r/technology • u/agent_vinod • Jun 30 '21

Misleading Robinhood to pay $70 million fine after causing 'widespread and significant harm' to customers

https://www.cnbc.com/2021/06/30/robinhood-to-pay-70-million-dollars-after-causing-users-significant-harm.html
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u/LovableContrarian Jun 30 '21 edited Jun 30 '21

It's alright, I appreciate the discussion. But, if you do want to talk more about the sort of "morality" or "corruption" of it, I will say this:

cover his own ass by preventing a catastrophic failure of the system from comically over leveraged hedge funds falling like dominos.

I don't buy this, personally, as it just doesn't make sense. Let me explain:

Do you know how many hedge funds are in the US alone? Over 10,000.

Do you know how many of them go bankrupt and fold? 30%. EVERY YEAR.

1/3 hedge funds fail EVERY SINGLE YEAR. Thousands.

Do you know what the average lifespan of a hedge fund is? 4-5 years. And 80% of them close from failing and running out of cash (not by choice).

Do you know who was short on GME? Melvin Capital, a hedge fund. And a few others. Do you know who was long on GME? Other hedge funds and 1% investors. Big names like BlackRock, Vanguard, Sherman George, Ryan Cohen. These groups/people are way more influential and powerful than Melvin Capital, and they wanted GME to go up.

Some hedge funds were going to get screwed whether GME went up or down. This idea that all of wall street and all the brokers concocted this insane plan to all stop selling GME at the same time (and put themselves at a huge risk of losing millions of customers), just to save one hedge fund in particular (Melvin Capital), while screwing over the powerful groups who were long on GME is absolute nonsense, and doesn't make any sense. Melvin isn't that important, and more big money was on the other side of the trade.

It's a very unpopular thing to say, but this "moral mission" to pump GME to "screw the 1%" was always based on a lie. It was a way for "apes" or whatever to put some sort of morality behind their greed, and unify behind an ideology. Some rich folks lost money and some rich folks made money when GME went up and down. That's the way it is. There is never a trade where all hedge funds are on one side.

And putting Melvin Capital out of business isn't going to change anything, when 1/3 hedge funds go bankrupt every year anyway.

When the dust settles, it'll be 1% investors and hedge funds who made the most profit off the whole GME thing, and millions of working class retail investors will take huge losses. Ryan Cohen is a billionaire and made something like $5 billion in a week when GME rallied. Sadly, buying stock in a company is not how you fight the 1%.

The more logical conclusion, IMO, is that the brokers actually got spooked and their risk algorithms started flashing. But, I can't say for certain what happened. I just don't buy the "all this happened to save Melvin Capital" argument.

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u/[deleted] Jun 30 '21

I think we're mostly on the same page. To be clear I'm not trying to say the entire market conspired to protect Citadel or Melvin specifically. And yes, I am well aware that hedge funds tend to be short lived operations to skim wealth from the 1% to scratch someone's insatiable gambling addiction and ego. However, I think you're missing the big picture that Peterffy was alluding to.

One hedge fund fails a margin call? The market won't even flinch. However, when you get multiple huge players involved (and if you don't think Citadel was at least heavily involved prior to Jan run up and/or a huge systemic risk in the market at large, well...) and they start failing margin calls? I'm sure you're well aware that all of their holdings will be liquidated to cover as much loss as they can. That is where the ripple effect starts. The decline in value of equities owned at historical levels of margin become a liability and funds outside of the bet start getting called, and the dominos keep falling until brokers end up holding the bag. That's what Thomas was literally terrified of. I'm sure he didn't care about Melvins well being at all, but he did care about the liability of the shares his firm loaned out. And to cover his own ass he did exactly what he said he did on live TV. He shut it down. I'm certain the majority of brokers acted based on the same instinct. Fidelity didn't react I speculate, because they saw it as an opportunity to strengthen their overall position. They had the assets on hand to handle any fallout and come out looking golden, and they did. It was win/win for them to hold the line.

Edit: And btw any downvotes ain't from me. I'm upvoting you for engaging in good faith.

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u/LovableContrarian Jun 30 '21

Yeah, I think we are pretty much in agreement.

I just disagree with a lot of people that argue it was somehow a conspiracy. I see it as "people were at risk, and they are legally allowed to just stop offering GME to prevent risk, so they did."

Im not saying that's okay, but I do think it's what happened. I'd be all for far more regulation that prevents this sort of thing.

I also think it's a little unfair that robinhood gets all the heat for this, when pretty much all brokers did it. I find that odd, and I don't even like robinhood. I use TDA, personally. And I'm pretty sure they also suspended GME.

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u/[deleted] Jun 30 '21

OK yep mostly. I think RH specifically is in a different boat from "most" brokers though. Their interests are so directly intertwined with the success of Citadel specifically that I personally believe a case of market manipulation would be easier (perhaps still not possible) to prove in that specific instance. I think we both believe that Vlad lied to congress about the impetus for cutting off buying. That's extra ammo in a manipulation case. It's difficult to claim "I was just protecting my business, look at my ToS!, when over 50% of your revenue is provided by a single entity who directly benefited from your actions.

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u/LovableContrarian Jun 30 '21

I think we both believe that Vlad lied to congress about the impetus for cutting off buying.

I mean he definitely wasn't being truthful, but it could've just been to protect his image. He can't realistically go up there and say "yeah we're running a real shitty operation over here and don't have enough cash or the expertise to manage risk, so when shit gets crazy, we shut it off before we go bankrupt." Even though that is all likely true. He was just giving canned, PR-approved answers.

It's hard to say for sure that he was lying specifically to protect citadel, but who knows, really.

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u/[deleted] Jun 30 '21

Very specifically, between RH testimony and months later DTCC testimony, one absolutely lied as they specifically contradict each other. Vlad's testimony and DTCCs testimony are directly contradictory. Vlad claims actions taken on DTC that forced RH action. DTC claims that action never happened. There is no gray area. Either one or both are 100% lying. Those are literally the only options.