The Robinhood/GameStop “Scandal”

January 31, 2021

As I understand it, there are many folks out there who think that we saw some major sleaze by the Wall Street big boys, screwing the little guy, when Robinhood stopped taking buy orders on GameStop, as the stock was soaring to record highs. They resumed taking buy orders after a pause of a day or so.

The story is that this allowed for Robinhood’s hedge fund friends to get out of their short positions, thereby saving themselves from huge losses. Yet another case of the big money Wall Street crew ripping off ordinary investors.

I have to admit, I don’t quite see the scandal here. First, the official story from Robinhood was that they needed to raise capital to met SEC leverage requirements. That seems to me to be outwardly plausible, since the company did in fact raise a substantial amount of capital during this brief period.

As far as the claim that they were giving the hedge fund boys time to close out their positions, that is possible, but the stock price fell precipitously during this period. If the hedgies were getting out, this would have meant they were buying to cover their shorts. That should have driven the stock price up, not down. My guess is that most of the hedge funds had closed out their positions when the stock was at $40 or $50, I doubt they still had big bucks in their shorts at the point where it hit $400.

But more importantly, what exactly is the Robinhood/GameStop crew complaining about? During the period of the buying moratorium they still had the opportunity to buy the stock through another platform if they were really dying to do it. But more importantly, the stock price fell by more than $100 a share during this period. If this was due to Robinhood’s moratorium, then the company allowed its clients to buy shares at a huge discount compared to the pre-moratorium price. What is the problem here?

Anyhow, I hate to ruin a good Wall Street scandal, but I would rather focus on real ones.


More on the FTT and the GameStop Game

In an earlier post I had said that I didn’t think that a financial transactions tax, of the size generally proposed, would have much impact on the sort of frenzy we saw around GameStop. A friend pointed out to me that Robinhood’s business model depends on passing its order to its partners, who profit by front-running trades and then making kickbacks to Robinhood. In this context, a tax of 0.1 percent (the amount proposed in a bill just put forward by Representative Peter DeFazio) may put Robinhood out of business, since it would likely absorb the full profit on a trade.

That is very plausible, but if we envision people using a platform like Robinhood and trading with low fees, it is still very possible that we could see the same sort of frenzy that we saw last week. In other words, I doubt raising the cost of trades by 0.1 percentage point could stop this sort of mania, although it could slow it down a bit.

Anyhow, as I said in my prior post, there is no reason the government shouldn’t get a few bucks out of the deal. We tax other forms of gambling, why not tax gambling on Wall Street?



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