The answer may be hidden in the murky relationships involving market makers and hedge funds.Ĭitadel Securities, a market maker, handled Robinhood’s orders on a “pay for order flow” basis (it paid for orders routed to it), which equaled 40 percent of Robinhood’s revenue. Why would Robinhood shut down GME trading? It did not lose money on trades, because it did not have its own investments. GME that day hit $483, but then the price plummeted, and the short squeeze was over. However, DTCC CEO Michael Bodson told the committee in May that “the decision to restrict trading really was internal to Robinhood, we did not have discussions about that.” He noted that with Robinhood, “the system worked.” It stopped the buys while the big traders continued to sell. Robinhood CEO Vlad Tenev told the House Financial Services Committee in February that he had discussed the trade restrictions with the Depository Trust and Clearing Corporation (DTCC), which clears public trades, after it made a $3 billion margin call. A January 28 spike in GME led Robinhood, the online broker that handled orders for many retail traders, to cut the buy option for the stock from its app. The short squeeze ended under peculiar circumstances. They were threatened with a short squeeze, with the price going so high that they cannot cover it with existing assets, and they get a margin call, a demand that additional money gets dropped into their brokerage account. The major GME short sellers had to cover their shorts at a time when the funds had shorted much more stock than existed and when owners with real shares weren’t selling, even at higher prices. This rule is massively ignored or finessed, and the penalties are minor. Traders that have outstanding FTDs are required to transfer the shares within a given time and are restricted from selling short until then. This is also known as naked short selling. If they don’t convey the stock, there is a failure to deliver (FTD). Sellers are supposed to send shares to buyers within two days. Traders and brokers have been mildly sanctioned for this scam.
A broker handling several sellers will borrow synthetic or manufactured shares, or “locate” the same stocks for multiple shorts. Short sellers borrow the stock, usually from a broker, who either has it in their inventory, borrows it from another broker, or vows to “locate” the stock when the time comes and cover the short. The SEC allows traders to short a stock, which means to sell it even if they don’t own it, hoping to buy it back later at a lower price and bank the difference. The financial media also ignores this systemic corruption. The Securities and Exchange Commission (SEC), which along with other regulators could confirm whether the patterns seen in GameStop trading constitute fraud, has known about and largely ignored practices like this for years. What happened around GameStop can be explained only by massive counterfeiting of shares. But as retail investors looked into the details in the aftermath, they found telltale signs of a common yet egregious trading fraud by major brokers and hedge funds, which evaded what could have been far bigger losses. The rally eventually subsided, and the stock fell, though it remains well above its original price. Another fund, Maplelane, lost 40 percent.
The hedge fund Melvin Capital reportedly closed out its position after taking a drubbing of 51 percent. According to Markets Insider, one analyst estimated losses in February of roughly $19 billion. This brought disaster upon a handful of hedge funds that had bet on GameStop’s stock to drop. Millions of retail investors made the stock soar by over 1,000 percent in January 2021. I have written previously for the Prospect about the frenzy over GameStop (GME), the video game and electronics company. In the aftermath of the GameStop run-up in January, retail investors found telltale signs of a common yet egregious trading fraud by major brokers and hedge funds.
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