Good piece on r/WallStreetBets

[Fly]

I would suggest that isn't serving any actual purpose.

 

IBKR chairman on CNBC today:

 

https://www.cnbc.com/2021/01/28/interactive-brokers-restricted-gamestop-trading-to-protect-the-market-says-chairman-peterffy.html

 

He is very worried about a broker or clearinghouse failure. He doesn't mention which counter-party he is worried about, but RH says they are restricting long stock purchases due to CAPITAL requirements. This suggests RH is thinly capitalized. I know RH investors aren't sophisticated enough to understand this, but if I was sitting on $20M paper gains at RH, I'd be very worried about the viability of my broker.

 

Disclosure: long IBKR

 

Edit to add: When you say that IBKR should permit bear call spreads, you are saying that IBKR should accept the counter-party risk on both legs of that trade. The trade might be low-risk for you, but very high risk for IBKR.

 

Robinhood is not a trade executor, how are their paper gains in any danger? Unless you mean the service itself goes dark preventing them from selling their shares before the bubble pops....

 

That's happened several times in the recent past as well (RH shut down and nobody can access their account for the day).

[TwoCitiesCapital]

Robinhood draws on credit lines from banks - Bloomberg News

 

I'd bet that is because of massive account closings, more so than their exposure to GME. They really destroyed their relationship with their core userbase today.

 

I don't know why they'd need cash to close accounts. All those investors need to wait 1-3 days for whatever trades to settle to withdraw. No need for capital at RH to be impacted. Now - if they're sitting in a hole from margin loan losses, that's a different story....

 

I would suggest that isn't serving any actual purpose.

 

IBKR chairman on CNBC today:

 

https://www.cnbc.com/2021/01/28/interactive-brokers-restricted-gamestop-trading-to-protect-the-market-says-chairman-peterffy.html

 

He is very worried about a broker or clearinghouse failure. He doesn't mention which counter-party he is worried about, but RH says they are restricting long stock purchases due to CAPITAL requirements. This suggests RH is thinly capitalized. I know RH investors aren't sophisticated enough to understand this, but if I was sitting on $20M paper gains at RH, I'd be very worried about the viability of my broker.

 

Disclosure: long IBKR

 

Edit to add: When you say that IBKR should permit bear call spreads, you are saying that IBKR should accept the counter-party risk on both legs of that trade. The trade might be low-risk for you, but very high risk for IBKR.

 

That is an angle I hadn't considered. Thanks!

 

But my understanding was that the OCC clears every options trade. So IBKR's counterparty on my options trades is always the OCC. If the OCC went down that would be a systemic risk, and I think there is a 100% chance the US government would bail them out. And IBKR reducing GME volume probably doesn't make any difference to OCC's solvency.

 

These aren't OTC derivatives with a specific counterparty like the Bear/Lehman issues.

 

IBKR CEO estimates gains/losses are $10-15B from GameStop options alone. Someone made, and someone lost, $10-15B. As of this time, its not clear who those parties are and if they can sustain those losses - but relying on the US govt to backstop a counterparty so your business can run as usual is a very poor form of risk management IMO.

[KCLarkin]

Robin Hood accounts are protected by The Securities Investor Protection Corporation, up to 500K/account; worst that happens is that it takes account holders a few months to get their money out. IBKR is just pissed that they would be assessed a portion of the restitution, and that Robin Hood would just be the first domino of many that collapse.

 

My apologies if I don't find $500k sufficient...

 

But IBKR has an obligation to protect their shareholders and clients. They don't exist to entertain YOLO gamblers.

 

Robinhood is the "broker" that:

- stored trading passwords in plaintext

- allows self-described degenerates to trade options despite KYC regulations

- allowed WSB to get "infinite leverage" using a bug

- caused the death of a young trader

- settled for $65M with SEC for deceptive practices

- became the preferred platform for YOLO short squeeze plays

 

Robinhood admitted that they need to block CASH PURCHASES of certain stocks because the capital requirements for their very concentrated positions was more than they could afford. They drew down their credit lines.

 

Allowing more risk to build in the system (at hedge funds, WSB, RH, Clearing house, etc), is absolutely insane. And AOC and Ted Cruz cheering on a bubble is doubly insane.

 

Disclosure: Long IBKR (so I am biased against RH)

 

[sleepydragon]

Robinhood draws on credit lines from banks - Bloomberg News

 

I'd bet that is because of massive account closings, more so than their exposure to GME. They really destroyed their relationship with their core userbase today.

 

I don't know why they'd need cash to close accounts. All those investors need to wait 1-3 days for whatever trades to settle to withdraw. No need for capital at RH to be impacted. Now - if they're sitting in a hole from margin loan losses, that's a different story....

 

 

 

 

I would suggest that isn't serving any actual purpose.

 

IBKR chairman on CNBC today:

 

https://www.cnbc.com/2021/01/28/interactive-brokers-restricted-gamestop-trading-to-protect-the-market-says-chairman-peterffy.html

 

He is very worried about a broker or clearinghouse failure. He doesn't mention which counter-party he is worried about, but RH says they are restricting long stock purchases due to CAPITAL requirements. This suggests RH is thinly capitalized. I know RH investors aren't sophisticated enough to understand this, but if I was sitting on $20M paper gains at RH, I'd be very worried about the viability of my broker.

 

Disclosure: long IBKR

 

Edit to add: When you say that IBKR should permit bear call spreads, you are saying that IBKR should accept the counter-party risk on both legs of that trade. The trade might be low-risk for you, but very high risk for IBKR.

 

That is an angle I hadn't considered. Thanks!

 

But my understanding was that the OCC clears every options trade. So IBKR's counterparty on my options trades is always the OCC. If the OCC went down that would be a systemic risk, and I think there is a 100% chance the US government would bail them out. And IBKR reducing GME volume probably doesn't make any difference to OCC's solvency.

 

These aren't OTC derivatives with a specific counterparty like the Bear/Lehman issues.

 

IBKR CEO estimates gains/losses are $10-15B from GameStop options alone. Someone made, and someone lost, $10-15B. As of this time, its not clear who those parties are and if they can sustain those losses - but relying on the US govt to backstop a counterparty so you're business can run as usual is a very poor form of risk management IMO.

 

Citadel securities’s last 13F shows they long the stock, call, and puts of GME.

I bet they have been long the GME and its options, made a ton of money at the expense of the short sellers

[KCLarkin]

But my understanding was that the OCC clears every options trade. So IBKR's counterparty on my options trades is always the OCC. If the OCC went down that would be a systemic risk, and I think there is a 100% chance the US government would bail them out. And IBKR reducing GME volume probably doesn't make any difference to OCC's solvency.

 

These aren't OTC derivatives with a specific counterparty like the Bear/Lehman issues.

 

IBKR CEO estimates gains/losses are $10-15B from GameStop options alone. Someone made, and someone lost, $10-15B. As of this time, its not clear who those parties are and if they can sustain those losses - but relying on the US govt to backstop a counterparty so you're business can run as usual is a very poor form of risk management IMO.

 

I am looking at this from IBKR's risk-management perspective. Petterfy owns most of IBKR, so any losses come directly from his pocket.

 

I think OCC has ~$4B in collateral. Not saying it is likely, but if this short squeeze was allowed to play out, it is quite possible that OCC would become insolvent. They would do capital calls to members and you could have a systemic crisis. This is how Petterfy thinks.

[KCLarkin]

Robinhood is not a trade executor, how are their paper gains in any danger? Unless you mean the service itself goes dark preventing them from selling their shares before the bubble pops....

 

Securities are held in "street name". If your broker goes under, there is no guarantee that you will get them back. As mentioned by others above, full recovery is likely due to SIPC but the process can be prolonged. In practice, the accounts are usually assumed by another broker with minimal hassle to the account owners.

[sys]

[Parsad]

Robinhood is not a trade executor, how are their paper gains in any danger? Unless you mean the service itself goes dark preventing them from selling their shares before the bubble pops....

 

Securities are held in "street name". If your broker goes under, there is no guarantee that you will get them back. As mentioned by others above, full recovery is likely due to SIPC but the process can be prolonged. In practice, the accounts are usually assumed by another broker with minimal hassle to the account owners.

 

They are held in "street name", but your account is really only exposed if it isn't a cash account and you have cash and securities above the SIPC limits.  So if your assets are above $250K in cash and total of $500K in cash/stocks/bonds sitting in a margin account...your exposed.  Margin account assets can be comingled with the brokerage's own assets if they are lending securities...which all do.  Cheers!

[KCLarkin]

Yes, but you are trusting the broker that stored passwords in plain text to segregate your accounts. I wouldn’t hold any account greater than $500k at RH, but that is just me.

[Parsad]

Yes, but you are trusting the broker that stored passwords in plain text to segregate your accounts. I wouldn’t hold any account greater than $500k at RH, but that is just me.

 

I fully agree.  I wouldn't use them period.  But for those that are, as long as they are within SIPC limits, they should be ok.  Cheers!

[Mephistopheles]

I am so angry about all of this. Can someone explain why if two parties want to make a trade it should not be allowed? I don't get it. I don't get the gamma squeeze thing either. Like the market makers took the risk to take the other side of the transaction by selling calls, did they not? So then they had to go buy stock to hedge but again, is that not part of the risk???

 

Bear Stearns...Lehman Bros.  It's not that two parties are making a trade.  If the parties are large enough or have enough fire power, they could take down a major financial institution...and then dominoes fall. 

 

Now when I say two parties, I'm not referring solely to the WSB crowd, but even rogue hedge funds, private equity funds or any other fund of size.  If parties are acting together, they should be filing their positions together...such as proxies, 13D's, etc. 

 

Personally, I'm pleased that hedge funds got a taste of their own medicine, especially anything involving Cohen, but the system has to have disclosure, transparency and rules to create a fair playing field.  Cheers!

 

I guess what I meant to say was. Say 2 parties: a retail investor at TD Ameritrade and an Hedge fund client at Goldman make a trade. The retail buys $10,000 notional value of calls from the Hedge fund. So now the fund has a $10 k liability which may be naked or hedged against the stock. At this point, why are either of the brokers involved or have any risk? Doesn't the risk belong to the investor on either side? Granted, assuming the brokers require decent margin requirements of their clients. But why does trading need to be restricted at this point? Why can't the brokers just ensure that the margin requirements are aggressive enough? I noticed a bunch of them raised the margin req to 100% for these stocks. At that point, what is the risk to the system?

 

Now the step I never appreciated was that there is a market maker in between all of this. They sell you the option to make the market and then find a party to take the other side. In order to lower their risk, they buy stock. So the way I understood the gamma squeeze was that a whole bunch of retail piled on buying calls that the market makers sold way too much risk that they couldn't sufficiently offset just because 1) there aren't enough shares available and 2) the float is so thin that the stock needed to hedge just shot up 50%. Because the position only gets bigger as it works against you, the Market Maker's liability kept growing which contributed further to the squeeze.

 

Is this a good description of the risk to the MM?

 

But again,, even in that case, why can't the MM just stop selling calls? Or why can't they just limit the amount of risk they take?

[fareastwarriors]

Yes, but you are trusting the broker that stored passwords in plain text to segregate your accounts. I wouldn’t hold any account greater than $500k at RH, but that is just me.

 

I do like their app though but maybe I just a sucker for all the pretty colors. For basic buying/selling of equities and simple option trades, it works great.

 

I have accounts at IKBR, Schwab, Fidelity, e-Trade, Ally Invest, and of course Robinhood!

 

(I think I need to consolidate some accounts.)

[Parsad]

I am so angry about all of this. Can someone explain why if two parties want to make a trade it should not be allowed? I don't get it. I don't get the gamma squeeze thing either. Like the market makers took the risk to take the other side of the transaction by selling calls, did they not? So then they had to go buy stock to hedge but again, is that not part of the risk???

 

Bear Stearns...Lehman Bros.  It's not that two parties are making a trade.  If the parties are large enough or have enough fire power, they could take down a major financial institution...and then dominoes fall. 

 

Now when I say two parties, I'm not referring solely to the WSB crowd, but even rogue hedge funds, private equity funds or any other fund of size.  If parties are acting together, they should be filing their positions together...such as proxies, 13D's, etc. 

 

Personally, I'm pleased that hedge funds got a taste of their own medicine, especially anything involving Cohen, but the system has to have disclosure, transparency and rules to create a fair playing field.  Cheers!

 

I guess what I meant to say was. Say 2 parties: a retail investor at TD Ameritrade and an Hedge fund client at Goldman make a trade. The retail buys $10,000 notional value of calls from the Hedge fund. So now the fund has a $10 k liability which may be naked or hedged against the stock. At this point, why are either of the brokers involved or have any risk? Doesn't the risk belong to the investor on either side? Granted, assuming the brokers require decent margin requirements of their clients. But why does trading need to be restricted at this point? Why can't the brokers just ensure that the margin requirements are aggressive enough? I noticed a bunch of them raised the margin req to 100% for these stocks. At that point, what is the risk to the system?

 

Now the step I never appreciated was that there is a market maker in between all of this. They sell you the option to make the market and then find a party to take the other side. In order to lower their risk, they buy stock. So the way I understood the gamma squeeze was that a whole bunch of retail piled on buying calls that the market makers sold way too much risk that they couldn't sufficiently offset just because 1) there aren't enough shares available and 2) the float is so thin that the stock needed to hedge just shot up 50%. Because the position only gets bigger as it works against you, the Market Maker's liability kept growing which contributed further to the squeeze.

 

Is this a good description of the risk to the MM?

 

But again,, even in that case, why can't the MM just stop selling calls? Or why can't they just limit the amount of risk they take?

 

It's not the cash accounts that cause the problem for the brokerages.  It's the margin accounts and it affects them two ways:

 

1)  They are lending out securities by borrowing from a customer's account to someone who needs to cover a short position. 

 

2)  There is interest paid to borrow those securities and on the margin account. 

 

The interest isn't as big of a problem on the security, because you know what it is, and generally the brokerage is collecting the interest from the borrower.  But the problem arises when 1 happens on a large scale...a six-sigma event.

 

Say RH borrows 1M shares of GME from someone's margin account and lends it to someone who needs to cover their short.  So as the stock is rising, the borrower gets these shares at an inflated price...say $250.  RH is now on the hook for that borrow for $250M...it wasn't a cash purchase, but a borrow in a margin account.  RH collects say 20% interest and pays 15% to the lender, but RH is on the hook for $250M while collecting 5% of the interest. 

 

Now the next day the stock falls back to $150.  The borrower is on the hook now for $250M and can't cover his whole margin account, which essentially puts RH on the hook for the difference.  RH only has to pay $150M as the price has fallen to acquire the shares, but the difference is $100M minus whatever they can collect from the borrower's margin account.  Now multiply this scenario by 100 fold, and suddenly RH has a shortfall of $1B+.

 

If the brokers were not lending capital for margin accounts and lending securities...they don't have a problem.  But nearly all brokerages are in the lending business.  Generally they take enough precautions on interest, margin restrictions and margin calls, but you have a six-sigma event where there is massive exposure in a short period of time...you get problems!  And my example doesn't even include asset to equity leverage.  Virtually all brokerages operate at a 10-1 leverage and many operate much higher.  I would imagine RH operates somewhere closer to 20-1.  Cheers! 

[skanjete]

You have to appreciate the irony of it all : with their wild speculation the Robinhood investors are cutting off the branch they're sitting on.

They are destroying the means (Robinhood) they're using to "destroy the hedge funds and the system" and so ultimately themselves.

 

The brokers halt trading to protect their business and thus their clients. But these clients are now outraged because they think the brokers are just protecting the enemy and don't realize THEY are being protected from their own stupidity.

 

This whole story makes me even more concerned about the market than I already was. And I'm already sitting on 50% cash.

[DooDiligence]

Is this an accurate breakdown of why RH had to shut down?

 

[SharperDingaan]

Robin Hood accounts are protected by The Securities Investor Protection Corporation, up to 500K/account; worst that happens is that it takes account holders a few months to get their money out. IBKR is just pissed that they would be assessed a portion of the restitution, and that Robin Hood would just be the first domino of many that collapse.

 

My apologies if I don't find $500k sufficient...

 

But IBKR has an obligation to protect their shareholders and clients. They don't exist to entertain YOLO gamblers.

 

Robinhood is the "broker" that:

- stored trading passwords in plaintext

- allows self-described degenerates to trade options despite KYC regulations

- allowed WSB to get "infinite leverage" using a bug

- caused the death of a young trader

- settled for $65M with SEC for deceptive practices

- became the preferred platform for YOLO short squeeze plays

 

Robinhood admitted that they need to block CASH PURCHASES of certain stocks because the capital requirements for their very concentrated positions was more than they could afford. They drew down their credit lines.

 

Allowing more risk to build in the system (at hedge funds, WSB, RH, Clearing house, etc), is absolutely insane. And AOC and Ted Cruz cheering on a bubble is doubly insane.

 

Disclosure: Long IBKR (so I am biased against RH)

 

Sure RH is no saint, but they exist because the regulatory framework let them. Tech bros built a network driven start up for capital markets, expecting to put the compliance 'stuff' in 'later' - and the framework let them. Ali Baba (China) also tried something similar, and it didn't work out so well.

 

Network businesses run on viral swarming. Create a buzz, others pile on, and magnify it at a compounding rate; if the buzz makes individual network members money, transmission accelerates. The more 'buzz', and the more 'central' the network, the more value to the network, and everyone in it. Direct the swarm at a narrow group of targets, and members WILL make a LOT of money - both on the way up AND the way down.

 

Until now the dominant network had been restricted to just the hedge fund community, and a few participants with a lot of money each. Now its a zero trust, public democratized network swarm, of many participants, each with a small amount of money. The very ethos of bitcoin protocol, and nicely in time for the kids of the founders! and their very deep and broad 'support' bench!!

 

Individual RH accounts are for the most part < 500K each. The most they will lose is their account contribution, the same as if they had simply bought an option on XYZ coy. If they luck out and win, most gains will be <500K and they are protected by SIPC. Free pass.

 

What it really shows is just how obsolete the current 'plumbing' is.

It's going to get replaced  ;)

 

SD

 

 

 

 

 

 

[Liberty]

I posted some thoughts on the WSB/GME phenomenon in the intro of this:

 

https://libertyrpf.substack.com/p/84-my-thoughts-on-wsb-phenomenon

[KCLarkin]

I posted some thoughts on the WSB/GME phenomenon in the intro of this:

 

https://libertyrpf.substack.com/p/84-my-thoughts-on-wsb-phenomenon

 

Loved this description. With the DOXXING of DeepF---Value as a CFA, investment advisor, and value investor, does this change your opinion at all? This seems to be a deep value play by DFV, Scion, Chewy guy, combined by some reckless shorts more than a pump-and-dump.

 

Now the charlatans like Chamath, Portnoy, and Elon are piling on. But it started as a really smart deep value trade not a pump-and-dump.

[Liberty]

I posted some thoughts on the WSB/GME phenomenon in the intro of this:

 

https://libertyrpf.substack.com/p/84-my-thoughts-on-wsb-phenomenon

 

Loved this description. With the DOXXING of DeepF---Value as a CFA, investment advisor, and value investor, does this change your opinion at all? This seems to be a deep value play by DFV, Scion, Chewy guy, combined by some reckless shorts more than a pump-and-dump.

 

I don't think it changes anything. It's not about how it started, it's about what it became... We've never had this kind of thing before, it was impossible to rapidly coordinate so many people and keep them engaged and bought in a project and recruiting a large flow of new adherents. Totally uncharted territory.

[fareastwarriors]

"Game's the same, just got more fierce."

[Liberty]

"Game's the same, just got more fierce."

 

"At some point, enough quantity becomes qualitative"

[adesigar]

You have to appreciate the irony of it all : with their wild speculation the Robinhood investors are cutting off the branch they're sitting on.

They are destroying the means (Robinhood) they're using to "destroy the hedge funds and the system" and so ultimately themselves.

 

The brokers halt trading to protect their business and thus their clients. But these clients are now outraged because they think the brokers are just protecting the enemy and don't realize THEY are being protected from their own stupidity.

 

This whole story makes me even more concerned about the market than I already was. And I'm already sitting on 50% cash.

 

Do you really think retail investors are the customers for Robinhood or any brokerage offering free trades? No just like with Google, Facebook etc. If they are not paying for it, they are not the customers they are the product.

[Jurgis]

Do you really think retail investors are the customers for Robinhood or any brokerage offering free trades? No just like with Google, Facebook etc. If they are not paying for it, they are not the customers they are the product.

 

Definitely. Everyone should switch to the one or two remaining full service brokers asap to be treated as a client and charged $50 per trade of commissions. Do it right now KKTHXOK.

 

 

 

Or move to Canada and use one of the bank brokerages our Canadian friends rave about.

[stahleyp]

I like Buffett's idea of taxing capital gains at 100%. That would, overnight, end almost all speculation.

[rb]

I am so angry about all of this. Can someone explain why if two parties want to make a trade it should not be allowed? I don't get it. I don't get the gamma squeeze thing either. Like the market makers took the risk to take the other side of the transaction by selling calls, did they not? So then they had to go buy stock to hedge but again, is that not part of the risk???

 

Bear Stearns...Lehman Bros.  It's not that two parties are making a trade.  If the parties are large enough or have enough fire power, they could take down a major financial institution...and then dominoes fall. 

 

Now when I say two parties, I'm not referring solely to the WSB crowd, but even rogue hedge funds, private equity funds or any other fund of size.  If parties are acting together, they should be filing their positions together...such as proxies, 13D's, etc. 

 

Personally, I'm pleased that hedge funds got a taste of their own medicine, especially anything involving Cohen, but the system has to have disclosure, transparency and rules to create a fair playing field.  Cheers!

 

I guess what I meant to say was. Say 2 parties: a retail investor at TD Ameritrade and an Hedge fund client at Goldman make a trade. The retail buys $10,000 notional value of calls from the Hedge fund. So now the fund has a $10 k liability which may be naked or hedged against the stock. At this point, why are either of the brokers involved or have any risk? Doesn't the risk belong to the investor on either side? Granted, assuming the brokers require decent margin requirements of their clients. But why does trading need to be restricted at this point? Why can't the brokers just ensure that the margin requirements are aggressive enough? I noticed a bunch of them raised the margin req to 100% for these stocks. At that point, what is the risk to the system?

 

Now the step I never appreciated was that there is a market maker in between all of this. They sell you the option to make the market and then find a party to take the other side. In order to lower their risk, they buy stock. So the way I understood the gamma squeeze was that a whole bunch of retail piled on buying calls that the market makers sold way too much risk that they couldn't sufficiently offset just because 1) there aren't enough shares available and 2) the float is so thin that the stock needed to hedge just shot up 50%. Because the position only gets bigger as it works against you, the Market Maker's liability kept growing which contributed further to the squeeze.

 

Is this a good description of the risk to the MM?

 

But again,, even in that case, why can't the MM just stop selling calls? Or why can't they just limit the amount of risk they take?

What you're missing is that they don't really just buy some stock to lower their risk. They buy stock to hedge the delta on the calls. As the delta goes up, they need to buy more stock in order to keep their hedge. Now here's the thing, black scholes assumes something like continuous delta hedging. But desks don't hedge continuously. That would be impractical They do it once maybe twice a day. Now if you have an explosion in the stock price like with GME then that's gonna hurt the MM. I agree that the MMs screwed up and took too much risk with this one. I don't know why they didn't pull back.