The Fatuous Uproar About Robinhood and GameStop

Not only is your humble blogger not feeling well and in no mood to write, but due to the uninformed and misguided hyperventilating about Robinhood and the outrage about Reddit touts being deprived of their trading fix and possibly some gains, I nevertheless feel compelled to weigh in.

I can muster the teeniest bit of sympathy for media frenzy over this story. It’s a happy bit of nostalgia, a reminder of the innocent days of the flash crash, before Trump and Covid. Plus the financial press must be happy to be getting some attention again. First Leon Black, now wild stock gyrations and lots of finger-pointing. They might be on a roll.

But let’s put the atmospherics to the side. This episode, including the grotesquely disproportionate amount of attention it is getting, is an indictment of American capitalism.

First, the spectacle of the Senate wasting its time, in the middle of a pandemic, on some trading junkies maybe having not made as much money as they felt entitled to, is pathetic. It shows how warped the priorities of our putative elites are. This is secondary market trading in one bloody stock. Secondary market trading is societally unproductive (more on that shortly) and should be discouraged by increasing transaction costs (this is one of the big reasons to push for a financial transactions tax, not for revenue purposes, although that’s a nice side bennie, but to shrink the financial casinos).

The company is unimportant. The parties on both sides are competitors in a beauty contest between Cinderella’s ugly sisters: clueless new gen day traders versus clumsy shorts, many of whom look inept at the basic survival requirement of managing trading risk. And as we’ll address in due course, the real bad guy, the SEC for promoting such a socially unproductive market, has yet to receive the criticism it deserves. It’s simply bizarre that cheap market liquidity is being treated as some sort of right.

The focus has been the traders on Robinhood, a free trading platform, although some of the bigger low-cost services also had some trading halts in GameStop. These punters are surprised that a free service might not give them the best, or any execution in a bad market? Did they not work out that they were the product and having their order flow to Citadel might not be a great position to put themselves in?1 Or as Financial Times reader AM put it:

Providing zero commission retail investing is only viable with an inflexible and highly optimised execution model.

It’s no surprise that the execution model fails for small single name stocks when their market goes haywire.

Now in fairness, it appears that not all of the speculators involved in the short squeeze were plucky retail investors up against big bad Wall Street pros; some have suggested that there were hedge funds on both sides of this play. But the press is still running uncritically with the “little guys get the better of professional money” spin, no matter how well it actually fits what happened.

However, another wee problem with the little good guys versus big bad Wall Street narrative is that the retail traders might be deemed to have engaged in price collusion or market manipulation. Bloomberg’s Matt Levine walked very carefully around the issue and said he couldn’t conclude either way. But his arguments to try to exculpate the Reddit-maybe-colluding longs all hinged on the trades being one big lark. So why should Congresscritters come to their defense if it’s not clear that their activity was legal, and it is clear that they were speculating, not investing? You live by that sword, you can die by it too.

The shorts are depicted as hedgies, when short sellers are arguably the least pernicious financial speculators. They do the unloved and risky work of finding badly managed, overhyped, or even outright fraudulent companies, then betting on their views and trying to educate other investors that they are being had at current price levels.

However, the GameStop shorts look like an awfully inept bunch. Even though at a remove, they appear to be correct about their views of the company’s valuation, if you are a short, you never want to take a position that is so large you can’t get out of it pretty quickly, as in out of proportion to regular trading volumes. This is the same rookie’s mistake that brought down LTCM, which managed to make a outsized bet in the interest rate swaps market. From Ghostrider2014:

Firstly, contrary to what WSBers think, there is no sympathy in any corner (wall street or main street) for the HFs who in their infinite wisdom shorted over 100% of free float – that is just dumb and they deserve to lose in the squeeze.

Secondly, there is no way the long is driven solely by retail demand – there is over $15bn of trading every day for the past 4-5 days and that has to be institutional money. So this is HF vs HF most likely.

Finally, brokerages have no incentive to halt trading unless they have capital/margin requirements from the clearing houses. So this conspiracy theory of wall street banding together doesnt make sense.

Second, the reporting on the Robinhood and other trading halts in GameStop has been abysmal. Some of them were circuit-breaker-type interruptions due to the speed of the price moves. But that big uptick in price volatility in turn led the clearinghouses imposing higher margin requirement on brokers trading in GameStop, hitting Robinhood, proportionally most exposed, the hardest. Mind you, I’m not saying that Robinhood handled its customers very well when this happened, but the underlying cause isn’t nefarious. Robinhood is likely to be revealed as incompetent, which is still a very bad look someone handling other people’s money.

See the discussion by the WeBull CEO starting at 1:20 on the big increase of DTCC margin requirements and how that affected brokers:

The simplified version from DSC at the pink paper:

RH has capital requirements for that activity and in extreme vollitality/elephant herd of orders it’s easy to see how that got smashed and how it might have been reasonable for RH to liquidate non margin but RH funded positions

Third, while this story has entertainment and perhaps even educational value, the fact that it’s getting any traction in DC is confirmation of how backwards our priorities are. Since the crisis, there have been boatloads of economic studies on secular stagnation and other ills of advanced economies. Despite the joke, “You can lay economists end to end and never reach a conclusion,”: a surprisingly large number depict overfinanicialization as a drag on growth. Even the IMF concluded that the country representing the optimal level of financial “deepening” was Poland circa 2015, and more financialziation was productive only if regulations were strict. Those conditions haven’t been operative in the US for quite a while.

On top of that, the most unproductive activity is secondary market trading and asset management. The US stock market has a very high level of secondary market activity compared to primary investment, as in companies selling stock to the public to raise new funds to expand their business. You don’t need anything approaching this level of liquidity for companies to be able to price and sell new shares, as the success of large (by the the standard of the day) IPOs and stock offerings of seasoned issuers back in the stone ages of high priced stock commissions attests. The fact that it’s twice as easy to become a billionaire in asset management as in tech shows the degree to which money manipulation is sucking activity and talent away from Main Street to Wall Street.

Fourth, and related to our third point above, is how the SEC has actively promoted speculation and poorly functioning markets. Since my childhood on Wall Street, the agency has relentlessly pushed for lower and lower stock trading costs, as if that were somehow a good in and of itself. In fact, it has largely fostered speculation and the worst sort of liquidity, the kind that is there when you don’t need it and goes poof when you do. It’s a complete disgrace that SEC hasn’t stopped high frequency trading, which is destabilizing in bad markets, which it could easily do by revoking Rule NMS, which on top of making the world safe for high frequency traders, dark pools, and also gave American the worst possible market structure. As recovering derivatives trader Craig Heimark and we explained in 2014:

Perversely, much of the regulation of the last twenty years has been nominally in the interest of “market efficiency” but has come at the expense of market integrity. Far too many of the arguments and studies saying the promotion of competition among exchanges (and dark pools) has led to greater efficiency look at the efficiency as measured by the bid ask spread (plus fees) only of trading in the top stocks (because if they are trade weighted so that is where all the volume is). But this greater efficiency comes at the expense of no reciprocal liquidity obligation (witness the flash crash) as well as reduced liquidity in less frequently traded stocks.

The societal benefit of trading is to reduce cost to raise capital for actual companies. Does anyone really think that narrowing the spread on Google by a penny or two makes any difference to its weighted average cost of capital? In contrast, incidents like the flash crash and the feeling the market is rigged keep many small investors away from the market. The penalty for reduced liquidity in small stocks may actually be material to small company capital formation.

And these small investors are right to be concerned. The old exchange system was a hub and spoke model, which was a stable system architecture. The internet was an outgrowth of a DARPA project to make a communication system so decentralized that it could not be taken out by a nuclear strike. Hub and spoke models are stable, but subject to an outage, say by a nuclear bomb or electrical failure. What chaos theorists have found is that highly decentralized networks are stable, as are single node networks (like exchanges), but that slightly decentralized networks are fragile. And that is what we have now thanks to the SEC’s misguided efforts to “modernize” the stock market via Regulation NMS.

So I am bracing myself for some particularly painful, as in misguided, Congressional hearings and follow on upset. It’s really disturbing to see the Congresscritter eagerness to score points on this nothingburger (in the larger scheme of things) on Twitter and in the press, when late 2019 House hearings on private equity abuses produced an embarrassing amount of Big Finance pom pom waving on both sides of the aisle.

And while I would be delighted to be proven wrong, the odds of anything good coming out of this controversy look vanishingly small.

1 Just to be clear, the order flow buying part of Citadel swears up and down it has a firewall between it and the hedge fund part of Citadel, which translates into, “Don’t you accuse us of front-running.”

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    1. Yves Smith Post author

      Thanks! Had to launch before totally done due to wanting the headline to be included in our daily e-mail blast, so please have a look at the last bits.

  1. GramSci

    Thanks, Yves!

    I know you didn’t welcome this “assignment”, but somebody had to point out the emperor was naked!

  2. Bill Smith

    I think the thing would actually get Washington”s attention is if the stories that Robbinhood actually sold non margin long positions in GameStop that some of their account holder had without their permission.

    The problem is 1) the stories might not be true, 2) who knows that the terms of service with Robbinhood actually say.

  3. Temporarily Sane

    The BBC ran an article about a guy who lost a few grand in this “scandal.” He unironically complained about how unfair it is that working-class stock traders are getting shafted by the big Wall Street players. MSM coverage of this non-event has largely been idiotic. The leftish pundits on YouTube and Twitter haven’t been doing much better.

  4. no use for a username

    All of these are good points. While I have not purchased any of these reddit stocks myself, I know people are desperately in debt, avid reddit readers, and are betting amounts akin to this year’s modest 401k contribution on these stocks. They are not unique. It’s risky, and while desperate, these people are not stupid. When Robinhood and other trading platforms shut down trading, they were unable to sell their stocks and capture their gains. This might be HF vs HF, but the impacts on real people are wide spread. It’s one more reason for us all to sit at home and be good little debt slaves.

    1. Yves Smith Post author

      That part is very sad and a point I underplayed, since the screeching about Robinhood so far seems to be mainly traders acting as if they are upset about having been denied trading gains, as opposed to incurring losses they might not otherwise have suffered. That is one of the few areas where the press could shed some light. There were earlier reports after a Robinhood trader killed himself when his account showed a huge loss, which as I recall even worse would have washed out when his options settled. They stressed how Robinhood was deliberately seductive and game-like, designed to entice users into not seeing their trading as being all that risky.

      1. Alex V

        I’ve been reading the WSB subreddit a bit and there is a significant proportion of users saying they don’t care if they lose everything on GME, out of spite for Wall Street. Who knows how true this is, but the sentiment feels genuine based on the number of upvotes.

        They also share tips on which trading platforms are still accepting GME trades when other are halting, in virtually real time.

        “Hold” is the most popular word used by far.

        As usual, anecdotes are not data.

          1. lyman alpha blob

            Excellent take, and so was the one you posted yesterday –

            I think Yves post above does a great job of getting past the overly simplified ‘David v Goliath’ narrative being spun by a lot of the media, but I think that among the Davids involved, there is a cohort who saw a chance to [family blog] the big guys and went with it, even knowing they were likely to lose in the long run. Because it made them feel at least a little powerful and alive, and because they could.

            I had a buddy who got into day trading when it first became a thing back in the 90s. He knew nothing about stock trading, but was a bright guy who learned fast and had a rich dad. The dad was a well heeled investor who offered to set him up with a job with one of his broker friends, but my buddy convinced his dad to stake him with some cash to start investing on his own instead. We was lucky in that he started out in arguably the biggest bull market in history where it was really pretty hard to lose money for a few years, but he also did his research, a lot of it, and developed a very unemotional, fairly conservative trading strategy and did very well for himself even when the market turned. He also ponied up for some fancy trading tools and had access to level II quotes.

            His dad still invested the old-fashioned way through the advice of his broker, Merrill Lynch. My buddy saw Merrill dumping huge blocks of stock in real time that they had just recently recommended to his father as a buy. He told his dad who went screaming into his broker’s office and if memory serves, the broker was suitably embarrassed, didn’t want to lose a big client, and promised to put my buddy’s dad on the A list going forward.

            My buddy wasn’t the only one who noticed Merrill ripping its clients’ faces off and a couple years later their unethical (and should be illegal) behavior turned into what was at the time a pretty big penalty for Merrill, although as NC readers (and Nader) know it wasn’t nearly adequate –

            Funny thing is when I went looking for a link to that older settlement, this first thing that popped up was this one, where Merrill almost two decades later got popped again for misleading its investors –

            Clearly slap on the wrist fines aren’t much of a deterrent. I’m with Yves in thinking that not much good will come out of this latest episode, since it never did in the past. But if there are actually some retail investors in the mix sticking it to the hedgies who made stupid bets, and they aren’t worried about losing a few hundred bucks to bring some pain, even if it is only temporary, I say sic ’em.

          2. Sutter Cane

            Great link, farragut, thanks for posting it. Really nails it.

            I think it is easy to make this too complicated. It really comes down to, a lot of people saw an opportunity to buy a stock for $50 bucks and make a hedge fund pay them way more than that for it.

            Sure, there is a core of wsb redditors who know the market well, and even some who think Gamestop is actually going to turn it around and be successful. But mostly there are a bunch of people who probably never heard the term “short squeeze” until this came up, but when you explain “If the hedge fund can’t cover it, they have to buy it back from you at whatever price you set,” they definitely understand THAT, and viewed it like betting on a horse race or football game. And with the pandemic, they are looking for entertainment. The fact that some “wall street fat cats” would be the ones paying out is icing on the cake.

            Sure, stock shorters do valuable work by uncovering fraud, like in the case of Enron. But Gamestop isn’t Enron, and as Yves says, these guys are pretty inept. I honestly don’t know what these short sellers who haven’t closed their positions are thinking!

            For people scraping by who saw a shot to quickly turn 100 bucks into 400, 1000, maybe more – who can blame them?

          3. Thomas P

            From farraqgut’s link:
            ” To do what is known in gaming circles, as Int-ing, or Intentionally dying. Running madly at the boss, unworried if they are going to lose, suffer, or die.”

            Some may even take this literally. I think people on Wall Street should take note of what happened at Capitol, they may be next.

        1. ObjectiveAce

          I highly suspect most of these “users” are actually hedgies or even bots from hedgies that are trying to amp up the masses to support their positions as they close them out. The genuiness was carefully crafted to spur emotions and get people to not think logically. I guess to your point though, social media is a big giant echo chamber, so once real people start thinking that way, they repeat it

          Its very reminiscent of the dot com bubble, except the chatrooms are now on reddit

          1. Alex V

            How many people actually work at hedge funds? I’m guessing a few less than the 5.9 million users on the subreddit now, or the approximately 6.5 million RH users (13 million users X percentage alleged to hold GME stock in some reports) with shares.

            Difficult to prove any of this, but I have my doubts even the HFs are this coordinated or even smart.

            1. ObjectiveAce

              You dont need 6 million. You just need a couple people to write something marketing their position and a couple hundred bots to upvote that post to make sure everyone sees it. Very little coordination required

              Most WSB thesis have a healthy dose of people arguing both sides. Anyone expressing anything related to the downside of WSB gets downvoted to oblivion and I believe some of the contrarian posts are being removed. Someone posted something about how GME could issue more shares which would eliminated the ability to squeeze the stock anymore and the post has been removed.

              1. Alex V

                Since this isn’t my area of expertise, how would GME issuing more shares help anyone except the HFs that were short? I guess GME would raise capital and the rival HFs could ride the current momentum, unless they have both longs and shorts? Or would they only want a limited number issued, so that a squeeze would still exist and they could still profit. Sorry for not knowing all the ins and outs.

                1. Objective Ace

                  Welp it would help GME.. which is why they would do it. But trader wise, yea it would definetly be bad for people long. In some way it might hurt traders who were short too, if GME could somehow sell shares for like 50 dollars and actually capiatlize on the current paper value of GME.

                  GME is currently a 25 billion dollar cap company. Pre bubble it was maybe 1 billion. If they could just extract a couple billion before the bubble blows their genuine intrinsic value would rocket up multiple times because they’d be sitting on that much cash. It will be interesting to see how everything plays out.

                  PS. GME issued a prospectus in December to issue 10 percent more shares with a price of 18 dollars. No idea realistically when they actually could issue these, but I feel like its a story being ignored

                  1. Wukchumni

                    25 Billion was the amount that Enron took Californians to the cleaners in gouging us on rates 20 years ago, and at the time it seemed like all the money in the world.

                    Now some pesky video game retailer is in their ranks.

                  2. Mike

                    Shareholders can sell if they like . However, If the company issues shares it will hurt their share price and thus their share holders and help the hedge funds that had sold the stock 150% Short in an effort to put them out of business. And the Longs are likely to be gme customers too .

                    1. Objective Ace

                      If someone truly believes the value of a stock is x amount of dollars, they would be indifferent if the company sells more shares for x amount of dollars

                      If GME is really worth 300 dollars, then GME selling more shares at 300 dollars should not effect the price. They now have the corresponding cash on their books. Put differently, if the stock is diluted 10 percent , or 2.5 billion in this case – it makes no difference to stock holders because GME has 2.5 billion in cash now

                      What you mean to say is: if the company issues new shares it will hurt the share price if the price is artificially high.

                      Well run companies tend to buy back stock when they view is as undervalued and sell more when its overvalued. Warren Buffet is known for doing this

            2. Mike

              And it has the following of other mainstream popular voices in Dave Portnoy.
              GME went from 40 to 480 ( loser now ) in the blink of an eye with over 60mm shares short . Looks like close to a 25B margin call / loss for a few concentrated hedge funds .
              That is a big number and it only counts the GME losses . And the short interest is north of 100%

        2. a different chris

          >saying they don’t care if they lose everything

          Lose everything as in every penny of they own, or lose everything as in their “FU Money”? Big difference.

          1. Fiery Hunt

            Not really.

            Most of us don’t have FU Money.

            We know there’s no difference between flat broke and owing X.
            Either way we’re screwed.

            “Freedom’s just another word for nothing left to lose.”

        3. vlade

          The problems is that these “we’re out to hurt HF” know s-it about markets. They are NOT hurting WS. In fact, they are actively making money for HS.

          Most HFs, and pretty much _all_ brokers and investement bankers need volatile market to make money. The absolutely worst possible thing for those people are stagnant or just trending (either way) markets. That stuff means people don’t trade – they want people to trade.

          When a stock gyrates tens or hundreds of percents a day, that’s when they make their money.

            1. vlade

              “few hedge funds” is, in the context of WS insignificnat. In fact, HFs aren’t hedge funds (they may be the most visble and “sexy” to write about, but they are not).

              At any given time there’s a few HFs that are hurting, often badly.

        4. drumlin woodchuckles

          How many of the Redditraders wanted to make money? As against how many of them wanted to get revenge?

          How much money did the Redditraders collectively lose overall? And how much money did the targeted hedge-funders lose overall in this event? If the hedge funder(s) lost more money overall than the collective Redditraders lost, then the Redditraders were able to impose more pain on the hedgefunders than the pain they themselves had to endure along the way. If so, did they inflict so much more pain on the hedge fund(s) than what they themselves suffered . . . . that the revenge was worth the price?

          If they end up collectively deciding it was, then they may try more revenge strikes in the future. And they may be more purely revenge-seeking strikes . . . Vengeance Plays , if you will.

          That would be an interesting development.

    2. ObjectiveAce

      I haven’t seen anything suggesting Robinhood didnt let people sell/close out their GME positions. Do you have a source for this? That would be extremely damning if true.

      1. occasional anonymous

        It prevented people from buying, not selling. ‘Conveniently’ it happened just as the stock was nearing $500. And there’s allegations of the app forcibly selling people’s stocks.

        1. Tim

          Yes, check the price action after RobinHood’s action.

          They had real reason to do it as Yves discussed, but she missed that this immediately resulted in the share price being cut in half, and people rightfully FEELING they were burned by it.

          Also note the attached link and the 140,000 upvotes and comments. You can’t win against somebody with nothing to lose and there are a lot people that feel that way having barely survived the GFC.

        2. jonswift

          Would someone please explain how you can sell something without someone/thing else buying it?
          I’ve got an old car I would love to sell that way.

          1. occasional anonymous

            Robinhood is just one brokerage app. People could still buy through any number of other venues.

  5. Alex V

    Missing “b” bold tag at end of Fourth.

    Also, any thoughts on the sheer volume of deliberate Reddit trades creating momentum that the HFs simply followed due to their algos, not due to some predetermined strategy?

    1. Yves Smith Post author

      Thanks, will fix!

      I am not clued into the world of algos, but the algos are really dumb if they piled big trades into a not very liquid market.

      1. Alex V

        I guess one way to see that would be to see trading volume data of Redditors and HFs separately and see how much they correspond? Assuming RH was lots of small transactions and HFs were fewer but bigger. But perhaps not possible since brokers such as RH bundle trades to market makers, if I’m remembering what I read correctly. Also wondering how many algos are complete black boxes at this point, due to “AI”.

        Asking about algos only because I once met a quant working in a pension fund at a party and I inquired if any human occasionally checks if the machines are making trades that make sense. His answer was basically “nope”.

      2. Tim

        Trust me, the algos live for that volatility, liquidity be darned.

        As a personal example I bought $1000k shares of a very illiquid penny stock on a lark, which jumped the price 10 percent. Within a 10 seconds the price went up another 80%. That was no human doing the buying, and I’m not sure they had the ability to close out that trade at a profit, since there was no volume to support it on the backside as it came back down to earth on almost no valume. That was in 2016.

  6. Wukchumni

    Having no vested interest in 3 letter montes, i’m clueless about them in the same way i’d not care about somebody’s bowling score.

    My dad’s first foray into finance was penny stocks in the mid 1950’s in Denver, and here we are in a uproar over a digital penny stock that could have far ranging consequences for all I know. What if ‘GameStop’ was taken literally and Wall*Street was taken out by machinations, in a similar fashion with ‘To Serve Man’ being a cookbook?

    1. Randall Flagg

      “To Serve Man” It does seem like a lot of what’s happening today is nothing but aTwilight Zone episode.

  7. Mikel

    “Secondly, there is no way the long is driven solely by retail demand – there is over $15bn of trading every day for the past 4-5 days and that has to be institutional money. So this is HF vs HF most likely….”

    I”m looking forward to the reveal of the institutional players on the long side. Maybe they will start being named soon.

    I’m guessing that won’t recruit stock bagholders like “fighting the establishment.”
    Count me suspicious at the way everyone fell in line with the “rebel retail trader” narrative.

    And Robinhood hasn’t handled any volatile period well. Reports were it was a mess during the Feb/March 2020 crash.
    Glitchy, poor customer service, and financially unstable….of course they were talking about going public!

  8. FreeMarketApologist

    Thank you for this. I’ve been fuming a bit over the misinformation presented in various posts and online forums, as well as the mainstream media, and the endless conspiracy theories which are presented instead of a solid knowledge of market structure, the mechanics of prime brokerage financing, and hedging of option calls. Matt Levine’s writeups of the events are right on, if a bit breezy — he assumes his writers know how market structure works, and is happy to point out the inanities that can result. A few pertinent facts:
    * The founders of Robinhood were previously programmers for high frequency trading activity. Their knowledge of the requirements of running a retail brokerage was effectively zero. Given the run ins they’ve had with FINRA and the SEC since startup, they’re still getting up to speed in how retail brokerage works.
    * Much has been made about the fact that Citadel has bailed out one of the hedge funds that had significant short exposure to Gamestop. I would suggest that this is simply because Citadel (the broker-dealer arm) was acting as their prime broker, and had to make a funding call, or Citadel the HF side or Citadel the broker-dealer (separate divisions/legal entities) had a hedging swap with the other HF – in either case the price caused a call for increased collateral. It’s not unusual for a PB (or an underlying bank where there is one) to provide financing, even via an ownership position in a stressed position – this happened in the case of LTCM: A consortium of banks stepped in with funding and took ownership positions in the firm. The conspiracy theorists want to make much of this because Citadel also pays RH for order flow, but forget that the simplest explanation is usually correct: Citadel has it’s own capital and funding requirements, and has to follow the SEC regulations on funding and margin (theirs and customers) – they can make plenty of money within the structure of the regulations, without resorting to rule-breaking practices.
    * The media has been very unclear on whether the RH trading is direct purchase of positions, or through options. Options trading is a great way to leverage your bets, but is carries greater financial risk, and can really change capital requirements for the broker-dealer. There’s a reason that there are whole separate set of disclosures and ‘suitability’ requirements for customers who want to options trade – this has been industry practice for decades. I could imagine that RH could have been deficient in doing their due diligence around whether a client should trade, or obtaining all the add’l paperwork.

    1. Yves Smith Post author

      Thanks for this. I had totally forgotten that Citadel was a prime broker, as well as the possible lending exposures as a HF counterparty. Both make sense.

      And due to not wanting to think harder about this than I really had to, I forgot (gah!) that Robinhood also traded options. Their customer who committed suicide showed his big apparent loss on an options trade.

    2. lyman alpha blob

      From what I’ve read in recent days a lot of the RH trading was through call options. And check out the chart in the following article which was posted here yesterday showing a huge recent increase in options trading among retail investors in general –

      It seems like there must be heavy hitters involved somewhere in all of this, but one of the narratives is that the little guys made small investments they knew they were likely to lose to basically make a very loud point. If that narrative is true, the way to get in on the action without losing too much would be with options. I’ve never used options myself, so maybe others who do could chime in, but I can’t imagine that in the current scenario gamestop options would have been priced correctly. You could probably have purchased a call option with a 300 strike price for dirt cheap a week or ten days ago when the stock was selling for 50 bucks. (Again, not an options trader so I have no idea if anyone would even sell options with a strike price that far out of the money at the time of sale, but 75 or 100 seems within reason and probably also pretty cheap). And if the option is no longer in the money when the contract expires, who cares? You aren’t out much and you made some big piggies squeal.

      1. Odysseus

        Again, not an options trader so I have no idea if anyone would even sell options with a strike price that far out of the money at the time of sale, but 75 or 100 seems within reason and probably also pretty cheap

        You’re probably not going to see 6x the stock price, but you can definitely find stocks with a 2x range of options prices. I just checked American Air Lines (AAL) on Fidelity right now, and the highest strike price option it shows me for a $17 stock is $35.

        I don’t know what rules govern what strike prices are advertised and traded. I just checked AMC, and it has options from $1 to $40. The 52 week high is $20, so that still makes sense if all of the options commonly quoted are within a 2x range of known possible prices.

        GME calls are listed up to an $800 strike price. Which again is roughly 2x the recent highs.

  9. Louis Fyne

    I’ve dealt with Citadel/their legal dept, they are as by-the-book as they come.

    Citadel was steamrolled by a financial press and punidtry that’s click-hungry and publishes anything first and asks serious questions second , if ever

    (yes, everyone get out their smallest violin)

    1. Harry

      i have absolutely no sympathy for Citadel, and the reason they are taking heat is because they are acting on too many sides of the market simultaneously. They are the buyer of the RH order flow, which means they have been able to front run the flow, while at the same time offering money to Melvin to finance the maintenance of the short position.

      Pick a business if you want to avoid the appearance of conflicts of interest.

      1. FreeMarketApologist

        I have to object to your statement: When you say Citadel have been able to front run the order flow, you’re saying that they are deliberately violating securities regulations (violation of the Limit Order Display rules and the Manning rule). I think some evidence is needed for such a statement.

        By regulation, they are required to keep their proprietary positions (held by the hedge fund or other divisions of the Citadel entity) and their market making positions separate and distinct, and proprietary traders are not able to see customer order flow. Also, they are subject to a whole slew of order handling rules (in addition to those noted above). Even for the job of market making, customer orders are preferenced over the market maker’s orders. As somebody who has worked for market makers, I can tell you that the business is lucrative enough when working within the rules to bother with the risks of working outside of them.

  10. The Rev Kev

    However entertaining this story is, it is the repercussions that are actually instructive. When the media tried to deep-six the Hunter Biden laptop story, that was a clear demonstration that the media was taking sides in an election instead of reporting it. The fracas at Capital Hill was instructive in how people reacted to it. So you have two divisions of National Guard sitting on their heel in DC for the next coupla months because legislators are scared, people like AOC were calling for censorship along with a lot of other people, federal buildings and streets were being fortified, and social media started to delete people and groups. Very instructive that.

    And now Gamestop is being instructive in the position of Wall Street traders today. Of course there were the usual suspects talking about ‘foreign’ influences and how unfair it is to small people while risking people’s pensions but there was something else. So not only were WallStreetBets booted off Discord without any notice, now Facebook has given them the boot as well because reasons. So the takeaway lesson is that big tech will always take the side of the establishment and can never be relied upon-

    1. French75

      Thank you, Rev Kev.

      There’s more going on than just RobinHood, and Yves’ hot take seems to miss the forest for the trees. *All* of the big e-brokers placed limits or bans on buying *several* names (GME, NOK, AMC, and others). But in addition to this

      + Subreddit was banned
      + Trending twitter hashes were removed
      + Discord servers were shut down
      + Facebook groups were banned

      Maybe clearinghouse requirements forced the hands of all the brokers (really? that many)?; but Conde Nast, Twitter, and Facebook don’t have to post capital to clearinghouses, so why are they involved in this story at all? This reeks of cartel-like behavior, and one can reasonably ask “qui bono?”

        1. morgondag

          Google is within their rights to do that though because they have a rule against this type of review flooding.

      1. Fiery Hunt

        Sub reddit wasn’t banned.
        Was taken private because they didn’t want to be banned; going up to a nearly 6 million subscribers makes it awful tough to moderate.

        I didn’t see any mention of Twitter trend manipulations and certainly didn’t see it yesterday.
        Got a source for that?

      2. Weimer

        The banning of the groups by FB (, goog removing negative reviews of RH, and Discord banning the trading group is what gives this fiasco scary-creepy note and pushes it up a notch, much beyond just a trading story.
        This certainly has the potential to morph into a much bigger thing – and/or at least clearly reveal the rigging (all around us, for that matter). This ain’t over, I betcha :(

  11. timbers

    This GameStop thing and impeachment are perfect vehicles for AOC and Mama Bear to throw shinny balls around and have reasons why we can’t talk about or vote on Medicare for all and fixing our 3rd world healthcare system.

  12. Tom Stone

    What a gift to our Congresscritters!
    They can bloviate about RH, get favorable headlines and they can avoid talking about 1 MM homeless on the way, fiscal support for Cities and States….
    issues that might upset donors.

  13. Anonymous Coward

    If we are going to point fingers at the institutional culprits who got us to this point, and the SEC certainly deserves their share of blame, also save some ire for the DTCC. It is they who allow naked shorting and failure to deliver conditions that resulted in 140% of the float of GME to be short, consistently for weeks on end.

    In my opinion, we will see a financial transactions tax passed due to this event. Ro Khanna was already out on twitter yesterday with that proposal.

    1. Yves Smith Post author

      No, the SEC sets the rules on shorting. It’s poor market structure, the very fragmentation that we criticized in the post, that enables that to happen. That again is the SEC’s doing. For instance, in 2018 a lot of parties though that there was naked shorting in cannabis stocks yet nada was done. The DTCC isn’t a regulator and can’t investigate and fine and implement new rules.

      1. Anonymous Coward

        According to these guys, there is a lot more nuance to it.

        Regulation SHO helped a bit with the naked short selling situation in the marketplace, but whatever relief it provided was short-lived. Later in 2004, the SEC adopted Rule 17Ad-20, which prohibited issuers from withdrawing their securities from DTCC so that they could be settled by their transfer agencies. This rule made little sense, as transfer agencies are the only ones that keep a true record of shareholder lists for each corporation.

        The rule only served to make DTCC more powerful, and it enabled them to hide certain activities from the SEC and issuers nationwide. Perhaps it is time for DTCC to “enter the age of transparency” and build a much-needed tracking system into their clearing and settlement software.

        1. Yves Smith Post author

          The SEC is still the one setting the rules. If they allowed themselves to be snookered in the rule-making process (where there is a public comments period, interested parties are supposed to weigh in), it’s a combo of shame on them and shame on investors for not piping up. And the SEC added Rule 204T in 2009, which your article does not address. And even so, makes clear this is the SEC’s problem to fix. The SEC is also the one who ought to stomp on the DTCC if its record-keeping isn’t adequate, as your linked piece contends.

  14. Dan


    I’ve been following Reddit’s WSB for a couple years now and have found many good trades (and some bad ones) there. I agree with you that this type of speculation is a socially and economically unproductive activity. I must also second your observation that most of this is a hedge vs hedge fight – at one point yesterday there was over 1 million shares of GME bought in a few minutes. I can’t imagine that’s retail at work.

    One fact that gets lost in the noise is that this started out on WSB last year as an old fashioned value play, with people betting that Gamestop would be able to change its business model from dying mall retailer to an e-commerce company specializing in custom gaming systems. It’s not a bad thesis, and it was a good play last year (when the market cap was less than cash on hand for a minute). I could see it working out and the stock price settling where it is now in a couple years.

    The thing that’s fascinating to watch on WSB – which has grown from 1.8m to 6m members in the last 10 days – is how much this has tapped into deep popular anger about 2008 and its fallout. The comment threads are full of testimonials about how families suffered at that time, when most wallstreetbets members were kids or young adults. They HATE big finance in a pure but amorphous way, and people are piling into the stock as a chance to make a statement, and hopefully destroy a predatory hedge fund or two. It’s an emotional experience to see strangers organizing to fight big capital in this way, even if it’s obvious that a) most will lose their shirts, and b) stock speculation is an unlikely tool for changing capitalism to the benefit of human beings.

    And, while not disagreeing with any of your points, this has been a heck of a fun thing to be part of.

    1. ND

      Great overview from inside WSB. I too have been watching the anger manifest into a kamikaze attitude towards the ‘retards’ personal savings. This is a protest first and foremost, with various associated levels of opportunism thrown in.

      1. Jonathan Holland Becnel


        Someone posted on r/Stupidpol that it was everyones duty to buy one share to crush a Hedge Fund.

        I like the energy, but would be cool if the WSB winners started a Mutual Aid Fund or something for the Workers of Reddit.

    2. Basil Pesto

      a similar point to yours (I think) was made in this CNBC spot that was mentioned in Water Cooler yesterday. Namely, the investor makes the point that /WSB are not necessarily idiots, jejune antics notwithstanding.

      Thanks for the post Yves. I feel that the fact that there are so many takes on this is indicative of… something, but I’m not sure exactly what. The inherent slipperiness of finance, maybe, if that makes sense?

    3. Mason

      It really is for the fun. I hope it does a little damage to the hedge funds.

      Pure anger against WallStreet, I blame them for rigging real estate as well and likely setting it up for a large devastating correction.

      The best I can do is beg people not to borrow for buying stocks. I’m new to day trading, but no way in heck I’m borrowing a single dollar for this.

    4. Ed S.

      Yves, thanks for this note. I want to amplify a few of Dan’s comments (I have been following WSB (r/reddit/wallstreetbets)) for a few months and for the GME saga. FD: no positions in GME.

      1) The GME thesis on WSB WAS a value play: new technologies/consoles, a pivot to on-line gaming, and a meaningful investment (with Board participation) by the guy who started Chewy. Is it a good thesis? Don’t know, but INTC popped 20% with new investor and a new CEO.

      2) Many commentors on WSB don’t focus on day trading – they focus on buy and hold (“diamond hands” in the WSB vernacular) and options for leverage (they don’t have much money – you’ll see posts with evidence of buying $50 in stock). There is also a “evidence or go home” culture – if you say you’ve done X then you need to post a screen shot of X. Can this be manipulated? Sure……..and I wouldn’t be surprised if some of the commentary is by HF or bots.

      3) To acknowledge the norms fairy: the language is coarse and not politically correct.

      4) Many WSB commentators present themselves as young and are using their gains for taking the dog to the vet (rather than putting it down) and paying off student loans. And there is real anger evident on the board – they haven’t forgotten what happened in 2008 (several cite parents losing their home to OneWest).
      5) Part of that anger stems from the perception that HF (one called Citron in particular) would short and publish reports on particular stocks (GME was one target) they would also basically taunt the WSB crew as a bunch of idiots. Echos of deplorables?

      6) WSB collectively realized that the math of options and market makers required them to hedge when an option was written (delta hedging). Buying and holding (diamond handing) stock in a heavily shorted company along with buying options would drive the share price up. Which feeds into the short squeeze that we’re seeing and the explosive spike in the GME price. There are MANY more knowledgeable NCrs who can better explain delta (and gamma) hedging.

      7) WSB noted that on 1/22 (last Friday) EVERY call option written was ITM. On 1/22 GME closed at $65 and options to $115 were made available starting with 1/29.

      8) On the trading restrictions – I can’t speak to what RH did (my understanding is that they only allowed sales, not new purchases. I CAN speak for what TD Ameritrade did (for AMC, CVM, EXPR, FOSL, GME, NOK, BB, BBBY, FIZZ, GSX, IRBT, NCMI, TR, UONE, VIR, NAK, NAKD, DDS, KOSS) – No margin, Long calls and puts (only), Covered calls and short puts ONLY by calling a broker, no other complex transactions, other restrictions to follow on 1/29 options. More than a few of these are discussion topics along with appropriate due diligence

      I don’t know how this will end, but I think that this situation is the Wall Street analog to the media losing control of the narrative. Expect to see calls to shut this down as market manipulation.

  15. CH

    I think one thing this misses is the optics.

    No one watches congressional hearings. But this is headline news all over the world, because it’s spun as a David-and-Goliath story (even if it’s not, really), and people love those kinds of stories.

    What it shows is how rigged the game is for insiders. It destroys the narrative that the Wall Streeters and other financial predators are doing anything socially productive with their gambles; are “better” or “smarter” than the rest of us; or have some sort of uncanny ability us mortals could never hope to achieve. It’s basically The Emperor’s New Clothes for Wall Street. But the key is: ordinary people are seeing these aspects of capitalism for the first time!

    The narrative is that it’s a rigged game for the elites, and that once they start to lose at their own game, they change or alter the rules. They never lose; only us “little people” do. That’s a powerful narrative. And narratives win political battles, regardless of the underlying truth or falsehood.

    I’ve seen a number of people claim that this is Occupy Wall Street 2.0. I’ve even heard some people suggest that this will kickstart a new Leftist movement in America. It’s certainly the most energized I’ve seen anti-establishment sentiment since 2008. So, regardless of the reality, it might have value out of proportion to the reality, like a fruit vendor setting himself on fire in the public square. Thus, the end results may go far beyond a single stock or a single bad bet, into things that really do matter.

    1. Yves Smith Post author

      Having been involved in Occupy Wall Street (both the original Occupy, Occupy Banking and peripherally with Occupy the SEC), this is so not Occupy that it’s deeply offensive to hear people make the claim. Day traders as anti-finance? Only in the minds of ZH readers.

      This anti-establishment meme is totally fake and at best delusional and at worst cynical theater for the rubes.

      And absolutely nothing will change. As FreeMarketApologist pointed out above, what if anything will be revealed will be that the Robinhood guys were breaking all kinds of rules because they were clueless about customer and exchange regs. So it won’t be hard to make an example of them.

      1. Patrick

        Yves, this may be a bit off-topic and hopefully not a violation of NK protocol (apologies in advance if so) but you made a comment last week that has since haunted me because it seemed to imply that investing in stocks is generally wrong-headed (“swimming with sharks”). I am in agreement with the idea that the so-called “market” is a shark-infested casino as today’s post and subsequent comments illustrate, but find my wondering what alternatives exist for investment/wealth preservation in the Fed-induced TINA world we find ourselves in. In other words (and if I may ask) are you suggesting that an ostensible eyes-wide-open prudent investor might want to get out of the water?

      2. Skip Intro

        The beauty of the Occupy Wall St. 2.0 narrative is how it is using traders as the occupiers! Talk about co-opting a revolution. But there’s something so perfect and parallel about this, like the petit-bourgeois Capitol Riot, resentment and precarity channeled into self-styled Revolutionary Acts by very unlikely rebels.
        Now people will conveniently be able to lash out at their oligarch oppressors simply by gambling money they can’t afford to lose at the oligarchs’ own rigged casinos. Patriots can lash out for democracy by kidnapping legislators! And this whole story will function as advertising to bring many more suckers rebels into the casino battle!

        I love when the names work so well for these things too. GameStop.

        1. Yves Smith Post author

          Please stop this nonsense. It discredits you.

          The traders have absolutely zero to do with the demographics or aspirations of the original Occupiers. They are not storming the bastions. They are Wall Street wannabes, using Wall Street infrastructure and making Wall Street money. Vlade pointed out they are making financial firms dough by increasing volatility.

          They aren’t lashing out. They are helping the casino make more money.

          1. Skip Intro

            Maybe this reply was intended for someone else?
            I agree with you and perhaps wasn’t clear. This is a co-opted version, a mockery of Occupy in all ways, from participants to goals to tactics. I was savoring the parallel spectacles of cosplay ‘revolutionaries’, and pretty much labelled the Occupy2.0 narrative advertising for the casino. You could probably get a good reader-thread post going just with anecdotes from all the contacts who have suddenly expressed interest in buying stocks.

            I appreciate the need to reduce low-value post volume, but I want to make sure any discredit accrues due to discreditable claims.

            1. Yves Smith Post author

              I now see you might have mean otherwise, but there is TONS of psychological research that shows that repeating a meme in order to debunk it reinforces it. So even mentioning the idea propagates it. Debunking has to be done in a very careful manner and even I am sometimes not careful enough in doing so.

      3. VodkaTom

        Yves, I agree with all your points. But I think dismissing the anti-establishment aspect out of hand is missing an important aspect of this story.

        “This anti-establishment meme is totally fake and at best delusional and at worst cynical theater for the rubes.”

        In the last few days I’ve been surprised to discover how many people in my circles have purchased a small number of shares for the purpose of being involved in making a wall street entity lose money. Excluding an amazon worker whose says he’s “5 figures in”, and probably is a day trader/ZH type, I have a young high school age nephew, and many acquaintances who were out in the streets in early days of the BLM protests, and because this is Portland, were teargassed many times over a period of weeks.

        I know anecdote is not data, but these aren’t the day trading types. They are naive about the functioning of wall street and the stock market. I had to explain to one friend, the secondary market has nothing to do with the underlying company. Politically they are not fans of the democratic party, many supported Sanders based on policy positions, not personality. But they aren’t in it for the money. They all expect to lose their small amounts invested, with maybe some wishful lottery type thinking. But they definitely see this as an opportunity to poke the man in the eye.

        Is this “protest investing” effective? Probably not for the reasons you outlined. At the end of the day (and probably already) big players have made their fortunes. And most small investors will have lost their money. To keep score in America, we count the dollars and not the people. The argument made above in these comments is the daily dollar amounts must mean big investors are involved. While the original Reddit instigators, and Robinhood seem to be cynically driven groups, I don’t think we’d have such an entertaining short squeeze, except it tapped into the anti-establishment feelings of many people. And though the individual dollars aren’t there, I believe RH has (soon to be had) millions of accounts.

        From what I can see these “rubes” know they are rubes. But like the protest over the summer, I see young people looking for any lever they can push to try to change things. I don’t think this is going away. They aren’t watching or reading CNBC, or Bloomberg, but they seem willing to experiment with ideas and methods. And a lot of them are doing it with a sense of humor and self-awareness. Perhaps I read the tea leaves too much. But i feel real passions against income inequality are driving part of this..

        1. juliania

          A lot of folk don’t know the ins and outs of financial capitalism, but they do know it’s at war with industrial capitalism because they read the articles you graciously do support here, Yves, that Michael Hudson writes. And in the last one he wrote he did say that financial capitalism is more fragile than industrial capitalism. The point being for lower income folk, whose ranks are growing, that financial capitalism is for the wealthy oligarchs and deserves to be taken down. Prof. Hudson’s last point is that this system in the US is or has been morphing into a global system and threatening other countries as well, which is why the meme of anit-Russian and anti-Chinese animosity by the US government is so pressing. And really, we should not forget the Occupy logo, Wall Street’s rampaging bull delicately being used as theatre by a beautiful ballerina. It did seem this was beginning to happen.

        2. vlade

          The problem is, as Yves tries to point out, that they are _not_ hurting WS. They are hurting one, small, part of the financialisatin – and the one which for example is interested in exposing fraud (it’s much easier to prove and ruin company that’s fraudulent than one’s that’s simply badly run).

          At the same time, they are HELPING another, a MUCH, MUCH larger part of the WS, which needs the volatility to make money. The more people trade, the more they make money, no matter which way the markets move.

          And, apart from HF, they can be also actively hurting things like investment funds, which includes pension funds, because those need at least a bit rational market, not a white-noise one. Which may mean that instead of hurting WS, they are hurting a pensioner next door, because they don’t understand what it is they are doing.

          It’s like joining a game to hurt the casino. The only way to get the casino to lose is to stop the game, not to invite more people to it.

          1. VodkaTom

            I don’t disagree with your point (and Yves) that this isn’t hurting WS in any meaningful sense. WS is making money off this. My point is highlighting there is real anti-establishment feeling among many of the small players in this absurdist theater, and they are treating this as a symbolic act. These aren’t “day traders”, and to think of them as the same is missing what they are about. The day traders involved, I assume want to, and expect to make money.

            Is it an effective symbolic act? I doubt that, but I’ve never seen anything like the sentiment I’ve seen in people I know, as regards to putting money into a stock. It’s more akin to a brick through a bank window, than a belief in getting rich in the market.

            1. rob

              Just think what people COULD do as a real blow to the wall street money machine if they went after the important part.
              the movement to rescind the federal reserve act, and through monetary reform, kill the golden goose that feeds wall street… banks ability to create money when they make loans.
              112th congress HR2990 the “NEED act… along the lines of the chicago plan of the thirties which sought to end private banking interests creating us dollars for the us gov’t..,which was codified under the federal reserve act, and won’t change until we change THAT law.
              kill the beast….

            2. Dirk77

              You would do a service then by telling your friends to pick their battles better. As Yves says, it’s a casino, and as Vlade says, the best move then is not to play at all. Never fight someone on their terms, but on yours. Or don’t fight at all and just do something worthwhile for yourself, like a long walk or going out for an ice cream cone with your best girl.

                1. Dirk77

                  Ha. I meant they’d be better off doing anything than essentially something self-destructive in a game that is rigged. With the possible exception of politicians that accept only small dollar donations, such as Gabbard and AOC, none of them will care – ever – because you aren’t who they serve. So at the very least devote your time to more important things.

  16. John Wright


    I was surprised to see Matt Taibbi write this:

    “Fast forward thirteen years. The day-trading followers of a two-million-subscriber Reddit forum called “wallstreetbets” somewhat randomly decide to keep short-sellers from laying waste to a brick-and-mortar retail video game company called GameStop, betting it up in defiance of the Street.”

    Taibbi is looking at a company’s outstanding stock incorrectly, because a company is NOT “laid waste” by having short sellers push its stock price down

    The company’s outstanding stock in the market is historical inventory that was sold some time ago. A functioning company could continue just fine with its stock priced at zero. In fact, a profitable company could buy ALL its own stock back, if it wanted to, at a near zero stock price with loose change.

    The company might have some unhappy employees who are invested in the stock, but the actual business of the company should be independent of the stock price, assuming the company was not in the process of raising new capital via a secondary offering.

    I was disappointed with Taibbi’s coverage..

    1. Alex V

      One argument I’ve seen supports Taibbi’s thesis is that share price / market cap affects the ability of company to obtain credit. Maybe not true in this specific case, since GME seems to have plenty of cash hand, but has happened to others.

      1. Yves Smith Post author

        It has happened ONLY in the case of financial firms (as in they need money all the time) AND their ratings were either going south fast (AIG, the monolines, the big banks pre crisis) or their ratings are already in the toilet, and either way, they need to raise equity to keep their credit ratings from going further south.

        This it utterly irrelevant to GameStop.

    2. Mikel

      “the actual business of the company should be independent of the stock price…”

      This past year has proved like no other that stock prices have little to do with the actual business of companies.

  17. upstater

    Robin Hood makes its money selling aggregated retail investor trading data tongue big boys, so they can assess where the rubes’ money is going. That is how they can offer “commission free” trading. The customer is the product.

    It is all a sinful industry, for lack of a better term.

  18. Neohnomad

    I definitely think there is confusion and poor communication on How/Why certain platforms restricted only buying GameStop and other ‘meme’d stocks but not selling them.

    I have heard the reasoning that the clearinghouses started to require up to 100% of the price/share, and if that is legitimate, fine and dandy.
    But why only the buy side for the retail users on these various platforms? If there is sell there is a buy somewhere else, right…

  19. Harry

    All fair points and a good summary. Personally its pretty clear the market is still has a short cos otherwise the stock wouldnt be here. The fact so our RH friends have still made out pretty good, and some of them will be small account traders.

  20. a different chris

    >and also gave American the worst possible market structure.

    But it had to. We have the worst possible health care structure, the worst possible “democratic government” structure — and the third leg of the stool clearly needs to match the other two or the whole thing falls over. /s

    1. Randall Flagg

      As far as our “democrat government “structure, I would offer that ours as structured, requires that the folks we elect have some integrity. As Paul Harvey once said (I think), “ Self government does not work without self discipline “. Something like that.

  21. Deschain

    Thanks for this. 99% of the takes on this out there have been flat out wrong. Financial journalism is, unfortunately, generally terrible.

    RH biz model was guaranteed to produce this outcome (they had to take a $1B emergency funding to cover their margin call) if they had any success. They use social media engineering to drive trading volume, part of that is alerting their users what other users are trading. So give your customers margin loans, then drive them to all bet on the same stock in the same direction, pyramiding that bet all the way up. What could go wrong? Truly, the smartest guys in the room.

    I can offer a little perspective on why the short HFs were caught so badly offsides on this. Sony and Microsoft released their latest game consoles in November, their first since 2013. In the year before that (2013) console release, GME stock ran from 16 to 55, and literally peaked the week of the console release. Gaming stocks in general are very ‘sell the news’ because major product launches are so anticipated. GME stock had run from 4 to 16 in the 6 months or so before the most recent launches and I’m sure the HFs thought they had a no-brainer zero risk short once the consoles had hit the market. And honestly, I think they would have, but this market has become so illiquid (per Yves comment about liquidity not being there when you need it) that some retail day traders were able to start a short squeeze. The main damage was done by other hedge funds though, amplified by trend follower HFTs; if you look at what’s been happening to the market generally, lots of other stocks were having crazy moves; everyone was shooting at Melvin’s entire book because they were obviously in trouble (along with a bunch of Melvin-wannabes). The other day, one stock I follow – a multi-billion dollar, boring profitable business of long-standing – opened up 20% on no news and closed down 20%. That is very far from normal and indicative of a very sick market.

    1. vlade

      GME has no moat in Warren Buffet’s terms. It’s B&M retail business is dead. Online game business is hard – on the HW side, the retail margins on consoles are small, and the cost of entry is low. If they would white-label they HW (PCs), again, the cost of entry is low, and there’s tons of companies that already do it, when GME has no relevant experience (turning a retailer into a producer is hard..).

      Digital sales in the game world are, on the PC, dominated by Valve (aka Steam), with Epic making some inroads, at very high costs (=cost or offering quite a few free games). On the consoles, the console makers control the channels a lot, and while they offer deals like XBox-all advantage (=game subscription).

      To put boot into it all, Google games streaming platform seems to work quite well (the last major title, Cyberpunk 2077 was very playable on it, much much better than on consoles and comparable to a reasonably good PC), so if that continues to attract major games, even the distribution can suffer (although at least some of them can, possibly, go into the same arena to compete, they have the technical know how and the bandwith ). That would, incidentally, also kill most of consoles (as they are now).

      GME is a videoshop that somehow survived to the inception of netflix.

      1. Phillip Cross

        Game Stop, Bitcoin, Dogecoin, Tesla… whatever. What we are seeing seems to be a wider understanding that the fundamental value is not what sells most securities, and hasn’t been for decades, for many buyers it is the story and rising prices that bring them in. Everyone thinks they can get off one stop early!

  22. truly

    Looking at the other side of the equation- what might this actually mean for GameStop, its management and employees? I don’t understand stock value enough to understand what it does to a company when it goes astronomically up.
    With no thought to what is happening on the investment side, can someone answer whether this is possibly a golden moment for GameStop? Is it possible with its new found “value” that it could make major changes in it business model and come thru this a renewed, reinvigorated and more importantly profitable business? Maybe make a major change and become a retailer for used cell phones or other tech/digital devices?

    And another question, while this is quite likely HF vs HF, is it possible that some “wise” HF workers learned that they could use Reddit as a place to create just enough of a stir to help create the “momentum” they need to push stock price in the direction they want it to go? And maybe use Reddit to cover their own possibly illegal market manipulation?

    And am I correct in remembering that Jim Cramer lost his trading license for antics similar to these? Placing bets and then starting a rumor mill that would make his bets come true?

    I sincerely hope I am ok here regarding TOS with these questions. Thanks.

    1. Objective Ace

      I posted a more through comment above, but it only helps Gamestop if they manage to issue shares before the bubble pops. They did put out a prospectus in December to issue 10 percent more shares, so maybe they can take advantage of it? The prospective was to sell shares at 18$. I imagine they could increase that price now, but I have no idea how long it takes to comply with all the Government regulations before issuing more

      1. FreeMarketApologist

        GS could, although the SEC took a dim view of Hertz doing it when they were going through a similar price pop not too long ago. Probably too much legal risk for GS to want to willingly take on.

        1. Objective Ace

          Interesting, that’s kind of ironic because allowing the company to more freely buy and sell stock would be how you end manipulation… of course it would also allow the companies to more directly raise capital which is much more productive then the casino known as the stock market. Cant have that as Yves pointed out!

          1. Yves Smith Post author

            To raise new stock you have to have a legitimate corporate reason for doing so, as in a need for the funds, Crushing shorts is not and has never been one.

            1. Objective Ace

              Having additional cash is a legitimate corporate reason. I’m sure they can find a productive use for it. AMC just managed to take advantage of the bubble and issue some.

              Crushing manipulation is just a side effect. And I think you mean crushing *longs*. It would be purchasing back shares that would crush the *shorts* and I’ve never seen a similar criticism there. Is there a legitimate corporate reason for purchasing back shares?

              I know you’re just the messenger.. maybe what I think seems economically rational is somehow legally not the case. So please let me know if thats the case

              1. FreeMarketApologist

                In the SEC’s statement this morning, they specifically said “Likewise, issuers must ensure compliance with the federal securities laws for any contemplated offers or sales of their own securities.

                Which is a industry-insider dog whistle for “Be extremely careful if you’re considering using events like this to raise cash, because we will be scrutinizing every period and comma in your documents and public statements. In fact, just don’t do it.”

                1. Objective Ace

                  Thats crazy to me. If the market is cornered and being squeezed you’d think the powers that be would want the market to be opened/freed back up. The higher its allowed to be squeezed the more pain there will ultimately be.

                  …but what do I know. Appreciate the insight – thx!

                2. Fazal Majid

                  AMC retired $600M of unsecured convertible debt when Silver Lake exercised the option to convert so it could close its short position in AMC. The issuance of Schrödinger’s equity was when the convertible debt was raised, so I doubt they have any regulatory worries. As for Silver Lake, the short was literally a hedge against their debt going bad, not speculation unlike Melvin.

    2. John Wright

      Right now, the high share price is not benefiting Gamestop Company because they are not issuing new shares to pull in cash.

      This would be a “golden moment” for Gamestop to issue more shares and pocket the money (massive executive bonuses?)

      Maybe they can’t get the paperwork through the SEC fast enough?

  23. Mikerw0

    This nonsense allows me to add one other angle — so the meme that businesspeople should hold high office, because well they have run businesses.

    The problem is confusing Wall Streeters as being business people. Even Mellon at Treasury was more than just a financier, he was also a de facto industrialist. (Imperfect person to choose, I know.)

    Stocking our government with Investment Bankers, PE guys, etc. is not the same as GM in the 50s. Sadly, there are so few true industrialists around today.

    1. NotTimothyGeithner

      is not the same as GM in the 50s.

      Those guys managed to get Carter and Reagan and they and their successors wrecked everything keeping the likes of George Romney from being Mitt Romney at Bain. They only understand one thing: power. If they listen to “reason”, its because they are forced to.

  24. vlade

    On a technical note, I have little sympathy for the HFs hurt. As Yves says, they seem to be better at figuring out who to short than how to short.

    Anyone on an illiquid stock is way better paying the cost of put options (even if you have to get your IB to write them OTC) than shorting outright.

    If you could not get it in the sufficient amounts (which, on stock that had 140% short position is hard to believe, it means plenty of stock lending), there’s probably a reason, and you’d managing the risk of your short position very very carefuly – especially given that stock price is a social construct, not an indicator economic reality.

    And no, buying a put option doesn’t mean that someone else has the same short position (delta of an ATM option is not one).

    1. Susan the other

      rapidly rehypothecated shorts? who can understand any of this? It might help to put the SEC under the actual and effective aegis of the US Government. If that’s not too commie… I’d guess that when WS hedge funds call for stricter regulation its GameOver. The best metaphor is (above) Herd of Elephants. And a glimmer through the fog came from the “reformed derivatives trader” to the effect that we have dysfunctional finance – loop hole finance, if you ask me. In that a “wheel and spokes” model regulates coherently and so does a completely decentralized model (no doubt because chaos creates a dense matrix of its own – remember that profound little graph of chaos) – but a nit-picked compromise of the two is a disaster. Too many degrees of freedom to be stable, not enough to be a tar pit. Or something like that. So, again, who can understand any of this?

      1. hdo

        Regardless of the ethics of this whole enterprise, I for one was understanding up till the last “delta of an ATM” explanation. I thought it was actually a really good explanation of why one would want to buy a put option vs just short something, which I always had wondered vaguely about.

        Another basic thing I don’t understand after reading this thread is how, per Yves, a publicly traded company can actually still function with their stock price at $0. I thought the reason they can’t let that happen, aside from the fact that the C-suite wouldn’t get obscene bonuses that year, is that a very small group could buy a majority of their stock (and what would “buy” even mean if the value was literally $0?) and thus take them over and actually *fire* the whole C-suite, etc.

        1. vlade

          re the first. Delta is used as a risk measure, indicating how much a price of a derivative changes when the price of the underlying changes. In this case, how much a price of an option changes if the price of the stock changes.

          ATM is “at the money”. Think about it as an option with a strike (exercise price) that is the same as the current price of the stock. So if the stock is currently trading at 100, the ATM option is 100.

          If I have say a call option at the ATM – 100 in this case, and it’s price is 1, then if the underlying stock moves to 101, the price of the option will not be 2 (unless the option is very very close to the expiry, like same day).

          There are actually reasons why one might prefer to short directly vs puts, which go into “cost” bucket. But TBH, if your short case is such that it would require years for the stock to drop, or similar issues, that likely means your short case is not that good in the first place, and IMO you’re taking too much (of an unlimited) risk.

          Re your second thing – it would not be publicly traded anymore (companies where the price gets too close to 0 get delisted, they may do a reverse split to get out of that zone, but usually it’s just a question of time when it’s there again..). After delisting, a company can still exists. It’s not like private companies can’t raise capital or function..

  25. Pete

    I remember reading about the idea of a Tobin tax for currency markets many years ago. It seemed like a great idea to create an additional transaction cost to reduce speculation. Similar to what Yves suggested in the intro. I would be very curious about the actual effect though. Eveything I found suggested that the Tobin tax actually increased volatility because it caused trader to increase their positions to compensate for risk. I can say that i experienced a similar tendency many years ago when i tried to day trade.

    1. pjay


      The technical analyses provided by Yves and most of the commenters here are valuable and valid. But I think they miss a big part of *why* this story is significant. We all know Trump was a fake populist conman. We see those who actually believed Trump had a secret plan to “drain the swamp” as dupes and fools. Yet… Trump was valuable in pulling back the curtain and forcing the real Establishment power structure to expose itself. Those who focus on explaining how and why Trump was a conman keep missing a significant part of the story.

      Similarly, we can agree that making this a “David vs. Goliath” story is simplistic, and those who believe masses of small internet traders will save democracy (or “markets”) from billionaire hedge funds or banks are perhaps also dupes and fools. Nevertheless, this story has other dimensions, one of which is — hopefully — dragging speculative manipulation “into the sunlight” for many people from whom it would otherwise be hidden. There is also a basic psychological dimension: a big middle finger to the Powers that Be, however irrational. In that there are parallels to Brexit, voting for Trump, etc.

      I think Greenwald and Taibbi, among others, are emphasizing the latter dimensions of the story.

      1. vlade

        Again, as I point above. The problem is that it’s a middle finger that doesn’t really hurt WS, in fact it helps a lot of it.

        It’s not just irrational (an irrational response is, at times, the right response TBH and the only way to break the cycle), it’s counterproductive.

        If people wanted to hurt them en-masse, they would liquidate their 401(k), and insist that their penions (like CalPERs) invest directly (but not via a third “PE” party) into local SME businesses or similar. I.e. stop all direct or indirect public stock and investement fund activities.

        Ain’t gonna happen.

        1. flora

          oh, indeed. I did as you recommend because I was able to. In the US, the 401k and 403b retirement defined contribution vehicles have replaced the traditional, defined benefit pensions for most people even in old line enterprises. Most people working for a large corp or govt entity now have their 401k and 403b deductions taken from their pay checks automatically, just as the defined benefit contribution once was taken automatically as a deferred compensation paid benefit in lieu of a higher working salary. How does a union member of a state/local govt in California, for example, “cash out” their CalPERS contributions while still employed with the government agency before their retirement to invest elsewhere ? I don’t think they can do that.

          1. flora

            adding: The automatic retirement monies investments in Wall St. was a sound policy when Wall St. itself was soundly regulated. That time has passed.

            1. flora

              adding: So glad W. Bush and O didn’t succeed in privatizing Social Security and putting that at the “mercy” of the stock market.

      1. Mel

        Glen Greenwald is a god who walks the earth. Theoretical background for his interview piece can be found in Michael Hudson’s Killing the Host.

  26. ChrisFromGeorgia

    I’m going to respectfully disagree on points 1 and 2, while being whole-heartedly in agreement on 3 and 4.

    Point 1 – the Senate hasn’t done much other than some individual Senators (Cruz, Warren) sending out tweets yesterday. Maybe they’ll hold a hearing. Hardly wasting time on this. The Senate wastes its’ time on lots of things, like non-binding resolutions and if I dare, the impeachment of an ex-President.

    I believe there is a real issue here, in that there are clearly two sets of rules, one for small retail traders and one for large hedge funds. Someone posted on another finance forum that the percentage of the float short for Gamestop was over 100%. This should be impossible – you have to find shares to borrow in order to short, at least if you are a regular shmoe. It smells like naked shorting which is essentially counterfeiting. And anything that gets Ted Cruz and AOC on the same page smells like the return of the anti-Wall St. sentiment that got swept off the front pages by the Trump/COVID era. Some good can come from this, if it results in some scrutiny of these hedge funds. It’s just a feeling, admittedly.

    2. On order restrictions – I am an E*Trade customer and can confirm that it was not just margin requirements or trading halts that affected GME and AMC, but also an outright block on new positions. This happened roughly at 2-3PM yesterday. I had tried to put an order in but was blocked. I am not on margin and had more than sufficient funds to cover the long position in my account. I called their customer service desk and got an incredibly poor excuse, that the decision had been made by higher ups and nothing more. I asked for a call back from someone more sensitive to customer relations and have yet to receive one. The press may have mangled the reporting but I believe the same outright blocks on new buys (you could still close out an open position) were also applied at Interactive Brokers and TD Ameritrade.

    This is very problematic as it exposes the “market” for what it truly has become – a rigged casino where the house can change the rules any time it wants.

    1. vlade

      Seems like my previous comment on this went poof.
      1) shorting more than 100% float is trivial. I own one share, lend it out,they sell it, the other person lends it out, sells it.. as many times as you wish (in theory).
      Rehypothecation of collateral was severely restricted after GFC, but that’s collateral – so from a marginless accounts the shares can be still lent out ad infinitum as far as I can tell.

      TBH, there’s no good way to track the share lending/shorting in the real time, because you’d have to track every share, marking it as “sold short, can’t resell” – and, in reality, there would be limited benefit to it. Despite the popular beliefs, making money running a (legal) short shop is much, much harder than a long shop, and one can argue that also reasonably socially beneficial – because the safest short bet is against a fraud (hello Wirecard! – which of the longs was ever prosecuted for being right and then didn’t even get an apology? If Theranos was public, it would never ever last as long, shorters would have had it for a breakfast)

      2) It’s not your margin. RH didn’t raise 1bln to cover their traders margin. It raised it to cover their DTCC margin call (in practice, it’s to confirm with their regulatory capital). DTCC margin raises aren’t usually cpty specific, but asset specific, which means that similar margin calls went to any brokers who had relevant clients with relevant positions. In fact, it’s a show that the rules apply to _all_.

      The problem is that many people, not just small-time investors like you (who, TBH, can’t be expected to know the inner workings of the markets), but other people don’t have a first idea how things work.

      AOC blew it up badly here (or didn’t but wanted the spotlight), luckily for her, not many people will notice.

  27. Stephen C.

    Thanks for this piece, very insightful.

    Wondering if this now political issue intertwines with the Section 230 issue. (Reddit ends up taking the brunt of this.)

    Seems to me the elites and their political representatives are more worried about the plebs talking to one another. Whether that exchange results in questioning the status quo or being sucked down the rabbit hole of misinformation into the swirling toilet water of conspiracy theories matters not. They are grappling with the question of how to implement outright censorship, and squaring that with being able to call our financial system as market-based and our political system as voter-based. You can only have both (censorship and free markets/free expression of ideas) with lots of hallucinatory rhetoric at play, and so, IMHO, that is where we are at.

    1. eg

      I heard “foreign interference” come out of the mouth of more than one of the shills, so no, it’s been floated.

  28. Wukchumni

    The Hunt Brothers silver bubble was my first financial bubble, and I was barely an adult when the deal went down. Those 2 argent provocateurs had a great game going, all they required was physical delivery of a traded item .999 fine 1,000 oz Comex deliverable bars. They’d taken an ounce from $6 to $48 in less than a year, and created one hell of a shortage of physical, and it had to be .999 fine pure, everything of lesser fineness sold at a big discount as 1979 came to a close as the refiners were way backed up. The brothers were stymied when the rules got changed on their scheme, kinda similar to yesterday, but their bubble took about a year to play out, and the only day trading the public was doing was selling every last item of silver they had. Every coin store had lines of people wishing to sell their stuff, that kind of resembled the lines of people nowadays outside gun shops waiting their turn to procure a hand cannon.

    The Hunts also pulled a strange one in that they got the Ag-Au ratio back to the biblical standard of 16-1 for a very short spell. It’s now about 70-1.

    1979 by the Smashing Pumpkins

      1. Wukchumni

        At the time the B word was almost never uttered, it being such a vast amount of money, but now I converse in Trillions like its normal, and it is.

  29. flora

    re: Fourth, and related to our third point above, is how the SEC has actively promoted speculation and poorly functioning markets.

    Babylon Bee is on the SEC’s case.

    “New SEC Rule: Wall Street Will Now Only Allow Traders Who Wear A Top Hat And Monocle And Carry Around Giant Bags Of Money”

    (I can’t add anything useful, beyond mocking the pretensions of Wall St. as a “great *Capitalist* enterprise”, which it stopped being over a decade ago. It lives off the government largess, as the last 2 multi-trillion dollar bailouts clearly demonstrate.)

  30. Rock Hard

    I’ve followed WSB casually for a year or so and I never got the whole idea about trading stupid (“retard” or “autist” are the terms in play there). Until this week I read more deeply there, and I think I get what’s going on finally. The most vocal people on WSB mostly don’t care if they lose money. They don’t care if they make money. They just smell blood in the water.

    Here’s one big lie that Motley Fool got pretty rich off of: Ben Graham investing doesn’t work anymore. Fundamentals are meaningless when the Fed is writing massive checks every 8-10 years when someone who’s rich and connected starts losing money. Robinhood is absolutely a symptom of the entire system and not some new kid on the block “disrupting”, they’re just perfecting the system that’s already in place. We’ve been on track for zero commissions for at least 25 years – trading costs have dropped from something like $25/trade (or more) when I started in the mid 90s to mostly zero now. It’s not like RH did something all that radical, they just hired some UX designers to make it fun.

    So the markets have been irrational for about 12 years, at least. Maybe what WSB has discovered is that when the market is irrational, acting irrationally is the most rational option. So they go out and “invest” like idiots, because the one thing the algorithms and HFTs weren’t expecting is for market participants to act completely irrationally. No fundamentals, no due diligence, no reading analysis published by a brokerage working on both sides of the trade, no technical analysis alchemy, no protecting your profits, no concern about losing all of your capital.

    The Vietnamese already proved that you can win a war if you don’t care how much you have to lose first.

    1. hdo

      And my understanding is that (only the luckiest?) professional traders have been winning by trading stupid for decades.

      Nassim Taleb seems to refer to Graham-style fundamentals-based investing as the Green Lumber Fallacy. Ie, a full-stupid trader could make a killing on trading green lumber, a product they’ve never physically seen and assume it’s called green because it’s painted green or whatever.

  31. al

    Nice summation. Some guy named Santayana once commented on the lack of historical context and clarity and the possible consequences of such lack. Some other guy once said that there is nothing new under the sun and when it comes to human nature, that is most probably a trivial observation. Things are only ‘new’ for the youth lacking the necessary historical context and clarity mentioned above.

    See for example the large hint found here,

    “Why Wall Street traders are obsessed with Jesse Livermore”

    The only difference being that of technological advance, because “It’s no secret that machines are taking up a bigger and bigger share of investing, but the extent of their influence is approaching shocking proportions. It is as high as 80%, according to one major investing firm.”–“80% of the stock market is now on autopilot”

    Finally, a while ago, some guy named Keynes noted that, “The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.”

    But, that was a long time ago and this is the dawning of a new ‘different’ era. because this time is different. It always is, except that it isn’t.

    1. Wukchumni

      I’ve always liked this book from about the same era as Livermore:

      My Adventures With Your Money by George Graham Rice

      The opening paragraph:

      You are a member of a race of gamblers. The instinct to speculate dominates you. You feel that you simply must take a chance. You can’t win, yet you are going to speculate and to continue to speculate–and to lose. Lotteries, faro, roulette, and horse-race betting being illegal, you play the stock game. In the stock game the cards (quotations or market fluctuations) are shuffled and riffled and STACKED behind your back, AFTER the dealer (the manipulator) knows on what side you have placed your bet, and you haven’t got a chance. When you and your brother gamblers are long of stocks in thinly margined accounts with brokers, the market is manipulated down, and when you are short of them, the prices are manipulated up.

      Read it online for free:

  32. Susan the other

    Thank you for this info, Yves. It is way interesting, if puzzling. I hope there is followup; and you’re feeling better. We have been limping along with an incoherent SEC forever. Maybe some new agency.

  33. digi_owl

    Whenever i try to decipher finance jargon i feel like i need a stiff drink, for medicinal purposes, because i find myself developing a splitting headache from slippery terminology.

  34. a fax machine

    I still obtain stock certificates of companies I invest in. It then sits in my safety deposit box. These people all, simultaneously, realized that if they do not carefully read the broker’s terms of service they will get hosed if it’s convenient for the broker to do so. It takes a lot of time, effort, reading and liquid cash to avoid getting hosed which is something these people are allergic to. They thought Robinhood worked exactly like cypto trading and paid the price.

    There is now intermittent protesting outside Robinhood’s HQ in Menlo Park, CA as a result. 4-5 people with signs is certainly now OWS levels, but it’s only a matter of time before it grows or it spreads to other banks as they too do things that might inconvenience users.

  35. Gulag

    Is Reddit’s WSB (approximately 7 million members) a much more effective way to Occupy Wall Street?

    1. Yves Smith Post author

      No. This is a absolutely ridiculous idea and deeply insulting to anyone who was actually involved in Occupy. How is participating in the casino and trying to make some dough from it, and not changing anything one iota a force for reform?

      What they have done at best is give some really stupid some hedgies some losses, which any competent big trader could do even better….and recall further that the trading volumes say this is HF v. HF, that the little guys are volunteering to be cannon fodder for bigger actors. I addressed this above, as did vlade, and I’m not wasting more pixels repeating myself.

    1. Yves Smith Post author

      Get a grip. Total assets of the hedge fund industry are $3.1 trillion.

      The mere second biggest hedge fund failure, Tiger, Julian Robertson’s fund, was $22 billion at its peak.

      This isn’t a systemic event or even significant save for how inept the hedge funds showed themselves to be. It’s more the financial version of the Darwin Awards.

      1. RickV

        With all due respect, contrary to your post above, I’ve been concerned about potential systemic risks from the RH phenomenon. On Thursday, Interactive Brokers Chairman, Thomas Peterffy, stated on CNBC “We are worried about the integrity of the marketplace and the financial viability of the intermediaries and clearing houses” when asked why the firm curbed trading in speculative names. Further, Peterffy said there were 3 million open option trades with losses of about $15B in the system and growing. This does seem to have the potential for systemic consequences if allowed to continue. Here is his interview:

        1. Yves Smith Post author

          A stock market crash is not a systemic event unless there is leverage on leverage, as in the US before the 1929 crash.

          $15 billion of total losses distributed among banks, if it came to that, isn’t either. Individual TBTFs have paid fines as big as nearly $10 billion at a shot. As worst, there will be a scramble and jawboning to shore up the clearing houses and then some reforms at the margin.

          A financial crisis is something that delivers losses to banks big enough to impair the payments system. These numbers aren’t in the ballpark unless by some bizarre happenstance Deutsche Bank, which is wildly undercapitalized, were somehow very exposed.

      2. vlade

        It’s actually third one at best, unless you discount Madoff (which technically was a HF, practically a fraud of course). If Madoff is off, then SAC capital tops the table IIRC.

    2. notabanker

      When the GameStop stock price soared on Wednesday, investors’ losses on paper rose by about $10.2 billion, Ortex’s data showed. But as the price tumbled on Thursday, short-sellers regained some ground, with estimated gains of $5.95 billion.

      Boy, they sure got lucky DTCC forced the retail funds to stop buying shares on Thursday, it could have been a real bloodbath. But you know, rules are rules.

      1. vlade


        DTCC didn’t “forced” retail investors. It stopped their brokers who didn’t meet a margin requirement. Do you have an idea what happens to a HF when it doesn’t meet a margin requirement? Brokers who could cover their margin call quickly (or didn’t have one in the first place) could operate w/o any stumbles.

        FFS, years back one of the exchanges almost went down because it didn’t have enough regulatory capital and got the injection literally minutes before open.

  36. cat’s paw

    well, as usual yves’ analysis is insightful, but this is one of those times where i think the analysis is missing the forest for the trees. vlade’s comments above are instructive in this regard and run in parallel to the point i’m making: the field of play is not on the ground this sort of analysis assumes. it does not have a remotely accurate sense of the motivations and desires driving wsb.

    others have helpfully fleshed out some of this above, but to make it short and sweet: the wsb (self professed) retards know they can win by losing and thus are perfectly willing to take the loss in order to win. they’re not playing the game yves and vlade, for example, think they are. hence, the rationality informing the rules of that game does not apply.

    maybe i’m wrong. yves has proven me wrong before when i thought she had missed the forest for the trees. i see something altogether different happening here, well beyond what this post is crediting.

    1. Yves Smith Post author

      You really did miss the point of this post. I could care less about WSB and the general public should ignore them. $12 billion of losses for the hedge fund industry, even if they wind up all being realized (unlikely) is on the order of a stubbed toe. Some individual players may bleed and even die, but they were dopes that happened to get caught out on this trade. It would have been something else, eventually.

    2. Justin

      Something else is going on beneath the actual events, for sure. I happened across this story and took a gander at the WSB reddit board and was blown away by the amount of energy there — it was lively and real — something so foreign in an age of sleuths, slights and deception. It does not matter that what was being done would have minimal overall impact on HFs or the financial system in the grand scheme of things. All that matters was people came together spontaneously to do something with no regard for the consequences. And something did happen. Some brokerages halted trading of GME and other affected companies, and it drew quite the media attention as well as a flutter in congress. Maybe it is no big deal as Yves seems to think, but I disagree.

      Consider for a moment that this was a somewhat random collection of people (and maybe some big money too) uniting for something that is foolish and self-defeating. People who can afford not to lose, and yet still choose to do so.

      Consider also that social media, tech companies, and corporate interests are all geared to measure and predict public sentiment, or further, as for public relations, to shape it. This is predicated upon the continual cycle of researching, organizing, and staging an event (ie product release, new policy, crises) that the public is primed to react to, and upon the assumption that people will generally seek their own interest and well being, often irrationally.

      What happens when people act spontaneously (without some widely publicized event or first mover), in tandem, against their own interest and well being? Obviously some people will stand to gain and some to lose. That’s not the point. What is, is that a good chunk of people, bought into their own game with no regard for how it ought to be played, and in the process they (for that moment) changed the rules. And for once they moved and everyone else reacted.

    3. vlade

      They cannot win by losing, not here. The best thing they can hope to achieve is their 5 minutes of glory in the media.

      WSB here are the equivalent of people who “occupied” Capitol Jan 6 (and similar to them, some may find themseleves fined/jailed). Maybe not even that.

      Again. You cannot beat casino by joining the game. The only way to beat the casino is not to join the game.

      1. Palaver

        I am surprised by all of the negativity here. It was a small protest snuffed out by reactionary forces on Wall Street. All recent protests have been big losers thus far, so expectations are low.

        I was skeptical at the beginning… because the house never loses. But expressions of solidarity with the narrative, the small traders, showed our numbers.

        The “stupid amateur hedge fund” vs “stop the squeeze” investors is even less of a plausible narrative. It’s edgy, misanthropic, and sharp. But not what people are shopping for in a mass movement.

        1. Yves Smith Post author

          This is just deluded. There is no mass movement. It was not snuffed out by reactionary forces. It ran into clearing house margin requirements.

          Guys who don’t even understand why they got hammered when they got hammered even after the fact are fools.

  37. Kevin Carhart

    Is it plausible to take VC-funded entities like Robinhood as the concrete pilot-project wing of think tanks? I think I remember Hubert sayingi n the context of Uber, no. But I continue to think so. My thesis is that they are inculcating the public into everyday neoliberalism through participation in a market experience – you get to have personal reasons for enjoying the jurisdictional fuzziness towards the SEC or DOL or the FDA – as well as through the potpourri of older think tank methods like Friedman’s TV show, Business Roundtable articles in the Reader’s Digest, agnotological talking heads to embody certain positions. I’d like to be more longitudinal – it goes beyond the brouhaha of the moment. I think Robinhood the entity in its own right is also important in addition to stories taking place over the platform. Platform-makers would prefer that the emphasis be on the stories involving the new lexicon of their platform, and not the platform itself.

    This is Robinhood itself:

    I think there’s a third kind of thing besides financialization and “ordinary honest businesses.” We’ve been through this several times with VC-backed entities that have serious designs on how you think.

    1. Kevin Carhart

      Here’s the actual quote I was remembering from Hubert’s series. I’ll gloss it properly. Time flies, this was a while ago. From part five, addressing reader comments.

      LT says “You have to go a step further and realize that there are investors that are not investing in the success of Uber, but they are investing in Uber as a vehicle to get rid of certain laws and regulations. The wool was never pulled over their eyes about ‘profitability’. It’s an investment based on ideology and they would deny that every step of the way.”

      Hubert replies, ” … I’ve seen no evidence that any investors put money into Uber just to pursue political ends. I think ‘possibility of big financial returns’ was the primary motive in every case. But I’m sure the worldview compatibility made it easier to conclude that this management team might actually produce those big financial returns…”

      I go beyond LT, so the rest is an argument from just me. I think these entities function as a means of getting the users to imbibe ideas through living them out. Never “just” or only, but in addition to seeking returns. When it comes down to the ideas or the money, they abandon the stridency and go with money. Somebody else picks up the stridency using a different vehicle which is earlier in its “life” and does not yet have to say things at anniversary parties like “We’ve made mistakes, all companies make mistakes but we’ve grown as an organization” and swap out their Kalanicks for someone with less idea-oriented rhetoric.

      Why is this important or useful in addition to the blow-by-blow of the present Robinhood incident? Because startups are involved in a destructive blowup every couple of years not attributable to a few bad apples – Uber, Theranos, Robinhood – .. Prop 22 … And, additional startups roam the land right this moment who have a lot of common DNA with the blowups and whose own blowups are still preventable.

  38. drumlin woodchuckles

    Here is a years-old video of a financial TV-show person talking with Jim Cramer about how Jim Cramer used to manipulate shorting and longing back when Jim Cramer ran a hedge fund and he needed to make stocks go where he needed them to be. I don’t know how many of the details are granularly relevant to present day conditions. Perhaps most of them. Perhaps all of them.

    It certainly illustrates how the manipulator thinks.

    Early in the interview, Cramer said that a money manager who needs to move a stock one way or another has to commit 10 to 20 million dollars to the effort real fast and hard and all at once in order to get the stock moving.

    And I thought . . . what if 10 million WallStreetBets-groupmembers all watched this video and then all discussed it among themselves? And learned all these methods and held dry-run practice drills in “applying” these methods? 10 million WallStreetBets-groupmembers each committing 1 or 2 dollars apiece could have the same impact as a single money runner committing 10 or 20 million dollars. And again, it comes to this: how many of the WallStreetBets-members want to “make money”? As against how many of them are willing to lose money in order to get revenge? How many are committed to the proposition that revenge is worth the money?

    Anyway, here is the link.

  39. Sound of the Suburbs

    You can manipulate share prices.

    CEO’s worked it out ages ago.
    As a CEO, I can use the company’s money to do share buybacks, to boost the share price; get my bonus and top dollar for my shares.
    What is there not to like?
    Share buybacks were found to be a cause of the 1929 crash and made illegal in the 1930s.

    What lifted US stocks to 1929 levels in 1929?
    Margin lending and share buybacks.
    What lifted US stocks to 1929 levels in 2019?
    Margin lending and share buybacks.
    A former US congressman has been looking at the data.

    Margin lending can inflate share prices too.
    The University of Chicago worked that out in the 1930s.

    What is the fundamental flaw in the free market theory of neoclassical economics?
    The University of Chicago worked that out in the 1930s after last time.

    Henry Simons was a founder member of the Chicago School of Economics and he had worked out what was wrong with his beliefs in free markets in the 1930s.
    Banks can inflate asset prices with the money they create from bank loans.
    Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.
    “Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of “bank-financed inflation of securities and real estate” through the leveraged creation of secondary forms of money.”
    Margin lending had inflated the US stock market to ridiculous levels.
    Real estate lending was actually the biggest problem lending category leading to 1929.
    Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from 2001 – 2007 and went back to look at the data before 1929.

    The IMF re-visited the Chicago plan after 2008.

    Why are the Americans repeating the mistakes of the 1920s?

    1. Sound of the Suburbs

      What else will you find if you look there?

      Mariner Eccles, FED chair 1934 – 48, observed what the capital accumulation of neoclassical economics did to the US economy in the 1920s.
      “a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped”

      This is what it’s supposed to be like.
      A few people have all the money and everyone else gets by on debt.

      Is that why Keynes added some redistribution?
      Yes, it stopped all the wealth concentrating at the top and gave rise to a strong, healthy middle class.

      The arc of progress.
      When you realise it looks like a U-turn, it all becomes clear.
      We went back to an economics we had used before.

      To get the full picture we need the timeline.

      Economics the timeline.
      Classical economics – observations and deductions from the world of small state, unregulated capitalism around them
      Neoclassical economics – Where did that come from?
      Keynesian economics – observations, deductions and fixes for the problems of neoclassical economics
      Neoclassical economics – Why is that back again?
      We thought small state, unregulated capitalism was something that it wasn’t as our ideas came from neoclassical economics, which has little connection with classical economics.
      On bringing it back again, we had lost everything that had been learned in the 1930s and 1940s, by which time it had already demonstrated its flaws.

      After a few decades of Keynesian, demand side economics, the system became supply side constrained.
      Too much demand and not enough supply causes inflation.

      Neoclassical, supply side economics should be just the ticket to get things moving again.
      It does, but it’s got the same problems it’s always had.

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