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Explaining The Robin Hood GameStop Fiasco

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It has become one of those stories that shows just how capitalism screws the little guy. So all these retail investors decided to shaft the short sellers in GameStop. And then Robin Hood, the trading app that most used, said you can’t buy GameStop any more.

This is clear evidence of screwing the little guy, right? Robin Hood got payment for order flow from Citadel, Citadel is friends – best mates! – with one of the hedge funds that was getting screwed over their short selling and what more proof do we need?

Except, of course, it was nothing to do with that at all:

Robinhood made a loss of $1.4bn (£1bn) in the first three months of this year amid the GameStop chaos, the stock trading app revealed as it applies to go public.

A massive buying frenzy driven by retail investors on Reddit forced Robinhood to raise emergency funds that cost it $1.5bn and tanked its finances for that quarter, according to paperwork filed with US regulators on Thursday.

What actually happened.

So, yes, retail investors pile into GameStop, many through Robin Hood. We agree so far. That makes the volatility of GameStop shares go up.

Robin Hood has to post margin into the markets to cover the trading of its customers. Margin size is based upon the volatility of the stock under consideration. A more volatile stock requires greater margin. There was so much piling into GameStop through Robin Hood that Robin Hood ran out of money. Quite literally, just ran out. It had to run around and find more financing – $4 billion if memory serves. It had to find that $4 billion in a matter of hours too.

Which is where the loss comes from, you need money right now and no kidding and you don’t get a good deal, ain’t no use in prayin’, that’s the way it’s stayin’ baby.

So, what did Robin Hood do? It stopped retail traders buying into GameStop and thereby increasing again and again the margin that it didn’t have but had to put up to support the retail trading in GameStop.

And that’s it. No conspiracy, just margin calls. But out of which the most lovely conspiracy has been constructed…..

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1 COMMENT

  1. And if the run had been happening on the floor of the trading hall, the market management/regulators themselves would have stepping in and suspended sales. To everybody.

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