Home Journalism The American Prospect's Economic Knowledge And The Gamestop Hustle

The American Prospect’s Economic Knowledge And The Gamestop Hustle

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One of the problems with The American Prospect is that no one there actually understands matters economic or financial. Therefore their attempts at critiques fall more than a little flat as there’s no one there to ensure that they’re valid. Or even make sense.

They have a go at showing how the whole Gamestop thing was really a hustle by the hedge funds. Full of references to naked short selling and all sorts of other chicanery.

Dark pools are opaque private exchanges run by the major banks and prime dealers, and they are inaccessible to other investors. They were created to settle large trades by hedge funds and institutional investors without moving the markets.

No, dark pools move markets – because it’s the balance of buying and selling which moves markets.

Market makers like Citadel Securities facilitate dark pool transactions, without the market being aware of the transaction price. That prevents the transaction from impacting the share price on the public exchanges. In this fashion, GameStop manipulators could buy in a dark pool and sell on an open exchange, making money on the transaction.

No, as Reuters puts it:

Nearly every major bank runs a dark pool, a trading venue that does not have to provide information such as trade sizes or prices to the public prior to trades taking place.

You don’t have to be giving a bid/offer on a dark pool. But you must still report the transactions:

Under SEC rules, every stock transaction must be reported to a consolidated data feed, whether it occurs on an exchange, like the Nasdaq or Intercontinental Exchange Inc’s ICE.N New York Stock Exchange (NYSE), or in a dark pool. Off-exchange trades are reported through Trade Reporting Facilities (TRFs) run by Nasdaq and NYSE in conjunction with FINRA.

Further, think what would happen if you could just buy on a dark pool and sell on an open market and make a profit every time? Then everyone would be doing this all the time. The two prices would equalise and then you’d not be able to do this. It’s not just, therefore, the lack of knowledge, it’s the lack of logic too.

Toward the end of January, as prices spiked during the run-up to a squeeze, the total number of trades more than quadrupled, but the average trade size dropped. There was a curious phenomenon of hundreds of thousands of micro transactions, trades of just a few shares, even one share each. But dark pools are set up to handle massive trades that must be hidden because they might otherwise “move the market.” The key players were known short funds.

Well, yes, what would we expect when we see retail traders charging into a stock? Quite, that transaction size will fall.

Who was trading? u/nayboyer2 explains: “Based on their SEC 13F filing, Citadel owned only 217,132 shares. Prior to January, its previous high for number of trades was 75,652. But in January, Citadel traded over 252 million GME shares in the OTC market. In January, it traded over 1,161 GME shares for every one share that it owned.” Citadel is a high-frequency trading market maker, which means it can access more shares than it owns. But this level of trading activity is notable.

We’d also expect market makers to be trading more stock when more stock is being traded. These are “Yeah, D’Oh?” observations.

What are the SEC, FINRA, and the DTCC doing in the face of such apparent market manipulation? The SEC is reviewing payment for order flow, as well as whether off-exchange trading distorts stock prices. But at a May 6 House Financial Services Committee hearing about GameStop, Gary Gensler (SEC), Robert W. Cook (FINRA), and Michael C. Bodson (DTCC) and their congressional questioners never mentioned naked short selling, fails to deliver, or other documented indicators of market corruption. These regulators are the only ones who can truly unravel this mystery.

Conspiracy! The capitalists are gouging the proletariat!

But the heart of the complaint is this:

The short squeeze ended under peculiar circumstances. A January 28 spike in GME led Robinhood, the online broker that handled orders for many retail traders, to cut the buy option for the stock from its app. Robinhood CEO Vlad Tenev told the House Financial Services Committee in February that he had discussed the trade restrictions with the Depository Trust and Clearing Corporation (DTCC), which clears public trades, after it made a $3 billion margin call.

However, DTCC CEO Michael Bodson told the committee in May that “the decision to restrict trading really was internal to Robinhood, we did not have discussions about that.” He noted that with Robinhood, “the system worked.” It stopped the buys while the big traders continued to sell. GME that day hit $483, but then the price plummeted, and the short squeeze was over.

Why would Robinhood shut down GME trading? It did not lose money on trades, because it did not have its own investments. The answer may be hidden in the murky relationships involving market makers and hedge funds.

Citadel Securities, a market maker, handled Robinhood’s orders on a “pay for order flow” basis (it paid for orders routed to it), which equaled 40 percent of Robinhood’s revenue. Citadel Securities is a division of a company founded by billionaire Ken Griffin. Another division, the Citadel hedge fund, helped provide short seller Melvin Capital with nearly $3 billion in funds during the GME short squeeze. Citadel Securities would have the clout to persuade Robinhood to shut down trading, and the motive, given its other division’s investment in Melvin.

Citadel Securities also has a knack for running afoul of the trading laws. It has been fined 58 times in the last few years for violating trading regulations, many about naked short selling.

See! See! Conspiracy! Citadel got to RobinHood and it’s infamy, infamy, they’ve all got it in for me!

Then there’s that no mas on trades:

Well, they are in a way–but NOT the way that is being widely portrayed. What is going on is an illustration of the old adage that clearing and settlement in securities markets (like the derivatives markets) is like the plumbing–you take it for granted until the toilet backs up.

You can piece together that Robinhood was dealing with a plumbing problem from a couple of stories. Most notably, it drew down on credit lines and tapped some of its big executing firms (e.g., Citadel) for cash. Why would it need cash? Because it needs to post margin to the Depositary Trust Clearing Corporation (DTCC) on its open positions. Other firms are in similar situations, and directly or indirectly GME positions give rise to margin obligations to the DTCC.

The rise in price alone increased margin requirements because given volatility, the higher the price of a stock, the larger the dollar amount of potential loss (e.g., the VaR) that can occur prior to settlement. This alone jacks up margins. Moreover, the increase in GME volatility, and various adders to margin requirements–most notably for gap risk and portfolio concentration–ramp up margins even more. So the action in GME has led to a big increase in margin requirements, and a commensurate need for cash. Robinhood, as the primary venue for GME buyers, had/has a particularly severe position concentration/gap problem. Hence Robinhood’s scramble for liquidity.

Robin Hood was running out of money to be able to finance the trades that customers were making. That’s it, that’s all.

Exactly and precisely because the GameStop prices was bouncing around therefore more margin was required. And at some point in having to stuff margin into the maw of the DTCC then RobinHood is going to refuse to allow trades rather than stuff more margin into that maw. Which is what they did.

Now, not grasping all these details and logics ‘n’ facts ‘n’ stuff is not shameful, it’s not even a lack of anything. There are vast areas of life that few of us have even little clue about. But knowing these details ‘n’ logics ‘n’ facts ‘m’stuff would be a useful beginning to constructing a conspiracy theory about financial markets.

LUCY KOMISAR
Lucy Komisar is an investigative journalist who writes about financial and corporate corruption. Follow @lucykomisar or www.thekomisarscoop.com.

I always enjoy finding out who I don’t ever need to read any more of.

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