Obviously the situation needs to be investigated. But I think there is a real possibility they did nothing wrong here.
Despite this, the main problem I see with Robinhood is that with it's gamified UI, ease of access, etc... these 99.9 percentile events are mainly what it is designed for. It's encouraging people to pick up the "hot stock" on social media on a whim.
While there may not be legal repercussions for this, it's fundamentally incapable of it's core purpose. If you are new to RH you might not realize that the platform has outages all the time and it costs its users a lot of money. It is straight up dangerous to trade on this platform for the purpose which the UI glorifies.
Index funds have done a lot more to democratize finance than RH in my personal view. While commission free sounds fantastic, it comes with some very large hidden costs.
There are worse problems with Robinhood, all of which I'm surprised people aren't bringing up more:
1) They've had outages where 100% of stocks were unavailable for trading.
2) Their business model is to offer their users inferior prices and then collect on the arbitrage (Yes, this is illegal. Yes, they are in trouble with the SEC over it).
3) Robinhood isn't transparent with their users about the risks of trading options and trading on margin. Some of the barriers they've removed for their users to make risky bets were there for regulatory reasons, it's not just a matter of their app being over-gamified.
You can't offer "inferior prices" to customers. It's called the Order Protection Rule of RegNMS. You must price improve the customer, by law. If a bid-offer is 23.01/23.02, Robinhood (but actually Citadel/Two Sigma) _must_ transact with a buy order at 23.0199 or less (the subpenny rule only applies to quotes, not actual trades). The reason Robinhood sells this order flow is because Citadel/Two Sigma would rather collect a spread of almost 1 cent (23.0199-23.01) from
_you_ rather than a hedge fund, who may conceivably move the market against the market maker. They are "paying for order flow" (PFOF) - much less than 1 cent - to collect the 1 cent spread from you.
Robinhood is in trouble with the SEC for a failure to disclose this relationship to customers, _not_ for having the economic arrangement to begin with.
"The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission."
What you are referring to is the fact that Robinhood can't offer a worse price than the NBBO, but the NBBO is not the best available price, there are also dark pools and brokers can match orders against their own clients.
Robinhood, like all brokers, has a fiduciary duty to its customers and as such is required to do what it can to always offer the best price to its clients instead of simply offering the NBBO, whose price serves as a worst case scenario when all other options have been exhausted. Robinhood not only failed to do that, they failed to do it while claiming in marketing materials that their execution is better than their competitors (it's not).
> The SEC has stated that “routing order flow for automated execution, or internally executing order flow on an auto- mated basis, at the best bid or offer quotation, would not necessarily satisfy a broker-dealer’s duty of best execution for small orders in listed and OTC securities.” The reasoning behind this view is that prices better than the NBBO may be readily accessible to the member."
Yes, they had outages where 100% of stocks were unavailable for trading, which is factually true. What makes that assertion weaker is the fact that other brokerages had the same kind of outages too, and not with less frequency of occurrence either. Which is why (1) is not really a meaningful point against RH specifically.
Yeah... And other stock trading platforms also stopped users from trading GSE. So by your own bad logic the original complaint against Ribbonhood should be no big deal, right?
That other fruits are rotten does not weaken the assertion that this particular fruit is rotten. I don't think anyone is claiming that every fault that Robinhood has is unique.
They don't have a normal amount of outages. They have more outages. It's a significant amount of outages. It's already been the subject of complaints previously.
>That other fruits are rotten does not weaken the assertion that this particular fruit is rotten
Services occasionally experiencing unexpected outages doesn't make them a rotten fruit. By that metric, literally every single complex online service in existence is rotten. Given how rare those outages are, and how they are all not happening at the same time across different brokerages, I wager to say it is normal with nothing nefarious going on. Unless you expect a complex online service to have zero downtime ever, which is just unrealistic.
It's partially true tho, they provide inferior price than other brokers using Citadel (because their contract apparently gives them a bigger kickback than most other brokers).
In practice price improvement is split between the trader and the broker right, some brokers might do 50/50 while others will be 80/20.
Yes this is true. It wouldn't qualify under the "best execution" standard, which is based on publicly displayed (lit) quotes.
But you are right that technically you could've been price improved slightly better had your broker signed a more favorable agreement with a market maker (and then passed it onto you). This would really venture into business economics though and is not related to regulation/legality.
> But I think there is a real possibility they did nothing wrong here.
They did blatantly lie about their liquidity problems. They didn't mention it in their fluff blog post. Their CEO smirked on national TV and insisted it was not about liquidity. Turns out it was. That's the problem.
> Despite this, the main problem I see with Robinhood is that with it's gamified UI, ease of access, etc... these 99.9 percentile events are mainly what it is designed for. It's encouraging people to pick up the "hot stock" on social media on a whim.
Landline phones and CNBC in the dot com boom and after could do much the same. They had a show where a guy just yelled out symbols all angry with cheesy soundboard effects. Only difference was higher commissions and no buying into fractional shares and stuff.
That I think is the real scandal here. Robinhood was built to market to (and in some sense coevolve with) the wallstreetbets culture of crowd-sourced market manipulation. And that was a great growth hack.
Until it grew enough that the crowd source market manipulation was... actually manipulating significant markets. GME has been ballooned to the tune of something like $13B over the past few days, based almost entirely on a flawed understanding of short trading.
And absent any discussion about Robinhood in particular, I think we need to be asking whether or not this crowd of people who didn't quite understand shorts were fed those lies at the direction of users who did. Someone has (or will have) made a ton of money here at the expense of the late-arriving GME traders. It seems like we should find out who.
If - hypothetically, ignoring the nominal legalities - it were possible to do the same on Reddit without leaving too obvious a trail, what's to stop one or a small number of players from running a virtual operation that creates this kind of sentiment for trading?
And then betting for or against it - or perhaps both, in sequence - for some very easy money?
It's a good point. Many of the more popular subs are transparently astroturfed, and more than a few mods are bought and paid for. Reddit is already neck deep in information warfare. I'd be surprised if what you describe isn't already happening, although who knows at what scale.
"The short interest staying at a similar range means nobody has closed out their old positions so we can keep squeezing" seems to be a big one.
If you assume that new short positions are being opened - and at the recent prices, that's not an entirely unattractive thing to do - then the short interest staying steady suggests some positions being closed and others being opened, and tells you little about single actors.
And anyone opening short positions at today's prices is basically "resetting the clock" on how long you'd need to squeeze to get them to back down... so if I were to sell it short now, I'd be betting that some folks making some of their first investments ever to ride the hype train are going to be more likely to blink first than I am.
Technically not. Shorts have a borrow fee, and if you trust the wsb guys on this number, the current borrow fee on gme is 80 percent per annum. So if I'm not getting anything wrong here, short sellers do have a bit of a clock.
Does 80 percent per annum mean that carrying the short for ~9 months will cost roughly the same as closing it out today, assuming the price remains constant for the next 9 months?
It means your broker will charge you that carry cost on a pro rata basis, assuming borrow also remains constant. (It's generally not a fixed rate.)
So if you carry a 9mo short with 80% borrow rate on a stock that realizes 0 vol, you played yourself.
If you don't want to deal with borrow, you can buy a put and sell a call on the same strike (usually slightly higher than ATM) which comes with an implied borrow rate that is locked in.
Overlap between which world views? Are you saying between the short sellers’ world views and WSB’s? I have a feeling that a lot of the people on WSB actually work on Wall Street and are just on their phones at work. There seem to be some experienced professional traders there(among many who aren’t), but I don’t see much similarity between them and the shorters in particular.
It’s really creepy how you just compare WSB to a group that half the country considers “supporters of terrorism” or literal terrorists. This is the “magical thinking” to me.
The original GME investment groupthink (Reddit always works this way, it’s lovingly called “the hivemind”) was based on complex, but logically-sound technical reasoning. A lot of due diligence was done. QAnon, as far as I know at least, was based on a post on 4chan with no verifiable evidence whatsoever. WSB’s GME buying was motivated by logic and evidence at its core, and many aspects of this logic have happened exactly as predicted (for example, the multiple gamma squeezes). Unlike QAnon, the more you learn about this, the more it makes sense (though, very obviously, the price is going to crash eventually, and these people know it). Respectfully, I think it’s disingenuous and below-board to try to baselessly compare something you don’t understand well to an alt-right hate group. Show me the solid due diligence and technical analysis that underlies QAnon, and maybe I’ll give your comparison a closer look.
I'm just saying that it's all the same magical thinking. I'm not saying it's the same people, though given the demographics I suspect the overlap is bigger than we think.
Your suspicion, and you’re baseless assumptions about the “demographic” of several million Reddit users, sounds a lot like “magical thinking” without any evidence to offer.
Most people seem to have been led to understand that the short leverage of 140% meant that when the short call happens, the hedge fund will "have to buy more stock than exists" to settle, and thus that something like an infinite price spike will happen. The same people tend to refer to this as a "naked short", which it is not[1]. Most of these people seem to have latched onto a theory that the short calls are all coming due today and that they NEED to buy as much GME as possible ahead of the metaphorical rapture.
But the hedge funds in question closed out their short positions days ago. The stock right now is being propped up by simple (and misinformed) speculation. And effectively all of the purchase price that people are paying right now is going to end up being transferred to the people with earlier positions who are getting out at the peak of the bubble.
[1] A naked short is a short sale where no underlying stock was borrowed first. This is a crime, but only possible for certain very privileged traders with control over the various tracking records. Leverage over 100% just means (for example) that you borrowed a share, sold it, then later went to the same buyer and borrowed it again. You end up owing them "two shares", but not necessarily the same share twice. In practice what happened is that as the stock started rising, Melvin closed its position buy repeatedly buying and returning shares to the tune of 140% of the capitalization. (Edit to add: it seems likely that it did so in combination with a bunch of loans and favors from other hedge funds with the ability to buy and hold GME across the inevitable collapse. The WSB folks complaining about hedge fund corruption and insider dealing aren't wrong.)
> And effectively all of the purchase price that people are paying right now is going to end up being transferred to the people with earlier positions who are getting out at the peak of the bubble.
There is at least one other group that is likely benefiting massively through all of this: Those who have been selling options. There are a lot of levels here, but when this is all done I suspect that the aggregate spent by retail traders on premiums for options that expired worthless will eclipse the final market cap of GME.
When there is this much volume, you have to remember that someone is in the middle of it taking a tiny fraction in order to facilitate it. These people are likely doing a very good job limiting their risk, and just printing money right now.
I suspect that overall we'll end up with "Hedge Funds" (as an aggregate) in likely the same positions, intermediaries and market makers wayyyy up, and Retail (as an aggregate) way down. Which, I guess is the system that people are virtual-rioting over.
I don't know what you mean. You want a list? I don't have one, but I'm sure you can find one.
If you mean a tradeable index so you can invest in market makers... I doubt it. Their entire business is making money for themselves, and likely don't need or want public shareholders that they have to report to.
They are paying for ads saying they closed their position. Why would they do that if they actually closed? The occams razor pushing naivety of this forum is really starting to grate. How many times do they have to fool you before you get the message?
Seen this twice now. This is another conspiracy theory. The screenshot going around is NOT a paid ad from Melvin, it's a promotion of a headline from a CNBC show. CNBC doesn't take money to issue ads on behalf of its guests, they were merely teasing the content of the segment.
Individuals buying now are more likely to get screwed. On a self-interested side, they could be wanting as few retail investors to lose as possible to minimize the calls for new regulations
> But the hedge funds in question closed out their short positions days ago.
I have asked people about this. They accuse me of buying into corporate media propaganda. Melvin must still be in and be near exploding in their minds.
They put ads on Twitter saying the had closed their positions. Why would someone put ads on Twitter saying that? They're either lying or playing 4D chess.
That link is to a screenshot of a routine promoter for a CNBC show. I mean, I guess it's possible that this was done because CNBC took a kickback from Melvin to put paid content out on its twitter feed, but that would be a huge, huge scandal if so, much larger than the story of Melvin failing would be. CNBC may be business journalism but they're still selling journalism under the NBC brand.
They don't do that, basically. This is a conspiracy theory.
But it's old news. It's not even relevant content as of three days ago, where they first announced that they had closed their position. Is there even a new press release that restates the action they took and announced three days ago that would make it news?
>But the hedge funds in question closed out their short positions days ago.
No they haven't, because they are literally running ads on CNBC telling people that right now. Why would they spend money doing that if they no longer have skin in the game?
Please be patient, I seem to be experiencing some genuine cognitive dissonance. Rare to catch oneself at it so I hope you'll help.
In your example, if I understand it, I go to Alice, take her share and give her an IOU. I give the share to Bob, and take his money. Then I go to bob, take his share and give him an IOU. I give the share to Christy, and take her money.
I have two people's money, and two people have my IOU's. If ten shares exist and these are the only shares that changed hands, it would be 20% shorted - or am I misunderstanding already?
Assuming I'm not, I would think I need to buy any two of these ten shares to give one each to Alice and Bob, and it could be the same one if Bob or Alice sell it back to me after I return it for my IOU. Okay, so far so good for a 20% short position.
If the shares were 140% shorted, that would imply that I've sold each of the ten shares once, and four of them twice. This sounds like the same situation in theory except that now rather than having the option of buying a share from someone whom I've just returned it to for an IOU I now have to do that - four times at least in total. The difference practically though seems to be that people know I don't have much bargaining power. If ten of the twenty-four people who own either a share or one of my IOU's conspire to not sell me a share back at any price, I'm in a world of hurt - and the more shares I've sold, the higher the odds that enough of the people owning these shares would want to do exactly that.
Go to a broker, search for the security you're interested in but don't have a position in. Hit sell. You will receive cash, and you will see a negative number of shares in your account.
I keep seeing over and over again that hedgefunds MUST buy stock if the price goes up, and that 100% shares short is some sort of trigger that means everyone must buy.
There is another common misconception that stock cannot be created, that there is some finite supply. People should take note that AMC has (shrewdly) issued a lot of new shares in response to their stock price climb.
There's a few issues for the short sellers though, one is that their brokers are charging them interest on their borrowed shares as a function of their share price. The higher the share price, the more interest they have to pay. Not just that, the harder the shares are to borrow, the more interest they have to pay. This creates a ticking clock. During the initial BYND squeeze, some people were being charged 100% APY.
Then of course as it goes up and they bump up against their personal (or their brokers' personal) risk tolerance, they're forced by them to buy.
Is that what happened? Did hedgefunds run out of credit? The problem with this reasoning is that it takes rules which apply to small investors trading through an intermediate platform and applies them to Melvin. It's just false that anything would be a legal or rules-based trigger for Melvin to buy. They don't HAVE to buy like people have been claiming. Melvin isn't trading on Robinhood.
Melvin may not be trading on RH, but they are trading on a prime broker who has a personal risk tolerance expressed as a function of mark to market losses. Once you exceed your collateral the broker is on the hook for your losses and “shorting GME” is not part of a prime brokers business model.
It seems to me like the regulatory framework around brokerages like Robinhood that gamify trading need to be fixed, but it smells like something that’ll take an act of congress.
Which makes retail harder to invest and one of the reasons why people are mad is that they are not allowed to participate in the stock market. It doesn't seem like there's a winning formula here. The term professional investor is already under fire but it's literally by the decision makers to protect you. Not many people like that.
This is the weird part. If RH is in the wrong, the crime they committed was giving users what the users thought they wanted (all gas, no brakes, no seatbelts).
Despite this, the main problem I see with Robinhood is that with it's gamified UI, ease of access, etc... these 99.9 percentile events are mainly what it is designed for. It's encouraging people to pick up the "hot stock" on social media on a whim.
While there may not be legal repercussions for this, it's fundamentally incapable of it's core purpose. If you are new to RH you might not realize that the platform has outages all the time and it costs its users a lot of money. It is straight up dangerous to trade on this platform for the purpose which the UI glorifies.
Index funds have done a lot more to democratize finance than RH in my personal view. While commission free sounds fantastic, it comes with some very large hidden costs.