Robinhood on Shaky Ground and Potential Market Destabilization to Come

Published on
January 28th, 2021
Duration
33 minutes

The Robinhood Revolt as an Expression of the Fourth Turning


Robinhood on Shaky Ground and Potential Market Destabilization to Come

Daily Briefing ·
Featuring Jack Farley, Ed Harrison, and Dave Floyd

Published on: January 28th, 2021 • Duration: 33 minutes

Dave Floyd, founder of Aspen Trading, joins Real Vision managing editor Ed Harrison to talk about the newest developments in the GameStop story and the market implications of elevated activity in options trading. Floyd expresses his concern over the restricted buying over GameStop and other equities experiencing similar price action that occurred today, stating that it’s bizarre and ludicrous to mandate how traders allocate their capital, which cuts to the core of ongoing social issues. However, he explains that the anger arising from these circumstances is misdirected as the market environment and price discovery has continuously been muddled by regulations and monetary policy. Harrison and Floyd move on to discuss the equity market at large, and he explains that the record number of call options being purchased and puts being sold at open can introduce a destabilizing effect on markets. In light of this high implied volatility, he then expounds on how this impacts futures, the dollar, and time horizons, and what trades he has his eye on now. Jack Farley breaks down the saga of GameStop Corp ($GME) and how forced buying is turning into forced selling.

Comments

Transcript

  • JF
    Jonathan F.
    30 January 2021 @ 04:32
    So what brokerage didn’t restrict trade this week? Who’s going to take their money there?
    • DF
      Dwight F.
      31 January 2021 @ 02:30
      Fidelity
  • NT
    Nicholas T.
    30 January 2021 @ 23:02
    The rules should be the same for all.
  • JT
    John T.
    28 January 2021 @ 23:48
    So let me get this straight. Dave says the hedge funds aren't to blame for the bailouts and other market sleight of hand -- the politicians and regulators are. Who do you think pays the politicians and regulators? Who do you think donates to their $1,000-a-plate fundraiser, campaigns and super PACs? Wall Street IS to blame. Whether they truly get what they deserve is another matter. But they have been put on notice.
    • EG
      Euan G.
      29 January 2021 @ 00:16
      I agree young people are frustrated a lot of what is happening here is activism, and a big middle finger to "the man". I think many people are not in these trades to make money, they are trying to make a statement.... And it is working.
    • LF
      Liam F.
      29 January 2021 @ 00:37
      1,000+ brother! And it's not just Wall Street, it's the whole goddamn system! The industrial-complex ecosystems are out of control! As the Epsilon Theory folks are fond of saying, it's time to burn it the f**k down.
    • CA
      Chad A.
      29 January 2021 @ 04:54
      I'm not really disagreeing here but....if a cop accepts a bribe who's fault is it?
    • DF
      Dave F. | Contributor
      29 January 2021 @ 05:09
      Hi John, I think my comment needs some clarification. Operating as a hedge fund does not make one a low-life degenerate. Most are merely trying to generate returns/alpha like any trader or investor. By and large, hedge funds are not the issue. Yes, any investor or manager who is buying influence from these slimy-ass politicians and regulators are low lives and looking for the easy way to solve the problem....i.e. their inability to generate alpha in the marketplace. Now, equally, as guilty are the slimy politicians who took these bribes masquerading as 'campaign' contributions. It boils down to people looking for the path of least resistance and that means greasing palms versus doing the hard work needed to make money in the market. Shall we also discuss theoretical clowns like those that staff the world's Central Banks? Dave
    • CK
      C K.
      29 January 2021 @ 08:46
      John T's comment is spot on and touches on the wider issue of political contributions and lobby groups. That's the real cancer that needs to be ripped out. There's nothing wrong with a small hedge fund shorting a stock based on fundamentals, like there's nothing wrong with my local grocery store. It becomes a problem when they are big enough to use their power to influence government. As long as lobbyists are allowed to operate this problem won't go away. I'm glad to see clients taking legal action against Robinhood, whose mission was supposedly to free the markets from the grip of the elite and make them accessible to the masses ("democratize finance for all")... until they decided that the masses had too much access for the elite's good. I'm not into conspiracy theories but it does make you wonder: Citadel (and others HFTs) buys order flow from Robinhood --> Robinhooders (allegedgly) drive up GME stock and bankrupt Melvin Capital --> Citadel bails Melvin out to the tune of $2B. Maybe the moral of the story is don't bite the hand of the friends of the cash cow that feeds you.
    • JT
      John T.
      29 January 2021 @ 15:09
      Hi Dave, Thank you for clarifying and I apologize for my intensity. I agree with you that this short squeeze is not an effective instrument of change, and there are innocent people caught in the crossfire who are just doing their jobs. What I'm trying to get across is American politics are pay-to-play, while younger generations and retail investors don't have a seat at the table. Consider how little of the recent stimulus actually flowed to Main Street. Why am I paying to bail out zombie companies after they blow their reserves on buybacks? Just today, it's been reported that Janet Yellen received $800k from Citadel for speaking fees over the last two years. The politicians and regulators are interchangeable. The money flowing to them is not. The GME situation is basically a riot, and riots are hardly proportional. My generation has been screwed yet again, so the politically-connected class can go on living high on the hog. WSB is just the beginning. Best regards, John
    • JF
      Jess F.
      30 January 2021 @ 18:14
      How come I have yet to see the age old quote. " He who sells what isn't his'n, must buy it back or go to pris'n"
  • sc
    sohyung c.
    30 January 2021 @ 03:12
    I am new to this. Sorry if this is a dumb question. Jack said that passive funds needed to buy more GME due to it being a bigger part of R2k suddenly. Otherwise, they would be net short on the stock. I am a bit lost on that comment. Can someone explain please.
  • SW
    Suzanne W.
    30 January 2021 @ 01:26
    One of the best discussions I’ve seen on Real Vision. You three are terrific. Would love to see this trifecta discuss the week every Friday. Thanks!
  • DT
    David T.
    29 January 2021 @ 23:40
    Jack, it was very informative. Thank You.
  • DN
    Douglas N.
    29 January 2021 @ 01:18
    The alternative to bailing out the big banks in 2008 was turning out the lights and entering the bread lines. Everybody was benefiting from the evolving global financial system until we weren't. I am more than bored by the never-ending desire to finger the elusive "fat cats" who need to lose their heads so that all the good people can prosper.
    • LK
      Lauri K.
      29 January 2021 @ 14:53
      That is an extremely ignorant stance. Please look how they handled the financial crisis in Iceland to find a much better third alternative.
  • LK
    Lauri K.
    29 January 2021 @ 14:37
    Assuming the government is omnipotent and can just "do as it sees fit" is not based on reality. We already see in the U.S. representatives from the far left and deep conservatives voice their discontent on violating basic human rights, which in this case is trading your posessions between individuals. The corruption in governance can exist to a degree, but there always is a tipping point where the oppressed have less to lose than they have to gain from disobedience.
  • RT
    R T.
    29 January 2021 @ 04:44
    I've invested in cryptos for 10 years. Bitcoin is available in 160 countries on hundreds of exchanges. The US is a tiny part of the crypto universe and no other nation listens to the assholes in Washington anymore. Bitcoin longs have nothing to fear.
    • BP
      Brent P.
      29 January 2021 @ 14:21
      If regulators ban BTC crypto users will just take their wealth to countries with friendlier regulations. Just look at how companies are moving out of California with 10's of thousands of employees... Thinking that regulators will act to destroy BTC is a very narrow minded view in my opinion.
  • NI
    Nate I.
    29 January 2021 @ 02:09
    I love Ed's comment about lottery tickets. Spot on. Here's mine. Where is all of the concern about private equity buying up houses, with near zero interest loans (courtesy of the crooks at the Federal Reserve) that ordinary people can't get and squeezing the little guy who now can't afford a house? Funny I didn't see anyone crying a river and restricting that market.
    • RL
      Robert L.
      29 January 2021 @ 02:23
      Don’t worry helicopter on the way....CBDC fun zone. Sit back and relax while they mess up the next decade in a new way.
    • DL
      David L.
      29 January 2021 @ 11:51
      Not to mention apartments, businesses and farm land.
  • LL
    Ludovico L.
    29 January 2021 @ 11:45
    Great explanation Jack, awesome job in encapsulating all the different factors of the GME situation
  • MT
    Mike T.
    29 January 2021 @ 11:04
    ... if I may quick $0.02 on yesterdays short period of "closing orders only" on GME and AMC. Whilst the notification to Clients came from your Broker leading to many believing it was a Brokerage policy decision that was not the case in most instances, I have to say most as I do not have an account with every single Brokerage out there so choosing my words carefully for majority of Brokerages shutting down 'new orders' was forced on them by the Clearing Houses e.g. APEX Clearing i.e. the Custodians invoked "closing orders only" policy decision and the Brokerages had no alternative than to implement the policy.
  • KD
    Kelley D.
    29 January 2021 @ 10:25
    I was on schwab options team in late 90's early 00....dealt with active retail options traders..at time schwab was biggest traders on cboe (15% 0f volume... 10 lot's at a time) In high volatile times, we manually had to take the same steps Robinhood just took....this is when the reality of meeting clearing house requirements take over...we had old time OEX trader who said it all.."Black Scholes works..till liquidity dries up..then it's every man for himself"..Clearing House has to look after it self..RobinHood it self..and the cleint many times is over his/hers head in risk he/she clearly does not understand..hence gets liquidated before he/she does to liq to deficient status...times like this is when all parties in the ecosysteam take a hit on the reality bong,.... to make sure they are around the next day...
  • BS
    Brian S.
    29 January 2021 @ 09:27
    How many percent of the GME shorts have been covered now? I read on WSB that there were a few fills Thursday at $2600 and $5000 - limit orders finding market orders in a market with almost no sellers? If this GME keeps going higher and the short sellers can't cover their shorts, and if they go broke, do Citron, Citadel and others pose systemic risk?
  • MH
    MARK H.
    29 January 2021 @ 00:42
    As I understand it, firms like Robinhood are more reliant on firms like Citadel, that pay for order flow, than they are on their customers who pay nothing. If Robinhood bans certain trading activity, it makes me wonder who's calling the shots?
    • WT
      William T.
      29 January 2021 @ 02:29
      When the customer pays nothing for the product, the customer becomes the product.
    • SR
      Suds R.
      29 January 2021 @ 08:42
      Thankyou!! i have watched this video and scrolled through the comments but nobody has mentioned WHY Robin Hood and other brokerages have banned buying the stock. What does that actually mean "paying for order flow"? Are they investors in the RH? Do they make trades through RH? Damn, the millennials are gonna get even more angry!!
  • JS
    John S.
    29 January 2021 @ 08:20
    Can you imagine how many people are going to short Robinhood when they go public!
  • DS
    David S.
    29 January 2021 @ 00:18
    Great structure overview Jack!! It's a ruse to say that GME is being run by WSB
    • JF
      Jack F. | Real Vision
      29 January 2021 @ 05:14
      Agreed. Prop traders are following the longs, I was talking to a trader who was noting all sorts of weird correlations in the "stohnks" that were very strange, indicating proprietary trading. The hedgies aren't just on the short side, they're long as well...
    • JF
      Jack F. | Real Vision
      29 January 2021 @ 05:15
      Nevertheless, David, I do believe that GME > 100 would not have happened had not the WSB crowd build the Gamma Ramp and intended to bankrupt Melvin and the shorts
    • ac
      anthony c.
      29 January 2021 @ 05:35
      Agreed. This was not a flash mob short squeeze by WSB. Bryan Cohan who discovered GME had been posting his bullish thesis on YouTube since 2020 when GME was under $4. Watch his YouTube comments. https://www.youtube.com/watch?v=GZTr1-Gp74U&feature=emb_logo
  • LA
    Linda A.
    29 January 2021 @ 05:33
    Excellent episode- thank u. So black rock is buying worthless GME stock at sky hi high prices? OMG!
  • LA
    Linda A.
    29 January 2021 @ 05:33
    Excellent episode- thank u. So black rock is buying worthless GME stock at sky hi high prices? OMG!
  • DB
    Donna B.
    29 January 2021 @ 02:13
    Watched Jack's intro twice, to understand the intricate details. Thanks Jack!
    • JF
      Jack F. | Real Vision
      29 January 2021 @ 05:12
      Thanks Donna! Glad you enjoyed, for more intricate details stay tuned for tomorrow where Ed, Ash, and I will be talking about all this
  • SG
    Stuart G.
    29 January 2021 @ 04:43
    Jack you nailed your explanation of passive. Well done! You really excel with your prepared remarks, explanations and demonstrations. Do more!
    • JF
      Jack F. | Real Vision
      29 January 2021 @ 05:10
      Thanks Stuart. I'm going to be on the RVDB tomorrow with Ash and Ed, and I would be shocked if the subject of GameStop didn't come up. While I'm plugging away 🔌, here is a conversation I filmed with Nick Correa and Weston Nakamura about the GameStop Gamma squeeze: https://exchange.realvision.com/post/tracking-the-gamestop-money-flow---gamma-squeeze-explained-601395f6bc18e24f10f97ccd
  • AY
    Andrey Y.
    29 January 2021 @ 04:56
    If we take our eyes from the rear view mirror for a moment (what GME price was) and try to compare it to peers and today’s overall frothy valuations across the market. GME turned around and turned into a growth story (growing online sales + Chewy’s exec). I think it would be fair to compare it to Chewy as this is what market expects GME turn into with arrival of Chevy’s exec. The companies have similar amount of assets and liabilities on the balance sheets. Chewy’s market cap $43B. If the GME would reach $1000 per share the cap would be $59B. Now the game sales are more capital efficient than sales of dog food aren’t they? Factor in current massive publicity and current price levels in the current market conditions start to look like just the beginning... Where am I wrong?
  • NB
    Nuno B.
    29 January 2021 @ 03:03
    whenever someone says "what if the regulators come in and say xyz" as if it will be the deathblow for crypto. please consider that this is a distinctly american-centric viewpoint, which is colossally flawed. don't assume that american regulators in a world increasingly frustrated with USD dominance and arrogance, will have any long-term impact on crypto. the technology is here for good. forget the coins and the speculation. blockchain is here to stay because it answers the cry from an entire generation that they no longer trust centralized government and their policies. you can't regulate something that is centralized. you can make it difficult, but you can't kill it. in fact, regulators might just catalyze the opposite effect. adam smith called this the invisible hand. governments will fear the people again. history tells us it will be so.
    • RT
      R T.
      29 January 2021 @ 04:45
      Right on!
  • KR
    Kel R.
    29 January 2021 @ 00:51
    IMO if they restrict $BTC right now...there will be massive Angst and Push back from the masses. Not what the new admin wants to take on in this current (tense) environment !!
    • NI
      Nate I.
      29 January 2021 @ 04:26
      Washington DC looks more like Baghdad, Iraq than the American capitol. I see no indication that they care what any American thinks about anything. They're already doing things that upset far more Americans than a comparatively small number of bitcoin owners.
  • RL
    Robert L.
    29 January 2021 @ 01:02
    BTC ETF.....that’s next year
    • NI
      Nate I.
      29 January 2021 @ 04:21
      Possibly. This is nothing but my intuition and it could be completely wrong, but I believe the US government is going to squash bitcoin under the guise that it's used by "drug dealers" and "terrorists". We'll see what happens, but I wouldn't have more than I could afford to lose in bitcoin.
  • IM
    Indranath M.
    29 January 2021 @ 03:44
    Jack's explanation of 'forced buying' was the best part. Kudos!
  • Hv
    Hannah v.
    29 January 2021 @ 03:01
    Loving Jack Farley’s delivery. He’s really got it all. Bright, eloquent, fresh, easy-on-the-eyes, smart, interesting and engaging. Great job young man! You’ll go far in life.
  • MS
    Mark S.
    29 January 2021 @ 02:42
    People who side against the Robinhood investors because based on the argument of GME valuations are inconsistent. I don't hear anyone complaining about the valuations of Tesla or any other number of stocks. Hedge Funds . Cave Venditor! I didn't have a stake in this game but Robinhood should get. Icahn did the same thing to Ackman, nobody prohibited Icahn from buying.
  • jW
    john W.
    29 January 2021 @ 02:22
    I've found that when a decision, or rule or law, seems ludicrous and illogical, it has another influencer. Follow the money and the associated power.
  • JH
    Jeremy H.
    29 January 2021 @ 02:02
    Ed raises a good points about the similarities of GME and BTE. Surely if the BTC bubble inflated much more - especially given the allegations of manipulation in that market - we would likely see the same regulatory response. As we saw with Ripple, and now GME, as soon as the exchanges curb trading the asset drops precipitously. Given what we just saw in GME, is it really realistic to expect BTC to rise to $350k and there to be no regulatory / exchange response?
    • RL
      Robert L.
      29 January 2021 @ 02:20
      Regulation has been occurring and only continues to legitimize BTC
  • KF
    Kim F.
    29 January 2021 @ 01:40
    Great explanation, Jack. You're growing leaps and bounds as a reporter.
  • EC
    Earl C.
    29 January 2021 @ 01:35
    Can RV please help me with technical support. The videos will not play. Last night I switched from Google to Microsoft Edge & it finally played but not this evening. I can get the transcript. Thanks
    • EC
      Earl C.
      29 January 2021 @ 01:37
      Immediately after I posted that the video started to play. Good but still frustrating.
  • TT
    Tokyo T.
    29 January 2021 @ 01:37
    Nice intro, Jack.
  • JS
    John S.
    29 January 2021 @ 01:18
    Finally!!!! A solid explanation of the forced buying. Thank you!
  • MC
    Mark C.
    29 January 2021 @ 00:58
    Jack. That intro. Another great break down. Maybe CNBC could take some notes.
  • SW
    Suzanne W.
    29 January 2021 @ 00:47
    Great explanation of the GME saga, Jack!
  • DG
    David G.
    29 January 2021 @ 00:19
    You can't card count in black jack. You can't pyramid bet to infinity in roulette. You can be too good for their business model. They are just saying that hedging your positions are hurting their profitability. Welcome to the conflict of interest of retail brokers.
  • SG
    Stuart G.
    29 January 2021 @ 00:08
    Why does the building graphic say Market "Opening" Soon when it's posted at 6pm ET? Shouldn't it say "Closed"? PS. This is not a meta-comment on markets. It's purely a graphic design nitpick. :-)
  • BK
    Brian K.
    29 January 2021 @ 00:04
    Hollywood Jack killer explanation on Gamestop. Great Job
  • DJ
    Dennis J.
    28 January 2021 @ 23:57
    Actually, RH, etc banned buying but not selling. They gave cover to the shorts. We'll see tomorrow now that they're allowing trading again.