In the WSJ, Alexander Osipovich writes,
The practice, in which high-speed trading firms pay brokerages for the right to execute orders submitted by individual investors, has long been controversial. Some say it warps the incentives of brokers and encourages them to maximize their revenue at the expense of customers. Supporters, including many brokers and trading firms, say it is misunderstood and helps ensure that investors get seamless executions and good prices on their trades.
In theory, there are two types of market-makers in securities markets: brokers and dealers. A broker connects a buyer and a seller. A dealer buys some securities from a seller, holds them in inventory (maybe for just a few seconds), and then sells them to a buyer.
Most real estate transactions are intermediated by brokers. The broker finds a buyer for your house, and then you pay a hefty commission to the broker.
From time to time, an entrepreneur will try to operate in the real estate market as a dealer. The company offers to buy your house, with the intention of turning around and selling it. Instead of charging a commission, the firm tries to buy your house at a price somewhat below the price at which the firm expects to sell it. You save the commission, but chances are you do not get full price for your house.
It sounds to me as though the “payment for order flow” model is one in which brokers hand off customer orders to dealers. The dealers pay for the order flow because they are efficient at doing what they do, so they make more profit if they have more business. The dealers supply liquidity in the market. This enables the brokers to allow customers to trade without commissions.
Some retail investors also supply liquidity. If you target a stock at a particular price, but you don’t care when you get it, then you place a limit order. You supply liquidity, and you make it easier for brokers and dealers to do their job.
On the other hand, if you want the stock right now and you don’t care what price you pay, you are a demander of liquidity. If I am trying to arbitrage the options market by writing a call option and buying the stock, then I am going to demand liquidity. I don’t want those trades to take place at different times.
My guess is that the action in GameStop involved a lot of traders who were demanding liquidity. Amateurs buying call options and bidding up those option prices, leading arbitrageurs to want to write calls and buy the stock with rapid execution in order to arbitrage and discrepancy between call option prices and the price of the underlying stock.
The cost of operating as a dealer rises when prices become volatile, because your risk of keeping an inventory of shares goes up. This increased cost has to be passed on to traders in volatile stocks. The zero-commission model may not necessarily be sustainable in those cases. Shutting down trade for the retail investors seems like a bad solution, though. Charging a commission would be better.
When someone proposes something like “Ban short-selling!” or “Ban paying for order flow” I suspect that they are either are shilling for a trade group that stands to benefit from such a regulation or that they are just posturing without any sense of what sort of Chesterton fence they may be tearing down.
Zero comments so far. Is GameStop over as a topic of discussion? Where is Tom G?
Full disclosure: the GameStop corporate HQ is located like 10 min from me in beautiful Grapevine, TX. So, I want them to survive even if that business model is probably completely and totally doomed.
All day, and all of the night…
The moonshot is over. GME remains interesting.
First big anti-short/ anti-Hedge Fund media co-ordinated “buying mob”. They’re already mobbing other excessively shorted stocks, like AMC (was), but only weak short squeezes being shown.
The WSB comment included an emoji, which Arnold’s comment editor accepted but the [post comment] always led to an error. These 90 min comments are too long, tho.
Thanks for checking-in as I was getting concerned. I have called off the welfare check with the local authorities in Slovakia :). Have a good day, sir!
Full disclosure part II: The American Airlines corporate HQ is located like 20 min from me in underrated Fort Worth, TX. Going to continue rooting for them despite all of the shorts.
GameStop GME about $50-53 today, probably lots of shorts want it under $50.
https://finance.yahoo.com/quote/GME/key-statistics?p=GME
Congress will “investigate” the situation:
https://www.nasdaq.com/articles/robinhood-melvin-capital-citadel-execs-expected-to-testify-in-congress-on-gamestop-turmoil
There was a short squeeze AND a gamma squeeze (on the out of the money calls that go into the money creating huge new demand by dealers & brokers & market makers to buy shares) so retailer buyers wanted to “go to the moon”.
*** 140% (or more) Short interest – meaning more shares were already “sold short” than existed. ***
This is a clear red flag for short squeeze vulnerability. ALL short sellers are well educated and know that there is “no limit” to how much you can lose with short selling. Tho if you’re right, you can make a lot, with little cash to start.
Simple “retail buyers need education” will be the pablum given out by Karl Roessner and others, see the “Live” recorded feed as GME went from over $320 down to $240 in the 9 min video (Thurs, 28 Jan, before a Friday with required short closings)
https://www.nasdaq.com/videos/retail-investors-need-financial-education-former-etrade-ceo-roessner-says
“Volume & volatility are simply unprecedented” (~7:00)
“Trades go thru self-clearing firms, trade-reporting facilities then into NSCC – DTCC … the ultimate clearing house… massive amounts of trade settlement risk, unlike anything they’ve ever seen before … just my opinion ” Very wise for CYA.
Robinhood, the “no commission” broker used by WallstreetBets, stopped retail buyers from BUYING. Reportedly because DTCC requested some $3 billion in collateral for the risk. (Deposit Trust & Clearing Corporation, owned by Wall Street firms)
If Robinhood is lying, they should be fined into bankruptcy – but it’s probably the truth.
There’s no good economic reason for DTCC to require much collateral for cash buyers.
It looks like the main purpose was to choke off the moonshot.
Sorry to mess up order due to emoji – the above was (#1).
“DTCC decision” (#2), reply #3, “Dodd-Frank” #4
Reply to Hans (#5);
Gotta get it out of my head – so there’s room for Zvi M. and other new to me FIT folk.
The DTCC decision process is where Big Finance changes the rules to
screw the little guyssave their butts from their own recklessly risky excessive short selling (GME < $15)Unsurprisingly, with retail buyers locked out of buying, buyers who had been willing to pay $200, $300, $400, without those buyers the price drops – and the short sellers only lose billions instead of tens of billions. (And GME attracts new HF hordes selling short from a higher price). A rocket out of gas – goes down.
The DTCC decisions and the collateral requirements need to be the focus of the investigation, but I don't see that yet.
Banning short selling would have been less unfair than the collateral increase. SEC did ban short selling for 2 weeks in 2008.
With social media "buying mobs" now a real possibility, the DTCC rules should be changing to make it much more expensive/ risky for all short sellers who oversell any stock by more than 100%.
Near the start of the video, there's a comment about the traders not "only" trading for money. This is true, and important to include:
a) many investors are willing to pay $330 for a $30 stock to make short sellers, or rich HFs, lose money
b) many investors are willing to pay $330 for a stock which has a chance to zoom to the moon – $500, $1000. Because of bragging rights.
Try reading WSB:
https://www.reddit.com/r/wallstreetbets/comments/lgrxxk/gme_reeee_consolidation_zone_210/
(#3) Sample WSB comment:
Literally just shorted it down from 62 to 52 lol. You hedge f*cks are morons you think adding to your short position is a good idea? And that were actually scared? Jokes on you I’m just a retard
Also lots of talk about paper hands, those who sell, losing less or even closing positive, versus diamond hands, those who hold. The few, the strong, the WSB retards with diamond hands. And lots and lots of emojis, many of which are cool.
It’s actually “rational” to want have experiences that one can brag about, or share with others. Like dropping $10k on a Hangover in Vegas. So buying an overpriced $330 share, to be a part of a short squeeze that really did cause some HFs real financial pain — I would have liked to have been a part of that. But not quite $300 worth, strongly expecting to lose that much.
Far more knowledgeable guy is Silent Cal for more details:
https://threadreaderapp.com/thread/1354952686165225478.html
The T+2 settlement “custom” should also be looked at – in this digital age why isn’t it within an hour of confirmed cash received?
“Dodd Frank” is going to be the scapegoat for the HF saving collateral change requirements.
Focus on short sellers will be a diversion, because every short squeeze requires the stock price to go up “too much”. So the early shorters, like GME @ $14, lose their shirts. But when it’s rocketing up, shorts at $100 or $300 look a more likely to be profitable.
I actually don’t want to be the Party Pooper over their, since my hands weren’t even tested (would have mostly been paper hands, selling, but would have kept one share. Small diamond hold).