Step 0 and step 2 are false, but in typical Twitter fashion uttered with such confidence. Citadel can fill those trades internally for better-than-market price, but it's illegal to front-run them. It's not a practice I agree with, but it's not front-running.
HFT surely made money market making GME, as they probably did with many other instruments today. There's nothing unique in the HFT space about GME.
Front running is simplistically placing your own orders in front of your customers orders based on the knowledge that the customers orders will be executed.
Buying at better than requested rates and reselling to a customer based on a request from that customer to buy at a specific point is not front-running the customers order, it's literally just carrying out the customers order, but pocketing the difference between what you can find buy the asset at and what the customer decided to pay.
Think of this, you pay someone a fixed amount to buy you a PS5. When he gets to the shop there is a sale, so he pays less than he expected and less than you expected, but he's fulfilling your order at the agreed price so he pockets the difference. That's not front-running. He is making money fulfilling your order, but it's not front-running.
Now second scenario imagine you again pay a fixed amount for him to get you a PS5. He comes back saying "sorry, but they didn't have any left ... but I just happen to have bought 4 myself before I could fulfill your order, I'm willing to sell you one at an elevated price".
That's front-running. He executed his own order, in front of the one he was carrying out for you, with the knowledge that he would be able to make money because of your order.
Note that the illegal part is not "making money by buying and selling something". It's perfectly legal for someone to buy the last PS5 and resell it at a higher price to make money. The illegal part carrying out such an order based on the inside knowledge of your pending order and front-running your order with their own.
Naturally this is rather fuzzy explanation, take it with a grain of salt.
Can someone explain how this is manipulation? Users on WSB saw the potential for a short squeeze and bought on it (it's a common trading strategy to play highly shorted stocks) and they told other users about the idea. Large investors like Ryan Cohen and Michael Burry were on this trade, too, for a long time.
I have issues with where the line is actually drawn for market manipulation. It sure looks like the way it's applied is "if you inconvenience institutional investors, you're a market manipulator". As I've not seen much in the way of mitigating institutional investment firms capacity to do the same in the other direction vs retail.
Another thing, GME is just one of many stocks that appear to be squeezing right now. These other stocks that might be squeezing (like DDS, TR?, FIZZ, BBBY) are barely mentioned on WSB.
What's causing all these stocks to be squeezing at the same time?
I'm not even sure we should be saying GME was WSB's doing, although it is a fun story.
BBBY has been brought up in a few DD (due diligence) posts. If you go to WSB and search for BBBY you'll come acorss them. GME is obviously the focus of attention, and therefore the lions share of posts are about them.
Pattern recognition? It's not hard to find a list of the most shorted stocks currently, and think that you can buy them "earlier" than GME. By Monday, several were already way up, although not as extreme.
I think the real world meaning of this, is that people shorted stocks that were perhaps in temporary distress, but many if not all of them could be saved if they got a lot of cash, which they can do, if they suddenly can sell stock at an inflated price. The short theses could have been self-fulfilling, but now things are going the other way. It's not really a violation of objective facts if the market decides to give these companies more capital. Who's to say they shouldn't get it? Especially with all the money showered on IPOs lately?
I used to think short selling was honorable, misunderstood, etc. but if it really is a self-fulfilling thing, maybe it isn't a social good, especially when the viability of a company is affected by the temporary situation with covid.
Maybe GME and similar should get a year's lifeline, for the good of all their stakeholders, because a lot could and almost certainly will change.
In theory short selling is a way to make money off of bubbles and weaken them by driving the price down. In this case we basically saw the opposite. Instead of people optimistically buying a stock and driving the price up we got institutions optimistically short selling a stock to drive the price down. It's a bubble in the opposite direction.
They've had high short float for months though? It could've happened at any point, I guess I'm just wondering why now, and why all at once? I suppose you're probably right, it could just be people trying to replicate GME.
I don't know, but the idea that other heavily shorted stocks might skyrocket came to me personally right about the end of last Friday, based on reading about GME.
It reminds me of when "everybody" (in a vague sense) suddenly took covid-19 seriously. There's a dynamic sort of like people are particles in an avalanche or something. I remember the week or so leading up to March 13th (iirc) as just having the pressure building and wondering when something would be done, and then there was the tipping point.
You're not meant to coordinate your trades with other entities. That alone is manipulation I believe.
You're meant to buy(sell) because you like the idea of (not) owning something. That means you don't want to move the price. If you move the price you can't buy more at the same great price later. Wanting to move the price is sort of the smoking gun of manipulation.
Being able to change the price in the short term means the price is "wrong". A wrong price cheats all sorts of market participants even ones who don't trade.
Securities fraud is defined as any action that "induces investors to make purchase or sale decisions on the basis of false information"[0]. A false price is a great false piece of info to manufacture.
I'm watching with interest for when WSB attracts the interest of the regulators. Being retail means they're generally ignored, until they're not.
>Wanting to move the price is sort of the smoking gun of manipulation.
That's the definition of shorting 100% of the float.
Borrow the stock of every active trader. Sell all stocks. Now the market looks like everyone, literally every single trader, is selling the stock and it is true because all of the actively traded stock was in possession of wallstreet who did indeed sell the stock.
People who are long in the stocks now get scared and sell their shares. That's how this strategy is making money for wallstreet. However, wallstreet kept shorting and shorting. From $24 per share to well below $3 and they never stopped shorting. They never closed their shorts even though going from $3 to 0 is only an extra $3 in profit but it massively increases exposure to a short squeeze and thus the potential for losses. They could have bought some options to cover their shorts and lock in profits at $6 and still have the upside of the stock going down to $0. They did neither.
It doesn't matter who buys GME. Anyone can buy the stock and go long and cause a short squeeze. Anyone. I think it is sad that I have to remind you that a short squeeze is not market manipulation. There is nothing to regulate except the short sellers and that is exactly why they try to find a scapegoat like WSB. When you fucked up and are about to get investigated just stirr up the media and control the narrative.
The difference is they expressly coordinated (a no-no) to change the price (a no-no).
There is nothing wrong with saying "X is a good stock, buy it". Saying "I don't really know about stock X, but if we work together to drive prices up we can make money when we dump the stock" is all sorts of illegal.
Don't get me wrong. I am not saying a case will definitely be made. Maybe it will be judged not worth the effort or politically unpalatable (going after the little guys). Maybe they had much less impact than they\we think and there was actually some other entity behind it.
But if there is a case to be made, those are the key elements:
* They conspired together
* Their aim was to manipulate the market (move the stock price).
But there's a problem for me -- how do you prove that this particular comment has validity? It's Reddit -- you can shitpost whenever you want. Trolls run rampant. It'd be easy for WSB mods to simply state that all those comments/examples that the SEC is presenting are just trolls and has nothing to do with WSB. A Reddit forum is far too loose to be accused of any coordination.
Has the SEC ever considered the market value of a stock false information in this way before?
Edit: and as to your first point, it has always been legal to say, hey, I am buying this stock, I like it, I recommend you buy it too. That alone is definitely not manipulation.
The reported actions of WSB is basically the second half of this with the twist that they think they can use large short positions as leverage to push prices up more.
It's actually a very common, old form of fraud. The question is whether regulators care to enforce the rules. It's what Leonardo Decaprio is guilty of in Wolf of Wallstreet.
That's not what WSB is doing. The traders charged by the SEC were acting in coordinattion to drive stock prices up and down with manufactured orders.
On the other hand, WSB is just a bunch of different people and a lot of them have bought GME because they thought would go up.
By your logic, anytime a stock goes up, how's it not just manipulation? It's typically caused by a bunch of people buying it cause they hope it will continue to go up. This is all that's happened at WSB.
That said, manipulating the price up because you think someone is manipulating it down, is still manipulating it. I'm not saying they're "the bad guy", but they're breaking the law and not actually helping anything imho.
I think I've been converted to the idea that it isn't manipulation, because you can't prove that the inflated price is the wrong price and thus artificial.
If the price goes way up, they can sell stock at that price and keep the business running.
GME being a worthless company right now is not an objective fact about the world, but a contingent one, significantly dependent on their access to capital to get through covid and restructure.
P.S. Matt Levine's column today gave a "traditional four part test" for manipulation:
(1) That the accused had the ability to influence market prices; (2) that the accused specifically intended to create or effect a price or price trend that does not reflect legitimate forces of supply and demand; (3) that artificial prices existed; and (4) that the accused caused the artificial prices.
No individual on WSB can possibly be doing all four things, can they? Unless there is some private conspiracy among a small number of people.
I can understand your feeling on this, and I am only speaking from my opinion. I am certainly not an expert or in possession of special facts.
May I ask: Why would there need be an individual behind the attempt? If it takes (say) 1mUSD to manipulate a market, then the market is being manipulated whether 1 person does that in one $1m trade or 1000 people do it in 1000 trades each of $1 right?
The second possibility adds complexity admittedly. I'd have to show they were conspiring to do it, not just all randomly making the same trade on the same day.
But at least some WSB members have explicitly admitted that so...
There are a lot of reasons the SEC (and others) might not act on this. And there are a lot of "fuzzy edges" (eg how influential were they in the price move vs someone else trading at the same time?). But the case I'd make is pretty much that: Members of WSB conspired together to complete your 4 items, no different to a safe-cracker and a get away driver working together to commit a crime they couldn't have managed solo.
Of course, I'm a bit of a Crime and Justice nut, so maybe it's best I don't get to interpret these things in real life :)
I put what I thought was the most important point at the beginning of my previous comment.
"Legitimate" and "artificial" seem like undefined words. If one person or a few people puts a value on something that nobody else does, then you can call it artificial. But if millions of people are buying and selling at various prices, how can you prove any of them are "artificial"? To some extent, I think it's simply about numbers. One person who thinks different is crazy. Millions are a political party or religion or something.
They could go after Elon Musk (again), since he gave WSB a shout-out after hours and it jumped like 50%.
I think that's always the issue with any market manipulation case: how do you know it was manipulated.
To be honest, I have no idea.
There may be a hard mathematical test I'm unaware of. Or it might just come down to convincing the jury. In this case, I'd say that the statements on WSB and the fact the price rose 2 (3?) figures with no change in the underlying company is a pretty strong indication. But it's not a slam dunk, "anything over x% is manipulation" rule AFAIK.
Still, plenty of others are convicted of it, so either juries can be convinced or there is a mathematical rule I'm missing.
That's true, but finra will have a record of who sent the orders, so the SEC etc can trawl through the data and see.
I actually think WSB likely didn't do it completely alone. Plenty of hedge funds watch WSB. RobinHood sells the data too so I'd be surprised if it was a solo effort.
Even if that were true, would it constitute manipulation? What disclosures are required for stating opinion and publicly available information. I can find 1000 articles on google finance.
It’s a problem if let’s say a hedge fund buys a struggling stock such as AMC for example and decides to plaster the entire sub using hundreds if not thousands of manufactured accounts? It’s been happening for awhile over on r/wsb. It’s basically a political misinformation campaign for stocks. DL makes it very easy to create believable live accounts.
As someone who knows basically nothing about stocks, I still don't totally understand whether this is a situation where the WSB guys are going to be left holding the bag, but at least they will have screwed over the short sellers and so it'll be worth it to them, or if they're actually going to come out way ahead? Like surely GME stock can't be worth 150 or whatever once this short squeeze business is done with. So what's the offramp look like?
Short squeeze like this have happened before. The most famous probably being Volkswagen in 2008, when they briefly became the most valuable company in the world. In that case hedge fund managers lost $30 billion, and Porsche (who orchestrated it) came out with $10 billion.
HFTs do not create demand. Most of the time, they flatten their positions at the end of the day. As such, their impact on the market is minimal.
And anyone who can claim that HFTs front run trades simply do not understand the basics of what is happening. HFTs simply make money off being the glue in fragmented markets.
Sometimes identical products trade at different venues, often different products at different venues are highly correlated. HFTs reduce the friction of value transfer between these many different markets. They are, in a sense, building the neurons that make up the global economic central nervous system. It's a natural and healthy market phenomenon. The benefits are systemic, which requires some perspective to appreciate. In the course of a decade or two, HFT has permanently cemented itself into the fabric of the finance.
All this talk about front running is uninformed utter nonsense.
What this whole saga has brought to light is how much the market is manipulated, mostly to accelerate the wealth transfer from the retail investor (boomer, millenial, zoomer, it doesn't matter) to the insitutional investors and hedge funds - the smart money.
We have to give up the thought that the markets move as they do on pure investor sentiment, and face the reality that a large part of price movement is manufactured to suit the big money.
Isn’t this already known? This is what HFT does. They are literally, front runners.
This is why they spend millions of dollars on exotic telecom equipment, just to shave off milliseconds from the latency.
So, for every share you trade on Robin Hood, they make a penny or a fraction of a penny.
Easy money. It’s even easier than taking candy from a baby. You never even knew that you were fleeced of that penny. At least a baby cries when you take his candy.
You as a retail investor or day trader cannot play that volume game with the HFTs, so there’s no point trying. But you can still do other strategies, like swing trading.
Short selling 100% or more of the float should be illegal. That's market manipulation. Why allow wallstreet to make money off of price movements they caused themselves? Why short sell only to short sell even more and never actually close your shorts? It's like a bubble where everything is going down and once the bubble bursts it shoots back up. The reason they do it is that it is easier to drive the price of something down than up.
I don't want to come out strongly in favor of payment-for-order-flow (the term for RH's relationship with HFTs), but since you seem so incredulous about it, let me offer the non-cynical explanation to help build intuition: RH traders receive better prices than they otherwise would because RH routes their orders to specific dealers. RH is paid for this, and theoretically passes on some of that payment in the form of commission-free trades.
It's more complicated than that (even defining "better prices" is an unsolvable problem), but if you take that at face value, it's easy to understand by the practice isn't immediately regulated out of existence.
I really like this take. The whole time (pandemic onward) I've been thinking: "how can a bunch of small potatoes on WSB actually make such an impact." This neatly explains it... It's the HFT amplifying these actions.
This has very little to do with HFT. I would argue that the person who wrote this Twitter thread really quickly veers off into the territory of just-plain-wrong. What's more likely,
- Citadel is paying multiple billions to get in on a firm that's so talented that they managed to take on this GME position, or
- Citadel is a market maker that has written a shitload of near-naked call options and now needs to deliver on them?
HFT is not the root of all evil. Citadel isn't making a killing off of frontrunning retail investors that have a Robinhood account containing $137. Odds are pretty damn good that they're in hot water with an options position and need to ensure that Melvin stays afloat to try and keep as many contract OTM as they can.
HFT surely made money market making GME, as they probably did with many other instruments today. There's nothing unique in the HFT space about GME.