[beachwood23]

I don't think this was Robinhood's choice.

Robinhood doesn't actually execute any trades. They sell user's trade orders to Citadel, a trade executor. Citadel then buys the shares on the market, and sells them to Robinhood for a slight markup. It's how Robinhood offers trades for $0 fees. You pay pennies more per share, but don't have to spend $5 per trade.

Citadel, and other trade executors, are refusing to buy shares for retail traders. Coincidentally, Citadel also bailed out Melvin fund for their short position in GME. So, Citadel has an interest in not letting the price go up any further. And citadel controls trade execution for dozens of firms.

This is definitely illegal. But Citadel is betting that the resulting SEC fines from this illegal manipulation will be less than the loss they would get if they didn't suppress the price.

[JumpCrisscross]

> Citadel also bailed out Melvin fund for their short position in GME. So, Citadel has an interest in not letting the price go up any further.

Citadel bailed out Melvin Capital. Not its position. Melvin doesn't have a short position anymore.

Melvin made a stupid bet. Citadel bailed them out. Private sector bailouts aren't free: Citadel got its pound of flesh. Even if they bought the entire portfolio, that portfolio no longer includes GameStop shorts.

If Citadel's asset management and market making arms are colluding, that is illegal. But it's the most complicated and stupid explanation of the bunch. Market makers stop quoting for all kinds of reasons. If I were still on my options market making desk, I'd be pulling the plug on this. My traders would yell at me. This is what you make money on in market making! But the risks of loss go up with volatility, and the costs of gamma getting away can be nasty.

The chances that a fund the size of Citadel has any strong opinion on the direction of GameStop stock is vanishingly low. The chances that they stopped quoting in the name, as did almost every other market maker, and thereby broke Robinhood's system, which doesn't--to my knowledge--directly interface with exchanges to any significant degree, is high.

[jamilbk]

> Melvin doesn't have a short position anymore.

Source? If I was caught in a short squeeze, this is exactly the kind of announcement I would circulate to prevent the price from going any higher.

[raducu]

Citadel din't bail them out and they didn't close the positions, if they did, the "bailout" would be a complete writeoff -- why would Citadel do that?

Citadel probably gave them the cash to avoid a margin call, knowing they can later manipulate the market and the shorts would payoff in the end, and Citadel would get their share of the spoils.

Otherwise a bailout makes no economical sense, Citadel is not the FED, they can't print money just to cover someone elses losses.

[JumpCrisscross]

> if they did, the "bailout" would be a complete writeoff

What? No it wouldn't.

Melvin faced cash calls. To raise cash fast they could (a) get it from their LPs (fat chance), (b) raise it from someone else or (c) sell other assets. The last option is a fire sale. You figure out what the fire sale discount would be, say it's 50%, and then use that to get (b).

I don't know what the terms of the bailout were. If I were structuring, I'd make it a loan with a super-high interest rate triply collateralized by their remaining assets. If they pay it back, I get the super high interest rate. If they default, I get the rest of their assets for 33¢ on the dollar. Between those two, the latter is frankly the higher-payoff scenario. (I would also require all short positions be closed out within N days, with the borrower's investors bearing the losses.)

[raducu]

Are you saying that Citadel just lent someone money to close short positions worth a very significant percentage of their total assets? (Melvin having 11 bilion in total assets and Citadel giving them 3 billion).

That's what I was pointing out! Melvin did not close their shorts(as they said they did), they just got more rope from Citadel, and Citadel was willing to do just that knowing they can manipulate the market.

The narative of Melvin was "Citadel gave us 3 billion dollars, we closed our shorts at a loss, you won wsb, aren't you happy, you won, now leave us alone and stop buying".

[JumpCrisscross]

> Citadel just lent someone money to close short positions worth a very significant percentage of their total assets?

Yes. Those other assets are presumably uncorrelated to this short position. If they were fire sold, depending on the assets, they could have gotten 20¢ or 30¢ on the dollar.

That discount gives Melvin the incentive to borrow, even at exorbitant rates. It protects the rest of the portfolio. With the bailout, the GameStop loss is capped and eaten by LPs. That sucks. But it sucks less than eating that loss and selling off the rest of the portfolio for peanuts.

> Melvin did not close their shorts(as they said they did)

You're alleging securities fraud. This may be the case! But we have zero evidence of it. And if Citadel and Point72 invested $3bn to aid and abet securities fraud, that would be quite stupid.

[raducu]

Genuinely curios, what type of assets can only be liquidated 33 cents on the dollar?

And what is the likelyhood Melvin had such a significant proportion of their portfolio in such assets?

[sandworm101]

Junk bonds. Packages containing failed/failing mortgages. Unsecured medical debt.

[ethbr0]

The type of assets that you need to sell in the next hour, of such a magnitude that there are only a few buyers.

[ric2b]

Think about it, you're staring at a mob of people willing to buy the stock at absurd prices... Why would you announce that you've closed your shorts instead of keeping quiet and profiting of the mob?

The answer is they didn't close it, they were trying to get the mob to back off.

And no, it technically wouldn't be fraud, they were very careful with their words...

[anonymouse008]

Here's the source --

Citadel, Point72 to Invest $2.75 Billion Into Melvin Capital Management - WSJ [0]

Read As: Melvin no longer has a short position. Citadel (edit: or like someone else said, a 3rd party) does. Citadel will handle this. Melvin is in time out.

We'll figure out who holds the chips in a few weeks time when filing deadlines are due. Thus it's dark.

Thus explains the perfectly executed short ladder today - could only be pulled off by someone with more dry powder than Melvin - but if you look at the Level II data, this is going to take a long, long time.

[0]https://www.wsj.com/articles/citadel-point72-to-invest-2-75-...

[JumpCrisscross]

> the perfectly executed short ladder today

I missed this. What's this referencing?

[dspig]

Selling back and forth at a lower and lower price while WSB couldn’t buy to keep the price up

[stainforth]

> while WSB couldn’t buy to keep the price up

Yes which could be called the crime of these brokers

[JumpCrisscross]

> If I was caught in a short squeeze, this is exactly the kind of announcement I would circulate to prevent the price from going any higher

That would be securities fraud.

[pc86]

Well surely that never happens. No large organization has ever committed securities fraud in order to make or save billions.

I hope you have a better reason why that's not likely than "but that's illegal." Them actively committing securities fraud seems to be the most likely occurrence from where I'm sitting.

[JumpCrisscross]

> No large organization has ever committed securities fraud in order to make or save billions.

Who would save billions? For how long?

Let's assume the statement is fraudulent. Before the statement was made, Melvin's LPs were set to get hosed. Melvin's general partners, the ones making the statements, have a lot of egg on their faces. But they didn't do anything wrong. They keep their money and houses and yachts. And in all likelihood, after a few months, craft a lessons-learned pitch and raise more money.

After the statement, they have engaged in fraud. Not only is criminal prosecution a risk. All those deep-pocketed LPs can now sue the general partners, personally, for breach of fiduciary duty.

Add to that the Citadel bailout, which removed the risk of the fund going under, and there is no reasonable explanation for lying about closing out the short. If you wanted to show resilience, you'd say something like "we've fully hedged our shorts with long-dated puts, reducing our expected profit but capping our losses."

[silexia]

This will probably be my least popular post ever, but the explanation needs to get out there for why Robinhood stopped trading on GME.

Selling a stock short is NOT illegal. It is a perfectly valid type of investment according to the SEC:

“D. Are short sales legal? Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.”

Basically – you can’t short sell a stock to manipulate the price down so you can buy a lot more of it later. If you believe a stock is overpriced and short sell it, that is legal. That is exactly what tons of retail traders and hedge funds do every day, including on Gamestop.

On the other hand, manipulating a stock price upwards to cause a short squeeze IS illegal according to the same SEC article:

“Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal.”

Unprecedented numbers of people on Reddit, Twitter, and elsewhere collaborated to intentionally create a short squeeze on GME in the last week. No one talked about a fundamental case why Gamestop the company was worth a lot of money and would be successful in the future; instead everyone made the argument that due to a very high short interest of 100%+, that a short squeeze would send the price “to the moon”. That is illegal according to the SEC.

Multiple brokerages, especially Robinhood, probably had their attorneys tell them that “Hey, you are aiding and abetting illegal activity by enabling a short squeeze and could be liable criminally or civilly if you continue to allow this blatant illegal activity on your platform”. So they decided to stop it by only allowing people to close their positions rather than open new ones in support of the short squeeze.

Another strong reason is that if the short squeeze caused the GME stock to go to 5000 in a sudden leap, tons of traders (both retail and professional) could instantly go broke, and then the brokerage (Robinhood) would be left holding the bag. For example, picture a retail investor with a Robinhood account had sold call options in the amount of $100,000 and their account was worth $200,000. If the price gapped from 300 to 5000 and those options were exercised, that trader could have a loss of $10,000,000. He would lose the value of his account, $200,000… but the brokerage would have to make up the rest of the settlement and take a loss of $9,800,000. Now multiply that by thousands of accounts…. no brokerage wants to take the risk of being bankrupted, so they shut it down.

The two strong reasons Robinhood and other brokers stopped trading was to prevent legal liability from enabling illegal activity on their platform, and for wanting to avoid potentially massive banktuptcy from traders unable to cover their losses.

[tomjakubowski]

It's one thing to commit securities fraud. It's another to do it, blatantly and openly, as part of the biggest news story of the week.

[ric2b]

People panic.

Especially when they're staring at billions of losses and maybe all it takes to save them is a carefully worded public statement that they think they can later argue is technically truthful.

[unreal37]

To be clear, they didn't "announce" they closed their positions. They whispered it to a CNBC news anchor on the phone.

There's no announcement, just a sourced rumor, and no proof they closed their trades when they said they did.

[paxys]

Not if you ask one of your buddies at CNBC to announce it, and when caught they just say oops my bad, it was based on incorrect info.

[ZephyrBlu]

How have they exited their short position when the short interest is still ~130% though?

[majormajor]

The higher the price goes, the more incentive for new people to buy short, who aren't subject to the same pressure to get out fast that the ones who've been there longer were.

Doing this all in such a publicly-coordinated way on Reddit means you're wide open to people trying to directly play against your goals.

So much of the "proof" of things around this seems to be making big assumptions about who is on the other side that the aggregate numbers don't seem to indicate one way or another.

[JumpCrisscross]

> How have they exited their short position when the short interest is still ~130% though?

Lots of people are short? I know at least half a dozen people who bought puts over the last few days. Those puts hedge into shorting the same way calls turn into buying.

[ZephyrBlu]

Hmm. There seems to be a lot of unknowns right now. Do you think the information about how this all went down will come out once it's over?

I'd say most of the wallstreetbets traders still believe Melvin has their position, but you're saying otherwise. Though the still extremely high short interested doesn't seem to make sense if the big losers already exited...

[TechBro8615]

Do we have real time access to the short interest numbers? My impression is those came from a report that comes out every two weeks?

[ZephyrBlu]

Not real time, but theres this wallstreetbets post from yesterday.

https://www.reddit.com/r/wallstreetbets/comments/l642ms/upda...

[ryanSrich]

Yeah I don't buy this at all. There isn't enough stock for them to close their position.

[JumpCrisscross]

> There isn't enough stock for them to close their position

Tens of billions of dollars of GameStop have been bought and sold over the past few days. If you can buy GameStop to go long, you can buy it to cover a short.

Note that there isn't a limit on rehypothecation. A share sold short by Bob can be used by Anna to cover her pre-existing short.

[FabHK]

I don’t believe Melvin has public investors that could claim to have traded Melvin’s shares on the basis of Melvin’s misleading statements.

And I am quite certain that there is no obligation that you have to truthfully tell the world your position in any one security.

So, I’d like someone with legal training to make a case for security fraud.

(It might still be market manipulation or some such).

[alasdair_]

>That would be securities fraud.

Naked shorting to drive down the price is also securities fraud. And yet...

[Fredej]

Aren't we already discussing SEC violations here?

[monkpit]

Yeah, I don’t see how it being fraud leads to the conclusion that it’s not happening.

[ordinaryradical]

If the alternative is bankruptcy and the destruction of your legacy, would you risk it?

[metiscus]

If the penalty is less than the potential fine as has sometimes been the case, is that really that big of a deterrent?

[scsilver]

Seems like the most financially responsible move. And these guys are fiduciaries.

[franklampard]

> That would be securities fraud. Are you saying that they wouldn't commit securities fraud?

[piracy1]

Weather or not Melvin has the position, you can look at the borrow rates and short interest. Someone is balls deep in shorts and they have to cover one of these days.

[jb775]

Yeah I don't believe it. Or they transferred it to a complicit 3rd party who will eventually benefit.

[monoideism]

> The chances that a fund the size of Citadel has any strong opinion on the direction of GameStop stock is vanishingly low.

I find it exceedingly unlikely that Citadel has no opinion on the value of a stock that could make or break a firm they just lent massive amounts of money to.

It's also very unlikely that Melvin didn't have a short position anymore. I think that was a lie, knowing the SEC fine would be less than what they otherwise would lose. We'll see - maybe. Or maybe TPTB will cover this up.

[dehrmann]

> The chances that a fund the size of Citadel has any strong opinion on the direction of GameStop stock is vanishingly low

I didn't touch this in the first place, but once it was clear it was a short squeeze, nope, not gonna play that game. Just sit back and enjoy the show.

[jansan]

A short squeeze is nice if you get caught in in by accident as a stock owner. During the Volkswagen short squeeze a lot of lower level employees at Volkswagen were suddenly able to fully pay back their mortgage. Isn't that cute?

[hinkley]

I doubt many gamestop employees got to do that this week, but there was a similar, smaller drama also going on with a Blackberry short squeeze, and that might have gotten a few extra mortgage payments taken care of.

[macromaniac]

>Melvin doesn't have a short position anymore.

This makes no sense, if gme isn't shorted then why then break the law and restrict buying it?

And it does feel like they are restricting buys. Seems unlikely that all the trading platforms that rely on citadel coincidentally decided they wanted to hedge against volatility by restricting user buys.

[macromaniac]

I am ashamed to have written this comment. I didn't know about clearing houses and shouldn't have been so arrogant in a field I'm not familiar with. Funnily enough I put my money where my mouth was and profited, but that was just luck. Whatever.

[6nf]

> Melvin doesn't have a short position anymore.

Untrue, the number of shares short is still 70 million. Nothing changed.

[girvo]

They aren’t the only people with short positions. They could’ve exited and others picked it up.

I’ve no dog in this race; just thought I should point that out

[nowherebeen]

The question is, would there be any consequence if he lied about it? Given the huge amount of losses, it’s not unreasonable for one to lied about closing their position in hopes of the price falling down.

[znpy]

I wonder... couldn't people do this over and over again?

how long can citadel and/or other entities hold?

[arminiusreturns]

No, or rather, only if MM's like Citadel over-short like they did here. It's a rare catch by retail that they were overextended, and retail pounced on the opportunity, just like the MM's do against retail all the fucking time, but now that the little guys are doing the fucking, it's all fetch me my smelling salts and call the sheriff!

[whimsicalism]

Retail didn't do jack to the market makers and Melvin capital isn't a market maker.

So many people here who have no idea what the hell is going on, and yet are so confident.

[arminiusreturns]

Melvin capital is a market maker, it's in the list at least... You might check yourself before acting so high and mighty. 1 is the reference for wikipedia. 2 is just another source in case you doubt. By the way, Citadel is also on that list. Retail did do something to Citadel and Melvin... so wrong on both counts.

1. https://web.archive.org/web/20070228050751/http://www.alphat...

2. https://www.level2stockquotes.com/market-makers-m-list.html

[whimsicalism]

Melvin securities is a completely different company than Melvin capital.

Retail did nothing to Citadel securities.

[whateveracct]

This entire GME WSB thing is a bunch of people wanting to feel important. That's why there's so much high-and-mighty talk even though the facts of the matter are..pretty boring.

[intended]

The facts are supremely boring. Fund gets caught with bad luck. Fund blows up. Life goes on.

Even the amount of billions being transferred here are not interesting.

[arminiusreturns]

I'd say this is a vast oversimplification of the situation, don't you agree?

[KMag]

Citadel is probably having a very busy, but very good day today.

[einrealist]

I wonder whether Citadel was the / a major lender for the shares in the first place. That would explain a lot. But even then, I doubt that there was foul play.

[AndrewBissell]

I certainly get pulling the plug on options, but I don't understand how the volatility in $GME would lead a market maker to simply stop quoting the underlying stock altogether. If the price starts flying around you just widen your spread. If there's too much pressure on the buy side and you can't keep your position neutral, you just raise your offering price until you're not selling shares at too fast a rate anymore.

[JumpCrisscross]

> I don't understand how the volatility in $GME would lead a market maker to simply stop quoting the underlying stock altogether. If the price starts flying around you just widen your spread.

People after the financial crisis liked to talk about fat tails. Risk models assuming narrow tails, reality having a taste for extreme events. This is a fat-tail event. We don't have great models for stocks as volatile and as correlated as GME is right now. Which means for even cash equities trading, we don't have a great sense around what the appropriate spread should be.

Market making has sometimes been described as vacuuming up nickels in front of bulldozers. These are bulldozin' times. You don't want to fill a bunch of sell orders in GME right before it gaps down 80%.

[AndrewBissell]

I mean, we can see that this idea that the stock is too risky to quote is not true because there is a two-sided market in it right now, which can be traded on multiple platforms. The only actually existing peculiarity here is that Robinhood is not allowing customers in possession of 100% margin to open a new long position.

[JumpCrisscross]

> we can see that this idea that the stock is too risky to quote is not true because there is a two-sided market in it right now

On exchanges. Those are buyers and sellers as well as market makers. Robinhood connects to a subset of the latter.

[whimsicalism]

> Those are buyers and sellers as well as market makers.

Nope, pretty much just market makers.

[whimsicalism]

Hopefully others realize that downvotes on HN do not change the reality of how market makers function.

[treis]

Today it opened at $265, hit a high of $483 and dropped to a low of $112. At 2:00 pm it was $226, 2:05pm it was $431, and then came back down to $237 at 2:15pm. That sort of volatility is, I think, unprecedented which means the market makers don't have good risk models. So you're right that they could be cleaning up here with a large spread. But that profit comes at unknown levels of risk.

[dcolkitt]

An internalizer must match displayed NBBO at the exchanges. If it can’t, it has to route to the exchange, pay exchange fees, and on top of that still pay for the order flow.

Normally internalizers have no problem competing with spreads on the exchanges, because retail flow is much less toxic than the sophisticated traders in the public venues. But with GME, the retail investors are running the show.

Therefore it no longer makes sense for internalizers to pay for this order flow.

[cameldrv]

I don't think it's an issue of Citadel not quoting GME. In my understanding, Robin Hood is allowing purchases to close a short position, so there exist quoted prices, they just don't want people expanding a long position.

If this is coming from Robin Hood, they could make the (very weak) argument that they are protecting their retail customers from themselves, but if it's coming from Citadel, it just looks like market manipulation to me.

[jodrellblank]

I don't think it's coming from RobinHood; eToro is also blocking buys and they have the message "We have made this change following a notification from our liquidity provider that they have set $GME to close only status".

[andoriyu]

I got similar email from tasty. They said Apex clearing won't allow any new positions on meme stocks.

Given that it's not just RH, but nearly all, if not all, brokers that outsource order flow like RH...I think it's safe to assume it wasn't RH decision.

[whimsicalism]

You're making assumptions that it was the liquidity provider who pulled the plug and not the much more likely option that it was Robinhood pulling the plug for liability reasons.

[kosh2]

Tastytrade also restricted trade in the same manner. They send a mail to all customers and made it very clear that it was Apex Clearing who forced their hand. It is very unlikely that something different happened at Robinhood.

[AndrewBissell]

No, I'm granting that as the parent's premise. And what liability reasons would Robinhood have to disallow buying an NYSE listed stock with 100% cash?

[whimsicalism]

They've already been sued by retail investors who have lost their cash in the past and courts have already shown themselves to be somewhat partial to "the gamified interface just made me spend $1k I could barely afford because it was so fun!" arguments that RH is liable.

This is a much bigger deal, some (not hedge fund!) people are going to lose a crapton of money on it, and people are probably going to sue them once that happens.

You can see this discussed elsewhere in the thread.

[ROARosen]

> for liability reasons

For trying to get some positive media coverage, after being constantly bashed and blamed by them for the uneducated retail trader boom.

[totalZero]

Market makers on exchanges generally have a contractual uptime obligation if I am not mistaken, but I'm not sure that applies when talking about payment for order flow.

[Red_Leaves_Flyy]

Gme has been freezing up for a few seconds to fifteen minutes at a time for days now. Sounds like a breach to me, unless someone else ordered a halt. Robinhood itself was responsive, as were other stocks.

[selectodude]

Those are due to exchange LULD halts. Not brokerages.

[deeeeplearning]

>Melvin doesn't have a short position anymore.

That's not at all verified. Short interest is still well over 100% of float. The only thing you are going off is a poorly sourced CNBC report with wishy washy language from Plotkin.

[bigtunacan]

Citadel is blocking trades on these stocks where Melvin Capital holds shorts for any platform that uses them; Robinhood is just the most prominant among small retail traders.

Citadel "bailed out Melvin Capital" because Citadel essentially owns Melvin and so their loss is our loss sort of situation. Melvin Capital stated they had closed out their short position on GameStop, but those are huge losses to cover no one knows how true that is. There is a lot of rumor that Citadel/Melvin Capital re-bought short positions yesterday before Citadel restricted trades to manipulate the market. If this is true it is highly illegal, but this effectively allow Citadel/Melvin to make back their losses if they can force market prices down.

TL/DR, Citadel/Melvin are breaking the law, all the retail traders are getting fucked, but when this is done Citadel/Melvin ends up having more cash than ever.

[whimsicalism]

I'm just not really sure I understand the narratives being thrown around right now, and I'd like to think I understand the economy somewhat

Melvin Capital closed out their short position yesterday with a large loss - and Citadel helped cover that loss.

As far as I know, Citadel and Melvin Capital no longer are holding any short positions in Gamestop. So what do they have to gain, by your narrative, from suppressing the price?

Citadel is probably making bank off of this actually, like a lot of other sell-side firms.

[beachwood23]

Yesterday, there was a 140% short position on Gamestop.

Today, there is still a 122% short position on Gamestop. There are still many funds hedged against GME. Melvin might have had one of the larger positions, but there are many more funds with this position. Source: https://finviz.com/quote.ashx?t=GME

As you say, they would make money by running the orders, regardless if GME goes up or down. So - why would they stop? It is most likely that Citadel is still exposed to other funds holding short positions in GME.

[whimsicalism]

> So - why would they stop?

There is literally no evidence that Citadel has stopped serving GME orders. That is entirely the conjecture of this thread and ignores the much more likelier option that it was Robinhood that limited the stocks.

Why wouldn't you short GME after the price has risen so high? I'm sure there are plenty of hedge funds shorting now at a much higher price.

Hell, I shorted AMC yesterday and have made quite a bit off of that already.

[matthewrobertso]

>Why wouldn't you short GME after the price has risen so high?

Because the stock is already over 100% short and an army of retail investors is purchasing it

[whimsicalism]

So? If you had shorted GME yesterday, you would make a bunch now that the price has collapsed.

[matthewrobertso]

What if the price goes up further? It's already rebounded 50% from the short ladder/blatant robinhood manipulation. Why put yourself on the hook for something during a black swan event?

[silexia]

Lots of individual retail investors, including myself, take short positions on a regular basis. People keep saying that all the short positions are held by hedge funds, but in reality there's a lot of individual investors that have short positions too.

The risk to a company that processes trades is that many of these retail investors accounts would turn negative and the company that processes the trades would take giant losses they did not plan for. To prevent that, they stop processing trades.

[vvG94KbDUtRa]

retail investors are a very small minority of short positions. hedge funds do most of the shorting in the market

[tsdlts]

They didn't tell you how much of the position they closed out on. They can say "they closed their position" even if they only closed out on 1% of it.

[tartoran]

How likely is it for them to close their position when the price hit so high? That would be a huge loss. Why not wait a bit, make a few desperate phone calls and leverage their power before that?

[whimsicalism]

Because of the expiration date of the short they sold and uncertainty over whether the price would continue to increase.

If you have to buy by EOD Friday and the price starts skyrocketing Thursday, you might want to buy a little earlier even if it means eating a huge loss, because you don't know if that skyrocket will continue into the next day.

e: Why is that downvoted?

[desertrider12]

Shorts aren't options, they don't have expiration dates. You can hold a short indefinitely just by paying interest on the borrowed share value when you entered the position. You can even keep the short from being forcibly closed during a squeeze by providing more collateral.

Put options do expire, but the worst case for puts is that they expire worthless. Regular shorts can have unbounded losses.

https://www.investopedia.com/ask/answers/05/shortmarginrequi...

[Leherenn]

I have to admit I'm missing something in this story. If the shorts do not have to sell, what's the endgame for WSB? Is it just the margin requirements will be too high, thus forcing lots of them to close their position? I see lots of references to the short squeeze happening tomorrow, so there must be something that force people to settle their position tomorrow?

[notSupplied]

What happens when the party you borrowed the stock from, seeing the new high price, wants to sell it to cash in on the fever? Can they not force close the position if the price moved up by some threshold?

[whimsicalism]

Sorry I misspoke.

Melvin Capital's short position was in the form of puts, I think.

Since they would expire worthless, better to sell them when it is skyrocketing than to wait and see it skyrocket further and lose all of your money.

[ROARosen]

The other commenter is right that shorts have unlimited risk, and put option are defined, but they can technically be short by selling calls which would make them expire-able.

But honestly I doubt it was even possible to be short so much with options alone on such a low cap company (as it was before this blew up)

[whimsicalism]

Is it wrong to call selling calls short selling? Regardless, I think it was puts that they were buying (so sorta the contrapositive).

[tartoran]

I don’t buy it. They’d try some tricks before capitulating. And look, it worked. Since RH stop allowing buys the price went down

[whimsicalism]

> They didn't tell you how much of the position they closed out on. They can say "they closed their position" even if they only closed out on 1% of it.

There is no ambiguity in what "closing the position" means. Stating on CNBC that you have closed the position when in fact you only bought shares to cover 1% of your short would put you in jail.

Your mental model for how the world works is wrong.

[stdgy]

Serious question: Has anyone ever been jailed for publicly saying they've closed a short position but not actually closing it all?

Is it equally illegal to say on CNBC that you closed it out, but to email your investors and tell them you didn't?

Is the legal issue that you're misleading your investors or that you're manipulating the market? Both?

[ziml77]

The thing the SEC is going to take issue with is lying to investors. Investors have a right to know what's going on with their money.

And despite how it seems from outside Wall Street, hedge funds are definitely scared of the SEC. Banks worry less because their money is sourced differently. Hedge funds have to worry about legal action not just for the fines but also for scaring their investors. When individual investors are so large it only takes a few redemptions to significantly impact AUM.

[Avalaxy]

The same way that tweeting "funding secured" puts you in jail?

[whimsicalism]

Musk didn't even make any profit from that (he didn't sell) and he still was fined $20 million and had to give up his Tesla board chair.

[TuringNYC]

Recall that when that was said, it was being said by an executive and director of a public company.

[djeiasbsbo]

If Melvin Capital got out, then why was the stock still 140% shorted after that announcement? I thought that 11% of the shorted stock was from Melvin Capital, it doesn't make sense that there was no significant change in that figure.

I am not trying to conspire, genuinely curious.

[whimsicalism]

> If Melvin Capital got out, then why was the stock still 140% shorted after that announcement? I thought that 11% of the shorted stock was from Melvin Capital, it doesn't make sense that there was no significant change in that figure.

Source?

Also potentially new shorters getting in? I shorted AMC yesterday and have made quite a bit today.

[__al__]

with the stock price through the roof other funds (and retail investors) see it as a good opportunity to short.

[tartoran]

> As far as I know, Citadel and Melvin Capital no longer are holding any short positions in Gamestop. So what do they have to gain, by your narrative, from suppressing the price?

If this is accurate then your question makes sense. Why? But how do we know this is real though? They could play games as well and I'm sure they do. Stock trading is gambling.

[whimsicalism]

Citadel securities does not "play games", they aren't YOLO-ing on a GME short. They are happy to model the market so they can hedge better than their competitors and make money off of the bid-ask spread.

Melvin Capital has already stated they have closed out their position, think it would probably be fraud if they hadn't.

[TuringNYC]

>> Melvin Capital has already stated they have closed out their position, think it would probably be fraud if they hadn't.

IANAL but I doubt this would be fraud -- they arent a public corporation making statements about themselves. They did have LPs, but i'm not sure what restrictions there are around speaking -- would anyone know?

[cmdli]

IANAL also, but I would imagine that they would need to represent themselves accurately to their investors at the very least. Perhaps they could be telling their investors something different privately?

[TuringNYC]

Yes, hedge funds send their LPs private "Investor Letters" with a lot more detail. Not sure who the public statement was meant for, but it might have been meant to discourage the public from taking opposing positions.

You wouldnt communicate to your LPs via CNBC or Twitter.

[cryptonym]

You may work on some fancy model but at the end of the day you are taking a risk and there is a possibility to lose in the worst possible way. Call it games, YOLO or hedge better than competitors.

Maybe, the problem was just transferred to someone else so they can remove it from their statements. And now that someone is trying to deal with this. Unless we have trustable source with all the details on how that position has been closed, I don't think it's safe to assume anything.

[whimsicalism]

> you are taking a risk and there is a possibility to lose in the worst possible way. Call it games, YOLO or hedge better than competitors.

Sure, there is some risk in liquidity provisioning, but I think you are really not understanding what market makers do and conflating it with hedge funds.

[npsimons]

> Melvin Capital has already stated they have closed out their position, think it would probably be fraud if they hadn't.

Two points:

  1. As I understood it, they closed *A* position, not their whole position, and announced that in the hopes it would deflate the stock price so Melvin doesn't crater.
  2. And what, exactly, would be the punishment for this fraud, assuming they even get prosecuted and convicted? Can you put a dollar figure on it? Now put a dollar figure on how much they would lose if they didn't make that announcement, and compare the two numbers.

[Red_Leaves_Flyy]

Iirc they only stated that they closed "a" position. Others have run with that in a horrid game of telephone.

[whimsicalism]

"Melvin Capital has repositioned our portfolio over the past few days. We have closed out our position in GME (GameStop)"

You recall incorrectly. I encourage you to Google before commenting your recollections, it's quite easy to find.

[exclusiv]

Which "spokesman" made that statement? Pretty easy to deny no?

"Melvin Capital has repositioned our portfolio over the past few days. We have closed out our position in GME (GameStop)," the spokesman said in a statement. [1]

[1] https://www.usnews.com/news/top-news/articles/2021-01-27/hed...

[llampx]

They have every incentive to lie

[Red_Leaves_Flyy]

Where's your source?

[shrimpx]

Have they closed out their position? They said via CNBC that they have "closed a position", that's basically the quote that's making the rounds.

[baq]

remember they don't have to report if they opened another one.

[whimsicalism]

If they opened another one, it would be at the much higher price and thus fine.

[baq]

couple hours after sister company of their major stakeholder (as of monday) disables purchases of the same stock for retail.

this stinks.

[warkdarrior]

If SEC decides at some point that this was pump-and-dump scheme (even crowdsourced), the Citadel may become liable for enabling that scheme, even if they do not run it themselves.

[cameldrv]

It seems unlikely to me that Citadel would be liable. They're just processing bulk transactions -- they have no direct contact with customers. You could just as well blame the NYSE.

[ethbr0]

They were just processing bulk transactions.

If it's true they refused to process for certain securities for their downstream clients, then I believe "When?" and "Why?", specifically in relation to other actions, become legally relevant questions.

[whimsicalism]

I think it is much more likely that Robinhood is liable than the liquidity provider for Robinhood.

[alasdair_]

>Melvin Capital closed out their short position yesterday with a large loss

This is something many people are claiming is false. As far as I can find, Melvin have not issues any formal statement on the matter - this claim is purely based on a CNBC "source".

[game_the0ry]

Wow. Just wow. As RH user myself, I did not have a clue I was actually doing business (indirectly) with Citadel.

I'll be closing my RH account soon. For now, I'll be holding the line on GME.

[colinmhayes]

Everyone who buys options is doing business with citadel. They're the originator of most options. HFT firms are inescapable because their very reason for existing is to provide the market with the best prices.

[game_the0ry]

Additionally, I speculate that Citadel/RH/IBKR and any other brokers that stopped buys on GME/AMC had sign-off from regulators (SEC etc.) where the fines they will surely incur would be limited to non-existent.

Not only hedge funds and brokers colluding against the retail investors, but the government as well. Yeah...sounds about right.

[adrr]

I am curious about holding GME. Is your plan to keep it long term? If not what are you plans to unwind your positions? Certain price point? Certain time frame?

[jiofih]

I think a majority of people riding this don’t care where the money goes - they just want to stick it to the man.

[542458]

Which IMO is silly. Institutional investors hold 160% of GME’s float. For every institutional investor wanting it to tank there are others who want to see it rise. It’s not like the institutions all agree or anything - “The man” is on both sides of this.

[adrr]

They are collecting interest from hedgefunds for the short positions and collecting interest from brokerages for capital they provide for margin accounts. They win no matter what.

[whimsicalism]

If you plan on continuing trading, it is going to be difficult to avoid doing business indirectly with Citadel, they are a major market maker.

[thanksgiving]

> This is definitely illegal.

I think there must be laws that say the CEO and the board must get prison terms (preferably life, with no possibility of parole) for these crimes.

No, I will not listen to hogwash like "you shouldn't be responsible for the actions of people you hire". BS. They report to you. Even if they did it on their own, why didn't you reverse it? If you are not responsible for the actions of your employees or contractors, don't hire them. Close down. See if I care.

[whimsicalism]

Why are Americans so crazy for absurdly long penal punishments?

[matthewrobertso]

Because nothing happened when wall street bankrupted the country by gambling and needed to be bailed out in 2008, and then paid themselves huge bonuses.

[Aunche]

Very few people actually got punished, but a lot changed since 2008. Executives were forced to step down. Several major players went bankrupt and many more lost 95%+ of their valuations. Anecdotally, I hear that companies are taking compliance much more seriously. HN would call the surveillance at banks today Orwellian if they were more knowledgable about it.

[dragonsngoblins]

Oh no people had to step down? They fucked up, lost their company loads of money and gasp got fired?!

Like. I understand your point but a lot of people really don't think that is punishment really

[LandR]

Even if they lost their job, they are still incredibly wealthy. That's not any sort of repercussion, at all. Its nothing.

These people who are gambling with peoples lives and livelihoods just to get richer need to start going to jail.

Nothing will change until proper punishments are handed out that makes people reconsider being a greedy, selfish, morally reprehensible piece of shit.

[munk-a]

I think it's generally because most Americans would be looking at ridiculously long prison sentences for common actions if they got caught (like possession) and because the US's general view is that there isn't anything in the world that can't be cured by throwing more prison time at it.

[whimsicalism]

Really? Where in America are you looking at a "ridiculous" long prison sentence in 2020 for possession?

The war on drugs sucked, but it was still mostly a war against dealers.

[lamontcg]

Not if you were black and used crack. And pretty much any prison for posession and use is rediculous, if its a problem for the user it is a mental health issue and prison is the wrong treatment. And of course the limits on what determines if you're a dealer is set low enough, and carrier laws meant that many users were getting prosecuted like dealers. And what defines a "dealer" since someone doing a group buy for three friends is significantly less socially problematic than someone trafficking drugs across the border.

[asveikau]

Afaik there is a recording of Nixon saying that they want to use drug penalties to go after black people and hippies. A lot of times those racially biased outcomes are the product of many unrelated parts of a big and complicated system, but in this case the top of executive government seemed pretty deliberate about this.

[whimsicalism]

I of course agree. It is ridiculous. I also grew up in one of the cities that was the center of the so-called "crime epidemic." We've definitely improved on sentencing since 30 years ago.

I just don't think it is accurate to say that people are getting super long sentences for possession anymore and I don't think it is right to use that as justification for longer sentences for other people.

[MisterBastahrd]

For financial crimes?

Because nothing ever happens to the rich when all you do is take a bit of their money away. They have so much that they will get it back merely for being wealthy, and as we just saw with the recent pardons, they won't even serve their entire sentence even when they're stealing the life savings of hundreds.

[pxtail]

Apparently in America there are huge prisons owned by private companies, traded on stock market of course. With this scenario one can quite easily imagine that incarcerating more and more inmates for maximally long periods of time could be something that is wanted and desired.

[llampx]

Where are you from that you don't have bloodlust for those that wronged you?

[thatguy0900]

What else can you do to a ceo? Fines mean nothing.

[teddyh]

> Fines mean nothing.

Fines can mean something, if scaled correctly:

https://en.wikipedia.org/wiki/Day-fine

[whimsicalism]

A shorter jail sentence? Somehow I feel like there is perhaps a less harsh punishment than life in prison but perhaps worse than a fine.

[thatguy0900]

These people are leveraging everything in their power to fuck over millions to save themselves money. We put them away for 5 years and they still come out billionaires in the end, why wouldn't they do it?

[whimsicalism]

These people are already billionaires or large multi millionaires.

If I had a billion dollars and could get 2 billion dollars but I'd go to jail for 5 years, I would absolutely NOT do that thing.

[tartoran]

A jail sentence for such a well positioned white collar criminal is probably comparable to a retreat lodge. Such an institution certainly doesn't have prison bars and a fenced perimeter because it is low security and has a special privilege.

[whimsicalism]

So what - somehow somewhere someone will have the power to jail these white collar criminals for their entire life, but they don't have the power to make a 5 year jail sentence more uncomfortable?

Your objection doesn't even make sense.

[Red_Leaves_Flyy]

Recommended listening while you read my rant: white trash anthem - blood for blood lyrics[0]

https://youtu.be/ghybm4Y6C7w

Here's my perspective.

I spent my childhood around kids from broken families, most of whom had parents in prison on long sentences for nonviolent drug charges. I saw lots of my friends lose their houses in the 00s. I entered a job market that treats just about everyone as disposable; unworthy of training, investment, benefits, time off, bathroom breaks, ppe, or a livable wage.

Wall sts focus on the short term has been like napalm on these issues and made fixing them political suicide. I don't say this lightly; wall st has enslaved America for profit.

>The Top 1% of Americans Have Taken $50 Trillion From the Bottom 90% [1]

The proletariat is showing their heads and nipping at the ankles of everyone. Some are misguided, but beating a hedge fund at their own game, trying to convince boomers that black lives matter enough to not be executed by police, or Medicare for All or forgiving student loan debt are all extremely well studied solutions to systemic issues in America that will not be meaningfully addressed until the root problems are addressed: money in politics, racism, trickle down economics, class inequality, asset inflation, health care, employee rights, war on drugs, etc, etc, etc.

This specific incident was a fluke of luck that required ridiculously overpaid bros in cushy hedge fund jobs to count past 100% while shorting gme/nok/AMC which is playing with the lives and livelihood of the people that work in each of those companies. Needless to say, but watching billionaires repeat '08 with gamestop, amc, and Nokia ruffled a lot of feathers. Gme especially brought out some whales with money to burn in the chase of infinite gains.

Maybe this was an elaborate psyop to manipulate people into doing things they wouldn't. If so, great job, if not, well maybe the fat cats on wall st and in Congress should come around my hood and experience the hopelessness for themselves, that's an open invitation for as long as this account is active for any billionaires or US politicians not already arguing against the same issues I am to come and walk in my shoes.

Hopefully this incident spurs some change in wall st and the culture there. Congress certainly doesn't have the courage to.

[0] http://www.darklyrics.com/lyrics/bloodforblood/outlawanthems... [1] https://time.com/5888024/50-trillion-income-inequality-ameri...

[matttb]

> I don't think this was Robinhood's choice.

They sure made it sound like it was their choice. https://blog.robinhood.com/news/2021/1/28/keeping-customers-...

[tornato7]

Exactly, while WeBull firmly pointed the finger at their market makers, Robinhood is treating it's customers like children and telling us they're banning trades for our own good while secretly collaborating with Wall Street in the background. They are a disgrace to the name "Robinhood."

[kosh2]

Tastytrade wrote very clearly that it was Apex Clearing that forced their hand.

[mgolawala]

Exactly this. They know there will be lawsuits and they know there might be SEC fines, but they are betting that those two will total up to be less than the billions it would cost them to cover a short position at $500-$600 per share.

The question I have is, can this be prosecuted criminally and can those in charge be threatened with actual jail time from this?

[tornato7]

But I don't think they are expecting the backlash that this had received. As a Robinhood user I am making it clear that this is not okay by withdrawing all of my funds and cancelling my Gold account, and I hope others will do the same.

[conformist]

Citadel Securities is not Citadel Investments. This is important, because they operate on different sides of this: Citadel Securities is the market maker that is interested in Robinhood's flow. Citadel Investments is the hedge fund that bailed out Melvin. Now, whether it's good that they're connected, and up to what extent they should be allowed to is an important question.

Even if there had been some kind of illegal collusion, it doesn't seem likely that stopping trading would have helped Melvin to cover their short position, which they ended up doing.

There is probably no conspiracy here.

[onlyrealcuzzo]

> This is definitely illegal. But Citadel is betting that the resulting SEC fines from this illegal manipulation will be less than the loss they would get if they didn't suppress the price.

It's not really a bet when they're 50% certain they can get away with no fine, 99% certain the SEC fine will be < 10% of the profit, and 100% certain the fine won't be > 100% of the profit.

[ivalm]

> Citadel then buys the shares on the market, and sells them to Robinhood for a slight markup

This would be front running and is fundamentally not how citadel or other MM function.

[huhnmonster]

I guess I understand where you are coming from, but they way I understand it is that RH submits a bulk order for a stock and gets a quote from the MM, which the MM thinks is appropriate. The MM then adjusts its own portfolio accordingly, buying/selling the underlying stock at its own pace.

So, more or less as described, but the order is a little different, right?

[ivalm]

Market makers fulfill a bunch of orders, they then have until end of day to get into a delta neutral position. They prefer to trade against retail traders because retail traders are typically uncorrelated, which means that vast majority of trades cancel out (but MM still collects the bid-ask spread on the trades!). When you make markets for counter-parties that include big institution there is always a risk that the "small" trades you're fulfilling will be very correlated (because a big institution is actually breaking-up and feeding you a big trade). This is called adverse selection and will force MM to start buying to get to a neutral position (which means that the bid-ask spread they are collecting will have to be paid to some other seller).

What Citadel and others are doing is they are saying to RH "your order flow is uncorrelated and we'd like to make markets for it, we will charge your users slightly lower bid-ask spread (price improvement for user) and we will also give you a slice of the bid-ask spread we do collect, in return the uncorrelated nature of the orders will ensure that we won't have to do much trades in order to maintain a neutral position."

This proposition is actually good for

1. RH users (they get price improvement relative to NBBO)

2. RH (they get to make money and get a user base)

3. Participating market makers (they get much steadier cash flow from MM activity).

It is bad for

1. Big institutions, they get to pay larger spread than they would if the market was more diluted by retails

2. Non-participating MM (they increase the bid-ask spread to make sure it's still worth their time but there is more volatility and it's a competitive market so mis-pricing the spread is a real problem).

Also, current GME shenanigans are net good for MM since MM is a business that makes money on volume, not direction.

[alexilliamson]

That's interesting because Ken Griffin started Citadel and has made huge investments in Melvin. Feels sketchy.

[dehrmann]

Can most brokers route trades directly through the market or use another market maker if something like this happens?

I assumed Citadel would actually be cleaning up market making GME with all the trading and volatility, but maybe the trades are too coordinated. What they're paying for is order flow from unsophisticated investors; they don't want to deal with hedge funds and the games they play. Maybe these trades are close enough to something a hedge fund would do, so the orders aren't worth it?

[whimsicalism]

> directly through the market

There is nothing but the market makers.

> I assumed Citadel would actually be cleaning up market making GME with all the trading and volatility, but maybe the trades are too coordinated

I suspect they are still making bank. The demand for liquidity has increased, so there is a higher premium on liquidity provision.

[throwawaylolx]

>Citadel, and other trade executors, are refusing to buy shares for retail traders.

Any evidence on this? RH said the opposite:

>To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to. We’re beginning to open up trading for some of these securities in a responsible manner.

[heimatau]

Rumor mill says that the White House and Sequoia called RH to force their hand. Honestly, I wouldn't expect anything less. I say this because 2% drawdown of the stock market didn't happen for zero reason. It happened because these fools are leveraged up to their ass (metaphor) and the bet cost them severely. And it's cheaper to take the bad PR while salvaging your fuck up. These people act in a different set of rules and that's not okay.

IMHO, I'm concerned about this because this is a 1st amendment problem. Let grown adults gamble. Let them be responsible for their dumb actions (hedge and retail alike). If someone is 'too big to fail' then they are 'too big to exist'.

[aneemzic]

> I'm concerned about this because this is a 1st amendment problem. Let grown adults gamble.

Gambling isn't even legal in most states. Good luck arguing that.

[heimatau]

> Gambling isn't even legal in most states. Good luck arguing that.

What States are you not allowed to short or long? Using your logic, this is cognitive dissonance. How free people spend their money is an act of speech, PACs and SuperPACs are emboldened by this current legal fact.

[aneemzic]

No, you specifically said it's a first amendment problem and to let adults gamble. If it was a first amendment problem, gambling wouldn't be illegal in most states.

[heimatau]

> No, you specifically said it's a first amendment problem and to let adults gamble. If it was a first amendment problem, gambling wouldn't be illegal in most states.

Maybe you need explicit help to understand my position. If hedge funds can short/long stocks, there should be nothing preventing a retail investor from doing the same.

As for it being speech, well, corporations are people and PAC/SuperPAC political donations (read: blackbox donations) are speech. These are current USA facts.

From there, I extrapolate that it would be unfair to regulate Main Street instead of Wall Street. This wouldn't be such a massive problem if Wall Street wasn't allowed so much leverage (and short 140% of the company shares...how is that even legal. That's literally fraud). I can't sell you 100% of my property and then sell 40% to someone else.

It's that simple, stop obstructing discourse.

[redisman]

The White House? This”rumor” doesn’t make any sense

[Rapzid]

The Man is pulling the strings and everybody knows The Man lives in the White House.

It makes a perfect kind of sense. Nonsense.

[michaelmior]

If that is the case, then it leads one to wonder why Robin Hood wouldn't come out and say so to avoid all the blowback they're getting. I suppose the obvious answer is that they don't want to burn bridges with Citadel.

[centimeter]

> You pay pennies more per share

To clarify: you will never pay more than market price (i.e. you will never have to pay more than the best order sitting on the book). Citadel or whoever will only internalize your order if they're willing to offer you a better price than market price. Otherwise RH is obligated to match your order with the best price currently available.

They are willing to do this because they would prefer not to leave orders sitting on the books, and there's a fee for taking orders off the books which they would prefer not to pay.

[cameldrv]

This is theoretically true, but there have been numerous SEC enforcement actions based on this not happening.

[Red_Leaves_Flyy]

The loss is provably infinite, the fine should be too.

[foobarbazetc]

Citadel != Citadel Securities.

Most clearing firms aren’t clearing GME or AMC anymore. It’s not just RH.

[Karunamon]

Same owners at the end of the day.

[infogulch]

Fix: fines should be 2x more than just taking the loss on the chin.

[corty]

Problem is, the losses will never really be known. Shorts have an arbitrarily high loss potential, but nobody knows how high GME would have climbed without Robinhood manipulating it down.

[sidlls]

Then set the loss at the price where the manipulation started and add a multiplier.

[ofou]

The weird thing is that Citadel Securities and Citadel are different entities. Citadel Fund went to the rescue of Melvin Capital and Citadel Securities stopped the buying trades. Suspicious eh?

[stjohnswarts]

I think it is probably illegal but SEC fines are so light they are just considered part of the price of doing businesses. If the SEC did something more reasonable like charge 5% o revenue for a year then these companies would sit up and take notice.

[riffraff]

Who wins from a more limited market? It seems to me suspending trades locks people from selling as much as it locks them from buying, and short sellers should be happy to have a more liquid market,not less.

[yaur]

According to the RH blog post they are allowing people to close their position, just not open or expand one.

[cc_stoic]

wow, this is a very apt explanation.

the best financial advice I ever got was to never ignore conflicts of interest.

[moralestapia]

"... the resulting SEC fines from this illegal manipulation ..."

Plus time in prison.

[sitzkrieg]

in futures, your refusing to execute an order for risk management is not illegal. as well as slamming you out of stupid positions. i can only hope equities execution houses are as coherent

[timack]

"Coincidentally"

[skyde]

thanks for explaining your a hero