Free Trading on Trial: Seven Questions to Ask before Thursday’s Hearing

Shah Gilani Feb 17, 2021
2 

Enjoy your commission-free trading while it lasts. Because tomorrow, the House Financial Services Committee, chaired by uninformed and sometimes-unhinged California Democrat Maxine Waters, is going to rip into the fabric of what makes your trades free in the first place.

Let’s dive in…

The Breakdown

In the process of asking all the questions necessary to conduct a thorough hearing on what happened when GameStop Corp. (NYSE:GME) stock got squeezed, when hedge funds teetered, why Robinhood and other brokerages stopped clients from buying more highly shorted stocks, exactly who did what, when, why, and how, the questions will ultimately be:

  1. Is shorting stock bad?
  2. How much shorting is too much?
  3. Who orchestrated the short squeeze, and was what they did legal?
  4. What really happened when brokerages stopped retail traders from buying more stocks?
  5. Did Citadel play any role in brokerages stopping clients from buying stocks?
  6. How have “retail” traders and institutions been impacted by what happened?
  7. What needs to change?

Of course, there’ll be the usual posturing and pontificating by political posers pretending to protect our rights, some of whom trade themselves, all of whom invest, because being in Congress is an enriching career, thanks to lobbyists and backroom deals. So, it’s possible these critical questions won’t be asked.

But since they should be asked, I’ll answer them for you. Not just because I have the answers, which I do, but because once you know the right answers, you can laugh at how they’re actually going to be answered by the likes of Vlad Tenev, founder and CEO of Robinhood; Steve Huffman, CEO of Reddit; Keith Gill, the Reddit “Roaring Kitty” who turned $53,000 into $48 million on GameStop stock (and then lost most of that); Ken Griffin, the billionaire hedgie who owns Citadel; and the politicians themselves who will invariably rhetorically answer their own questions to sound as if they know what they’re asking and what the right answers should be.

So, without further ado…

Is Shorting Bad?

No, it’s not. It’s not un-American. It’s not anything other than a legitimate way to make money (if you’re right) that a company will lose money, or maybe fail, because they’re doing something wrong, stupid, or illegal, or they’re just dying a slow death from natural causes. It’s actually a healthy counterbalance on the scales used to weigh companies’ prospects.

How Much Shorting is Too Much?

The only limit on shorting, in terms of the number of shares that can or could be shorted, should be determined by how many shares can be “borrowed.” If a short-seller can’t borrow shares to deliver them to the person who is buying them from the short-seller, he shouldn’t be allowed to short them.

Oh, that is a rule already.

So, let’s see if anyone asks the question: How are short-sellers able to short stocks if they can’t or aren’t borrowing them?

Who Orchestrated the Short Squeeze, and Was What They Did Legal?

It was just a bunch of peeps on social media, with an agenda, for sure. What was their agenda? To make money. Was it illegal ganging up publicly on hedge funds? No, hedge funds do that all the time, behind closed doors, and in Bill Ackman’s case and a lot of other hedgies who announce their big positions at industry conferences, in public. What’s good for the goose…

What threw hedgies (and legislators) for a loop is that “Joe Schmos” from Reddit were able to learn what they had known all along: the two biggest predictors of a short squeeze opportunity. It’s not illegal to take up opportunities that are in front of you, and it’s certainly not too late to learn how to make these plays for yourself.

The secret is out, and you can get the details on how you can catch the next super squeeze opportunity here.

What Really Happened When Brokerages Stopped Retail Traders from Buying More Stocks?

What happened is they needed to post their version of margin. That’s all. No conspiracy, no B.S., just regulations.

Did Citadel Play Any Role in Brokerages Stopping Clients from Buying Stocks?

No, they didn’t. They would have liked to, but they didn’t. Could they have? Yes. Have they stopped brokerage clients from trading before? Hmmmm… I’m not going to answer that, but if I were, I’d say the likelihood of a majority of discount brokerages having “outages” on the same days at the same time, is unlikely. You do the math.

How Have “Retail” Traders and Investors and Institutions Been Impacted by What Happened?

Who cares about the institutions? They’re pros. Let them figure out how to protect themselves from the Mom-and-Pop investors they’ve fleeced for decades – make that forever. Retail’s been impacted in a good way; they’ve gained power and are no longer Wall Street’s doormat. I LOVE THAT!

What Needs to Change?

That’s a long answer.

For now, suffice it to say, only a little. Not commission-free trading and retail’s access to markets. Not the selling of order flow (which I hated until it made trading free and fractional shares possible). Not retail traders talking shop on social media.

Sooner than later, we need better-enforced rules on locating and borrowing shares to short; we need tighter parameters on “frontrunning” by firms that buy order-flow, meaning let them make up to a penny a share, but not more, unless they are legitimately providing liquidity. And unchain all the order flow data controlled by exchanges, which is what I wrote about last week.

There’s a lot that’s broken on Wall Street, but not retail’s ascendency. That’s genius.

However, if Congress gets it wrong, and we’ll have a good idea by the end of the day Thursday if they ask the wrong questions, assume they have answers that are wrong, then retail traders could suffer.

And some brokerage company stocks could tank.

I’ll tell you where this looks like its going and what to buy or short next week.

Until then,


Shah

2 replies on “Free Trading on Trial: Seven Questions to Ask before Thursday’s Hearing”

  1. Dave Ogden says:

    Thank you, Shah

  2. James Welge says:

    Shah, this was a very articulate, well written, thoughtfull analysis of the GameStop and shorting game!! I, like you, suspect that the congrssional hearings regarding this, may lead to poorly thought out legislative overkill and poorly thought out regulation.
    I share the concern that borrowing shares to accomodate shorting is not being properly policed, so that borrowing cannot take place in excess of shares that are available. It is scary that allegedly 2 and 1/2 times the number of shares were borrowed than were available for borrowing at one point in this craze.

    You may not agree with me, but I think more enforcement needs to take place in the area of “Front Running” by brokerage firms, orders placed by brokerages using their own funds, to place trades, before retail custommer orders are allowed to trade.

    Best Regards
    Jim Welge

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