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They didn't change the rules of the game. The volatility and risk changed, thus the collateral requirements changed. Note: I am not a financial professional. I

by csours 6y ago

They didn't change the rules of the game. The volatility and risk changed, thus the collateral requirements changed. Note: I am not a financial professional. I'm not sure if anyone from wsb should be prosecuted; but I will say that if another hedge fund had tried to do what wsb did, it would have been clearly and unambiguously illegal market manipulation. I do think it is quite likely there were some financial professionals posting on wsb that were breaching some laws or technical requirements. I have no evidence, but I would not be surprised.

voiper1 6y ago
If they required 100% collateral, why did that mean Robinhood stopped trades? Why couldn't they allow trades with 100% settled funds?
- DavidSJ 6y ago
  I think the requirements were calculated at the brokerage level and not the individual customer level.
  - sillysaurusx 6y ago
    One level up, I think! Think of it like a pyramid: the clearinghouse sits at the top, the brokers are in the middle, and the rest of us dirty peasants sit at the bottom where we belong. The clearinghouse covers 95% of trades on Wall Street. So the clearinghouse issued a decree: "we are no longer able to support opening positions for GME, AMC, and KOSS." Since most brokers use this clearinghouse, that means almost all brokers were forced to prevent customers from buying GME. Everyone: pikachu face The brokers have no choice. https://youtu.be/4RS4JIEVyXM?t=96 https://youtu.be/4RS4JIEVyXM?t=96
    - rcxdude 6y ago
      Not quite right. There's the DTC (which carries out 95% of the trades), then there's clearing houses (sometimes a seperate entity, sometimes part of the broker: the larger ones all do their own clearing. e.g. Robinhood has their own clearing house), then there's the brokers, then the traders. The DTC said 'we need 100% collateral on these trades' (probably because they viewed there being a significant risk that someone, somewhere, would not be able to pay up for the trades they're making in a big way), and then APEX clearing (which is the clearing house used by a lot of smaller brokers but not 95% of the market) said 'we can't support opening new positions' because their liquidity would be sucked up by the requirement, blocking most of the smaller brokers. Robinhood did similar for similar reasons independently of APEX, but some other brokers not using APEX could still trade (either because they had more cash on hand or because their customers weren't buying as much of affected stocks).
      - xorcist 6y ago
        The Wikipedia article on DTC isn't very informative What is the relationship between the NYSE and DTC?
        bdonlan 6y ago
        The NYSE is one of the stock market centers in the US (yes, there's more than one). It's a place where you (usually virtually these days) go to agree with someone on the specifics of the trade - buy 100x GME at $420. The DTC is involved with what happens next - actually exchanging the stock and cash. In particular, they keep the records of which brokers hold how many shares of which stocks.
      - blablabla123 6y ago
        > The DTC said 'we need 100% collateral on these trades' (probably because they viewed there being a significant risk that someone, somewhere, would not be able to pay up for the trades they're making in a big way This sounds like nonsense to me. After all the job of the Clearing House is to make sure the cash is balanced correctly after the transactions. Or realistically speaking a never ending chain of transactions, thus correctly moving the cash behind back and forth in time. It's the secret of the clearing house why they have no problems that their institutional customers have single digit equity ratios (speaking about Basel II/III/...) all the time while most individuals deal with 100% equity ratio. Maybe the more reasonable explanation is that they were overwhelmed by so many small transactions.
        valuearb 6y ago
        GME was having 400% swings in a day, and being bought in a large part by brand new retail investors who had just opened accounts. That’s a perfect storm for nonpayment issues.
        blablabla123 6y ago
        > GME was having 400% swings in a day Well, if that's what people want. At that point in time it's about buying, not selling. > and being bought in a large part by brand new retail > investors who had just opened accounts. > That’s a perfect storm for nonpayment issues. Ok but they need to go through some sort of payment processing that checks the credit rating. Even if the credit card is close to the limit, we are probably talking about amounts smaller than 1000 $. Anyone able to visit the Reddit homepage and installing the Robinhood app should have that amount of cash in hardware. FWIW, normal eCommerce payment processors deal with nonpayment issues in the sub percent range.
- sillysaurusx 6y ago
  I highly recommend https://youtu.be/4RS4JIEVyXM?t=60 https://youtu.be/4RS4JIEVyXM?t=60 -- I didn't understand any of this myself till watching that. (Still don't! But I'm less confused.) My understanding is that the clearing firm informs everyone "Hey, we no longer support opening positions in three stocks specifically: GameStop, AMC, and KOSS." Literally everyone, including Robinhood, was forced to only allow people to sell GME. Somehow Fidelity was the only market maker to avoid this -- you couldn't buy GME anywhere else due to the clearinghouse's decision. (Why was Fidelity the only broker able to sidestep the clearinghouse's decision? An interesting mystery; perhaps someone here knows the answer.)
  - zappo2938 6y ago
    Fidelity is largest stock holder of GME.
    - thefounder 6y ago
      So in the end it can be done when the right people make profit
      - derangedHorse 6y ago
        Or rather because the trades could be done internally (Fidelity could sell off the stock they own) EDIT: It seems my assumption was incorrect. This link posted by grandmczeb shows that RH needed more capital by a downstream dependency to ensure those trades: https://archive.is/GFtf2 https://archive.is/GFtf2
        yskchu 6y ago
        Actually you were right, Fidelity did sell off all the stock they owned. https://www.wsj.com/articles/fidelity-cashes-in-most-of-gamestop-stake-11612980430 https://www.wsj.com/articles/fidelity-cashes-in-most-of-game... https://www.bloomberg.com/news/newsletters/2021-02-11/why-gamestop-didn-t-sell-any-stock-during-the-reddit-rally-kl14hqg1 https://www.bloomberg.com/news/newsletters/2021-02-11/why-ga... They owned 13% of the company; now they own only 87 shares; they sold 9.3 million shares in 1 month. So, during the Robinhood GME debacle, Fidelity could sidestep the issue, since they wanted to sell their own GME shares anyway, and also managed to look good in the process (no GME buying restrictions compared to Robinhood etc); win win for them
- tauwauwau 6y ago
  This episode of Planet Money should shed some light on it. What I understand from this episode is that there's a 2 day delay in settling trades, that's why clearing house exists. https://www.npr.org/2021/02/02/963466346/robinhoods-very-bad-day https://www.npr.org/2021/02/02/963466346/robinhoods-very-bad...
- grandmczeb 6y ago
  Brokerages can't guarantee trades with client money[1]. [1] https://archive.is/GFtf2 https://archive.is/GFtf2
- valuearb 6y ago
  There is a two day closing period for stock sales. During that period the exchange needs colateral to ensure when the transaction closes it will be paid for. Typically this collateral is small, like 3% because most stocks aren’t volatile and buyers almost always pay up. But when a stock gets incredibly volatile, there is a risk that buyers of $480 shares may refuse to pay when the price is $90 two days later. Especially when the buyers are a bunch of new retail investors who just opened accounts. You could buy GME from most brokers because they didn’t have the GME volume Robinhood had, and they had more collateral, so the 100% collateral requirements for GME were manageable.
  - scatters 6y ago
    And the inverse; if you buy at $200 and the stock is at $400 two days later there's a risk that the person you were buying it from has disappeared (maybe they were a short seller and went bust; maybe they got seller's remorse). So RH has to reserve not just the $200 you paid for it, but also another $200 to buy the share on the open market when the counterparty fails to deliver. That's why collateral requirements are based on volatility, not momentum.
ummonk 6y ago
There are formulaic requirements based on volatility and risk, but those aren't specific to one stock. The clearing exchange exercised discretion in applying a new collateral requirement, and in doing so put its thumb on the scale.
- toomuchtodo 6y ago
  Specifically the “Margin Liquidity Adjustment Charge”.
boublepop 6y ago
Institutional investors did do what people suspect wsb of doing. Retail investors where net sellers of GME during this event. The short squeeze happened because other institional investors went in hard under cover of the WSB memes. https://www.cnbc.com/2021/02/05/gamestop-mania-may-not-have-been-the-retail-trader-rebellion-it-was-perceived-to-be-data-shows.html https://www.cnbc.com/2021/02/05/gamestop-mania-may-not-have-...
- javagram 6y ago
  > Institutional investors did do what people suspect wsb of doing. Buying based on observing market conditions or seeing the posts in reddit wouldn’t have been questionably legal afaik. Only actively coordinating e.g. through posts on Reddit or phone calls or a Smoky back room could be argued to be market manipulation I think? If they were posting in Reddit to feed the squeeze that’s when stuff may get problematic.
  - IgorPartola 6y ago
    The sentiment on WSB from what I can tell is that they can’t coordinate which thread to sticky, let alone which stock to buy. My impression of observing it for a couple of weeks is that this is true. They aren’t capable of truly coordinating anything. Best I can tell, Roaring Kitty/Deepfuckingvalue basically had been buying more and more GME stock for like a year and every month showed screenshots to prove this saying a short squeeze was coming. Eventually in January something happened and everyone else was like “he might actually be right, I’m buying”. Then the news picked it up and it hit a positive feedback loop. Robinhood stopping buy orders put a wet blanket on things and after they lifted the restrictions enough time had passed that the frenzy slowed down. The short squeeze might still happen but lots of WSB participants bought at $300+ and I suspect will never recover that loss. But also because of this specific crowd it seems a good chunk of them are not selling on the idea that if you buy at $300 and sell at $50, you definitely lose. And if you hold the stock it might some day rise back to above $300-400. Mark Cuban did an AMA there where he basically reaffirmed this point of view which they took and ran with. Part of this behavior is that WSB wasn’t really focused on going long on stocks until now. They mostly traded options which have specific deadlines. They simply aren’t used to the idea of an open ended investment. I saw people talking about how GME is a solid company and how they believe it’ll transition to digital successfully. How it might grow from fundamentals, etc. Nevermind their EPS, or the fact that their valuation currently sits at 10x what it was with no justification as to how their fundamentals might have changed to account for this. The difference with this crowd is that they for the most part acknowledge that this is gambling and that you are likely to lose all the money you invest so don’t worry about losing it. They also acknowledge that they don’t know what they are doing vs pretending like this is all based on research, experience, or education. Makes them a sort of dangerous crowd, especially as some there do accumulate a good amount of wealth, IMO.
xorcist 6y ago
Can someone please explain the situation to someone with no competence how these markets work? As far as I understand, no one is allowed to trade on stock exchanges directly. Everyone has to go through a broker. Orders has to be settled in 2 days. So there are counterparty risks involved in both steps here. Is this where there was a problem? But the retail trading platform takes zero financial risk as long as they don't allow their customers to trade on credit (which is an entirely different issue). As a retail customer I am entirely confident that I own whatever stocks has been purchased, even if the trading platform used should go belly up, as long as the stock in question is traded in a public exchange, which was the case here. So what exactly was the problem? Some posts led my to believe Robin Hood and other apps extended some credit to its users in order for customers to be able to speculate immediately with their money and not have to wait for the trade to be settled. But surely the appropriate response to that would be to halt that credit, not suspend trading? There is also the question how it is possible to limit buys or not sells? For every sell there is also a buy. If some platforms are limited to sell orders, someone must be on the other side of that trade, and will have an advantage in the market. How is that legal? Or did this not concern stock trading at all? Some articles mentions options trading, which is a financial instrument issued by a counter party. But those kinds of orders are stopped all the time for all sorts of reasons. That is in itself hardly newsworthy.
- derangedHorse 6y ago
  I'm thinking it was a decision guided by their current application architecture. My guess is that there was no easy way to disable the purchasing of stock on credit, and preventing a stock from being bought was probably the easiest mitigation.
- tedunangst 6y ago
  https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf https://www.dtcc.com/-/media/Files/Downloads/legal/policy-an...
- donmcronald 6y ago
  The DTC changed the collateral requirements to 100%. The WeBull CEO said that. That requires way more cash on hand to handle settlements compared to the norm which I think is 2-3%. IMHO the DTC and prime brokers are all pals playing in the same fixed game. My baseless assumption is they’re manipulating the market by selling uncovered shorts to each other and since everyone is in on it / accustomed to it, no one ever comes to collect so there’s no risk of having to cover their uncovered shorts. They could be shorting 2000% of the float and no one would know if all the trading happens between complicit participants with the sole intent of driving share prices down.
epistasis 6y ago
By "what WSB did" are you taking about a short squeeze? Those are not uncommon and no one has ever been prosecuted for it. Or is there something else that WSB did beyond squeezing the shorts?
- valuearb 6y ago
  Organizing a team to do the short squeeze. Though you can quibble on “organizing” part when it comes to WSB.
playingchanges 6y ago
Interestingly from what I’ve read it seems like the hedge fund community overall views the GME event as fair play. ‘Maybe Melvin got burned but they should have known better’, kind of attitude.
- fractionalhare 6y ago
  The hedge fund community isn't really homogenous that way. Basically all the long/short equity hedge funds with appreciable AUM lost significant money in January, because most of them were short the...well, obvious short candidates, like AMC, GME and BBBY. Other kinds of funds which trade on monentum or which shorted near the top tick made an absolute killing. Personally I don't think it's unfair when any fund loses money - that's the game. I do think it's unfair Melvin in particular has outsized attention. The only reason Melvin is in the spotlight now is because the WSB zeitgeist just happened upon Melvin's public short and fixated on it without looking at other funds' 13Fs showing the same position. Melvin was far from the only fund short GME. This in turn led the media outlets to hyperfocus on Melvin, which has in turn led the mainstream lay community to hyperfocus on Melvin.
bsanr2 6y ago
The issue is that the volatility had been unprecedentedly high for a week, but they jumped up the collateral requirements overnight. It would be one thing if they'd stepped it up in time with volatility, but by the timing, it looks less like a protective and more like a punitive step.

by csours 6y ago

voiper1 6y ago

If they required 100% collateral, why did that mean Robinhood stopped trades? Why couldn't they allow trades with 100% settled funds?

DavidSJ 6y ago
I think the requirements were calculated at the brokerage level and not the individual customer level.
- sillysaurusx 6y ago
  One level up, I think! Think of it like a pyramid: the clearinghouse sits at the top, the brokers are in the middle, and the rest of us dirty peasants sit at the bottom where we belong. The clearinghouse covers 95% of trades on Wall Street. So the clearinghouse issued a decree: "we are no longer able to support opening positions for GME, AMC, and KOSS." Since most brokers use this clearinghouse, that means almost all brokers were forced to prevent customers from buying GME. Everyone: pikachu face The brokers have no choice. https://youtu.be/4RS4JIEVyXM?t=96 https://youtu.be/4RS4JIEVyXM?t=96
  - rcxdude 6y ago
    Not quite right. There's the DTC (which carries out 95% of the trades), then there's clearing houses (sometimes a seperate entity, sometimes part of the broker: the larger ones all do their own clearing. e.g. Robinhood has their own clearing house), then there's the brokers, then the traders. The DTC said 'we need 100% collateral on these trades' (probably because they viewed there being a significant risk that someone, somewhere, would not be able to pay up for the trades they're making in a big way), and then APEX clearing (which is the clearing house used by a lot of smaller brokers but not 95% of the market) said 'we can't support opening new positions' because their liquidity would be sucked up by the requirement, blocking most of the smaller brokers. Robinhood did similar for similar reasons independently of APEX, but some other brokers not using APEX could still trade (either because they had more cash on hand or because their customers weren't buying as much of affected stocks).
    - xorcist 6y ago
      The Wikipedia article on DTC isn't very informative What is the relationship between the NYSE and DTC?
      - bdonlan 6y ago
        The NYSE is one of the stock market centers in the US (yes, there's more than one). It's a place where you (usually virtually these days) go to agree with someone on the specifics of the trade - buy 100x GME at $420. The DTC is involved with what happens next - actually exchanging the stock and cash. In particular, they keep the records of which brokers hold how many shares of which stocks.
    - blablabla123 6y ago
      > The DTC said 'we need 100% collateral on these trades' (probably because they viewed there being a significant risk that someone, somewhere, would not be able to pay up for the trades they're making in a big way This sounds like nonsense to me. After all the job of the Clearing House is to make sure the cash is balanced correctly after the transactions. Or realistically speaking a never ending chain of transactions, thus correctly moving the cash behind back and forth in time. It's the secret of the clearing house why they have no problems that their institutional customers have single digit equity ratios (speaking about Basel II/III/...) all the time while most individuals deal with 100% equity ratio. Maybe the more reasonable explanation is that they were overwhelmed by so many small transactions.
      - valuearb 6y ago
        GME was having 400% swings in a day, and being bought in a large part by brand new retail investors who had just opened accounts. That’s a perfect storm for nonpayment issues.
        blablabla123 6y ago
        > GME was having 400% swings in a day Well, if that's what people want. At that point in time it's about buying, not selling. > and being bought in a large part by brand new retail > investors who had just opened accounts. > That’s a perfect storm for nonpayment issues. Ok but they need to go through some sort of payment processing that checks the credit rating. Even if the credit card is close to the limit, we are probably talking about amounts smaller than 1000 $. Anyone able to visit the Reddit homepage and installing the Robinhood app should have that amount of cash in hardware. FWIW, normal eCommerce payment processors deal with nonpayment issues in the sub percent range.
sillysaurusx 6y ago
I highly recommend https://youtu.be/4RS4JIEVyXM?t=60 https://youtu.be/4RS4JIEVyXM?t=60 -- I didn't understand any of this myself till watching that. (Still don't! But I'm less confused.) My understanding is that the clearing firm informs everyone "Hey, we no longer support opening positions in three stocks specifically: GameStop, AMC, and KOSS." Literally everyone, including Robinhood, was forced to only allow people to sell GME. Somehow Fidelity was the only market maker to avoid this -- you couldn't buy GME anywhere else due to the clearinghouse's decision. (Why was Fidelity the only broker able to sidestep the clearinghouse's decision? An interesting mystery; perhaps someone here knows the answer.)
- zappo2938 6y ago
  Fidelity is largest stock holder of GME.
  - thefounder 6y ago
    So in the end it can be done when the right people make profit
    - derangedHorse 6y ago
      Or rather because the trades could be done internally (Fidelity could sell off the stock they own) EDIT: It seems my assumption was incorrect. This link posted by grandmczeb shows that RH needed more capital by a downstream dependency to ensure those trades: https://archive.is/GFtf2 https://archive.is/GFtf2
      - yskchu 6y ago
        Actually you were right, Fidelity did sell off all the stock they owned. https://www.wsj.com/articles/fidelity-cashes-in-most-of-gamestop-stake-11612980430 https://www.wsj.com/articles/fidelity-cashes-in-most-of-game... https://www.bloomberg.com/news/newsletters/2021-02-11/why-gamestop-didn-t-sell-any-stock-during-the-reddit-rally-kl14hqg1 https://www.bloomberg.com/news/newsletters/2021-02-11/why-ga... They owned 13% of the company; now they own only 87 shares; they sold 9.3 million shares in 1 month. So, during the Robinhood GME debacle, Fidelity could sidestep the issue, since they wanted to sell their own GME shares anyway, and also managed to look good in the process (no GME buying restrictions compared to Robinhood etc); win win for them
tauwauwau 6y ago
This episode of Planet Money should shed some light on it. What I understand from this episode is that there's a 2 day delay in settling trades, that's why clearing house exists. https://www.npr.org/2021/02/02/963466346/robinhoods-very-bad-day https://www.npr.org/2021/02/02/963466346/robinhoods-very-bad...
grandmczeb 6y ago
Brokerages can't guarantee trades with client money[1]. [1] https://archive.is/GFtf2 https://archive.is/GFtf2
valuearb 6y ago
There is a two day closing period for stock sales. During that period the exchange needs colateral to ensure when the transaction closes it will be paid for. Typically this collateral is small, like 3% because most stocks aren’t volatile and buyers almost always pay up. But when a stock gets incredibly volatile, there is a risk that buyers of $480 shares may refuse to pay when the price is $90 two days later. Especially when the buyers are a bunch of new retail investors who just opened accounts. You could buy GME from most brokers because they didn’t have the GME volume Robinhood had, and they had more collateral, so the 100% collateral requirements for GME were manageable.
- scatters 6y ago
  And the inverse; if you buy at $200 and the stock is at $400 two days later there's a risk that the person you were buying it from has disappeared (maybe they were a short seller and went bust; maybe they got seller's remorse). So RH has to reserve not just the $200 you paid for it, but also another $200 to buy the share on the open market when the counterparty fails to deliver. That's why collateral requirements are based on volatility, not momentum.

ummonk 6y ago

There are formulaic requirements based on volatility and risk, but those aren't specific to one stock. The clearing exchange exercised discretion in applying a new collateral requirement, and in doing so put its thumb on the scale.

toomuchtodo 6y ago
Specifically the “Margin Liquidity Adjustment Charge”.

boublepop 6y ago

Institutional investors did do what people suspect wsb of doing. Retail investors where net sellers of GME during this event. The short squeeze happened because other institional investors went in hard under cover of the WSB memes. https://www.cnbc.com/2021/02/05/gamestop-mania-may-not-have-been-the-retail-trader-rebellion-it-was-perceived-to-be-data-shows.html https://www.cnbc.com/2021/02/05/gamestop-mania-may-not-have-...

javagram 6y ago
> Institutional investors did do what people suspect wsb of doing. Buying based on observing market conditions or seeing the posts in reddit wouldn’t have been questionably legal afaik. Only actively coordinating e.g. through posts on Reddit or phone calls or a Smoky back room could be argued to be market manipulation I think? If they were posting in Reddit to feed the squeeze that’s when stuff may get problematic.
- IgorPartola 6y ago
  The sentiment on WSB from what I can tell is that they can’t coordinate which thread to sticky, let alone which stock to buy. My impression of observing it for a couple of weeks is that this is true. They aren’t capable of truly coordinating anything. Best I can tell, Roaring Kitty/Deepfuckingvalue basically had been buying more and more GME stock for like a year and every month showed screenshots to prove this saying a short squeeze was coming. Eventually in January something happened and everyone else was like “he might actually be right, I’m buying”. Then the news picked it up and it hit a positive feedback loop. Robinhood stopping buy orders put a wet blanket on things and after they lifted the restrictions enough time had passed that the frenzy slowed down. The short squeeze might still happen but lots of WSB participants bought at $300+ and I suspect will never recover that loss. But also because of this specific crowd it seems a good chunk of them are not selling on the idea that if you buy at $300 and sell at $50, you definitely lose. And if you hold the stock it might some day rise back to above $300-400. Mark Cuban did an AMA there where he basically reaffirmed this point of view which they took and ran with. Part of this behavior is that WSB wasn’t really focused on going long on stocks until now. They mostly traded options which have specific deadlines. They simply aren’t used to the idea of an open ended investment. I saw people talking about how GME is a solid company and how they believe it’ll transition to digital successfully. How it might grow from fundamentals, etc. Nevermind their EPS, or the fact that their valuation currently sits at 10x what it was with no justification as to how their fundamentals might have changed to account for this. The difference with this crowd is that they for the most part acknowledge that this is gambling and that you are likely to lose all the money you invest so don’t worry about losing it. They also acknowledge that they don’t know what they are doing vs pretending like this is all based on research, experience, or education. Makes them a sort of dangerous crowd, especially as some there do accumulate a good amount of wealth, IMO.

xorcist 6y ago

Can someone please explain the situation to someone with no competence how these markets work? As far as I understand, no one is allowed to trade on stock exchanges directly. Everyone has to go through a broker. Orders has to be settled in 2 days. So there are counterparty risks involved in both steps here. Is this where there was a problem? But the retail trading platform takes zero financial risk as long as they don't allow their customers to trade on credit (which is an entirely different issue). As a retail customer I am entirely confident that I own whatever stocks has been purchased, even if the trading platform used should go belly up, as long as the stock in question is traded in a public exchange, which was the case here. So what exactly was the problem? Some posts led my to believe Robin Hood and other apps extended some credit to its users in order for customers to be able to speculate immediately with their money and not have to wait for the trade to be settled. But surely the appropriate response to that would be to halt that credit, not suspend trading? There is also the question how it is possible to limit buys or not sells? For every sell there is also a buy. If some platforms are limited to sell orders, someone must be on the other side of that trade, and will have an advantage in the market. How is that legal? Or did this not concern stock trading at all? Some articles mentions options trading, which is a financial instrument issued by a counter party. But those kinds of orders are stopped all the time for all sorts of reasons. That is in itself hardly newsworthy.

derangedHorse 6y ago
I'm thinking it was a decision guided by their current application architecture. My guess is that there was no easy way to disable the purchasing of stock on credit, and preventing a stock from being bought was probably the easiest mitigation.
tedunangst 6y ago
https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/NSCC_Disclosure_Framework.pdf https://www.dtcc.com/-/media/Files/Downloads/legal/policy-an...
donmcronald 6y ago
The DTC changed the collateral requirements to 100%. The WeBull CEO said that. That requires way more cash on hand to handle settlements compared to the norm which I think is 2-3%. IMHO the DTC and prime brokers are all pals playing in the same fixed game. My baseless assumption is they’re manipulating the market by selling uncovered shorts to each other and since everyone is in on it / accustomed to it, no one ever comes to collect so there’s no risk of having to cover their uncovered shorts. They could be shorting 2000% of the float and no one would know if all the trading happens between complicit participants with the sole intent of driving share prices down.

epistasis 6y ago

By "what WSB did" are you taking about a short squeeze? Those are not uncommon and no one has ever been prosecuted for it. Or is there something else that WSB did beyond squeezing the shorts?

valuearb 6y ago
Organizing a team to do the short squeeze. Though you can quibble on “organizing” part when it comes to WSB.

playingchanges 6y ago

Interestingly from what I’ve read it seems like the hedge fund community overall views the GME event as fair play. ‘Maybe Melvin got burned but they should have known better’, kind of attitude.

fractionalhare 6y ago
The hedge fund community isn't really homogenous that way. Basically all the long/short equity hedge funds with appreciable AUM lost significant money in January, because most of them were short the...well, obvious short candidates, like AMC, GME and BBBY. Other kinds of funds which trade on monentum or which shorted near the top tick made an absolute killing. Personally I don't think it's unfair when any fund loses money - that's the game. I do think it's unfair Melvin in particular has outsized attention. The only reason Melvin is in the spotlight now is because the WSB zeitgeist just happened upon Melvin's public short and fixated on it without looking at other funds' 13Fs showing the same position. Melvin was far from the only fund short GME. This in turn led the media outlets to hyperfocus on Melvin, which has in turn led the mainstream lay community to hyperfocus on Melvin.

bsanr2 6y ago

The issue is that the volatility had been unprecedentedly high for a week, but they jumped up the collateral requirements overnight. It would be one thing if they'd stepped it up in time with volatility, but by the timing, it looks less like a protective and more like a punitive step.