Tag Archives: Robinhood

Move to T+1 Trade Settlement Could Crush Short Sellers

May 12, 2022 tremendousblog Leave a comment

US markets will soon move to faster settlement of trades. This change could seriously damage some short selling hedge funds.

From a new report in The Trade News:

The Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) are working together to reduce the T+2 settlement cycle in the United States to T+1 by the first half of 2024.

This could quickly lead to regulators requiring that trades settle same day, or T+0, according to a Deutsche Bank report. Faster settlement could have two disastrous effects on short sellers:

Naked Short Selling Gets Harder

Some hedge funds sell short shares without ever borrowing them first. This mostly illegal practice shows up in huge, persistent fails to deliver in volatile meme stocks like GameStop Corp. and AMC Entertainment Holdings Inc.

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If trades have to settle faster, it will be harder to sell short shares you don’t own while possibly locating some shares later. You have less time for your incomplete trade to sit in limbo.

Without this powerful tool to push down stock prices, it will be more difficult for short sellers to tank a stock.

Brokers Are Less Likely to Suspend Trades in Volatile Stocks

Last January, Robinhood Markets Inc. and other brokers stopped users from buying shares of volatile meme stocks like GameStop and AMC. Their rationale was that given how much the stocks’ prices were moving, they couldn’t afford to put up the necessary margin to process the trades.

After buy orders were stopped, GameStop stock plummeted:

Brokers like Robinhood have to post money with clearinghouses such as the National Securities Clearing Corporation (NSCC). The more volatile a stock and the longer it takes to settle the trade, the more money they have to cough up.

If the time it takes for a trade to settle is cut in half, the amount of margin brokers would have to post would likely be cut in half as well. Indeed, reducing margin requirements is one of the main reasons why regulators want to move to T+1 settlement.

Where This Leaves Short Sellers

Short sellers in recent years have had a lot of advantages.

Loose trade settlement rules made naked shorting easier. And if that failed, brokerages might bail you out by stopping retail traders from buying the stock to squeeze you!

And even with these advantages, hedge funds like Melvin Capital lost billions on their short positions. How big would the hole have been without these tailwinds?

The Loophole

There is one good piece of news for shorts: there may be a loophole. SIFMA, a Wall Street Lobby, is seeing to that:

…SIFMA requests an exemption from SEC Rule 15c6-1 for security-based swaps, which are generally bilateral and executory in nature.

This would make swaps exempt from the faster settlement rules. Hedge funds like Archegos have already used these derivative contracts to make massive bets out of the public eye.

If the move to T+1 settlement makes short selling harder, I expect more funds to move into swaps to avoid the rules. I encourage the SEC to find a way to make T+1 apply to swaps transactions as well.

The future is looking darker for short selling hedge funds. The question is, will regulators create a more efficient market for everyone, or let lobbyists pick apart their work piece by piece?

What do you think new settlement rules will mean for short sellers? Leave a comment at the bottom and let me know!

Why the SEC Report Is Crap

October 19, 2021 tremendousblog Leave a comment

After nearly 9 months, the Securities and Exchange Commission released its report on January’s meme stock mania yesterday. Their dramatic conclusion:

There are many different types of investors, and they buy and sell stocks for many different reasons.

Good thing we’re paying these guys, huh?

The report is mostly a bland summary of the run-up in stocks like GameStop Corp., AMC Entertainment Holdings, Inc., and others. It ends with a series of milquetoast “areas for potential study” including “forces that may cause a brokerage to restrict trading”.

I’ll give you something to study: how about the internal chat logs at Robinhood in which the person who made the decision to restrict trading describes selling all his AMC shares first?

This allegation appears in a pending lawsuit in US District Court in South Florida. I find it incredible that the SEC never even bothers to mention it or investigate its veracity.

I just came back from vacation, and I was hoping to feel relaxed. But frankly, reading this report pissed me off.

This is the usual government hemming and hawing while strong evidence exists of crimes by well-connected fatcats.

The only way it’s going to change is if the public speaks out.

Robinhood Exec Dumped AMC Right Before He Limited Trades, Lawsuit Alleges

October 8, 2021 tremendousblog Leave a comment

A new lawsuit in federal court in Florida alleges that a top Robinhood executive sold his stock shortly before he limited buying in shares of some meme stocks:

Robinhood Securities President and COO, James (Jim) Swartwout, who Tenev points to as making the ultimate call to PCO, says in an internal chat on January 26, 2021, “I sold my AMC today. FYI – tomorrow morning we are moving GME to 100% – so you are aware.”

When Robinhood froze buying in shares of stocks like AMC Entertainment Holdings, Inc. and GameStop Corp. in January, it caused large losses for many customers. With demand for the stocks artificially reduced, prices plummeted.

Angry as customers were then, I wonder how much angrier they’ll be to know that the top executives of Robinhood may have conspired together to save themselves before throwing their customers to the wolves.

If these allegations are proven, top Robinhood executives could be headed to prison. Such actions are illegal and totally unethical.

One thing I wonder is if Robinhood executives were dumb enough to put this in an online chat, how did they get their jobs in the first place?

There will be no blog next week. I’ll be on a trip to celebrate my grandmother’s 87th birthday!

In the mean time, enjoy a few of my favorite posts:

Why You Should Tell Your Boss You’re Not Coming in on Friday

The Swami Who Taught Me About Politics

How China’s Tech Industry Dies

What if Everyone on Earth Had Super Fast Internet for $1?

The Best Mexican Food Is In…New Jersey?

Photo: “pinnochio-01” by Chris_Short is licensed under CC BY-SA 2.0

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AMC #3 on Robinhood for September, Behind Only Apple & Tesla

September 1, 2021 tremendousblog Leave a comment

The seasons are changing but one thing is not: the incredible popularity of AMC Entertainment Holdings, Inc. among retail investors.

Robinhood lists AMC at #3 on its leaderboard for September, behind only Apple and Tesla:

Apple is the largest stock in the entire market, with a market cap of $2.6 trillion. That’s 113 times larger than AMC. Tesla is 32 times larger.

AMC is more popular than massive companies like Amazon, Microsoft, or Walt Disney. It’s also significantly hotter than Robinhood Markets itself, at #12.

Even more incredible is that AMC has held the #3 position for six months straight. AMC also holds the #3 spot on Fidelity.

My understanding is that the Robinhood leaderboard reflects how many users own a particular stock, not the total amount held. So the amount of money in Apple, Tesla, or Amazon held by Robinhood accounts could be much greater than the amount in AMC, given those companies’ massive size.

Nonetheless, when a $23 billion business is more widely held than some of the most powerful companies on earth, I stand up and take notice.

Hedge Funds Get Special Treatment During Margin Calls

July 29, 2021 tremendousblog Leave a comment

A major feature of the run-up in stocks like AMC has been a battle between short selling hedge funds and bullish retail investors. The small investors have often sensed they’re not being treated fairly.

And when it comes to margin calls, it turns out they’re quite right.

A margin call happens when a trader borrows to fund a trade and the trade moves against him. If he doesn’t post more funds, the broker will close out his trade, whether he likes it or not.

An average investor generally gets two to five days to resolve a margin call. But the rules for the big boys are very different.

According to a new report from Credit Suisse, it gave troubled hedge fund Archegos Capital Management weeks to meet a margin call. The tactic Archegos used to deflect the demands for more cash was incredibly simple: claim they were too busy to respond.

On February 23, 2021, the PSR [Prime Services Risk] analyst covering Archegos reached out to Archegos’s Accounting Manager and asked to speak about dynamic margining. Archegos’s Accounting Manager said he would not have time that day, but could speak the next day. The following day, he again put off the discussion, but agreed to review the proposed framework, which PSR sent over that day. Archegos did not respond to the proposal and, a week-and-a-half later, on March 4, 2021, the PSR analyst followed up to ask whether Archegos “had any thoughts on the proposal.” His contact at Archegos said he “hadn’t had a chance to take a look yet,” but was hoping to look “today or tomorrow.”

No retail investor would ever get away with this. If Robinhood or any other retail broker didn’t get a response in an exact time window, they would liquidate the shares. And the special treatment extended to Archegos here would likely apply to any big client, like Citadel, Melvin Capital, or others.

This gives hedge funds a systematic advantage. They can borrow money and magnify their bets, and if the trades go against them, they can stall indefinitely and hope their position recovers.

All I can tell you is what I do: never buy on margin. Investing is risky enough without adding to the risks with borrowed money. But whatever strategy one chooses, hedge funds and small investors should at least be treated equally.

Hedge Fund Torched By AMC

June 16, 2021 tremendousblog Leave a comment

On glamorous Madison Avenue in midtown Manhattan, as most people were heading home for the day, the top executives of a powerful hedge fund filed into a conference room. The fate of this multibillion dollar institution could be at stake.

This is Mudrick Capital Mangement, L.P. With offices in New York City and London, it manages approximately $3.8 billion. Or did, until a struggling theater operator’s stock started to climb, seemingly out of nowhere:

Inside Mudrick, executives were growing apprehensive as the AMC rally gained steam. The firm’s risk committee met on the evening of June 1 after the stock closed at $32 and decided to exit all debt and derivative positions the following day.
It was a day too late.
AMC’s stock price blew past $40 in a matter of hours June 2, hitting an intraday high of $72.62. Call option prices soared amid a frenzy of trading that Mudrick Capital contributed to and, by the end of the week, the winning trade had turned into a bust, costing the fund hundreds of millions of dollars in losses.

Mudrick lost about 10% of its value, or around $400 million, in just a few days. These losses came not from short sales but from selling call options, or a right to purchase the stock at a specific price. The options Mudrick sold gave the buyer the right to buy AMC at $40 a share. At the time, it seemed inconceivable the stock could ever go that high.

Inconceivable except to retail traders on Reddit, among other forums. They pushed the stock to all-time highs, badly bruising Mudrick.

Mudrick sold these options to hedge the risk they took in lending AMC money. I think it would’ve been a lot smarter to buy credit default swaps, which are like insurance. If the company in question goes bankrupt, the seller of the swap has to pay you. But, buying the swaps costs money up front, whereas selling the calls produced income right away. Mudrick seems to prefer the quick buck to long-term risk management.

I find the sight of powerful hedge funds being torched by average Joes quite amusing. If other funds don’t want to join them, I’d suggest treating all meme stocks with extreme caution.

The New Black Wall Street: Young Black Investors are Piling Into Stocks

April 30, 2021 tremendousblog Leave a comment

A new survey finds that young black Americans now invest in stocks at the same rate as whites:

In a year like no other, however, there is also evidence of growing engagement in the stock market by younger Black Americans, with 63 percent under the age of 40 now participating in the stock market, equal to their white counterparts. The closing of this gap among younger investors is being driven by new investors: three times as many Black investors as white investors (15% vs. 5%) report having invested in the market for the first time in 2020.

Stocks are a major vehicle for wealth creation, and black Americans have long been less involved in the stock market than whites:

A majority (61%) of non-Hispanic white households own some stock, compared with 31% of non-Hispanic black and 28% of Hispanic households. Median investments vary here as well: Among whites the median is about $51,000. By comparison, the median for black families is $12,000, and for Hispanic families it is just under $11,000.

Behind this growth is a huge increase in the use of stock trading apps like Robinhood and Webull. Downloads in the last year are up 157% and 371% respectively. For all their faults in enabling speculation, these apps also seem to be opening up opportunity. The minimum investment in Vanguard’s S&P 500 index fund is $3,000, for example. This is far out of reach for many young people, particularly minorities. Meanwhile, Robinhood allows users to buy fractions of a share of stock for as little as $1. Webull has no minimum at all.

I’m happy to see more people get an opportunity to be a part of this amazing capitalist wealth creation system of ours. More people benefiting from our system helps preserve it. And more people getting rich makes me smile.

Have a great weekend everyone!

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Business, Podcasts, Technology

This Is How Vlad Tenev Built Robinhood

April 16, 2021 tremendousblog Leave a comment

“You can break down Robinhood into a series of small steps, the first one being start Robinhood, and every subsequent one being some variant of don’t stop and keep going, right, and you end up where we are today. “

In his mid-20’s, Vladimir Tenev lived in New York City. His apartment was tiny and spare. All his time went into his high frequency trading startup. Then mom came to visit.

When she saw his shabby surroundings, she began to cry. She told him she had a friend who worked at Macy’s. Maybe, she could get him a job there.

It must’ve taken great fortitude for Tenev to push ahead with his own business, despite few signs of success and the anguish it caused his family. But push ahead he did. Today, the company he built, Robinhood, has over 13 million users and plans to IPO soon at a valuation of around $40 billion. Tenev’s net worth exceeds $1 billion.

Tenev came to the United States as a child from Bulgaria and attended the elite Thomas Jefferson High School for Science and Technology, which US News ranks the best public high school in the entire country. What would’ve become of Tenev if he had stayed in Bulgaria? He might have had a very normal life. But giving this smart kid a superb education and access to a great entrepreneurial ecosystem turned him into a billionaire executive.

Tenev didn’t stop learning when he finished school. He taught himself to write iOS apps by watching free Stanford courses online while commuting on the Caltrain. It really shows you what a person can accomplish learning on one’s own for nothing now that knowledge is much more freely available.

Robinhood faced numerous obstacles along the way, but Tenev and co-founder Baiju Bhatt blasted through them. It took two full years of constant work to build their product. Venture capitalists were highly skeptical of their business. How could they make money without charging commissions? How could they beat giant competitors like Etrade and Charles Schwab? And could a couple of math guys make a beautiful consumer product?

But they kept pitching, and ultimately raised $250,000 from Google Ventures. Tenev couldn’t even get a job interview at Google 4 years prior. What if he had let that discourage him from ever approaching Google for an investment?

Just days before a meeting to approve a critical license Robinhood needed to operate, they were still $500,000 short of the required capital. Only the birth of an executive’s baby saved them by providing an excuse to postpone. By the new date, Tenev had raised the money.

A key lesson for startups: Robinhood didn’t worry about monetization until it achieved a large user base. It was confident that, like Instagram, winning enough users would give them all the opportunities for revenue they’d need. And they couldn’t put the cart before the horse.

What sticks out to me most about the Robinhood story is Tenev’s perseverance. At first, his business looked laughable. Later, it gained a bit of traction but faced seemingly insurmountable obstacles in fundraising.

But he just keep pushing, day after day. Now, 11 years after he started his first company, he sits at the helm of one of the hottest startups in the world.

For more on startups, check out these posts:

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Photo: “File:TechCrunch Disrupt NY 2016 – Day 2 (26902081436) (2).jpg” by TechCrunch is licensed under CC BY 2.0

Business

Is Robinhood Screwing You On Your Trades?

March 19, 2021 tremendousblog Leave a comment

An interesting detail surfaced in this week’s Congressional hearing on GameStop shares and Robinhood, the platform where they’re often frenetically traded:

In his statement, Themis Trading Partner Sal Arnuk went right for that last issue, calling attention to the fact that payment for order flow (PFOF) causes a disconnect between a broker and his customer — especially in the case of Robinhood.
“They recently changed their PFOF method from one giving them a set payment per share to one giving them a percentage of the spread instead,” he said. “Think about this: A Robinhood trader wants the spread in the stocks he/she is trading to be as narrow as possible. The HFT [high frequency trading] market maker buying those orders benefit most when that spread is as wide as possible. And now Robinhood benefits most when the spread is as wide as possible as well! This is an amazing misalignment of interests.”

Arnuk took a dim view of Robinhood’s motivations:

“This tells you Robinhood knows full well the value of its herded and gamified product base; they knew to educate their users just enough to incentivize trading and maximize their own revenue as a result of it.”

Let’s back up a bit. A spread is the difference between the price you can buy a share at and the price you can sell it at. Let’s say you can buy GameStop at $190 a share and sell it at $189 a share. The company that executes the trade gets that dollar for their trouble.

You want that spread as low as possible so you can make more money. If Robinhood is paid a percentage of the spread, their incentive is to get that spread as high as possible. Nice for them, not so nice for you.

I don’t think Robinhood has publicized this change, and it seems sneaky and not in the best interest of investors. I’d like to see them come out and explain why this is good for investors. But I’m not sure they can do that.

For more on GameStop, check out these posts:

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Photo: Robinhood Co-CEO Vladimir Tenev “TechCrunch Disrupt NY 2016 – Day 2” by TechCrunch is licensed under CC BY 2.0

Business

New Stimulus Checks Could Set GameStop Off Like Never Before

March 10, 2021 tremendousblog Leave a comment

With the House about to approve another $1.9 trillion in stimulus, the final hurdle before the legislation is signed by President Biden, I found myself wondering what this means for shares in GameStop and other meme stocks.

Those stocks took off big time in January, as personal income increased 10% month over month. Most Americans received a $600 stimulus check in December of 2020. A couple weeks later, shares in GameStop, AMC and others took off.

That stimulus is dwarfed by the new one, which will mean $1,400 checks for most Americans along with expanded unemployment, child tax credits, and other benefits. If a $600 check set meme stocks on a tear, what will $1,400 do?

Indeed, the expectation of stimulus payments may already be boosting GameStop shares, and may continue to do so in the future:

Market strategists have said tens of billions of dollars of U.S. President Joe Biden’s coronavirus relief package could indirectly find their way into shares, possibly boosting “meme stocks” that are heavily promoted by retail traders in online social media forums such as Reddit’s popular WallStreetBets.

My view of this company is that it’s lacking in fundamental value and should be avoided. However, it definitely wouldn’t surprise me if the stimulus gave the shares a short-term pop. The question is, how long will it last? You don’t want to be left without a chair when the music stops.

For more on GameStop and other meme stocks, check out these posts:

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Tag Archives: Robinhood

Move to T+1 Trade Settlement Could Crush Short Sellers

Why the SEC Report Is Crap

Robinhood Exec Dumped AMC Right Before He Limited Trades, Lawsuit Alleges

AMC #3 on Robinhood for September, Behind Only Apple & Tesla

Hedge Funds Get Special Treatment During Margin Calls

Hedge Fund Torched By AMC

The New Black Wall Street: Young Black Investors are Piling Into Stocks

This Is How Vlad Tenev Built Robinhood

Is Robinhood Screwing You On Your Trades?

New Stimulus Checks Could Set GameStop Off Like Never Before

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