Business, Economics, and Taxes: Capitalism. Yay? >=(

[aparch]

Note: RH and others intend to continue throttling buys. Supposedly Fidelity will let you rock out with your cock out if you want.

CNBC had a guy on this morning who was explaining more in detail why Robinhood and others were limiting trading. Because their underwriters who actually make the trades go through required them to have more capital on hand to cover these trades. The volume or people putting in orders were more than Robinhood (or others) could cover.

So the apps were stopped by the intermediary that actually settles the trades, not *exactly* by the apps themselves.

The guy said day traders normally trade at such small volumes that the capital limit never is an issue, or is such a small issue its ignored. The sheer volume, and volatility of the stock, was enough to make the companies that settle the stocks throw the red flags up.

Large companies, like Merrill Lynch, don't get flagged because they have so much capital (since they're more long term stocks) and the settlement companies know that. So large volume/volatile stocks can be traded easier through them than through the day-trader apps like Robinhood.

Basically, it boiled down to "day-traders pushed the system to the max, and Robinhood was sh*tty about explaining why."

He also reiterated that these stock settlers are unrelated and unconnected to the financial system... so it wasn't "collusion" to keep the hedge funds afloat.

 

[Handyman]

Yeah RH tried using that as the excuse when they first made the cap...but that was days ago and they called in capital reserves on Thursday I believe. In fact they were originally not going to throttle after that. (or at least CEO guy was hinting at that)

Either way it proves their business model is crap.

 

[aparch]

Yeah RH tried using that as the excuse when they first made the cap...but that was days ago and they called in capital reserves on Thursday I believe. In fact they were originally not going to throttle after that. (or at least CEO guy was hinting at that)

Either way it proves their business model is crap.

It sounded like it was an ongoing issue still... maybe thats the way the guy was spinning it. Either way, he sounded giddy that "retail investors" are getting in on this, and he wished that more companies would be forthcoming in explaining these asinine rules to everyone.


He also made it sound like WSB, and similar crowd-think researchers are "Moneyball"-ing the market (my summary, he was much wordier). This group did their homework on technicals, not just (or only) on fundamentals, and they realized that (again, my summary of his thoughts) 'who gives a sh** about the financials, this is way over shorted and prime for a squeeze.'

 

[St. Clown]

CNBC had a guy on this morning who was explaining more in detail why Robinhood and others were limiting trading. Because their underwriters who actually make the trades go through required them to have more capital on hand to cover these trades. The volume or people putting in orders were more than Robinhood (or others) could cover.

So the apps were stopped by the intermediary that actually settles the trades, not *exactly* by the apps themselves.

This is getting into my wheelhouse for profession - trade settlements. Two days after a trade is placed, it goes through the settlement process. (There are exceptions, but two-day settlement is the standard.)

The DTC comes into play here. The DTC is the clearinghouse for stocks, corp., state, and municipal bonds, ETFs, derivatives and a host of other investments that are not originated with the Federal government. When your clients go on a buying spree, without the offsetting sell trades, you can easily run into the debit cap - how much money your company is floated during intraday processing. This value differs from one DTC participant to another, dependent upon a number of variables. If you're unable to wire DTC the funds, they will halt your ability to settle buy trades.

During a normal settlement day, your customers' sell trades would offset some or all of your buy trades in order to provide the intraday liquidity needed to continue the settlement process under the Debit Cap Limit, but Robin Hood doesn't likely have enough sell trades for that to happen. Once you hit the DCL, you're stuck, unable to work with your trading partners (the sellers) to clear trades, until you have cash to cover.

 

[Handyman]

It sounded like it was an ongoing issue still... maybe thats the way the guy was spinning it. Either way, he sounded giddy that "retail investors" are getting in on this, and he wished that more companies would be forthcoming in explaining these asinine rules to everyone.


He also made it sound like WSB, and similar crowd-think researchers are "Moneyball"-ing the market (my summary, he was much wordier). This group did their homework on technicals, not just (or only) on fundamentals, and they realized that (again, my summary of his thoughts) 'who gives a sh** about the financials, this is way over shorted and prime for a squeeze.'

That is how I think of it as well.

 

[LynahFan]

So are we done, here?

GME off 31% today at closing, and down another 16% in after-hours. Did the Prisoner's Dilemma catch up to the bros?

Or can they re-form ranks for another assault?

 

[Jimjamesak]

The volume of trading is quite low though. Meaning that most of the stock is being held. Sounds like the hedges were trading back and forth, manipulating the price.

 

[Kepler]

The volume of trading is quite low though. Meaning that most of the stock is being held. Sounds like the hedges were trading back and forth, manipulating the price.

Is this because of an asymmetry between retail and hedges, or could retail (or institutional traders looking to gut the hedges) trade between themselves to push the price back up?

 

[dxmnkd316]

The stock price is whatever the last mutually agreed upon trade says it is.

im not sure what the idea behind colluding to set price would be or the logistics. The market price is what the market price is.

Even in low volume days, if someone is overselling, the market corrects that price. Vice versa if someone is buying. You don’t get to pick who you sell to or buy from on the open market. You pick and price.

 

[Kepler]

The stock price is whatever the last mutually agreed upon trade says it is.

im not sure what the idea behind colluding to set price would be or the logistics. The market price is what the market price is.

Even in low volume days, if someone is overselling, the market corrects that price. Vice versa if someone is buying. You don’t get to pick who you sell to or buy from on the open market. You pick and price.

Then how do the hedges drive the price down?

 

[Kepler]

Every trading party has a counterparty. The trade price varies according to supply and demand. Hedges are all looking to sell to deflate the price. All the redditers are looking to buy to inflate the price. The price moves up or down because of which side has more force.

So what prevents the redditers from forcing up the price through their combined desire to buy? Buyers are by definition people with the money not the share, so the current configuration of share holding wouldn't matter. What prevents the redditers swamping the system with buy orders to overwhelm the hedges' sell orders?

Does it come down to who has deeper pockets?

tldr: how do the hedges execute a short ladder attack if a redditer is always willing to offer more on each trade?

 

[dxmnkd316]

That’s my point

 

[Kepler]

The mobius strip is complete. There is an r/MelvinCapitalLove and it is everything you will ever need.

 

[unofan]

Is this because of an asymmetry between retail and hedges, or could retail (or institutional traders looking to gut the hedges) trade between themselves to push the price back up?

Prices are based on the last recorded trade. If the redditers are all holding and the only trading is among the hedge funds, the price will slowly decline. And yes, vice versa, if the current reddit buyers are dominating the market, it'll jump.

Conceptually just remember the price isn't based on what most people would or did pay, but what the most recent person actually paid.

 

[Slap Shot]

Prices are based on the last recorded trade. If the redditers are all holding and the only trading is among the hedge funds, the price will slowly decline. And yes, vice versa, if the current reddit buyers are dominating the market, it'll jump.

Conceptually just remember the price isn't based on what most people would or did pay, but what the most recent person actually paid.

What sets that price though? This means sellers are agreeing to sell their shares for less than the most current price?

 

[dxmnkd316]

It’s a marketplace. Almost no difference than tracking the price of scalpers outside mariucci. You have a bid and an ask. Ask is what the scalpers are barking out, bid is what the guy with two kids is offering them. If a bid and ask match up, the sale closes and the price is reported as the market ticket price for the UMN ticker.

you could have someone ask a low price and they get matched up a market order (see below) and the transaction goes through and the price gets reported. What the scalpers doesn’t want is to ask a lowball and have it matched. It doesn’t make sense because it’s a loss and the next reported sale erases that price anyways. When you have 100 scalpers out front, all sorts of prices are negotiated and closed. Those are the various market prices and why a lot of transactions are based on the fair market value, usually the average between the day high and low.




but there are multiple types of orders for the average schmuck on fidelity.

if the scalper finds a person who puts in a “market order”, the sale happens at the ask more or less.

A season ticket holder could also tell the UofM, “look, if the price of any of my tickets gets to $300, sell it to whomever will take it and send me an email. I just want to lock in the profits”

there are also stop loss sales. That’s about 1/2 way through the first when the scalpers are losing money and will take anything instead of risking it all hoping for their original ask.

then the options market kicks in. You have people who sold tickets on stub hub but didn’t have the tickets. You can imagine someone being pretty angry they bought tickets and not having them delivered, so these contracts can make for wild swings in prices.

this is just a few of the examples.

all of this gets thrown out for actual floor traders. There are all sorts of trades and deals made there.

 

[dxmnkd316]

Actually, that analogy gets even better. Options are no different than stubhub for an entire season. You have different dates for the contracts, usually they’re bundled (call it four seats on stubhub and 100 shares on an options contract). Stub hub charges you a transaction fee per ticket for the right to buy or sell. You just need to deliver the tickets, if necessary, on the date of the game.

 

[Kepler]

Conceptually just remember the price isn't based on what most people would or did pay, but what the most recent person actually paid.

I think of it as a tub with the faucet (buyers) open and the plug (sellers) open. The water level is the price. As you adjust the faucet (loosen -- add or tighten -- subtract buyers) the water level rises or falls, respectively. As you adjust the plug (loosen -- add or tighten -- subtract sellers) the water level falls or rises, respectively.

If the hedges are placing thousands (millions? billions?) of sell offers to create a short ladder, why can't the redditers place thousands (millions? billions?) of buy offers to create a long ladder? None of the money is real anyway because the trades alternate with each buyer/seller pair alternatively wiping out their prior gain/loss, and there is no fee on the trade to erode their resources. They could post infinite dummy buy/sells. If this manipulation works for the hedges why doesn't it work in reverse for the redditers?

Is the asymmetry that the hedges can "borrow" shares and repeatedly trade them (hence 140% short) while the redditers actually have to have shares and money in hand to buy/sell?

 

[Handyman]

What sets that price though? This means sellers are agreeing to sell their shares for less than the most current price?

Yes. That is what it means.

 

[LynahFan]

What sets that price though? This means sellers are agreeing to sell their shares for less than the most current price?

If someone on here can explain this to me, I will GrubHub you a steak dinner. I have never found anyone who can explain to me how stock prices are actually set, including my MBA finance professors. They only think at the micro level, on an individual trade basis. What are the macro effects of all the buy and sell orders that are going on? Some simple examples that would illuminate a lot, for me at least:

Example 1: Say price is $50. 5 people say that they want to sell their combined 500 shares. 8 people say that they want to buy a combined total of 400 shares. I presume that the 400 shares trade hands at $50, but there are now an excess of 100 shares that want to be sold. Does that mean that "they" would drop the price to try to attract buyers for those 100 shares? If so, how quickly does the price drop? Do they knock off 1% and wait 1 minute, then drop another 1%? Or is it .1% every 3 seconds?

Example 2: Price is $50. 5 sellers put in standing orders to sell 500 shares at any price over $49. I put in an order to buy 400 shares. I assume I get those shares at $50. Then what happens to the price? Would they drop the price to $49 due to the "excess" standing sell orders, but no lower?

Example 3: Say price is $50. 10 people put in standing orders on 500 shares saying that they'll sell at any price over $55. I put in an order that I want to buy 100 shares, thinking that I'm going to get it for $50. Would "they" raise the price to $55 (due to the "excess" buy demand from me) to make those 100 trades happen (but I pay a 10% higher price than I expected)?

Example 4: Same as example 2, but my buy order included a cap that said I was not willing to pay any more than $50. Would they still raise the price to $51 (even though no trades would happen) since there was a greater signal from investors that the price should go up (as evidenced by the greater number of sell orders at $55 than they have for buy orders at $50)?