so hand-wavy about the the idea that PFOF introduces serious conflicts of interest, when it's been debated for decades (with serious thought, not just some random internet trolls). A bunch of reddit/RH users talking about the issues with PFOF isn't new - that's my point. You seem to suggest that just because they are the ones bringing light to it that it shouldn't be taken seriously. Weird.

>Read the full article and maybe you'll understand better? If you're lazy here ya go:

Well you just casually linked a 11k word article with little context. I'm not going to read that and then try to figure out whether that article was supposed to serve as an addition to your original argument, or merely a source to back up your claim about PFOF being pioneered by maddoff.

>At the time, payment for order flow was highly controversial, and opposition was intense.

In other words, PFOF is bad because Madoff fought for it and it was controversial? That's still guilt by association, and a terrible argument.

>I don't understand why you guys are so hand-wavy about the the idea that PFOF introduces serious conflicts of interest

Because they're already obligated by law to provide best execution. They're also obligated to provide reports on the quality of execution.

>You seem to suggest that just because they are the ones bringing light to it that it shouldn't be taken seriously. Weird.

You started off by insinuating that robinhood took orders from melvin/citadel to restrict trades. Insofar as that's concerned, it shouldn't be taken seriously because there's scarce evidence.

Point of order: there is no evidence. It's a conspiracy theory without the theory.

> In other words, PFOF is bad because Madoff fought for it and it was controversial? That's still guilt by association, and a terrible argument.

I guess the statement "At the time, payment for order flow was highly controversial, and opposition was intense." doesn't mean the same thing to you as it does to me. In other words it didn't say it was controversial because it was Madoff, it was controversial because of the nature of incentives. If you're not going to read the article or understanding why PFOF is controversial (sans Maddoff or Warren's involvement) then it's not worth discussing anything here. Thanks.

> Because they're already obligated by law to provide best execution. They're also obligated to provide reports on the quality of execution.

You mean the same law that...you guessed it Robinhood violated?!

https://www.sec.gov/news/press-release/2020-321

This is deeply silly. PFOF improves outcomes for retail investors.

I’ll note Elizabeth Warren has made it a particular point of her platform to beat on Wall Street. I largely don’t mind cause someone ought to. But she is far from an unbiased source.

https://youtu.be/Yq4jdShG_PU

Here is the CEO of a big brokerage explaining how bad of a situation the hedge funds (shorts) were in, they made a terrible trade.

All you need to know. Shorts made a terrible bet and had Robinhood cut off retail to save their asses.

This is WSB logic. More than one entity can, and usually does, make bad decisions in a volatile market.

my reply from another thread: https://news.ycombinator.com/item?id=28000245

Reply on news.ycombinator.com