Anyone watching the Reddit/GameStop saga?

[jinjuku]

You have drawn an incorrect conclusion based on a lack of information. While I don't generally care much for articles on Yahoo Finance, here is one containing an interview with the CEO of Webull, which is another broker caught up in the GameStop (and other stock) frenzies:

Webull CEO: Here's why Robinhood is restricting users from buying stocks like GameStop

Webull CEO Anthony Denier joins Yahoo Finance Live to discuss how heavily shorted stocks are faring this week and break down why Robinhood restricted its users from buying surging stocks like GameStop, AMC, and BlackBerry.

finance.yahoo.com

The underlying cause of the buy trading stops was some under-funded brokers like Robinhood and Webull running out of capital to fund the two-day trade clearing period. It is not a conspiracy or the system being rigged.

This may not be the case. Robinhood, if underfunded, they are underfunded across the board. But they are only restricting certain stocks.

The issue is that Robinhood is selling peoples stock w/o consent. Plus there are better funded organizations that have done the same. That's called collusion.

Melvin Capital is bankrupt over this and Citadel was bankrolling them. Citadel also, wait for it... also has a large investment in Robinhood. I'll let you connect the dots.

 

[Hetfield]

This may not be the case. Robinhood, if underfunded, they are underfunded across the board. But they are only restricting certain stocks.

The issue is that Robinhood is selling peoples stock w/o consent. Plus there are better funded organizations that have done the same. That's called collusion.

Melvin Capital is bankrupt over this and Citadel was bankrolling them. Citadel also, wait for it... also has a large investment in Robinhood. I'll let you connect the dots.

I was gonna say from everything I read today Robinhood isn't just these "little guys" winning. As I understand it more there were big players in this Robinhood. This is a really weird story, I don't know where or how it ends.

Sent from my Pixel 4 XL using Tapatalk

 

[jinjuku]

Ok I don't understand any of this, I mean nothing. I get that done hedge fund was gonna lose a billion bucks.
What I don't understand is how do these people are making money if the stock is 300 bucks a share? If you bought it at 5 bucks yeah, but no one is making money now that it's 300. Am I correct? I'm order for you to have money in this deal you had to be in early? Am I right?

Sent from my Pixel 4 XL using Tapatalk

So here it is as short as I can make it (pun intended).

A short seller doesn't own stock in a particular company. A broker sells an option to a short seller to have the stock for a set amount of time. So they are transferred to the short seller. The short seller sells the stock for the current market value with the hunch that the price is going to drop in x time.

Short seller purchase back the stock from the market at the lower rate and returns it to the broker plus fee. Pockets the difference.

How the reddit guys made money is they found GameStop heavily shorted. And who's selling those shares? People that have an agreement with brokers that they are going to return those shares at a given date. They started purchasing up ALL the GS stock and where you have scarcity you have higher value and demand.

So this is where the $$ making part comes in: If a hedge fund put $2B into a position to short GS and they think that it's going from $20 to $10 then they are only having to buy at $10. But as the price starts going north of $20 they have to start purchasing it from the market again just to reduce their exposure. But they are purchasing from an organized group that rounded up all the available stock.

They have to do this because the put up $$ as collateral to cover their position. This panic buying only drives the cost up further because redditors aren't required to sell. As the drop dead date on S.S. looms near they are either going to up their offer (by seeking other investors) or bankrupt.

 

[Hetfield]

So here it is as short as I can make it (pun intended).

A short seller doesn't own stock in a particular company. A broker sells an option to a short seller to have the stock for a set amount of time. So they are transferred to the short seller. The short seller sells the stock for the current market value with the hunch that the price is going to drop in x time.

Short seller purchase back the stock from the market at the lower rate and returns it to the broker plus fee. Pockets the difference.

How the reddit guys made money is they found GameStop heavily shorted. And who's selling those shares? People that have an agreement with brokers that they are going to return those shares at a given date. They started purchasing up ALL the GS stock and where you have scarcity you have higher value and demand.

So this is where the $$ making part comes in: If a hedge fund put $2B into a position to short GS and they think that it's going from $20 to $10 then they are only having to buy at $10. But as the price starts going north of $20 they have to start purchasing it from the market again just to reduce their exposure. But they are purchasing from an organized group that rounded up all the available stock.

They have to do this because the put up $$ as collateral to cover their position. This panic buying only drives the cost up further because redditors aren't required to sell. As the drop dead date on S.S. looms near they are either going to up their offer (by seeking other investors) or bankrupt.

Boy is this stuff nuts. Its just impossible to understand at least for my tiny brain. I will bet 99% of the public have idea how any of this works. Its just insane.

Sent from my Pixel 4 XL using Tapatalk

 

[Irvrobinson]

This may not be the case. Robinhood, if underfunded, they are underfunded across the board. But they are only restricting certain stocks.

The issue is that Robinhood is selling peoples stock w/o consent. Plus there are better funded organizations that have done the same. That's called collusion.

Melvin Capital is bankrupt over this and Citadel was bankrolling them. Citadel also, wait for it... also has a large investment in Robinhood. I'll let you connect the dots.

The selected stocks were the ones causing the financial issues. They didn't shutdown all trading. There wasn't a lot of Robinhood action in IBM, for example, so IBM trading wasn't halted. Also, Robinhood denies the claims that they initiated sells without permission. If these accountholders accusing Robinhood of initiating sales without consent are margin accounts, they probably have language in their margin agreements allowing Robinhood to sell the shares at the company's discretion. Note this warning on the SEC website:

SEC.gov | Investor Bulletin: Understanding Margin Accounts

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about the use of margin accounts to buy securities and their related risks.

www.sec.gov

Recognize the Risks

Margin accounts can be very risky and they are not appropriate for everyone. Before opening a margin account, understand that:

• You can lose more money than you have invested;
• You may have to deposit additional cash or securities in your account on short notice to cover market losses;
• You may be forced to sell some or all of your securities when falling stock prices reduce the value of your securities;
• Your brokerage firm may sell some or all of your securities without consulting you to pay off your margin loan;
• You are not entitled to choose which securities your brokerage firm sells in your accounts to cover your margin loan;
• Your brokerage firm can increase its margin requirements at any time and is not required to provide you with advance notice; and
• You are not entitled to an extension of time on a margin call.

Your collusion argument doesn't seem to hold water. These brokerages would have to be incomprehensibly stupid to collude on equity trades, because there's such a detailed paper trail. Extraordinary claims like this takes evidence, more than "connect the dots". The only two "better funded" brokers that halted trading were TD Ameritrade (owned by Schwab) and Interactive Brokers Group; both only limited options trading.

As for your conspiracy theory about Citadel, I don't know what to say. Citadel is a financial services company, they're a market maker, for example, and they're also a hedge fund company. I'm not a fan of hedge funds at all, but why would Citadel try to force a portfolio company into bankruptcy?

 

[Irvrobinson]

I will bet 99% of the public have idea how any of this works.

I completely agree. Derivatives, as the entire class of financial instruments that are based on the value of asset, but not the ownership of the asset itself, are called, are legalized gambling on a multi-trillion-dollar scale, IMO. And then there's high frequency trading, which is another difficult to comprehend and scary strategy which is perfectly legal.

 

[Hetfield]

I completely agree. Derivatives, as the entire class of financial instruments that are based on the value of asset, but not the ownership of the asset itself, are called, are legalized gambling on a multi-trillion-dollar scale, IMO. And then there's high frequency trading, which is another difficult to comprehend and scary strategy which is perfectly legal.

And like a dope like me things a stock price is reflective of the company's profitability. Now revenue, more profits, stock should go up or the other way if revenue is down and profits are down.
All these crazy bets and all this shannagins is impossible to understand. It doesn't seem right or fair or anything. None of it, none of it makes any sense.

Sent from my Pixel 4 XL using Tapatalk

 

[Irvrobinson]

And like a dope like me things a stock price is reflective of the company's profitability. Now revenue, more profits, stock should go up or the other way if revenue is down and profits are down.
All these crazy bets and all this shannagins is impossible to understand. It doesn't seem right or fair or anything. None of it, none of it makes any sense.

Actually, the price of a stock is often more influenced by the forecasted future growth and profitability of a company than current revenue and net profit. This is the case with Tesla, for example, where many investors think Tesla is the next Apple, and Apple currently has a $2.5T market capitalization (the value of all outstanding stock), which is about four times as large as Tesla's. Tesla also has a cult of stockholders who are enamored with Elon Musk's leadership, and they bid up the share price. Other companies, like Ford, for example, do not inspire shareholder confidence about their future so Ford stock is considered grossly undervalued as measured by its price-earnings ratio.

Stock prices are exactly like the prices for used cars - they are both worth exactly what buyers are willing to pay for them. It isn't that difficult to understand, but these prices can be very difficult to predict.

 

[jinjuku]

The selected stocks were the ones causing the financial issues. They didn't shutdown all trading. There wasn't a lot of Robinhood action in IBM, for example, so IBM trading wasn't halted. Also, Robinhood denies the claims that they initiated sells without permission. If these accountholders accusing Robinhood of initiating sales without consent are margin accounts, they probably have language in their margin agreements allowing Robinhood to sell the shares at the company's discretion. Note this warning on the SEC website:

SEC.gov | Investor Bulletin: Understanding Margin Accounts

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about the use of margin accounts to buy securities and their related risks.

www.sec.gov

Recognize the Risks

Margin accounts can be very risky and they are not appropriate for everyone. Before opening a margin account, understand that:

• You can lose more money than you have invested;
• You may have to deposit additional cash or securities in your account on short notice to cover market losses;
• You may be forced to sell some or all of your securities when falling stock prices reduce the value of your securities;
• Your brokerage firm may sell some or all of your securities without consulting you to pay off your margin loan;
• You are not entitled to choose which securities your brokerage firm sells in your accounts to cover your margin loan;
• Your brokerage firm can increase its margin requirements at any time and is not required to provide you with advance notice; and
• You are not entitled to an extension of time on a margin call.

Your collusion argument doesn't seem to hold water. These brokerages would have to be incomprehensibly stupid to collude on equity trades, because there's such a detailed paper trail. Extraordinary claims like this takes evidence, more than "connect the dots". The only two "better funded" brokers that halted trading were TD Ameritrade (owned by Schwab) and Interactive Brokers Group; both only limited options trading.

As for your conspiracy theory about Citadel, I don't know what to say. Citadel is a financial services company, they're a market maker, for example, and they're also a hedge fund company. I'm not a fan of hedge funds at all, but why would Citadel try to force a portfolio company into bankruptcy?

But the redditors weren't margin , they were stock owners.

 

[Irvrobinson]

But the redditors weren't margin , they were stock owners.

I’ve read a few of those narratives. It doesn’t add up, literally. There aren’t enough accounts involved to make a dent in Robinhood’s cash flow, and they still have to give the proceeds to the account holders. What is Robinhood’s motivation?

 

[jinjuku]

I’ve read a few of those narratives. It doesn’t add up, literally. There aren’t enough accounts involved to make a dent in Robinhood’s cash flow, and they still have to give the proceeds to the account holders. What is Robinhood’s motivation?

I don't know, why do cops have the thin blue line? These redditors aren't doing this on anyone's margin. They are using and potentially losing their own personal money.

Robinhood doesn't have to cover any margins because there are none to cover. All these trades are 100% funded!

Bottom line is the entire market for the tickers involved should have been frozen out if that was the concern.

What was done was pretextual. The SEC regulations are probably a few New York phonebook thick so finding something, anything, to make this asymmetrical was just procedural.

 

[Irvrobinson]

I don't know, why do cops have the thin blue line? These redditors aren't doing this on anyone's margin. They are using and potentially losing their own personal money.

Robinhood doesn't have to cover any margins because there are none to cover. All these trades are 100% funded!

Bottom line is the entire market for the tickers involved should have been frozen out if that was the concern.

What was done was pretextual. The SEC regulations are probably a few New York phonebook thick so finding something, anything, to make this asymmetrical was just procedural.

You still don't seem to understand the situation. The financial issues of the affected brokers have nothing to do with margin trading. I bought up margin trading only because many people who trade options do use margin accounts, and lots of people never read their account agreements. And these agreements also certainly include mandatory arbitration in the case of disputes, which will make these lawsuits meaningless. Here is Robinhood's customer agreement. Good luck reading it easily, because it is written in legalese:

https://cdn.robinhood.com/assets/robinhood/legal/Customer%20Agreement.pdf

Fidelity Investments' agreement has many of the same provisions, but it is well-written in plain English:

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/updated-agreements/Fidelity-Account-Customer-Agreement.pdf

The entire basis of the financial issue affecting the brokers in question (like Robinhood and Webull) are trade clearing funding costs. These costs are independent of whether the trades originate in margin accounts or not. I could reference a bunch of news articles explaining, but most require a subscription (WSJ, Bloomberg, The Economist, etc.), and Robinhood did put a plain English explanation in their blog:

What happened this week - Robinhood Newsroom

The mechanics behind your trades With the extraordinary market activity this week, and the temporary restrictions we put in place

blog.robinhood.com

This correlates well with the more complex explanations in the WSJ and Bloomberg.

One action Robinhood has taken makes me wonder how it will play out, and that is their new limit on only allowing accountholders to buy one share of GameStop. My guess is that their attorneys have determined that action is legal, but if I was a Robinhood account holder I would dump them ASAP.

Regarding the Reddit narratives, I have no doubt that some of them are either due to app usage mistakes (it is so easy to touch the wrong thing on a phone display) or mistakes or errors made by the brokerage firm. I have been the recipient of several brokerage mistakes over the years, and I know people who have been in the same boat. Nonetheless, these anecdotal tirades on Reddit have no standing, and given the mandatory arbitration clauses and non-disclosure agreements that come with any settlements, we'll probably never know the basis behind these customer problems. Since I can't imagine how Robinhood benefits from unauthorized selling of equities in non-margin accounts, if it did occur it might be a user problem, a software problem, or both. Like I said, I think we'll never know the full story.

 

[jinjuku]

Again, IMO, it's all pretextual. Robinhood is in no financially compromised position to effectively halt trades for retail clients (tying one groups of hands up) while another group has time to divest and get themselves leveraged out of their short position.

Their terms of service have to be brokered against clean hands. If it's discovered that they did this under the table then their TOS is toast.

 

[jinjuku]

Bottom line is one group of people over shorted GS to drive the prices DOWN. Another group saw this over leveraged position and turned liquidity into stock to drive prices up to force the shorts to start mitigating their exposure.

This is on the short sellers. It's their fault. Pigs get fat, hogs get slaughtered.

There needs to be a come to Jesus meeting about all of this. This is fundamentally screwing over retail traders to the benefit of insiders.

 

[Hetfield]

Bottom line is one group of people over shorted GS to drive the prices DOWN. Another group saw this over leveraged position and turned liquidity into stock to drive prices up to force the shorts to start mitigating their exposure.

This is on the short sellers. It's their fault. Pigs get fat, hogs get slaughtered.

There needs to be a come to Jesus meeting about all of this. This is fundamentally screwing over retail traders to the benefit of insiders.

Now again this stuff is WAY over my head but couldn't this continue and happen with ever stock in this position that people know are "shorting"? Is this primarily how hedge funds make money? And lots of it? Again, just asking questions because I know nothing about any of this. Also hedge funds have regular people money in them don't they? Like pension fund for the working stiffs, police, fireman, teachers, ect? Am I correct about that also?

Sent from my Pixel 4 XL using Tapatalk

 

[jinjuku]

Like pension fund for the working stiffs, police, fireman, teachers, ect? Am I correct about that also?

Only if your investment firm places your money into them. I have Fidelity ETF through work. I have Vanguard and Invesco on my own. My Vanguard holdings are dividend funds.

 

[jinjuku]

This type of reporting is killing me. I understand the mistrust of 'journalism' (from CNN):

"If a Reddit forum can create and destroy billions of dollars, how much can we trust the markets, financial engines of the US economy?"

Nothing has been destroyed. Redditors are going to start cashing out at some point. One guy got in at $5K and got out at $47K. Another apparently got in at around $50K and now has a cool million.

 

[Trebdp83]

Is all action in the financial markets in this country on the up and up? No, but that doesn’t necessarily make them illegal. Are all for-profit media outfits and political whores going to scare the s#%t out of the masses to milk that for all it’s worth? Yes, and that isn’t exactly on the up and up either.

 

[Irvrobinson]

Here's an interesting little tidbit.

Lawsuits see conspiracy in Robinhood's GameStop moves, but experts doubt narrative

The commission-free online brokerage Robinhood faces several new class-action lawsuits brought by customers across the U.S. this week, alleging the company...

www.marketwatch.com

Note this quoted section:

While the company has said that this is part of our “standard margin-related sellouts or options assignment procedures,” left unsaid is the fact that Robinhood users are automatically enrolled in a margin account that leads to users effectively borrowing from Robinhood to execute trades, and gives the firm latitude to liquidate their holdings without permission.

“I have no idea why regulators allowed this,” Awrey said. “That is an issue that’s at least as uncomfortable for Robinhood’s regulators as it is for Robinhood,” he added, arguing that the Financial Industry Regulatory Authority, the Federal Reserve, or the Securities and Exchange Commission could have restricted the “extremely unusual” practice and therefore saved many of its customers from the confusion and disillusionment that resulted from having their holdings automatically liquidated.

Robinhood did not respond to requests for comment.

The University of Pennsylvania’s Fisch said that ultimately, these issues are likely to be addressed by regulatory actions rather than private litigation, which could easily wind up in a private arbitration process.


Amazing. Robinhood customers have been automatically enrolled in margin accounts, apparently without knowing it! That gives Robinhood arbitrary control over what's sold and when, as I pointed out in a previous post. This means most of these customers who think they don't have margin accounts probably do! And note the final quote saying the same thing I did previously about mandatory arbitration.

If I had a Robinhood account it would be history. I'm glad I don't.

 

[jinjuku]

Here's an interesting little tidbit.

Lawsuits see conspiracy in Robinhood's GameStop moves, but experts doubt narrative

The commission-free online brokerage Robinhood faces several new class-action lawsuits brought by customers across the U.S. this week, alleging the company...

www.marketwatch.com

Note this quoted section:

While the company has said that this is part of our “standard margin-related sellouts or options assignment procedures,” left unsaid is the fact that Robinhood users are automatically enrolled in a margin account that leads to users effectively borrowing from Robinhood to execute trades, and gives the firm latitude to liquidate their holdings without permission.

“I have no idea why regulators allowed this,” Awrey said. “That is an issue that’s at least as uncomfortable for Robinhood’s regulators as it is for Robinhood,” he added, arguing that the Financial Industry Regulatory Authority, the Federal Reserve, or the Securities and Exchange Commission could have restricted the “extremely unusual” practice and therefore saved many of its customers from the confusion and disillusionment that resulted from having their holdings automatically liquidated.

Robinhood did not respond to requests for comment.

The University of Pennsylvania’s Fisch said that ultimately, these issues are likely to be addressed by regulatory actions rather than private litigation, which could easily wind up in a private arbitration process.


Amazing. Robinhood customers have been automatically enrolled in margin accounts, apparently without knowing it! That gives Robinhood arbitrary control over what's sold and when, as I pointed out in a previous post. This means most of these customers who think they don't have margin accounts probably do! And note the final quote saying the same thing I did previously about mandatory arbitration.

If I had a Robinhood account it would be history. I'm glad I don't.

This all fit's the narrative that the fix is in. I thought that these accounts were liquid, as they should have been, and not margin. That's a sleazeball move right there.