There is a saying in the financial markets that in the event of a gold rush one should simply sell axes.
And the wisdom behind this proverb – which says it is better to make money through other Prime Time Zone’s optimism rather than being ravaged by that optimism as well – appeared in the market this week as market makers enjoyed the effects of the retail shift on the Reddit platform.
Users of the social media platform, “WallStreetBets”, through Reddit, showed their ability to send shares of companies such as “GameStop”, an American store that sells video games, “to the moon” at the expense of hedge funds that sold the company’s shares short, which contributed to the occurrence of The busiest week in the options market ever.
And it appears that companies like Citadel Securities, which execute buy and sell orders on behalf of the free-to-play Robin Hood platform, have been among the biggest beneficiaries of these events.
The higher trading volumes help those who profit from executing these trades, and despite the fact that GameStop’s shares have fallen sharply since reaching the highest level, the prices of shares of “Faircho Securities”, the only market-making company listed on the exchange, are still sharply high, and Robin Hood has witnessed And other trading applications such as “eToro” and “Trading 212” increased interest, and tens of thousands of new users registered with them, and those companies find themselves mired in a bad situation.
Robin Hood, and some of its counterparts, banned users from buying more Gamstop shares, and clearing houses – which ensure that cash and securities are exchanged in an orderly manner – have demanded that trading companies increase funds as collateral.
Reddit users, and even some lawmakers such as Alexandria Ocasio Kurtz and Senator Ted Cruz, described this measure as indicating fundamental injustice in the markets, and said that players on Wall Street protect each other by preventing external players – individual investors – from outperforming. On hedge funds, but there isn’t much evidence of that claim.
After all, market makers want to encourage activity, but the reality is not easy. And Robin Hood’s success means she needs to play the same rules as the big players.
It has to evolve rapidly to comply with post-global financial crisis rules aimed at making the financial system safer, and no gold prospector is convinced that he will find gold soon. He wants someone to tell him that he is not allowed to have an ax, however, legislators learned the hard way. The optimism driving the markets higher could quickly turn into fear leading to a devastating scramble to exit the market, however, there is still logic for Congress to look again at how the markets work.
The reforms may have made banks safer … but critics claim that they have shifted the risks elsewhere in the financial system, and the banks ’demand for higher capital requirements made trading less attractive, and thus the widespread institutions such as Citadel Securities, which profit from the differences, became less attractive. The simple price between buy and sell plays a much greater role.
Moreover, clearing companies are also important and for good reason. The inability of Lehman Brothers to benefit from the trading business is the reason why the bank’s collapse turned into a full-blown financial crisis in 2008.
And when volatility rises, liquidity comes at a higher cost, which is what trading apps have discovered.
There are fewer systemic risks than current events between individual investors and hedge funds, but these problems are viewed with more concern, especially during the first phase of the Coronavirus epidemic when traders found themselves paying much more just to buy and sell US government bonds.
The Federal Reserve resorted to flooding the system with liquidity, as it did during the troubles in the Treasury and Repo markets in September 2019.
Any congressional investigation should include a focus less on conspiracy theories about “Robin Hood” and more on real concerns about how the markets operate.
Financial Times Editorial.
The Financial Times article: The “GameStop” story highlights problems in the way the market works, written in the Al-Borsa newspaper.