Every brokerage firm in the US has capital requirements. These requirements are relative to the size of the accounts.
For example, if all the account holders at a brokerage firm have a total of one million dollars, than there might be a capital requirement of say 20% or $200,000. This means the brokerage firm must have $200,000 on hand sitting in an account some place (with the clearing house). The brokerage firm must have the money to back up any losses that occur for whatever reason. In between all of these brokers and various exchanges is a clearing house. The largest one in the USA is the Depository Trust & Clearing Corporation. A simplified overview of a clearing house is given below.
So let’s say I am the only account holder with brokerage firm A, and I have a million dollars sitting in the account ready to trade. The broker firm has $200K as required. Now I decide to go long bitcoin. On the other side of that long is the short. The short is with brokerage firm B. I think bitcoin is going higher, he thinks it’s going lower. At the end of each day, settlement takes place. If bitcoin is up, money is taken from the short sellers account and deposited into my account. Let us say that I have leveraged myself such that a 10% downward move in bitcoin, I get the margin call. For a 20% downward move, my account is zero. Now on Saturday, the US treasury announces a whole bunch of regulations to crack down on bitcoin. Sunday night futures start to trade and bitcoin is down 90%. In other words, my account actually reads a negative number of -$500K. My broker calls me and says, “hey, you owe us $500K”. A few problems arise. First, I might not have $500K. Second, I may say “see you in court”. Third, I may pay it but will be very slow to write that check. At the end of the day, the clearing house does not give a damn about what happened between me and the broker. They want the money to deposit into the short sellers account. This is maintain market integrity. Imagine being the short seller in this case. You were correct but the mechanisms in place behind the scene were not robust enough. Therefore, you did not get paid what you were owed. Stories like this are bad for business. Likewise, the same thing could occur on the long side. Bitcoin gaps up by 500%. Money from the short sellers account needs to be deposited into my account. How do you think I would feel if those profits could not be deposited into my account?
Robin Hood is a relatively small brokerage firm. I have read somewhere that 50% of Robin Hood accounts owned GameStop. I have no idea if this is true but let us say it is true. This means that the total account holders at Robin Hood increased substantially. In other words, Robin Hood had two choices: put more money in their account to meet capital requirements and/or limit trading.
Here is Robin Hoods statement:
As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.
What happened was obvious. Robin Hood was bumping up against its capital requirements. It was not a conspiracy between Wall Street and the brokerage firm. Yes some hedge funds lost money. Losers do what all losers do- complain about how unfair it is.
Wall Street VS Main Street?
Here is something that is missing from this entire discussion. The funds that made an enormous amount of money from these Reddit short squeezes. GameStop disclosed Thursday that one of it largest shareholders was MUST Asset Management. It sold its entire stake, 3.3 million shares, that it had bought sometime before March 19, 2020. And if it sold those shares at Wednesday’s closing price, it made about $1.1 billion in gains. AMC’s second-largest holder, private equity firm Silver Lake, disclosed that it sold its entire stake of 44 million shares for $713 million at an average price of $16 and 5 cents each. The users at WallStreetBets (WSB) do not give a damn about bankrupting some unknown hedge fund. They want to get rich quickly. I went to WSB the other day and all I see is a whole bunch of people dumping their life savings into GameStop and AMC. They are now down big. Worse, it is very cult like. They are emotional committed. They will not sell until they are forced to sell. Anyone trading on the advise from a forum is doomed to fail. Anyone trading with the idea of “revenge” is doomed to fail.
Is Silver Next?
I have no idea what they are planning next but I have heard they want to target Silver. I do not spend enough time on the forum to know if this is true but let us say this is true. Anyone talking about short squeezing silver to take down the big hedge funds has no idea what they are talking about. There is something called the COT that gets published. It actually shows the net positions of the market participants.
The red line shows that the hedge funds are net long silver. This is typically in all commodity markets. The large traders (hedge funds) tend to follow the trend of the market. The commercial hedgers take the opposite position.
The same stupidity cropped up a few years ago with JP Morgan and their supposedly ‘naked’ short position in silver. People had online campaigns to bring down JP Morgan by running up the price of Silver. As if some $20 million dollar lose would affect JP Morgan. That is what they tip the shoeshine boy.
Do your own research. Make your own decisions. Take responsibility for your actions. Every losing trader in the world blames someone else for their loses. Any talk about ‘manipulation’ of the market is pointless unless you know the manipulators.