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The Long and the Short of It

January 28th, 2021, 1:18 pm

Interesting trading news these days - It isn't just Game Stop - Market Watch January 28

"The dynamic that has seemingly contributed to a short squeeze in the stock of videogame retailer GameStop Corp. also appears to be affecting shares in a host of other heavily shorted companies.
Shares of AMC Entertainment Holdings Inc. AMC, +301.21%, BlackBerry Ltd. BB, +32.66%, headphone maker Koss Corp. KOSS, +480.00% and retailer Express Inc. EXPR, +214.14%, have all experienced sharp moves without any apparent news to act as a driver while facing a large amount of bets against them. The same dynamic exists for GameStop GME, +134.84% stock, which has skyrocketed more than 1,600% in the past two-plus weeks amid support from investors on Reddit’s WallStreetBets message board."

I'd think that they're not quite right about "without any apparent news" - it's just that the power of information has reached a new audience. Especially regarding really big traders who are running around in wintertime in shorts.

Also noteworthy - Twitter was down 2.98% partly due to recent controversial events, but has been set to overweight with a target of $65 by some analysts - https://www.marketwatch.com/story/twitt ... 2021-01-28. Twitter will announce 4Q results after the close on Feb 9.

Certainly, not suggesting that you want to believe everything you read, but if retail investors take note, might watch out for another David vs. Goliath squeeze. 

None of this is investment advice, just noting an emerging phenomenon with these message boards. TD Ameritrade has already announced that it will limit trading on some of those names, and there may be other countervailing actions too. TD Ameritrade restricts trading of GameStop, AMC stock - GameStop stock soars, but regulators are keeping an eye out - CNET Jan 27.

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The spectacle is not a collection of images, but a social relation among people, mediated by images. - Guy Debord
 
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Re: The Long and the Short of It

January 28th, 2021, 9:15 pm

To follow up on that - indeed Robinhood and Interactive Brokers did restrict trading today, joining TD Ameritrade and Charles Schwab, which had raised margin requirements yesterday. However, RH and IB have acted with a heavier hand: "Free-stock trading pioneer Robinhood and Interactive Brokers said that in some cases, investors would be able to sell only their positions and not open new ones. Both brokerages raised margin requirements on certain securities. Robinhood told clients it would close out some positions automatically if the client was at risk of not having the necessary collateral."

Robinhood restricts trading in GameStop, other names involved in frenzy - CNBC Jan 28 updated at 3:47 pm

"Interactive Brokers chairman Thomas Petrify (said): “We are concerned about the ability of the market and the clearing systems, through the onslaught of orders, to continue to provide liquidity. And we are concerned about the financial viability of intermediaries and the clearing houses,""

"Robinhood, however, has its own clearing system. (and further)... "Taking payments for order flow from Wall Street firms is a controversial, but legal practice done by most electronic brokers. For Robinhood, it’s the biggest revenue source." 

So, if buy and sell orders were seen a manifestation of free speech, is this another manifestation of cancel culture?

Sort of joking, but as jubilant as the little day traders were earlier, they did not realize - The electronic Empire can and does strike back.  

But obviously this is not the NYSE halting trading (which also happened this morning via code M = extreme volatility)*, so what comes next is uncertain. Has this ever occurred before at the retail brokerage level?

"Amid Twitter threats about a class action lawsuit against Robinhood, law firm ChapmanAlbin LLC announced Thursday it is “investigating claims on behalf of Robinhood users that were affected and suffered losses as a result of investing in Gamestop or AMC through the Robinhood brokerage platform.”"

TBC

*Extreme volatility caused trading halts for several popular stocks on Thursday morning. Among them were video game retailer GameStop, AMC Entertainment Holdings, and Express. According to data from Nasdaq, all three stocks triggered code M, a volatility trading pause for an "exchange-listed issue." Trading resumed a few minutes later.

For reference: Quote GME (Google Finance) A Dirac Delta appeared today just after 2 pm.
The spectacle is not a collection of images, but a social relation among people, mediated by images. - Guy Debord
 
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Alan
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Re: The Long and the Short of It

January 29th, 2021, 1:34 pm

The incident indeed raises lots of interesting questions. Can you have market manipulation by social media? Is the company now any more 'over-valued' than say Tesla, another social media fanboy/fangirl club? Does Robinhood, or any other broker for that matter, have an unlimited right to protect themselves by imposing trading restrictions and extreme margin requirements "on the fly"?

As a general premise, people should have the right to make really stupid decisions in the marketplace, short-sellers included. If the reddit crowd wants to take GameStop to $1000/share, so be it.  Good risk/reward opportunity for some new crowd of shorts.  Also, the use of "media" by shorts/longs is well-established: the Ackman-Icahn fight over Herbal Life a case in point.  I suppose this argues to just leave it all alone.

If I was running GameStop, I'd announce a new immediate share offering to raise some cash. While they're smiling to see some shorts killed, more will take their place; the chance to raise some cash with little dilution should trump.  
 
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bearish
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Re: The Long and the Short of It

January 29th, 2021, 5:06 pm

I definitely agree that people should be given a pretty long rope in the market. Most of the problems (and, hopefully, associated solutions) come from managing counterparty performance risk. I don’t think the infrastructure is calibrated to handle stocks with 600% implied volatility and serious intraday outlier events on top of that. How much margin do you require from a retail investor wanting to short GME or associated (put or call) options? My guess is such a large amount that you might as well prohibit the positions outright.

As for pump-and-dump market manipulation schemes - it feels like they should be at a least as illegal when executed via viral social media posts as when done through old fashioned phone calls from the boiler room.
 
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Re: The Long and the Short of It

January 29th, 2021, 5:11 pm

At the risk of sounding a bit trite, I am reminded of a quote attributed to Keynes that goes something like... the market may remain irrational longer than you may remain solvent.

Good point, Alan, any company should issue when its shares are plainly overbought. 
 
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Re: The Long and the Short of It

January 29th, 2021, 6:19 pm

This series of events is the basis for a good paper - and no doubt there will be a number of them published on SSRN and elsewhere in the weeks to come.

For now, here is some information about current and historical trading halts on NYSE, NASDAQ, CBOE, and OTC.
Illuminating stuff for market illuminati. 

NYSE Trade Halts 
Regulatory Halts; News Pending/News Dissemination and Limit Up Limit Down (LULD) data available for 1 year
Historical shown here, use tab for current. 

NASDAQ Trading Halts
Current shown here, historical search on side.

CBOE Trading Halts 
Also shows non-listed CBOE listed halts. Current; historical downloads button on page.

OTC Trading Halts
Current; searchable.

Trading Halt Codes
LULD and M (Volatility Trading Pause) are among the most common, as you might expect.
OTC has its own codes - shown in info tab on a sidebar. U3 is "Extraordinary Events".

One typo corrected.
Last edited by trackstar on January 30th, 2021, 10:41 pm, edited 1 time in total.
The spectacle is not a collection of images, but a social relation among people, mediated by images. - Guy Debord
 
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Re: The Long and the Short of It

January 30th, 2021, 12:13 pm

Another data point for the record:

Silver Lake Scores $113 Million on AMC Stake Amid Reddit Rally - Bloomberg Jan 29

"The private equity firm converted $600 million of 2.95% bonds to equity at a price of $13.51 a share, according to a regulatory filing Friday. It then sold the 44.4 million shares for an average price of $16.05 during a Reddit-fueled rally in the company’s stock, according to calculations by Bloomberg. The gains disclosed Friday don’t include any possible offsets from hedging.
...
Silver Lake provided millions of dollars in financing to the troubled theater chain in recent months as it has struggled to stay afloat amid the pandemic. The Menlo Park, California-based firm was the majority holder of AMC’s convertible notes due 2026."

and a picture of the past year:

Image

Continuing with market history and vol research over the weekend. Input welcome.

For those interested in the sociology of finance, this is a unique book:

An Engine, Not a Camera How Financial Models Shape Markets By Donald MacKenzie (2006)
The spectacle is not a collection of images, but a social relation among people, mediated by images. - Guy Debord
 
leptoq
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Re: The Long and the Short of It

January 30th, 2021, 6:52 pm

I'm sure you guys heard about business connection of Robinhood to Citadel, which together with Steve Cohen bailed out Melvin Capital which was caught on the wrong side of this trade. I would be curious to hear conspiracy theories :) Also, anyone has doubts that GME will go below $20 on a scale of a 3-6 months?
 
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Re: The Long and the Short of It

January 30th, 2021, 7:18 pm

I'm  sure you guys heard about business connection of Robinhood to Citadel, which together with Steve Cohen bailed out Melvin Capital which was caught on the wrong side of this trade. I would be curious to hear conspiracy theories :) Also, anyone has doubts that GME will go below $20 on a scale of a 3-6 months?
Yes, I have been reading about these subplots in the GME saga and such intersections/connections.  However, I am trying to troubleshoot conspiracy and (false) moral outrage narratives and keeping as close to facts as possible.

As a creative exercise, I am also thinking about the different groups of participants as various insect societies - you have ants and bees and hornets: each one has a culture, a hierarchical structure of labor, and a method of internal cooperation. They can be aggressive or peaceful (more or less), but you would not necessarily say that private equity and hedge fund hornets are morally wrong (it is a market, not a cathedral), or that ants are working closely together across all tribes with a clear and unified sense of direction and purpose. But it is true that hornets will kill bees when they get a chance and ants will kills ants from other colonies and they also carry their own dead home.

I look at online communities like that too - all are insect societies Tweeting and posting and blogging away. Some have Queens, some have Kings, and some have Parliamentary Democracies...

But this is just for fun - on a serious note, I will put up some more data as per previous posts later on.  Like Deep Throat said, "Follow the money."
The spectacle is not a collection of images, but a social relation among people, mediated by images. - Guy Debord
 
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Re: The Long and the Short of It

January 30th, 2021, 7:38 pm

So both Alan and David made the seemingly reasonable suggestion that companies whose stocks are heavily overbought should issue more shares. That feels like it should obviously be right in a mental framework where the company is managed for the benefit of a broad set of stakeholders, but would Milton Friedman agree? It’s not so clear to me that screwing one set of shareholders for the benefit of another amounts to “maximizing shareholder value”. But I could very well be wrong. I never thought all that much about corporate finance.
 
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Re: The Long and the Short of It

January 30th, 2021, 7:53 pm

So both Alan and David made the seemingly reasonable suggestion that companies whose stocks are heavily overbought should issue more shares. That feels like it should obviously be right in a mental framework where the company is managed for the benefit of a broad set of stakeholders, but would Milton Friedman agree? It’s not so clear to me that screwing one set of shareholders for the benefit of another amounts to “maximizing shareholder value”. But I could very well be wrong. I never thought all that much about corporate finance.
A couple of things on that, which you, Alan, and David probably know, but for the benefit of the conversation:

Issuing new shares depends on the company's constitution. From legal sources: If the company's constitution prevents new shares from being issued, the restrictions can be lifted if the decision is approved by the majority of shareholders. This is done through a special resolution, and at least 75% of shareholders must agree to the decision for it to be valid and allow the new shares to be issued.

Further and in addition to that, the company's board members have to agree to all the terms regarding the issuance and conclude that all the conditions are equitable for everyone involved. If a person's liability with respect to the company increases as a result of the new shares, or if it creates a new liability that way, then the issuance must be done with that person's full consent, otherwise it will be considered void.

So, the board members and senior executives are on the hook here (and the SEC is watching).  Also thinking about Form 8-K (significant changes at company) and if that or any other regulatory filings would be in order here.

(For benefit of quants who may not normally think about these things: An 8-K is a report of unscheduled material events or corporate changes at a company that could be of importance to the shareholders or the Securities and Exchange Commission. Form 8-K report notifies the public of events, including acquisitions, bankruptcy, the resignation of directors, or changes in the fiscal year.)

Very boring how the sausage is made, I know, but....

**

As an aside, here is a list of SEC Stop Orders (not Stop-Loss, but stop IPO orders). Not too common, as companies would normally withdraw if things were not going well with the S-1 filing and process.  SEC Stop Orders (IPOs) since 1995  Follow-on issues have a different process and more of an automatic green light this way, but looking into that a little more.  If the story could be seen as pump, dump, issue, repeat, the SEC would not be amused.

SEC Public Statement of Acting Chair Lee and Commissioners Peirce, Roisman, and Crenshaw Regarding Recent Market Volatility - January 29, 2021
"In addition, we will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws. Market participants should be careful to avoid such activity. Likewise, issuers must ensure compliance with the federal securities laws for any contemplated offers or sales of their own securities."

They are not a fun-loving, let-it-roll kind of bunch there, as you can see. 
The spectacle is not a collection of images, but a social relation among people, mediated by images. - Guy Debord
 
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Re: The Long and the Short of It

January 30th, 2021, 10:20 pm

For the PFOF (payment for order flow) conversation, here is Robinhood's most recent SEC Rule 606 and 607 Disclosure:

 Robin hood Securities LLC - Held NMS Stocks and Options Order Routing Public Report Q4 2020

What is that?, you may ask. Answers here at the SEC: SEC Adopts Rules That Increase Information Brokers Must Provide to Investors on Order Handling - November 2, 2018

So, since 2019, this information has been publicly available from the B-Ds.

As another example, you will find the filings for Interactive Brokers here: Interactive Brokers 606(a) Filings by quarter (pdfs)

You can find others as well; search to your heart's content!

One of the next questions to ask is: have any of these B-Ds been in trouble with the SEC in the past? And if so, what for?
It's a quiz!
The spectacle is not a collection of images, but a social relation among people, mediated by images. - Guy Debord
 
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Re: The Long and the Short of It

January 31st, 2021, 4:35 am

Answers:

RH - yes, $65m fine announced by SEC on December 17, 2020 for misleading customers about revenue sources and failing to satisfy duty of best execution - https://www.sec.gov/news/press-release/2020-321

IB - yes, $38m fine noted in total across SEC, FINRA, and CFTC in August 2020 for failure to file SARs, potential manipulation of micro caps in customers accounts, and AML violations.
https://www.natlawreview.com/article/in ... ng-38-over. Further links in article.

Best Ex, in particular, will come up again soon, as you might Expect.
The spectacle is not a collection of images, but a social relation among people, mediated by images. - Guy Debord
 
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Re: The Long and the Short of It

February 2nd, 2021, 7:03 pm

Here's the latest payment-for-order flow (606) report from Schwab

Schwab, of course, has a variety of revenue sources. Just glancing at those reports, suspect these payments constitute well under 5% of their total revenues.

But, for Robinhood, they may constitute a substantial fraction of revenues. My understanding is that those payments were RH's rationale for creating a zero-commission brokerage. Indeed, as trackstar cited, they were fined for misleading customers about that. They get credit for pushing the (discount brokerage) industry to zero commissions, but --   is that a sustainable business model for RH? What if some "true Robinhood" comes along and decides to rebate those payments to customers? 
 
leptoq
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Re: The Long and the Short of It

February 2nd, 2021, 9:40 pm

Btw., RH was planning to go for IPO.
Alan, it seams the reason is RH in business is that they figured out a way how to balance rebates from order flow sent to Citadel etc. versus their other expenses.