Top News  Shutterstock The three major stock averages all fell about 2% in Friday trading, wrapping up a week dominated by a feeding frenzy on highly shorted stocks touted on Reddit. Oh yes, and Q4 GDP rose 4.0% at an annualized rate, down from 33% in Q3, and the Fed continued its ultra-dovish talk, with Fed Chair Jerome Powell promising he'd give markets plenty of notice before considering any tapering of bond purchases. For the last session of the week, the Nasdaq Composite fell 2.0%, the S&P 500 declined 1.9%, and the Dow Jones Industrial Average lost 2.0%. The energy sector fell the most, followed by information technology; real estate dropped by the least. All three averages turned in their worst week since October, with the Nasdaq shedding 3.5%, the S&P dropping 3.3%, and the Dow dipping 3.3%. Of mega-tech names, Tesla sank 6.3% over the week and Facebook dropped 5.9%; Microsoft managed to climb 2.7%. The 10-year Treasury yield ended the week at 1.09%, not far from the 1.07% where it started, though in the interim fell as low as 1.00% on Wednesday ahead of the Fed policy decision. The U.S. dollar strengthened some, with the U.S. Dollar Index up 0.4% for the week | | Top News Shutterstock The three major stock averages all fell about 2% in Friday trading, wrapping up a week dominated by a feeding frenzy on highly shorted stocks touted on Reddit. Oh yes, and Q4 GDP rose 4.0% at an annualized rate, down from 33% in Q3, and the Fed continued its ultra-dovish talk, with Fed Chair Jerome Powell promising he'd give markets plenty of notice before considering any tapering of bond purchases. For the last session of the week, the Nasdaq Composite fell 2.0%, the S&P 500 declined 1.9%, and the Dow Jones Industrial Average lost 2.0%. The energy sector fell the most, followed by information technology; real estate dropped by the least. All three averages turned in their worst week since October, with the Nasdaq shedding 3.5%, the S&P dropping 3.3%, and the Dow dipping 3.3%. Of mega-tech names, Tesla sank 6.3% over the week and Facebook dropped 5.9%; Microsoft managed to climb 2.7%. The 10-year Treasury yield ended the week at 1.09%, not far from the 1.07% where it started, though in the interim fell as low as 1.00% on Wednesday ahead of the Fed policy decision. The U.S. dollar strengthened some, with the U.S. Dollar Index up 0.4% for the week | |
| Trending Outrage escalated in the retail trading world on Thursday as Robinhood (RBNHD) and other brokerages imposed trading limits on WSB/Reddit plays, and questions are circling about the protections that should be in place for investors. While Robinhood cited clearing house requirements as reasons for the stoppage, it also said "these requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously." Users were only permitted to close positions, leading the stocks to plunge during the session, while Robinhood looked to reopen trades on Friday (see below).
Investors and lawmakers alike lambasted the trading limits, including Dave Portnoy, Alexandria Ocasio-Cortez and Ted Cruz, accusing the trading platform of seeking to protect Wall Street's interests at the expense of smaller investors. "We need an SEC that has clear rules about market manipulation and then has the backbone to get in and enforce those rules," added Sen. Elizabeth Warren, a longtime critic of Wall Street. "You've got to have a cop on the beat."
How should market manipulation be defined? We're also talking about public markets here, where every share is only worth as much as people are prepared to pay for it - regardless of the fundamentals of the company. Regulators can't pick and choose which market participants are able to play in the market or the value of healthy share prices (or can they?). The pros are also going to have to get a whole lot smarter on how they take bets against companies if an army of day traders can be rallied within hours to make that bet go wrong.
Thought bubble: Should a hedge fund be able to get 10x leverage and short 140% of a company in a healthy market? Should mob and herd mentality of rolling into stocks be curbed? Regulators may want to step in on both sides, but government bodies may also be fueling the bubble. Easy money policies from the Fed have also driven consumers out of savings accounts and CDs, encouraging riskier behavior and flows into related products. (216 comments)    | |
| Financials The NYT reported that Robinhood (RBNHD) drew on credit lines of $500M-$600M to meet lending requirements and separately raised $1B in emergency funding to avoid having to place further limits on trades (just hours after saying there was "no liquidity problem"). It's a significant amount of money for a firm that was valued at about $12B just a few months ago, as users take their money elsewhere. "We pulled those credit lines so that we could maximize within reason the funds we have to deposit at the clearing houses," CEO Vlad Tenev declared, saying Robinhood will allow limited buys of previously halted plays like GameStop (NYSE:GME) and AMC (NYSE:AMC) on Friday, but will "continue to monitor the situation and make adjustments as needed."
Quote: "As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits," Robinhood continued in a blog post. "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."
Other brokerages gave similar reasons for the Thursday halt, attributing growing financial pressure vs. the shadowy motivations claimed by the retail bros. "This has to do with settlement mechanics of the market," Webull CEO Anthony Denier told Yahoo Finance. "It wasn't our choice. Our clearing firm gave us a call and said we're going to have to stop allowing you from opening positions due to high volatility. It takes two whole days for brokerages to fund trades with central clearing houses, and because of the volatility of these stocks, the clearing houses have made the cost of collateral for the holding period extremely expensive. We also cannot use customer funds to front that cost due to regulation."
Bottom line: The entire system needs more transparency. Robinhood allows free trades through a practice called payment for order flow, or PFOF, which sends customer orders to high frequency traders like Citadel in exchange for cash. Orders may also be filled at a slightly lower price (often pennies) than buying the same shares on a public exchange. While that may have enabled the commissions-free revolution that led retail investors into the market, it has also led to a moment of reckoning over how healthy public markets should work and function. (141 comments) |
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