[HN Gopher] The SEC's response to the 'meme stock' rally
___________________________________________________________________
The SEC's response to the 'meme stock' rally
Author : slowhand09
Score : 61 points
Date : 2022-06-24 19:28 UTC (1 days ago)
(HTM) web link (www.reuters.com)
(TXT) w3m dump (www.reuters.com)
| ratsmack wrote:
| It seems that the retail traders are doing better than the
| institutional types, so the "fix" is to hamstring the retail
| folks to maintain the status-quo, and make it look like they're
| doing a favor for retail by acting deeply concerned.
| ctvo wrote:
| > It seems that the retail traders are doing better than the
| institutional types
|
| Who do you think benefits most that this myth continues to
| propagate? The myth that the common man, with 1,000 USD to his
| name, can go on a trading app and do better than the financial
| elites and gain financial independence? Why would anyone in the
| market want to disabuse you of this when it brings in so much
| dumb money.
| Victerius wrote:
| That's a childish take. Here's what the article says are the
| SEC's actual concerns:
|
| Gary Gensler, the SEC chief, has criticized payment for order
| flow (PFOF), a practice in which some commission-free brokers
| generate revenue by sending customer orders to wholesale market
| makers in return for payments, rather than to exchanges. He has
| said a ban on the practice is not off the table as it raises
| potential conflicts of interest, giving brokers incentives to
| encourage customers to trade more frequently to maximize the
| payments. The meme stock trading frenzy exposed concerns about
| the ways in which PFOF increases complexity and potential
| fragility in the securities markets, the House Financial
| Services Committee report said. Proponents say PFOF is a major
| reason brokerages were able to stop charging trading
| commissions, and retail investors often get a lower, better
| price than they would on the main exchange.
|
| Gensler has criticized the "gamification of trading" in which
| commission-free brokerages encourage excessive trading using
| lights, noises, notifications and other gimmicks to generate
| more PFOF. He has also highlighted the use of artificial
| intelligence, predictive data analytics and machine learning to
| push products. In August 2021, the SEC issued a consultation on
| potential new rules to limit gamification and other "digital
| engagement prompts." The agency is expected to proceed with a
| rule change in the coming months. read more The U.S. House
| Financial Services Committee on Friday urged Congress to adopt
| legislation mandating the SEC study how its rules need to
| change to address new technological developments, such as
| digital engagement practices and social media-driven market
| activity.
|
| The GameStop saga highlighted the small number of market-makers
| -- brokers that execute trades and publicly post buy and sell
| quotes for others to trade -- that dominate the retail market,
| which may pose competition issues, Gensler has said. The House
| Financial Services Committee said that at the time of the
| Reddit rally, Robinhood was not connected to any exchanges, and
| of the six market makers Robinhood routed all its customers'
| orders to, nearly all were unable to execute trades in certain
| meme stocks due to the market stress. "Had all these market
| makers been unable to execute trades, Robinhood would have been
| unable to execute trades on behalf of its customers," the
| report said. Nearly all retail trades are executed away from
| exchanges. That is partly due to rules that allow market makers
| to offer fractional sub-penny price improvement on bids and
| offers, whereas exchanges have to quote in pennies. Gensler has
| said that has created an uneven playing field in the
| competition for retail orders.
|
| _______
|
| As an aside, institutional investors, like pension funds, are
| not trying to generate +500% returns on options or meme stocks.
| They're not trying to beat traders. They're more comfortable
| with stable rates of return over the long term. +2%-3% per
| year. Not hard to beat for a day trader.
| Animats wrote:
| _The House Financial Services Committee said that at the time
| of the Reddit rally, Robinhood was not connected to any
| exchanges, and of the six market makers Robinhood routed all
| its customers ' orders to, nearly all were unable to execute
| trades in certain meme stocks due to the market stress._
|
| Had Robinhood had actual exchange connections, would they
| have been able to execute the trades? If the exchange can
| match a buyer and a seller, you don't need a "market maker".
| Market makers provide liquidity in infrequently traded
| assets. For frequently traded assets, you don't need market
| makers, just matching of buyers and sellers.
| ueieishdijw wrote:
| logifail wrote:
| > the retail traders
|
| I have a friend who works in HFT[0][1], over a beer or three in
| central London a few years ago he told me that in his world a
| common description of retail trading is "dumb flow".
|
| When your intentions to trade are being sold to the HFTs before
| your trades are even priced, I guess that does indeed rate you
| "dumb".
|
| [0] https://en.wikipedia.org/wiki/High-frequency_trading [1]
| https://clsbluesky.law.columbia.edu/2015/12/15/is-high-frequ...
| tiku wrote:
| So nothing about the selling of stock they didn't own etc? That
| was one of the problems if I remember correctly.
|
| I wonder when the stock market is going to adapt some of cryptos
| tech, so that you can store your stock on your own PC instead of
| an exchange, like the paper versions.
| logifail wrote:
| > selling of stock they didn't own
|
| Compared with all the other stuff that goes on in finance, it's
| really really hard to see short selling as bad.
|
| https://www.cnbc.com/2018/10/05/experts-including-warren-buf...
| chrischattin wrote:
| Short selling wasn't the issue in this case. It was loaning
| out shares to short that straight up didn't exist.
| logifail wrote:
| > loaning out shares to short that straight up didn't exist
|
| We should note that naked shorting was apparently just fine
| until not that long ago[0].
|
| [0] https://seekingalpha.com/article/4453048-naked-short-
| selling
| Hasu wrote:
| The SEC didn't find any evidence of naked shorts in the
| GameStop debacle.
|
| Some people confuse naked shorts - which are currently
| illegal - with the simple finance fact that the same stock
| can be shorted more than once. Let's say A owns 1 stock. I
| borrow it from him and short sell it to B. Now I owe A one
| stock, and B owns one stock. There is _no reason_ (1) I
| can't borrow that stock from B, and short sell it to C. I
| now owe A and B each one stock, and C owns 1 stock. You can
| continue doing this as much as you want, and create
| effectively infinite short positions without ever doing a
| naked short.
|
| (1) Well aside from the the practicalities that it
| overleverages you and if your short position gets called
| you are completely screwed, and eventually you might not be
| able to find any stocks to borrow for shorting purposes,
| but there's no _theoretical_ reason you can 't do this.
| unethical_ban wrote:
| I'm sure it's because I'm a plebian, but being able to
| create infinite short positions from one stock seems like
| a bad thing, whatever the name is.
| cuteboy19 wrote:
| Forget about selling PFOF, in crypto exchanges are directly
| betting against their customers. When it looks like they're
| losing, they just turn off trading with the "unscheduled
| maintenance" excuse
| snowwrestler wrote:
| The framing of this article makes it seem like the SEC is acting
| to protect the hedge funds from the little retail investor.
|
| The reality is that many naive first-time retail investors
| experienced big losses on the backside of the meme stock rally,
| to the benefit of a few sophisticated retail investors: the ones
| who incited the rally in the first place.
|
| This was possible in part because they were working on top of a
| new system of well-marketed apps that made trades free and
| incentivized. Taking all the friction out of the system made it
| easier for a few people to whip it around with emotion.
|
| The problem is structural which is why the SEC is looking at it.
| thr0wawayf00 wrote:
| Exactly. That combined with incredibly low interest rates for
| years motivated people to put more and more cash into the stock
| market because CDs and saving account returns are a total joke
| nowadays. The total amount of cash that has flowed into the
| stock market over the last two years has been insane.[0]
|
| 0: https://www.cnbc.com/2021/04/09/investors-have-put-more-
| mone...
| mvc wrote:
| Has there ever been a time when investors could expect to
| earn a high rate of interest on risk-free investments during
| a period of very low inflation?
| ghaff wrote:
| Educated investors behaving rationally? No. But plenty of
| people in these pages and elsewhere get upset whenever the
| SEC tries to impose some modicum of rules that try to limit
| investments by people who don't have at least some veneer
| of education about financial markets.
| tomcam wrote:
| I can't seem to find any comments here, or anything mentioned in
| the article about the fact that free people made their own
| decisions and had to absorb the risk. I don't know what's wrong
| with that.
| ok_dad wrote:
| So basically they're gonna figure out how to game the system for
| the institutional investors. I never thought that those
| "superstonks" folks would be proven right that the system is
| rigged, but there it is in plain text.
| rvz wrote:
| > I never thought that those "superstonks" folks would be
| proven right that the system is rigged, but there it is in
| plain text.
|
| It always has been and it is made for the institutions to
| rarely lose and be ahead with the smart money over retail
| traders.
| WJW wrote:
| "The institutions" typically employ hundreds to thousands of
| highly talented professionals who get access to sophisticated
| training and bespoke software tooling. Retail traders often
| have a day job besides investing, which necessarily limits
| the time they can spend studying the markets.
|
| Tbh this is like putting up the neighborhood poker players
| against WSOP champions. They might win in the short term but
| only through luck. Any retail trader getting into any but the
| most risk-averse type of index investing (ie the type of
| trade where they are aligned with the wider market anyway) is
| kidding themselves they can beat people who have at least a
| 100x advantage compared to them.
| lupire wrote:
| The focus of the article is PFOF, which is what the "hedges"
| use and exactly what Superstonkers protest about Robinhood.
|
| Meme stocks are HODLs; they don't need Robinhood.
|
| This SEC action is about exploitative promotion of day trading
| -- WSB gambling, not MOASS.
| hn_throwaway_99 wrote:
| "In plain text"??? Please highlight which of the 3 proposals
| you think will benefit institutional investors:
|
| 1. Banning payment for order flow. Basically all of
| r/wallstreetbets agrees with this, too.
|
| 2. Anti "gamification" of stock trading. I've commented on this
| a million times, but the fact that Robinhood graphs have no
| labels on their y-axis means those graphs are totally
| meaningless and only there to act like slot machine lights. If
| retail traders have the same trading options as before, but
| with real actual information instead of whizbang blinking
| lights, I don't see how this is a negative.
|
| 3. Competition issues because of dominant market makers. That
| proposal is 100% a benefit to small retail traders at the
| expense of huge market makers, which goes directly against your
| thesis.
| bdonlan wrote:
| Do you want to elaborate on which specific changes listed in
| the article are, in your opinion, beneficial to institutional
| investors at the expense of retail investors, and how?
| kcl wrote:
| I don't know where this method of argumentation came from,
| but it's obnoxious and I'm over it. There are even soyjaks
| for this. Either you don't know and you're being lazy (I
| don't think this is the case), or you do know and you've
| generated an asymmetric work request for op that you could've
| answered and that left unanswered by him casts doubt on his
| argument. If you have a case to make, make it, instead of
| this nonsense DoS attack. This is not a defense of op's
| position.
| sumy23 wrote:
| Your outrage is unwarranted. The proposed changes are:
|
| 1) Limiting PFOF because it creates possible conflicts of
| interest.
|
| 2) Limiting "gamification" of trading via engagement
| prompts.
|
| 3) Adding sub-penny prices to exchanges to harmonize them
| with market makers. This is to encourage more orders to be
| sent to exchanges instead of market makers.
|
| How are any of these things capitulating to institutional
| investors?
| Hasu wrote:
| Which "argument method", asking questions to gain a further
| understanding of a position both for yourself and the
| person you're asking?
|
| I'm pretty sure that it came from Socrates.
| Izkata wrote:
| The article:
|
| > The U.S. House Committee on Financial Services on Friday
| called for the SEC, along with other regulators, to do more
| to protect the markets from similar events. read more
|
| > The impetus for change came from the so-called "Reddit
| rally" of January 2021, in which GameStop Corp (GME.N) and
| other "meme stocks" popular on social media surged to extreme
| highs on buying from investors trading heavily through
| Robinhood (HOOD.O) and other commission-free retail
| brokerages.
|
| > The intense volatility led to big losses for hedge funds
| that had bet against the meme stocks.
|
| They don't like that the general populace was able to damage
| hedge funds, so they're making changes to stop it. I don't
| really know the changes technically, but the intent is right
| there.
| sumy23 wrote:
| That's just color commentary from the author of this piece.
| If you read the rest of the article, the specific changes
| proposed by the SEC are outlined.
| flenserboy wrote:
| Quit picking winners, government.
| wayeq wrote:
| I didn't read the article and I'm deeply upset by this.
| hn_throwaway_99 wrote:
| Can't tell if sarcastic or not, because so many of the comments
| here along the lines of "the SEC is sticking it to the little
| guy" are clearly from people that haven't read the 3 proposals
| in the article, which are all detrimental to large
| institutional interests for the benefit of smaller traders.
| Pulcinella wrote:
| _Gensler has criticized the "gamification of trading" in which
| commission-free brokerages encourage excessive trading using
| lights, noises, notifications and other gimmicks to generate more
| PFOF._
|
| Normally I despise gamification, but this just reads to me as
| "Kids these days. Back in my day we had shouting, loud clothing,
| and platform shoes on the trading floor. None of this new fangled
| _digital_ stuff!"
| lupire wrote:
| To put in gamer language: the latency and bandwidth are
| valuable for performance, not the RGB lights.
| potatoyogurt wrote:
| A very small number of people trade by voice on trading floors
| and they are generally professionals. This is categorically
| different from phone apps that reach into every ordinary
| person's living room. No one is advocating for a return to pre-
| electronic markets.
| sidlls wrote:
| It's a little disingenuous, in my opinion, to compare earnest
| opposition to exploitative or dangerous use of new technology
| to a ludditism.
| andrewflnr wrote:
| It's a little disingenuous to assume the new technology is
| actually exploitative or dangerous, when accusing one of said
| tech's defenders of disingenuity.
| this_user wrote:
| So this report pretty much disproves all of the assumptions that
| the meme stock conspiracy theorist have been making:
|
| Robinhood had to disable opening new positions, because they are
| unable to meet their margin requirements. They only survived,
| because they were granted a discretionary rebate. Otherwise, the
| DTCC could have taken control of their entire portfolio, and
| could have liquidated everything to protect its other member
| firms.
|
| RH had poor internal practices, and did not fully understand how
| these margin amounts were calculated, nor had they implemented
| best practices for modelling those. Additionally, they
| technological infrastructure had already been at the edge of
| breaking down under the load for days even before the meme stock
| event.
|
| Citadel Securities had nothing to do with RH not accepting new
| buy orders. In fact, they were the only one of RH's six market
| makers who never asked them to route away orders. The only thing
| the did negotiate for was a reduction of PFOF rebates, because RH
| was using its own, non-standard approach for calculating those
| that resulted in RH receiving a huge increase in rebates.
| PartiallyTyped wrote:
| > Robinhood had to disable opening new positions, because they
| are unable to meet their margin requirements.
|
| It wasn't just RH that blocked buy orders. Revolut did as well,
| and at least 2 others if my memory serves me correct.
| boeingUH60 wrote:
| I wouldn't trust any word of the meme stock conspiracy
| theorists. If you can stomach it, visit r/SuperStonk, and it's
| basically like QAnon of Finance...with many posts screaming Ken
| Griffin bad!
| savant_penguin wrote:
| Sir this is a casino
| qaq wrote:
| DTCC is not a government entity and not very transparent. One
| other thing people overlook is that RH and others make money
| among other things by landing out stocks to short so had huge
| exposure to counter party risk on the meme stocks they have
| lent out to shorts. Which made their interests even less
| aligned with their customers.
| collegeburner wrote:
| DTCC does this kind of limitation because the finance
| industry is still terrified after Sarbanes Oxley Dodd Frank
| and similar legislation. The goal is to create some self-
| regulation so that the feds don't come in and fuck everything
| up even worse.
| adrianmonk wrote:
| NPR's "The Indicator" had a recent episode on this:
| https://www.npr.org/transcripts/1106468243
|
| Part of it was an explanation of what Payment For Order Flow
| (PFOF) is. They also had a few short comments by a researcher on
| the potential conflicts of interest. His opinion was that there
| are two, and one of them (ensuring customers get a fair price) is
| solvable but the other (brokerages having an incentive to steer
| customers toward trades with higher PFOF) is more problematic.
|
| It sounds like the SEC hasn't decided whether to ban PFOF or just
| require more disclosure about prices, which seems to match up
| with what that researcher said.
|
| (Also point of trivia from the NPR episode: PFOF was invented by
| Bernie Madoff.)
| horsawlarway wrote:
| NPR's marketplace also touched on this over the last week, and
| does a decent job laying out the basics.
|
| Generally speaking - I think we're seeing the same dilemma here
| you see with digital advertising: The "customer" now pays no
| trading fees, but because they're no longer funding the
| activity through those fees, they start to become the product
| sold, and the actual customer getting catered to is now the
| brokerage paying the best PFOF... which they can likely do
| because they inflate their earnings by taking a larger cut,
| which means the original "customer" is still likely paying
| anyways, but they now have no recourse and no say in how they
| are bought and sold.
|
| I'm not at all a fan of the kind of perverse incentives that
| pop up when you have to trust an agent, and that agent is
| getting paid better by someone else to fuck you.
|
| We have fiduciary duty laws for a reason - this situation leads
| to bad places.
|
| For comparison - the vast majority of EU states have this
| banned as under their inducement to trade laws.
| anticristi wrote:
| > For comparison - the vast majority of EU states have this
| banned as under their inducement to trade laws.
|
| Interesting. Didn't know about this. Can you send me a link
| to something like Wikipedia or an EU regulation?
| horsawlarway wrote:
| This was confirmed last year: https://eur-
| lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELE...
|
| I think a few of the states are still in limbo (last I
| heard was something about germany saying that they need to
| allow PFOF to prove PFOF is harmful first), but my
| understanding is most folks are treating it as banned.
|
| That said - I'm way outside my area of expertise here, and
| would welcome someone more knowledgeable to speak on it.
___________________________________________________________________
(page generated 2022-06-25 23:01 UTC)