• Mark Monfort

Gamestopped!


Originally posted on 1st February 2021 on LinkedIn


Update

Since the original post on LinkedIn there's been more than a fair share of people coming out to give their opinion on what happened. Most of it negative on the side of Robinhood. I'm not here to defend them but it seems so easy for everyone to think that that this is just some sort of class warfare.


I've seen many of these come from not just armchair bloggers or commenters but also the likes of Elon Musk or other famous folk. Robinhood are even being sued in a class action lawsuit for what's happened.


As much as it can be nice to think that there is something malicious behind this all, this quote from a tweet hits home pretty well I think:


"...don't assume malice when you can assume incompetence..."

Original tweet here: https://twitter.com/choffstein/status/1354963394479222797?s=20


I saw this in a talk from finance show "The Compound". Episode below:



They offer a different point of view to what the hoardes with pitchforks would have you believe. There's a lot of education in here about previous blunders that Robinhood got away with as well as some more talk about the irony that Robinhood was all about unleashing trading to the masses but could be crushed by its own creation. It didn't react well when it faced DTCC/OCC obligations (see below) and certainly didn't create good PR for itself when it came out with the truth.


The next stages are likely to be the investigations from regulators and sentiment from investors as the world of trading decides what comes next for this situation. As I mention below, I just want to see more people educated about finance and the world of risk they step into when they begin to trade. There's certainly more to it than meets the eye.


Original post

Some of my thoughts on the GameStop (GME) situation going on. These opinions are my own and formulated from my own research. Pulled this together to help those in my own network who might be wondering about what the heck is going on.


Firstly, it’s ironic that retail traders are going against the app that helped many get into the markets to begin with. Not knocking retail folks but its hard to deny that without Robinhood (RH) or similar apps like that there is much less market access. RH gamified trading and made it easy to get in but there is more to this than meets the eye.


The halt on trading for a stock is not unprecedented. Look at the rules on exchanges. They are essentially the police for the markets and can issue speeding tickets when a stock’s volatility gets as high as it did. So trading halts on single names are nothing new. In terms of this trading halt, it came from RH itself by limiting trading in GME on its own platform rather than an exchange but its trading halt nonetheless. RH cited capital requirements above their capabilities and even had to call upon their own credit facilities to get by. Clearing houses (in this case OCC, Options Clearing Corporation) required much more capital than previously required and this led to the decision to halt trading in the clearly volatile GME in order to keep the ability to trade in other stocks afloat. Better to cut off the arm if the patient has a chance at staying alive.


This move, however, happened to show that whilst some brokers were able to take on the more constrained capital requirements that the clearing houses put on them and some were not. If this happened in a retail banking sense you'd likely see the so-called neo banks have issues and we see how that can make the news here (especially since 2 of the 4 neos had issues). So whilst we saw hedge funds and other institutions able to trade whilst retail brokers couldn't, we also saw the growing anti-RH sentiment from it’s one-time supporters. It's likely due to the latter's inability to cover capital requirements. It's not a Joe Public vs the world but rather the lack of transparency or understanding of the plumbing of the markets that means that things look like institutions were against retail traders. Without the backing of folks with larger than life social media presence (Social Capital’s Chamath Palihapitiya and Tesla’s Elon Musk), it's unlikely this movement would have been as wide spread and success would have been limited.


In any case, it’s easy to see why RH customers feel aggrieved. They have a product that they put good hard earned money into and feel that as customers, they’ve been wronged. The main customer for RH though is not retail traders but rather, the hedge funds they route orders through. Unfortunately, retail traders are the product, like it or not. That’s why brokerage fees can get so low over there. The flip side to all of this is that if RH went under it would be much worse with counterparty risk. Look at what happened to MF Global and how it’s fall did not hurt the larger market players but much smaller clients (see Investopedia article here: https://www.investopedia.com/financial-edge/0312/what-happened-at-mf-global.aspx). A good read on RH capital requirements is on TechCrunch: https://techcrunch.com/2021/01/28/the-somewhat-boring-reason-it-appears-that-robinhood-yanked-trading-on-some-securities/ Good line from the article: “Here’s a tip, if your theory sounds like it could fit inside the QAnon orbit, try again?”


In any case none of this is likely to be believed by the average retail trader but I hope they take note. There's good reasons why a big part of making money is risk management. Whoever is left holding the bag when it comes time to sell later on is going to be burned. I hope it's not the tens of thousands of retail traders armed with some portion of life savings, university funds or other significant assets. None of what's happening right now is realised as a gain until you sell and like all good asset bubbles over the years, they do pop. It's great that lots of retail traders across the globe have piled into markets recently but times like this mean you need to get educated on markets and risk pretty quickly. If something like this can go against experienced traders than what about the inexperienced ones?


Fortunately there is a tonne of information online from places like the ASX or Chi-X Australia or Investopedia for more general knowledge. There are also ETFs that people can access and trade which offer inherent diversification benefits. Whatever your position on all this there was certainly a lot to learn last week. More on RH position from their statement here: https://blog.robinhood.com/news/2021/1/29/what-happened-this-week

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