Robinhood has Some Explaining to Do
Multiple regulatory bodies are looking into the practices surrounding one of the biggest short squeezes in history.
The popular online broker Robinhood – among others – are feeling some heat from the Department of Justice, the Commodity Futures Trading Commission, and Congress as they seek additional information surrounding the enormous rise in GameStop Corp. (GME) stock.
There’s been a ton of confusion around the recent Reddit-fueled attack on some of the most heavily shorted stocks in the market, and these regulatory bodies are looking to get to the bottom of several concerning allegations of market manipulation and conflicts of interest.
Yesterday, the House Financial Services Committee heard testimony from Robinhood CEO Vlad Tenev regarding the platform’s decision to halt trading on certain stocks as they experienced a massive short squeeze.
Tenev has defended the move as a necessary step to ensure Robinhood was able to rectify a $3 billion deficit in clearinghouse funds to cover its risks during unprecedented volatility.
Still, many Robinhood users believe it was done in an effort to throw a lifeline to hedge funds that were losing billions of dollars on the short squeeze.
Whatever the case may have been, the subsequent investigations could have some big ramifications for how brokers do business – and perhaps some additional government regulation on the market.
Here’s what could happen…
Where’s the money?
At the heart of the allegations of market manipulation and conflict of interest is Robinhood’s relationship with investment firms like Citadel LLC.
To put it simply, Robinhood sells its users’ order flow to be executed by market makers like Citadel – a practice known as payment for order flow (PFOF).
While brokerages claim that PFOF actually improves fill prices for their clients, that isn’t always the case. In fact, Robinhood paid a $65 million fine to the SEC in December for providing inferior trade prices.
The real problem with PFOF is that it is not a transparent process. While the practice allows brokers to offer commission free trading, the details of the matched trades don’t appear in public data feeds, making it difficult to know if an order received an inferior price or not.
There’s a reason firms like Citadel pay big money for brokers’ order flow, and that needs to be explored to ensure the practice isn’t benefiting big institutions while hurting retail investors.
The outcome of the investigations is anyone’s guess right now, but here’s what I believe should happen…
How do I get some?
Despite the smokescreens and excuses that Tenev will make, I think that Robinhood restricted traders from buying GME stock in order to push the price back down and help the hedge funds like Citadel.
And they should be sued for that.
I think that the government should make hedge funds disclose their short positions as well as their long positions. That would help to improve transparency in the market, even if new regulations on buying order flow aren’t enacted.
But again, at this time it’s unclear what, if any, changes are going to be made.
What is clear to me is that the market has fundamentally shifted. Retail investors will continue to target the most heavily shorted stocks in an effort to create massive profit opportunities.
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In the Spotlight: Bitcoin Making New Inroads
North America’s first Bitcoin ETF – The Purpose Bitcoin ETF (BTCC) – debuted on the Toronto Stock Exchange yesterday to a very receptive market.
The exchange traded fund saw more than $80 million worth of shares exchanged in the first hour of trading alone.
While it’s not the first of its kind, the expansion of a cryptocurrency ETF into a North American market is a big step.
I’ve been following the cryptocurrency market closely for years now, and as more great profit opportunities arise, you can bet I’ll be sharing them with you here at Profit Pregame. Stay tuned.
Robinhood has Some Explaining to Do