Robinhood App Decides To Stop Helping The Poor Steal From The Rich

from the everything-is-a-content-moderation-story dept

I had been meaning to do another story on the whole GameStop/Reddit/WallStreetBets story, because there's a lot of really fascinating points on this, but my original story got pretty much wiped away this morning when Robinhood, the popular stock trading app that promotes itself as a way of democratizing stock trading and providing free trades -- and which was the main app used by Redditors to drive up the prices of various stocks that a bunch of hedge funds were trying to short -- announced that it was blocking the trades in all of the volatile stocks that Redditors were driving up. It did so in the most ridiculous of statements, claiming that they were pausing buying of those stocks to "[help] our customers navigate this uncertainty."

Amid significant market volatility, it’s important as ever that we help customers stay informed. That’s why we’re committed to providing people with educational resources. We recently revamped and expanded Robinhood Learn to help people take advantage of the hundreds of financial resources we offer and educate themselves, including how to make sense of a volatile market. In 2020, more than 3.2 million people read our articles through Robinhood Learn.

We’re committed to helping our customers navigate this uncertainty. We fundamentally believe that everyone should have access to financial markets. We’re humbled to have helped many people invest in the markets for the first time. And we’re determined to provide new and experienced investors with the tools and resources to help them invest responsibly for their long-term financial futures.

Bull and Shit. The people buying into this stuff didn't need help "navigating this uncertainty." This was a protest. This actually was what happens when you "democratize finance" and stop letting the big giant firms abuse the system for profit. And it turns out that that's not what Robinhood really wanted after all.

As incredible as it seems, it turns out that even this is a content moderation story.

Also, I can pretty much guarantee that Robinhood is going to be hit with a whole bunch of class action lawsuits, probably before the day is out. (Actually, they were hit by lawsuits before even this post was out!)

Many people have recognized that while there's a lot going on here, at least some of what's happening is legitimately smaller individual investors giving a big giant "fuck you" to the big Wall Street hedge funds that were treating the market as a plaything with which to get ever richer. I heard someone jokingly note yesterday that Reddit and Robinhood together accounted for more wealth distribution from the rich to the poor in the past week than the Democratic Party has in years.

And, like every other time that gatekeepers' walls are knocked down, the gatekeepers freak out. This is Hollywood freaking out about Napster all over again. Yesterday the big news was that Discord banned the r/WallStreetBets server, which was where many of the Redditors were gathering (outside of Reddit). The company claimed -- somewhat ridiculously -- that the ban was for hate speech on the server. But the timing of it made that look like a very weak fig leaf. Considering how many gamers use Discord (its original target market), I can assure you that other servers have a lot more hate speech than the WallStreetBets one did.

Then, last night, we had the totally expected old school "Hollywood reacting to Napster" response when NASDAQ's CEO, Adena Friedman, said that they should halt trading in GameStop and the other targeted stocks to allow investors to "recalibrate their positions."

Funny how they never seem to do that when it's retail investors losing their investments.

As with other situations, the events of the past few days only serve to underline how the system itself is rigged to help the big guys on Wall Street, and the second that everyone else figures out how to game the system themselves, the gatekeepers freak out and look to reassert control.

Filed Under: content moderation, gatekeepers, hedge funds, retail investors, stonks, wallstreetbets
Companies: discord, gamestop, reddit, robinhood

How A School Board In Wisconsin (And The NYC Subway System) Became Accidental Hedge Funds

from the the-obfuscation-of-risk dept

We've talked in the past about how one of the causes of the financial crisis was that many banks on Wall Street stopped acting like banks and started acting like hedge funds -- despite not really knowing how to do that. That is, they took on much greater risks and higher leverage, without having much of an understanding of how to really hedge that risk. That was fine when all was going well, but when the bubble burst, it started impacting everyone.

Now, in a combined effort between NPR's Planet Money (I know I've said this, but I'll say it again: if you're not listening to this every day, you're missing out, big time) and the NY Times, reports are coming out about how it went well beyond banks turning into hedge funds, to all sorts of other organizations as well. The scary example being described in the first article in this series is how a Wisconsin school board and the NYC subway system, both effectively became hedge funds, lending money out to various banks in exchange for CDOs (collateralized debt obligations). What a CDO is, effectively, is the mashing together of a variety of different debt instruments (loans) that pay out some sort of return. So, you could basically buy some of the return on a whole mess of loans, packaged in all different ways (some amazingly creatively).

If all of those debt instruments that you're buying into keep on paying, you're in good shape. If, however, there are defaults, you can be in an awful lot of trouble. However, while everything was going great, defaults weren't an issue and the folks sold on these CDOs often had no idea how risky they really were. In the article above, for example, the guy who sold the Wisconsin school district on investing $200 million of its pension money in CDOs had only taken a two hour course on them, and greatly downplayed the risks.

And, of course, to make matters even worse, in many cases, the actual risks of such CDOs were hidden through some games, and made worse by either clueless or complicit ratings agencies which rated seriously high risk CDOs as being extremely safe bets. To see a rather graphic (and easily understandable) example of this, I recommend the following Paddy Hirsch video comparing CDOs to pyramids of champagne glasses: The really scary part was that, effectively, you had numerous less than fully sophisticated investors, dumping hundreds of millions, if not billions, of dollars into incredibly complex investment vehicles that they were being falsely told were extremely safe, when the facts are that they were highly risky. Many pension funds and the like allocate a certain small percentage of their investments into high risk vehicles -- but the financial crisis is being caused in part by the realization that a much, much, much larger percentage of their investments actually turned out to be in seriously high risk vehicles, many of which have now defaulted.

Filed Under: financial crisis, hedge funds, new york, wisconsin

Leverage, Derivatives And Dog Food: How Wall St. Screwed Up

from the and-what-comes-next dept

Following my post on the makings of the financial crisis, some folks noted that I didn't really discuss the issues of leverage and derivatives, and how they ended up screwing up Wall Street something fierce -- as, instead, I focused much more simply on the issue of "risk" and sort of swept those details under the rug. I'd been intending to tackle the subject this week, but it looks like Andy Kessler has already done the job for me, with an excellent description of how Wall Street went from helping people trade stocks into a bunch of cowboy hedge fund traders who didn't even realize what they were trading, but knew they were making tons of money -- so they kept borrowing to do more of it. They got suckered by their own dog food and ate until they became seriously overstuffed.

Still, those profits weren't enough. Their customers were making great money buying Wall Street's derivatives. But why should banks and pension funds and hedge funds have all the fun? What a perfect use for all that capital on their huge balance sheets and cheap financing from low interest rates. Wall Street, en masse, started buying all these high yielding derivatives for their own account. They ate their own dog food, if you will.

It was the easy trade. Borrow at 3 percent and make 6 percent or 8 percent or 10 percent. They liked it so much, they levered up. Meaning instead of just borrowing a dollar for every two dollars of assets they owned (which by the way, thanks to the 50-percent margin requirement, is the amount of leverage that you and I are allowed to buy stocks from these same firms), they borrowed 20 to 1, 30 to 1, and even 50 to 1, if they could get away with it. And man, it was a lucrative trade. So why not?

I'll tell you why not. Because all of a sudden, Wall Street is no longer a business of traders or stock brokers or investment bankers, it's a giant hedge fund. And they have no idea what they are doing. None. I ran a hedge fund for a lot of years and learned rather quickly that if a trade was too good, if everyone was doing the same trade, then I should absolutely turn around and run for the hills. But no one on Wall Street did. The spreadsheets flashed green. Risk was a four-letter word best not said in polite company. Wall Streeters became hedge fund cowboys and loved the spoils, until a tiny little downturn in housing sent everyone rushing to get out of the pool at the same time.

It's a good read. Kessler and I agree that a new sort of Wall Street will come out of this -- and that's for the best. Money will flow again, but there will be new opportunities for banks to get back to basics.

Filed Under: derivatives, hedge funds, leverage

Microsoft's Facebook Deal Might Make Sense If It's An Ad Subsidy... But What About The Hedge Funds?

from the still-scratching-my-head dept

We had some good comments on yesterday's post trying to do the math on Microsoft's $240 million investment in Facebook, for just 1.6% of the company. A few people pointed out that if you ignore the ownership part, and just think of it as something of a marketing statement for Microsoft's ad network, then perhaps it could make some sense. Maybe. Since the deal does come with a big advertising deal, if Microsoft thinks of the $240 million as a marketing spend or ad subsidy with the chance of eventually having some payback then it could potentially make sense -- depending on how valuable Facebook ads turn out to be, and whether or not it then helps Microsoft sign up additional ad partners. However, what's a lot more difficult to figure out is the corresponding rumor that on top of the $240 million from Microsoft, two hedge funds combined to dump another $500 million into Facebook at the same valuation. It's been reported that Facebook had been looking for $750 million, but those hedge funds don't get any of those additional benefits that Microsoft gets. For them, the best has to be on the fact that Facebook is going to be worth a lot more than $15 billion at some point in the relatively near future. That seems like an awful lot of money to bet on a risky situation without that much upside.

Filed Under: ad network, hedge funds, social networks
Companies: facebook, microsoft

Hedge Funds Betting On Patent Lawsuits With Courtroom Spies

from the you-need-that-edge dept

For many in the hedge fund world, the game is based around having some sort of edge -- that single piece of information that no one else has (yet) that allows the hedge fund to make the trade that will pay off big time when the information spreads. Apparently, a number of hedge funds are looking for that edge as it relates to patent trolling cases. There are so many patent troll cases these days, and they often impact large, public companies, that knowing the results before the news hits the wires can open up the opportunity to make an awful lot of money. That's why hedge funds have started sending spies into the court rooms of prominent patent troll cases (via Paul Kedrosky). Apparently there have been several cases where as soon as the verdict is read, a bunch of folks run out of the courtroom (you're not allowed to use mobile phones in the court room). They're not reporters, but patent litigators hired by the hedge funds to report back in within seconds of the verdict coming down. That gives the hedge funds enough time to make their trades before the reporters write their stories and the news hits the wires. We've talked about investors betting on patent trolls before, but this takes the practice to a new level.

Filed Under: hedge funds, investing, lawsuits, patents

From Hedge Funds To Skype, Collapses Prove Unavoidable

from the crashing-down dept

Is there a connection between the recent meltdown at quant funds and last week's outage at Skype? Nick Carr makes the provocative argument that both events are the result of what happens when algorithms fail to anticipate behavior that is somehow out of the ordinary. In the case of quant funds, their models failed to anticipate the market's wild volatility, whereas with Skype (if you believe the company's official explanation), the glitch was the result of mass reboots taxing network capacity. Interestingly, both Skype engineers and hedge fund managers were heard using the phrase "perfect storm" to describe the sequence of events that lead to their respective collapses. Of course, as hedge funds learn every few years, these perfect storms that are mathematically supposed to occur just once in a thousand years, seem to happen quite a bit more often. The same goes for any network that suffers an outage despite the best laid contingency plans. The problem is that it's difficult to craft an algorithm or a model that's robust during 'normal' times and abnormal times. In finance, one hopes that the profits are big enough during the good so that you can survive the occasional mess. The one problem, of course, with the comparison between hedge funds and Skype is that Skype's explanation doesn't ring particularly true. The connection between Microsoft patches, mass reboots and the network collapse seems tenuous at best. Thus, it's entirely possible that this particularly outage had nothing to do with abnormal crowd behavior. Still, as the surprise outage at 365 Main demonstrates, it's difficult, if not fully impossible, to completely inoculate oneself against adverse events.

Filed Under: algorithms, hedge funds, quant
Companies: skype