Tag Archives: Congress

This Congressman Is Buying Dogecoin

Dogecoin has become so popular, even Congressmen are getting into the game:

U.S. Rep. Mark Green purchased Dogecoin on April 1 and April 14 according to Congresstrading.com. The purchases were in the amount of $1,001 to $15,000 on each occasion.

A $1,000 purchase each time would now be worth $17,078 based on today’s price of $0.4009. A $15,000 purchase each time would now be worth $127,985.

More here.

As cryptocurrencies including dogecoin become increasingly mainstream, with more investors holding them and more companies accepting them as payment, it will become harder and harder for the government to ban or even regulate them. Congressmen won’t want to hurt their own portfolios, nor those of their wealthy contributors.

For more on dogecoin, check out these posts:

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The 2nd GameStop Hearing Just Happened. Here’s What You Need to Know.

Congress held a second hearing on the mania in GameStop Corp. shares yesterday. It focused on the business model used by Robinhood and other brokers popular with retail traders, which is called “payment for order flow.”

In this system, companies that execute trades (such as Citadel Securities) pay the broker (Robinhood, etc.) to execute the trades. They execute the buy and sell orders at a price slightly better than the public markets, but still keep a bit of money for themselves.

This model introduces a conflict of interest: what if Citadel gives you a worse price than the public market, and Robinhood is happy to let them do so because Citadel is sharing the graft with them? This was a big focus of yesterday’s hearing:

Potential market weaknesses highlighted by the GameStop trading frenzy brought calls for further investigation and possible regulation at a second House Financial Services Committee hearing Wednesday.

Those weaknesses include the potential for conflicts of interest between payment for order flow and best execution, whether short sale disclosure is adequate and if settlement times should be shortened.

There’s research to indicate that payment for order flow lowers prices for investors, but Citadel and Robinhood have also been fined for giving investors worse prices than public markets. So the jury is out on whether this practice is good or not. One thing seems certain: if payment for order flow is banned, trading commissions are coming back.

Settlement times are another major issue. If I send you a text message, you get it almost instantly. If I send you money via Zelle or the Cash app, same thing. But if I ask to buy 100 shares of GameStop, the trade doesn’t actually happen for several days, no matter what the Robinhood app tells you.

Even in today’s wired world, it takes two full days for a trade to be fully executed, or “settled.” This presents big problems for a super volatile stock like GameStop. In those two days, the shares could’ve doubled in price, or halved! We have no idea how much money will actually be required to settle the trade.

So, the Depository Trust & Clearing Corporation (DTCC), which clears all those trades, makes Robinhood put up a bundle of money as collateral. This covers everyone if GameStop shares move wildly in price, putting Robinhood in a position of having to come up with a lot more money for shares than it actually has.

Robinhood couldn’t afford to post all that collateral, so they stopped people from buying shares in GameStop in January when the price was at its most volatile. This incensed users and even some members of Congress. But if the trades cleared instantly, this probably would not happen.

I can find no rational basis for such a slow system in the internet age. These trades amount to text messages, basically. Buy 100 shares GME at $150. We’ve got only four data points there: buy (vs. sell), number of shares, what stock, and what price. Send those to a computer program, match the orders, and get it over with! A 2 day clearing period might have made sense in a time of paper orders, but those days are long gone.

In all, I don’t see a lot in this hearing to affect the stock right now. But if payment for order flow is banned or settlement times are shortened, it could have a big impact on markets in the long term.

For more on GameStop, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

GameStop Hearing 2.0: What You Need to Know

At 10am Eastern time today, Congress will be having its second hearing about the frenzy in GameStop Corp. shares that sent the stock up 1700% in January. This hearing is unlikely to affect the price of the stock much. Rather, it will dig into whether or not the trading system around it is fair.

A major focus will be a process called “payment for order flow”. This is the revenue model used by brokers including Robinhood, which handled many of the trades in GameStop. Under this model, the app user pays nothing to trade stocks. Instead, Robinhood gets money from the companies that execute the trades for the privilege of fulfilling those orders.

Experts on payment for order flow will testify:

Sal Arnuk, co-founder of trading firm Themis Trading, plans to spotlight the growing role of payment-for-order-flow, where retail brokerage houses such as Robinhood channel customer orders to specific trading firms in exchange for payments.

“These practices create a massive incentive for such brokers to sell their clients orders to sophisticated trading firms uniquely tooled to profit off of them,” Mr. Arnuk will say, according to preliminary testimony released by the House committee. “This is a needless conflict that can harm retail investors, and it degrades the integrity of the market ecosystem as a whole.”

Why do the companies, like Citadel, that execute the trades want to pay to do it? Because they can find a price better than the public market, buy or sell to you for a slightly worse price (but still better than the public market), and keep the difference for their trouble.

Robinhood and Citadel maintain this is a better deal for investors. And indeed, there is independent research to support that claim. However, Citadel has been fined for giving customers worse prices than public markets, as has Robinhood.

A month ago, I called for Robinhood and Citadel to release a data set of executed trades to prove their service is a better deal than public markets. Congress may demand something similar. If their service really is better, they have nothing to lose and everything to gain by showing us what a great deal they provide!

For more information on payment for order flow and GameStop, check out these posts:

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Photo: “Maxine Waters” by Gage Skidmore is licensed under CC BY-SA 2.0

Payment for Order Flow Really Does Help Investors, Research Indicates

Citadel CEO Ken Griffin claims that even though they pay Robinhood to execute their trades, investors are getting a better deal than they would in public stock markets:

Citadel CEO Ken Griffin said Thursday that the system has been “very important to the democratization of finance. It has allowed the American retail investor to have the lowest execution cost they’ve ever had.”

Sounds hard to believe, right? I’m naturally skeptical they’re giving those small investors a worse price and keeping the difference. However, one of the few recent studies to analyze payment for order flow (PFOF) finds the opposite:

Focusing solely on execution prices, we find that the cost of liquidity on exchanges utilizing the PFOF model is 80 bps higher than on exchanges utilizing maker-taker pricing. Nevertheless, when taker fees are incorporated into the analysis, the cost of liquidity on the PFOF exchanges is 74 bps lower.

More here.

In other words, the prices the PFOF model gave investors were a bit worse, but when you consider the commissions they would’ve paid otherwise, they came out ahead. This study was limited to options, not stocks, but many Robinhood users trade options as well.

On the other hand, Citadel has been fined before for offering worse prices than public markets. Until we see a comprehensive data set on Citadel-completed trades versus comparable ones on public markets, this will remain a difficult question to answer. I know of no such data currently available to the public.

If Robinhood or Citadel came out with something like that, I think it would go a long way toward allaying the concerns of investors and regulators.

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Photo: Citadel CEO Ken Griffin. “Ken Griffin with computers” by insider_monkey is licensed under CC BY-ND 2.0

A COVID Vaccine is Being Manufactured in Baltimore Now. But the Government Won’t Let You Have It.

The AstraZeneca COVID vaccine is being manufactured today at a plant in Baltimore. This vaccine has been show to be between 62% and 90% effective at preventing symptomatic COVID.

But despite those excellent results in trials in the UK, Brazil, India and South Africa, the US government plans to wait until an American trial is finished in April. This as 4,000 of our fellow citizens die daily.

We should do what the UK and other nations have done, rely on the data we have, and get this vaccine approved immediately. I propose we follow the counsel of economist Alex Tabarrok:

“The AZ vaccine should be given an EUA immediately and made available in pharmacies for anyone who wants it while continuing to prioritize Moderna and Pfizer for the elderly and essential workers.”

Alex Tabarrok, Marginal Revolution

I just wrote my Congressman and Senators to urge them to push for immediate FDA approval of this life saving medication, and I humbly request you do the same! Frankly, I am very frustrated with this situation. Maybe you are too!

If you like, you can use the text I used, below. You can find your Congressman’s contact info here and your Senator’s contact info here.

Dear X,

The AstraZeneca COVID vaccine is approved in the UK and other countries and has shown efficacy of 62-90%. With over 4,000 of our fellow Americans dying daily, I urge you in the strongest possible terms to push the FDA to authorize this lifesaving medication immediately.

Thank you for all the good work you do!

Sincerely,

X