Did Robinhood and Other Brokers Team Up to Swindle Retail Traders?

Published by Matt Warder on January 29, 2021

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Man, I am fired up.

First off, I understand that beliefs and preferences tend to vary from person to person — I’ll even give you a few examples.

I believe that baseball is the greatest game on the planet… Though lots of folks think it’s boring.

I believe in correct answers rather than Democratic or Republican answers… Though the vast majority of people in this country are pot-committed to one or the other.

I believe that Steely Dan records are fantastic to listen to… Though a friend once described them as sounding “exactly the way he imagined 70’s orgies smelled.”

But there is one ethic that most people can agree on, though… We should never do harm to others.

When Robinhood, Interactive Brokers, and others worked in concert to lock retail traders out of buying high-short interest stocks this morning, they actively chose to do the opposite.

Worse, there is at least some speculation that Citadel — who receives a significant amount of Robinhood’s order flow and who recently bailed out Gamestop short-seller Melvin Capital — reloaded that short position before they instructed Robinhood to stop trading the stock.

I can’t even begin to describe how wrong and entitled that is.

These very same funds with the same dumb long and short ideas, and whose groupthink crowds billions into the same trades have been ripping off retail investors for their entire existence.

And here, the very same wealthy-fund bros we bailed out with taxpayer money in 2008 mismanaged their leveraged positions so poorly they finally got outmaneuvered by the little guy.

But rather than take those ass-kicking insolvencies like honorable men are supposed to, those overprivileged, underprepared rich dudes instead felt compelled to openly rig the market.

Without the massive buying pressure from retail traders, GameStop Corp. (NYSE: GME) plummeted as much as 76% from its peak this morning at $483 before settling at $193.60, down 44% on the day.

And short interest in the stock hasn’t really changed that much, as S3 partners data still shows 123.25% of the float has been wagered to the downside.

Source: S3 Partners Black App

That is market manipulation… plain and simple.

That means everyday investors potentially lost billions of dollars, with those gains going right back to the hedge funds at whom the “Retail Army” was aiming.

If that collusion proves to be true, the company who once tweeted out “let the people trade” should have to change their damned name to “Sheriff of Nottingham.”

Or better yet, go to prison.

I mean, when both Alexandria Ocasio-Cortez and Ted Cruz are united in opposition to something, I’d say that’s a damn good indication it is sufficiently horrific.

And I’m so mad I can barely see straight.

End rant.

OK, Back to Stonks

The huge drawdowns caused by the Retail Army short squeeze forced most of these fund bros to reduce their exposure to the market — called “degrossing” in trader parlance — at the fastest pace since 2016.

And it was that selling that sent the volatility index (VIX) to its highest point since November.

Source: Bloomberg

Like I said last week, when volatility spikes such as this one happen, it’s helpful to look at the volatility of the VIX itself (VVIX) to see if a serious uptrend is beginning. And while the VVIX did pop up to a new near-term high, it didn’t even reach the level of last June’s 10% correction.

Source: Bloomberg

And just to further confirm that yesterday’s pullback wasn’t a sign that the world is about to end, we can look at volatility across asset classes.

During the COVID crash last March, volatility didn’t just rise in the stock market. It also rose in the corporate bond market, in treasuries, in currency markets, and in interest rates.

But when we chart yesterday’s move – which felt massive to a lot of people (like hedge funds!) — we can clearly see that absolutely nothing else showed any signs of going along for the ride.

Source: Bloomberg

Just that one little “bloop”… and that’s it.

So fear not, Retail Army… Your tendies are safe.

Feel free to concuss yourselves with that green hammer, and pick up a ¼ stake in Carnival Corporation (NYSE: CCL), because they trade at a discount relative to peers Norwegian and Royal, and booking data from wave season for cruise lines actually looks pretty good relative to expectations.