The Shocking Truth About PFOF That Will Leave You Speechless! | Financial Times

During meme-stonk craze of 2021, everyone had one question: Is there a working class revolution underway in the stock market?

The answer was obvious: no. Some people made money in a speculative bubble, which was good for them! A few more people lost money, which was less nice for them, but they memed a hedge fund into oblivion, which was kind of funny. And in the meantime they began to imagine the new sans-culottes, which was very stupid.

Dumb Money, out today, takes that misperception and seeks to reify it. You can read the mainFT review here, with interviews with the writer, producers, director and so on. But Alphaville will focus primarily on the film’s faithfulness to reality. And we can’t believe it’s come to this, but we will defend Ken Griffin (shudder).

The film basically sparks outrage over a bizarre conspiracy theory that Griffin was behind Robinhood’s clumsy decision to suddenly freeze its users’ ability to buy GameStop near the height of 2021’s stonk meme craze. Because Citadel (the hedge fund separate) had taken an equity stake in Melvin Capital, or something like that.

While it’s almost painful to engage with this line of thinking, I had to watch it brew for nearly two hours, so now it’s your turn.

The alleged conspiracy appears to be that Robinhood blocked investors from buying GameStop shares so hedge funds could cover their shorts? But there was a actual The reason is that the huge volatility of meme stocks has pushed clearinghouses to demand more liquidity from brokers.

AS mainFT reported at the time, brokers dramatically increased margin requirements for their clients, and Robinhood faced a $3 billion fee. Since he could not satisfy, he had to stop negotiations. across all of the most volatile meme stocks. But Redditors could still happily trade as much as they wanted on other brokers, which was mostly fair increased margin requirements!

The film also makes disturbing noises about payment for order flow (PFOF), in which market makers like Citadel Securities pay brokers like Robinhood to execute bundles of their clients’ trades in dark pools. We haven’t read the source material The antisocial network and I can’t speak to any conspiracy theory in it, but the movie theory seems to be that because Citadel Securities was paying for order flow from Robinhood, it was able to lean on Robinhood to hedge. . . Citadel hedge fund’s stake in Melvin Capital?

This is bizarre for many reasons. First, it doesn’t make sense to say that Citadel Securities would want people to do this stop trade GameStop shares.

Here’s a very obvious fact about financial markets: no one trades for free. The trades include spreads that go to market makers who act as intermediaries between the two parties. Citadel Securities is one such market maker! The greater the number of exchanges that take place, especially by private individuals! – the better for Citadel Securities. That’s why the market maker achieved record revenue of $7 billion in 2021.

Oh, and when there are a lot of trades in a stock that doesn’t have a huge amount of shares outstanding, like GameStop, that spread goes peanuts. The SEC had a nice graph in it staff report on the GameStop saga:

If nothing else, Citadel Securities and other market makers should have been encouraging Moreover trading in GameStop, without discouraging him to bail out hedge fund competitors Citadel LLC. This will be painfully obvious to our financial industry readers and has been covered long before, but we hope against hope that some Reddit degenerates and regular people will notice too.

Even Better Markets – hardly a friend of Wall Street in general and Citadel in particular – simply called it “unfounded speculation” in his otherwise critical report on the saga.

The biggest problem with the movie is that the other people involved in the GameStop mania deserved the anger more.

All the Dumb Money Redditors are charming and relatable, and there’s no sign of the platoon of scammers who hosted Twitter spaces for months after hedge fund short positions were effectively squeezed, arguing that the Big Squeeze would have happened anyway if more traders just HODLed. Unlike Gill, these Internet personalities manifestly were Not publish real-time spreadsheets with their investment positions.

In fact, I got into the habit of connecting to the Twitter spaces of some of these individuals after the GME short squeeze occurred. Here’s one of the exchanges that stood out at the time: A guy came forward to offer free software to help day traders track positions, for tax purposes. He was immediately met with hostility from the space guests. This is because his software included the recording of purchases AND sales, which implied that these “diamond-handed” investors would ever sell.

Things have gotten really crazy, and not in an inspiring way.

The film also completely ignores the business executives which had evidently encouraged a retail craze before diluent THE Always loving shit by their shareholders. Robinhood executives took some criticism, but strangely it was overpaying for order flow (??), rather than pushing and encouraging a retail trading boom until it came back to bite them, or the poor risk management that led to the suddenness $3 billion margin cost by the National Securities Clearing Corporation and triggered a trading halt in the meme’s stock.

In slight defense of the film’s makers, there is one (we counted) who recognizes that people weren’t just sacrificing earnings but losing real money if they listened to carnival barkers urging them to hold on to stocks indefinitely. And he has the good sense to focus on Keith Gill, who seems decidedly less feisty than many of his peers.

It’s also funnier than you might fear, largely due to some big-name actors chewing scenery as fund managers. (It made us want to be friends with Vincent D’Onofrio’s Stevie Cohen. Romeo the pig makes an appearance! Let’s go to the Mets! Maintain publication, king!) Pete Davidson is also there. But expectations were and should be low, because the movie is about lines on the screen and numbers going up and down.

Financial markets will not be the source of bad money for a statistically significant number of people. But instead of showing the pernicious consequences of the GameStonk craze, the writers and directors decided to make the film an incredibly stupid rallying cry for Little Guy.

Was this really “class warfare plain and simple” as the film seems to claim? Class struggle. . . in the stock market? This makes no sense because, as we described above, stock trading primarily creates revenue for financial intermediaries! It’s like encouraging people to go to Las Vegas to attack The Man through slot machines. The reality is that no one loves retail investors more than Wall Street. “Superstonk” is basically QAnon for people with brokerage accounts.

Of course there are various reasons why you might decide to get angry at hedge fund managers. But the film doesn’t provide any coherent ones.

He has a vague distaste for short selling, but committed short sellers very often reveal fraud and outright corruption. A character monologues about the “Wall Street” firms that restructured his father’s company and destroyed his pension, but hedge funds don’t do that kind of thing. Private equity does it! And while hedge funds are known to use the tax loophole related to carry-interest this has benefited private equity so much, that it doesn’t seem like WallStreetBets is the right place to fight this kind of battle.

It is equally senseless for an individual investor to get angry at Ken Griffin over PFOF. Questions about PFOF mostly concern the quality of competition between market makers and more rarely a difference of a few microseconds in share price between trading venues. This doesn’t really affect individual investors, other than abstract questions about price discovery and a vague sense of being used for profit – and if you happen to be a retail trader who thinks today’s market makers are ripping you off , I have some bad news Di the old structure.

You might instead choose to get angry about the billionaire’s spending tens of millions of dollars carry out lobbying activities successfully against Illinois’ proposal for a progressive income tax: it’s one of the right ones 13 states with fixed tax rates – AND moved to Florida soon after. He said a Miami official he didn’t move because of taxes, but because of Illinois government corruption, crime, and the collapse of social services in Chicago. (The latter may have something to do with the state’s ability to collect revenue, but what do we know?)

The film instead decides to focus on a byzantine and debunked conspiracy theory about the structure of the stock market, because individuals have decided to try organized action in the financial markets, of all places. Hmm. . . like that Audre Lorde quote about master’s tools go?