[csours]

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

I'm not sure if anyone from wsb should be prosecuted; but I will say that if another hedge fund had tried to do what wsb did, it would have been clearly and unambiguously illegal market manipulation.

I do think it is quite likely there were some financial professionals posting on wsb that were breaching some laws or technical requirements. I have no evidence, but I would not be surprised.

[boublepop]

Institutional investors did do what people suspect wsb of doing. Retail investors where net sellers of GME during this event. The short squeeze happened because other institional investors went in hard under cover of the WSB memes.

https://www.cnbc.com/2021/02/05/gamestop-mania-may-not-have-...

[javagram]

> Institutional investors did do what people suspect wsb of doing.

Buying based on observing market conditions or seeing the posts in reddit wouldn’t have been questionably legal afaik. Only actively coordinating e.g. through posts on Reddit or phone calls or a Smoky back room could be argued to be market manipulation I think? If they were posting in Reddit to feed the squeeze that’s when stuff may get problematic.

[IgorPartola]

The sentiment on WSB from what I can tell is that they can’t coordinate which thread to sticky, let alone which stock to buy. My impression of observing it for a couple of weeks is that this is true. They aren’t capable of truly coordinating anything.

Best I can tell, Roaring Kitty/Deepfuckingvalue basically had been buying more and more GME stock for like a year and every month showed screenshots to prove this saying a short squeeze was coming. Eventually in January something happened and everyone else was like “he might actually be right, I’m buying”. Then the news picked it up and it hit a positive feedback loop. Robinhood stopping buy orders put a wet blanket on things and after they lifted the restrictions enough time had passed that the frenzy slowed down. The short squeeze might still happen but lots of WSB participants bought at $300+ and I suspect will never recover that loss. But also because of this specific crowd it seems a good chunk of them are not selling on the idea that if you buy at $300 and sell at $50, you definitely lose. And if you hold the stock it might some day rise back to above $300-400. Mark Cuban did an AMA there where he basically reaffirmed this point of view which they took and ran with.

Part of this behavior is that WSB wasn’t really focused on going long on stocks until now. They mostly traded options which have specific deadlines. They simply aren’t used to the idea of an open ended investment. I saw people talking about how GME is a solid company and how they believe it’ll transition to digital successfully. How it might grow from fundamentals, etc. Nevermind their EPS, or the fact that their valuation currently sits at 10x what it was with no justification as to how their fundamentals might have changed to account for this. The difference with this crowd is that they for the most part acknowledge that this is gambling and that you are likely to lose all the money you invest so don’t worry about losing it. They also acknowledge that they don’t know what they are doing vs pretending like this is all based on research, experience, or education. Makes them a sort of dangerous crowd, especially as some there do accumulate a good amount of wealth, IMO.

[sillysaurusx]

But also because of this specific crowd it seems a good chunk of them are not selling on the idea that if you buy at $300 and sell at $50, you definitely lose.

So close! You're almost completely correct, but remember that a loss is considered a win on wsb, because you get to post loss porn. Can't spell trader without retard.

https://www.reddit.com/r/wallstreetbets/comments/ljde34/rip/

Your comment is excellent. But I just wanted to chime in with a "yes, but remember that they don't take themselves very seriously" type reply. It's necessary for preservation of their culture. People who act like they know a thing or two tend to get immediately jumped on, which I found quite refreshing. "But will a gamma squeeze happen?' is usually met with "stfu and go read a book rather than drop terms you don't understand."

Which ... seems unhelpful and awful, until you realize that it preserves the important property of letting everyone feel like they can participate. You, me, anyone. And I don't really see how that's a dangerous group; it's more like a virtualized casino meme factory.

[fractionalhare]

> People who act like they know a thing or two tend to get immediately jumped on, which I found quite refreshing. "But will a gamma squeeze happen?' is usually met with "stfu and go read a book rather than drop terms you don't understand."

Maybe this is how it was 6 million subscribers ago. Based on my (extensive) reading of WSB the past few weeks, this is no longer true.

I've read just about every WSB post (and its comments) about GME with over ~1000 upvotes. People asking when the gamma squeeze is going to happen were definitely not being told to read a book, they were being told things like "this Friday!" And people acting like they had intimate knowledge of this fact weren't exactly downvoted either...

[sillysaurusx]

Valid. :( An influx of millions of people tends to do that.

But! You can preserve the culture yourself. Try to make things a little better when you see problems. It's all we can do.

[IgorPartola]

That’s a really interesting take. The way they seek the lowest common denominator of communication does seem to create a strong sense of community.

What I mean by dangerous is this: as more people flock there more capital will enter the market through that gate. And that’s a lot of money to be directed by whims of a fickle and undereducated community that tends to ride whatever is popular at the time. This time they pump and dumped GME, AMC, and BB. What happens when they do this to a different company like say Amazon? Anything good/bad?

[sillysaurusx]

Their counterargument would be "How can we have insider knowledge when we have no knowledge?"

I get what you're saying, and it's a valid perspective. But, this gets back to the root of the issue: the older I get, the more it seems like there is a class division in society, and the upper class will do whatever it takes to ensure the lower class stay low.

I hate phrasing it like that, because you can't even say it without sounding like a loon. But think carefully about what you're saying. You're essentially saying that it's dangerous for uneducated, unsophisticated people to band together.

I'm not saying you're wrong. I'm saying, rich people aren't so different, and they are equally dangerous. Moreso, since they have the resources. So I personally find it hard to worry about some people collectively throwing around a few hundreds of millions.

My effort here is to try to convince you -- only you, not whoever's reading this -- to aim your worry "up the chain," so to speak, and to take a hard look at how the rest of the industry acts, and why the structures are in place. It seems false to say that these protection mechanisms are to prevent another 2008 from happening; after all, the 2008 crash wasn't caused by unsophisticated investors.

[quickthrowman]

> What happens when they do this to a different company like say Amazon? Anything good/bad?

What do you mean? AMZN has 3 million of 500 million shares sold short, less than 1% short interest. It would take one day for shorts to cover at average volume. Shares are also $3,277 as of Friday’s close, a lot of WSB people can barely afford one or two shares.

They cannot do this to a company like Amazon because the short interest isn’t there and the share price is too high. A weekly at the money call is $3,250 right now. WSB doesn't have enough capital to buy the shares or options.

[bsanr2]

A market so susceptible to mania is maybe in the need of brakes that are used judiciously and without bias. We clearly do not have that, and in fact have been stripping them away since the 80s.

You can't blame this on "unsophisticated" investors breaking norms but ultimately playing by the rules.

[baq]

that wsb is gone. maybe it'll come back after the dust settles.

it isn't all bad though - old timers migrated to a myriad of other subreddits where quality content is more popular. it may take a while to get back to late 2020 level of memes, though.

[ummonk]

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

[toomuchtodo]

Specifically the “Margin Liquidity Adjustment Charge”.

[voiper1]

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

[tauwauwau]

This episode of Planet Money should shed some light on it. What I understand from this episode is that there's a 2 day delay in settling trades, that's why clearing house exists.

https://www.npr.org/2021/02/02/963466346/robinhoods-very-bad...

[valuearb]

There is a two day closing period for stock sales. During that period the exchange needs colateral to ensure when the transaction closes it will be paid for.

Typically this collateral is small, like 3% because most stocks aren’t volatile and buyers almost always pay up.

But when a stock gets incredibly volatile, there is a risk that buyers of $480 shares may refuse to pay when the price is $90 two days later. Especially when the buyers are a bunch of new retail investors who just opened accounts.

You could buy GME from most brokers because they didn’t have the GME volume Robinhood had, and they had more collateral, so the 100% collateral requirements for GME were manageable.

[scatters]

And the inverse; if you buy at $200 and the stock is at $400 two days later there's a risk that the person you were buying it from has disappeared (maybe they were a short seller and went bust; maybe they got seller's remorse). So RH has to reserve not just the $200 you paid for it, but also another $200 to buy the share on the open market when the counterparty fails to deliver. That's why collateral requirements are based on volatility, not momentum.

[grandmczeb]

Brokerages can't guarantee trades with client money[1].

[1] https://archive.is/GFtf2

[DavidSJ]

I think the requirements were calculated at the brokerage level and not the individual customer level.

[sillysaurusx]

One level up, I think!

Think of it like a pyramid: the clearinghouse sits at the top, the brokers are in the middle, and the rest of us dirty peasants sit at the bottom where we belong.

The clearinghouse covers 95% of trades on Wall Street. So the clearinghouse issued a decree: "we are no longer able to support opening positions for GME, AMC, and KOSS."

Since most brokers use this clearinghouse, that means almost all brokers were forced to prevent customers from buying GME.

Everyone: pikachu face

The brokers have no choice. https://youtu.be/4RS4JIEVyXM?t=96

[rcxdude]

Not quite right. There's the DTC (which carries out 95% of the trades), then there's clearing houses (sometimes a seperate entity, sometimes part of the broker: the larger ones all do their own clearing. e.g. Robinhood has their own clearing house), then there's the brokers, then the traders. The DTC said 'we need 100% collateral on these trades' (probably because they viewed there being a significant risk that someone, somewhere, would not be able to pay up for the trades they're making in a big way), and then APEX clearing (which is the clearing house used by a lot of smaller brokers but not 95% of the market) said 'we can't support opening new positions' because their liquidity would be sucked up by the requirement, blocking most of the smaller brokers. Robinhood did similar for similar reasons independently of APEX, but some other brokers not using APEX could still trade (either because they had more cash on hand or because their customers weren't buying as much of affected stocks).

[blablabla123]

> The DTC said 'we need 100% collateral on these trades' (probably because they viewed there being a significant risk that someone, somewhere, would not be able to pay up for the trades they're making in a big way

This sounds like nonsense to me. After all the job of the Clearing House is to make sure the cash is balanced correctly after the transactions. Or realistically speaking a never ending chain of transactions, thus correctly moving the cash behind back and forth in time. It's the secret of the clearing house why they have no problems that their institutional customers have single digit equity ratios (speaking about Basel II/III/...) all the time while most individuals deal with 100% equity ratio. Maybe the more reasonable explanation is that they were overwhelmed by so many small transactions.

[valuearb]

GME was having 400% swings in a day, and being bought in a large part by brand new retail investors who had just opened accounts.

That’s a perfect storm for nonpayment issues.

[xorcist]

The Wikipedia article on DTC isn't very informative

What is the relationship between the NYSE and DTC?

[bdonlan]

The NYSE is one of the stock market centers in the US (yes, there's more than one). It's a place where you (usually virtually these days) go to agree with someone on the specifics of the trade - buy 100x GME at $420. The DTC is involved with what happens next - actually exchanging the stock and cash. In particular, they keep the records of which brokers hold how many shares of which stocks.

[sillysaurusx]

I highly recommend https://youtu.be/4RS4JIEVyXM?t=60 -- I didn't understand any of this myself till watching that. (Still don't! But I'm less confused.)

My understanding is that the clearing firm informs everyone "Hey, we no longer support opening positions in three stocks specifically: GameStop, AMC, and KOSS."

Literally everyone, including Robinhood, was forced to only allow people to sell GME.

Somehow Fidelity was the only market maker to avoid this -- you couldn't buy GME anywhere else due to the clearinghouse's decision.

(Why was Fidelity the only broker able to sidestep the clearinghouse's decision? An interesting mystery; perhaps someone here knows the answer.)

[onedognight]

> Literally everyone, including Robinhood, was forced to only allow people to sell GME.

Not literally. I was able to buy w/Schwab when it was restricted by RH. I tested this specifically to see if I should change brokers.

[bdonlan]

There's more than one clearing firm in the market. The more money the clearing firm has, the more likely it'll be able to continue trading highly volatile stocks at high volume. Fidelity, as a huge financial firm that's been around for a while, had the assets to afford to keep trading it (and/or their customers weren't trading enough to put strain on them), robinhood (which has its own, small, clearing firm) couldn't, simple as that.

[emteycz]

No, buying worked on many brokers.

[valuearb]

This is not true, you could buy GME at almost every broker except a handful too thinly capitalized to support their volume of GME trades.

[zappo2938]

Fidelity is largest stock holder of GME.

[thefounder]

So in the end it can be done when the right people make profit

[derangedHorse]

Or rather because the trades could be done internally (Fidelity could sell off the stock they own)

EDIT: It seems my assumption was incorrect. This link posted by grandmczeb shows that RH needed more capital by a downstream dependency to ensure those trades: https://archive.is/GFtf2

[yskchu]

Actually you were right, Fidelity did sell off all the stock they owned.

https://www.wsj.com/articles/fidelity-cashes-in-most-of-game...

https://www.bloomberg.com/news/newsletters/2021-02-11/why-ga...

They owned 13% of the company; now they own only 87 shares; they sold 9.3 million shares in 1 month.

So, during the Robinhood GME debacle, Fidelity could sidestep the issue, since they wanted to sell their own GME shares anyway, and also managed to look good in the process (no GME buying restrictions compared to Robinhood etc); win win for them

[valuearb]

Fidelity is the largest shareholder in many stocks, it has a massive amount of client funds.

[playingchanges]

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

[fractionalhare]

The hedge fund community isn't really homogenous that way. Basically all the long/short equity hedge funds with appreciable AUM lost significant money in January, because most of them were short the...well, obvious short candidates, like AMC, GME and BBBY. Other kinds of funds which trade on monentum or which shorted near the top tick made an absolute killing.

Personally I don't think it's unfair when any fund loses money - that's the game. I do think it's unfair Melvin in particular has outsized attention. The only reason Melvin is in the spotlight now is because the WSB zeitgeist just happened upon Melvin's public short and fixated on it without looking at other funds' 13Fs showing the same position. Melvin was far from the only fund short GME. This in turn led the media outlets to hyperfocus on Melvin, which has in turn led the mainstream lay community to hyperfocus on Melvin.

[xorcist]

Can someone please explain the situation to someone with no competence how these markets work?

As far as I understand, no one is allowed to trade on stock exchanges directly. Everyone has to go through a broker. Orders has to be settled in 2 days. So there are counterparty risks involved in both steps here. Is this where there was a problem? But the retail trading platform takes zero financial risk as long as they don't allow their customers to trade on credit (which is an entirely different issue).

As a retail customer I am entirely confident that I own whatever stocks has been purchased, even if the trading platform used should go belly up, as long as the stock in question is traded in a public exchange, which was the case here.

So what exactly was the problem? Some posts led my to believe Robin Hood and other apps extended some credit to its users in order for customers to be able to speculate immediately with their money and not have to wait for the trade to be settled. But surely the appropriate response to that would be to halt that credit, not suspend trading?

There is also the question how it is possible to limit buys or not sells? For every sell there is also a buy. If some platforms are limited to sell orders, someone must be on the other side of that trade, and will have an advantage in the market. How is that legal?

Or did this not concern stock trading at all? Some articles mentions options trading, which is a financial instrument issued by a counter party. But those kinds of orders are stopped all the time for all sorts of reasons. That is in itself hardly newsworthy.

[tedunangst]

https://www.dtcc.com/-/media/Files/Downloads/legal/policy-an...

[derangedHorse]

I'm thinking it was a decision guided by their current application architecture. My guess is that there was no easy way to disable the purchasing of stock on credit, and preventing a stock from being bought was probably the easiest mitigation.

[gruez]

>Is this where there was a problem? But the retail trading platform takes zero financial risk as long as they don't allow their customers to trade on credit (which is an entirely different issue).

From matt levine:

>This means that the seller takes two days of credit risk to the buyer. I see a stock trading at $400 on Monday, I push the button to buy it, I buy it from you at $400. On Tuesday the stock drops to $20. On Wednesday you show up with the stock that I bought on Monday, and you ask me for my $400. I am no longer super jazzed to give it to you. I might find a reason not to pay you. The reason might be that I’m bankrupt, from buying all that stock for $400 on Monday.

>Generally if you buy a stock on Monday you still want it on Wednesday; even if you don’t, we live in a society, and you’ll probably cough up the money anyway because that’s what you’re supposed to do. But at some level of volatility things break down. If a stock is really worth $400 on Monday and $20 on Wednesday, there is a risk that a lot of the people who bought it on Monday won’t show up with cash on Wednesday. Something very bad happened to them between Monday and Wednesday; some of them might not have made it. You need to make sure the collateral is sufficient to cover that risk. The more likely it is that a stock will go from $400 to $20, or $20 to $400 for that matter, the more collateral you need.

https://www.bloomberg.com/opinion/articles/2021-01-29/reddit...

[xorcist]

Yes, so I take it to mean that indeed the retail trading platform (the actual term may be something else), takes zero financial risk. The broker that the retail trading platform uses to access the trading exchange takes this risk.

But the counterparty risk here is quantifiable (by way of audits of said retail trading platform) which usually in society makes it a case for insurance, not security payments. That is my question. Is the premise misstated, and if not, why is this not settled by insurance?

The three replies posted to the question above seems to disagree what the problem actually was.

[bdonlan]

In the financial industry collateral is normally used as the primary means of mitigating counterparty risk as it avoids adding an additional counterparty that you then have to evaluate for creditworthiness, and you have to pay them money instead of just temporarily handing over collateral and getting it back 100% later on.

That being said the collateral doubles as a sort of insurance; if one party's collateral is insufficient to cover the loss, the excess is spread across other market participants. This is one reason why client funds can't be used for this collateral.

[donmcronald]

The DTC changed the collateral requirements to 100%. The WeBull CEO said that. That requires way more cash on hand to handle settlements compared to the norm which I think is 2-3%.

IMHO the DTC and prime brokers are all pals playing in the same fixed game. My baseless assumption is they’re manipulating the market by selling uncovered shorts to each other and since everyone is in on it / accustomed to it, no one ever comes to collect so there’s no risk of having to cover their uncovered shorts. They could be shorting 2000% of the float and no one would know if all the trading happens between complicit participants with the sole intent of driving share prices down.

[epistasis]

By "what WSB did" are you taking about a short squeeze? Those are not uncommon and no one has ever been prosecuted for it.

Or is there something else that WSB did beyond squeezing the shorts?

[valuearb]

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

[bsanr2]

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