The Reddit traders are not not a mob, and Portnoy & AOC aren't helping...
The Reddit traders are not not a mob, and Portnoy & AOC aren't helping...
The rise of Reddit traders will be a failed revolution, but not really b/c the establishment colluded against them. The mob leaders' unsubstantive criticisms are falling flat and rightfully so...
My email yesterday morning about Robinhood & Citadel argued that they probably didn’t collude because it is much harder for Citadel to pull off market manipulation without getting caught than the public thinks, while much easier for Robinhood to have simply made stupid decisions.
Today I want to explain how calls for arrests of Robinhood and Citadel executives don’t have much substantive evidence to back up, and how this opportunistic move by certain public figures like Dave Portnoy and AOC would further polarize the public perception of Wall Street in a mostly unhelpful and unjustified way.
What more do we know about what went down?
Since yesterday, more voices have come out on Twitter and other forums refuting claims of collusion and market manipulation. This thread below is the best explanation out there I’ve seen so far, with just the right amount of technical details for any non-finance person to understand:
Here’s also a post on forum Wall Street Oasis titled “AOC And Dave Portnoy From BarStool Are Idiots And TOTALLY WRONG!” that my friend sent me:
Brokers have regulatory capital requirements...and RobinHood was under capitalized and over leveraged. When GME volatility increased with corresponding volume in that name on the RH platform, RH found itself short of regulatory capital, because of GME and a few other stocks. RobinHood needed to post ITS OWN CASH (not customers) with DTCC [Depository Trust & Clearing Corporation] immediately, and they didn't have it.
Instead, RobinHood has a credit line with banks that it can tap in times like this...but it takes a few hours to tap a Billion $ credit line...and in the meantime, RobinHood was afoul of regulatory capital rules...so they either needed to post a Billion $ more cash immediately (which they didn't have for a few hours) or they needed to reduce their customers ownership in the stocks that created the regulatory problem.
I think these posts, combined with my email yesterday, should provide a fairly detailed picture of what most likely happened.
Just like Robinhood colluded with Citadel, the Democrats probably also colluded with Twitter to ban Trump
Dave Portnoy of Barstool Sports said yesterday on Fox Business that “generally, when there’s smoke, there’s fire, and this is a fire alarm blaze.” Sure, but that’s not how law and civil society work, right? We don’t just easily believe in something and execute policies because it feels a certain way…
For example, why did Twitter ban Trump after the Capitol riot, or Amazon and Google banning conservative app Parlor? If we’re just drawing simple correlations between “facts” for the ultimate purpose of slamming “the establishment,” then many can also thread a fairly convincing narrative:
These “liberal” media companies’ executives and top Democrat politicians secretively got together and decided to use this opportunity to curtail free speech and start a new domestic war on terror.
This must make perfect sense because most of the people working in these media companies are liberal and their executives all donate money to Democrats, and because they all happen to see Trump and right-wing media as threats to social fabric and their business interests, so it must be that they colluded…
blah blah blah…
Well, that’s probably not what happened… It was probably just that Twitter’s executives and lawyers got together and decided that it was the right thing to do after weighing all the tradeoffs – likewise with other tech companies. And just like after Robinhood’s ban on Reddit stocks, it turned out later that the backlash against the tech giants’ crackdown on the right-wing ecosystem were much greater than they expected.
Many are choosing to operate under the logic “if it smells shady, it probably is shady, and you also don’t know that the accusations are not true, so it probably is true.” Well, then, it would seem entirely reasonable to also believe in (or at least give the same benefit of doubt) to QAnon, Alex Jones, and tons of other voices out there that are recognized by most as largely not credible because they draw too many simple correlations and ignore important nuanced considerations when critiquing broad systems.
Were Reddit revolutionaries actually just a mob?
Going back to Justin Kan’s tweet that blew up. He actually later deleted it with the following explanation:
He probably took it down cuz’ it didn’t have much basis to his claim. “Just got a tip” – well who then? Everyone can say that to make themselves sound legit…
The whole thing should’ve been treated as a rumor, at best. It was almost a replay of Twitter during the beginning of Covid when people posted all kinds of information according to all kinds of “sources” – not saying that they didn’t have any value, but the noise-to-signal ratio is just really high for this kind of posts.
It’s really interesting that Justin used the word “mob” to describe his own action and the ensuing events. There’s some element of truth to his choice of word: most people attacking Robinhood and Citadel likely don’t understand how clearing houses work, the differences between Citadel Securities (the market maker) and Citadel (the hedge fund), how Robinhood makes money and interacts with market makers, or the compliance and regulatory regimes in financial markets today.
The calls for Ken Griffin and Robinhood executives to go to jail have little evidence to back up, and most people are simply motivated by this grand idea that “Wall Street is corrupt; the establishment is corrupt; something shady must have gone down; and we need to get them.”
There’s nothing wrong with people criticizing Wall Street without a finance degree. People today do have very legitimate grieveances towards Wall Street that need to be addressed – from IPO shares being allocated to insiders to seeing hedge funds regularly screwing over retail traders with insider information masked under the veil of “better understanding of fundamentals.”
These are all true, but it’s also true that calls for arrests and investigation without substantive evidence or technical understanding of the situation ended up detracting from the efficacy of their critiques. More tragically, the leaders of this “movement,” such as AOC and Portnoy, have not produced any substantive argument or evidence as to how exactly Robinhood really hurt consumers and colluded with anyone. It made many think that they’re just riding Reddit traders’ anger for their own profits without knowing much about the situation themselves.
The rise of GameStop was initially seen as a wonderful collective action that would finally teach the establishment a lesson. Today, AOC and Dave Portnoy are largely seen as making overly generalized, uninformed, and even ignorant claims.
People will just end up hating Wall Street even more regardless
When the music stops, someone has to be left holding the bag of sh*t. This time around, it’s probably not gonna be the retail investors holding it, but it probably won’t be the hedge funds either.
In a few months when nobody from Robinhood and Citadel go to jail, there would be another outcry that “the system is fixed” and “regulators and Wall Street are all in bed together”…
But shall I suggest, perhaps the reason why nobody will get convicted is because there’s probably actually nothing to convict people for… And if there’s some actual evidence that could convict these people, they almost certainly would be.
But those who resent Wall Street won’t see it that way, and we’ll just keep going down the spiral until something more severe happens in a few years – a bigger crisis where actual livelihoods will be shattered and stakes are much higher than the survival of some hedge funds.
The populist critics of Wall Street like AOC and Portnoy are mostly being opportunists taking advantage of this situation, whose actual criminality is way overblown. Because they cannot get their acts together, their criticisms for this all-emcompassing concept of “Wall Street establishment” are largely falling flat, and rightly so, which only leads to more division and anger.
The rise of Reddit traders will likely be a failed revolution, but not really because the establishment colluded against them. If they want to succeed next time, they would actually need to find leaders who can actually out-smart the Wall Street establishment that they hate so much, and not someone like Dave Portnoy, who’s a great guy for trying to help out but just really isn’t…
Even though I argued yesterday that Robinhood & Citadel probably didn’t collude, it is not utterly unlikely that the opposite did happen – Citadel, Ken Griffin, and all the “establishment” hedge funds could be so desparate to earn a few hundred million dollars (which are relatively little compared to what they already own) that they did collude and hence exposed themselves in such a blatant way under public scrutiny. I think the likelihood for this is very low, but again, knowledgable people do stupid things all the time, so we’ll see what the regulators find out later.
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