So in a way, with all of this potential activity, and please correct me if I'm wrong.
But in a way, are you saying that you have all of these Wall Street actors that are seeing what's going on, potentially with this online activity, and saying, Well, we know there's gonna be a high volume of buys ahead of time.
So I'm also going to buy under the kind of the guise of all of this online activity going on, and then potentially make out on top of it as well.
Yeah, that's what you're saying too.
[CROSSTALK]
So that is my suspicion, yes.
So yeah, so you suspect that this is not just redditors buying the stock, but that is also potentially.
Larger actors on the market and that that's something to explore this potentially larger actors on the market, looking at activity happening ahead of time and then getting ahead of it as and then getting ahead of that as well and almost using that as a veneer for riding this stock yet.
And there's one other wrinkle to all of this that I think is important for folks to know, which is a lot of folks have used the app Robin Hood, which I like to think of as the Facebook of stock trading.
And I say that because Facebook is sort of designed to keep you on Facebook, right.
It's designed to grab your attention and keep your attention Robin Hood is very similar.
I would describe it as gamified.
I know a lot of Robin Hood folks would disagree with that assessment.
That's just my personal assessment.
But Robin Hood is free, it doesn't charge Commission and the way that their business model works is they sell their order flow to market makers, which are these sophisticated Wall Street participants who execute the orders for them.
The market-maker they sell the most of their flow to is a hedge fund named Citadel.
And Citadel is not just the hedge funds, they're also a market make, they're also a technology company, they're on fire billionaire name Ken Griffin who is out of Chicago, who has funded some very questionable things in his political giving.
But Citadel pays for Robin Hood's order flow.
And strangely enough, the or maybe not so strangely, one of the hedge funds that wall street that was very excited about blowing up, Melvin capital was rescued by Citadel After it blew up.
So Citadel is paying for the order flow on Robin hood, which is driving up the price of the stock, which crashed one hedge fund and then sit it out sort of, but that hedge fund on the cheap, after it crashed.
And so, for folks at home so that we can put these dots together.
And because I think this is an important relationship to, to first to communicate and map out with you.
So basically also what you're saying now, is that you've got Melvin capital, right, Melvin capital is the hedge fund.
That was shorting GameStop.
They were the folks that were saying we're gonna make a ton of money.
We're going to make a ton of money off of GameStop's stock going down Wall Street that's comes in potentially with folks on Wall Street looking at what Wall Street bets is doing to kind of supercharged this activity and say you know what?
We're going to make the stock go up.
Which would of course.
Put Melvin capital into an extraordinarily compromised position which would essentially prompt them to get bailed out by one of the groups known as Citadel.
Now, okay, so Citadel, then swoops in as one of the actors to bail out Melvin Capital.
But Citadel's owner also co-founded a different Citadel.
They're both connected, hence the same name by the same owner.
They are two technically different entities, though, but they are, but the same founder.
Right so Citadel LLC is the parent company.
Citadel securities is the market maker that buys the Robin Hood orderflow but the parent entities Citadel LLC is the one that swooped up Melvin capital and Congresswoman I should just add there were actually two.
Wall Street firms that bought Melvin capital or rescued it, I should say Citadel and and another one now I'm blanking Of course on the name but it's the new fund of Steve Cohen, who you may know as the owner of the New York Mets.
All right.
[LAUGH] And Steve Cohen is famous for all the,
Wrong reasons this what the chat?
Yes, thank you.
Thank you.
Steve Cohen is famous or infamous, I should say because he used to have a hedge fund called SAIC that pled guilty to insider trading in 2013 and had to shut itself down and so, This is the next generation of [UNKNOWN]
All right.
[LAUGH]
So we've got Citadel and then 0.72 and who bailout Melvin capital who are relying on GameStop stock to tank.
So Citadel comm swoops in To swoops in to bail out Melvin capital.
But then Meanwhile, this connected Citadel under the same founder, it also receives the advanced information from Robin Hood.
That's what you're saying?
Yes, and I should clarify that's not unusual.
That is allowed.
It is something called payment for order flow.
During the Obama administration.
They raised the question about whether or not that was a good idea.
They asked one of their sec, which is a market regulator.
They asked the SEC Advisory Committee if Payment for order flow was just kind of disguising how you were really paying for stock trading.
So the idea is, Robin hood is free.
You don't pay commission, but the broker is supposed to make sure that they give you what's called best execution.
So they execute your trade and either get you the best price or they execute it really, really fast.
Citadel is paying Robin Hood for that order flow and they pay them via these things called rebates and Citadel might pay whatever they pay a different market maker may pay a little bit higher rate and what is not supposed to happen is the broker is not supposed to give the order flow to the highest bidder, because that would prevent them from giving their customers best execution.
People should know that Robin Hood was accused by the SEC in December of 2020, of not giving their customers best execution and actually costing them $34 million.
Even when you accounted for the free Commission's because of their failures to provide them with best execution.
So you're saying just a month ago?
Robin Hood was in trouble for not optimizing their customer's trades.
Yes, it was covering a period of time further back in time, right it was, I think in the 2018 range, but the action came down Robin Hood did not admit or deny Killed in the action but they did have to pay a civil penalty to the SEC to settle the charges
and they did pay that penalty to the SEC.
So these were charges that came from the SEC, just one month ago.
But these were they they were regarding actions that happened in 2018, but that this is documented past behavior from Robin Hood.
Correct.
And the other thing is Robinhood wasn't disclosing another part of that action was Robin who wasn't disclosing that they were paying our market maker for the order flow.
So why do I bring all this up?
I bring this all up to say Is Robin Hood doing the best by their customers?
Are these fin tech companies that are so easy to use that lots of people are using to trade stocks?
Are they doing right by their customers?
I think that's an important question that regulators should be asking right now.
So let's talk a little bit about what happened today with that.
The freeze that you saw not just on Robinhood but on I believe e trade well bull etc, where you have a lot of these retail you know these these retail platforms and all of a sudden putting a halt to some trades are not just GameStop but there were also there was also some activity I believe around AMC And other stocks that have been particularly identified by the subreddit, Wall Street bets.
Tell me a little bit about what is going through your head when you see activity like that.
And for folks at home, there are multiple possibilities here.
I think a lot of people sometimes want to jump to certain conclusions, but there.
In order for us to really responsibly look at the situation.
It does seem like there's more than one potential explanation but I'm interested in hearing what's going through your head when you see that and what are some of the possibilities that could arise.
So I just don't know why Robin Hood made the decisions they did to stop trading, allowing purchases of certain single-name stocks today.
Their decision was a little different than some of the other brokerages.
For example, So think of it from a point of the view of the brokerage right?
Especially if people are selling stocks short which has the potential for unlimited losses.
If your client goes bust and enough of your clients go bust then the brokerage goes bust.
Mm-hm.
So what Different brokerage did not Robin Hood but one called interactive brokers and some other brokers on the that, you know regular people use is they just change what's called their margin requirements.
If you wanted to buy a stock and some of these really active volatile names today you had to supply 100%
Cash margin.
And what does that mean?
You basically just had to front all of the money yourself, which might sound funny to people who don't trade stocks, but believe it or not, you can sometimes trade stocks with borrowed money.
So they're basically saying you can't borrow any money.
You got to trade cold hard cash if you want to buy these stocks.
So that's what I sort of would have expected.
To see from everybody.
Instead, what we saw is Robin Hood just straight up saying you can't trade in any of these names.
Now, I don't know that we know any more than that, was there direction coming in from from regulators?
Was this just a decision made by Robin Hood?
I don't think we knew, but I was a little surprised at their action as it related to what other brokers did.
And I should just say if we can just rewind very slightly because I forgot to mention this before about the whole idea of payment for order flow.
The reason that's important is because the the firm that you give your order flow to who knows what Your executions are and they can run in front of it and front run and trade ahead of it and make profits which may be fine or may not be fine but I just thought that that's important to mention.
So you set it up.
Sorry, you're gonna you're just about to say and Citadel is the one who receives that in that advanced operation from Robin Hood.
So correct all of these folks, but That but that advanced information only lasts for a few seconds, right?
Correct.
But set it all is known and other entities that do this market making are known for their high frequency trading algorithms.
That's their specialty.
They're experts.
They hire tons and tons of programmers and so You know that they're allowed to make profit ahead of that.
But I think the question that a lot of people have and we just don't have enough information to know is were they doing more with that information than just executing the trades?
So those are some of the questions that seem to be outstanding right because of Citadel receiving these advance.
This advance trade information from Robin Hood I go on my phone, except not me because I don't believe members of congress shouldn't own individual stocks, so I don't have any.
But hypothetically, if I'm on Robin Hood, and I hit my order, along with thousands of other people at that moment, CNET dollars is able to get that, potentially able to get that information.
milliseconds in advance.
And in those milliseconds their trading algorithms could adjust knowing that advance execution information is that correct?
Yes.
And then and I'll say that since a lot of the Robin Hood trades are very low volumes, what they often do is batch them together and so Citadel might be trading in much larger volumes and and matching the orders as they batch them together again, all in this sort of time of, Many micro seconds, but that's what they specialize in doing, is this very, very high speed high frequency training as it's called.
And so I think here, for folks that are watching at home, this is what raises a bunch of questions.
Not just for me but also from I think this is why this is starting to attract the attention of regulators, members of Congress, etc.
Because there's a lot of policy questions that come up policy questions about shorting stock policy questions about, as you said, some of this advanced information you mentioned, the Obama administration started to raise some questions about, The potential for this and I think this also is about power, right?
Because everyday retail investors don't get that even if you were able to who knows program something at home.
You do not have that millisecond advanced information.
You just don't have the market power to have that right.
Right.
And I think that's the reason why, yes, lots of people are making money right now.
Yes, 1 or 2 hedge funds are blowing up.
But there's still always going to be a systemic disadvantage that retail has.
And that wall street is always gonna have the advantage.
They have more data.
As you said, Congresswoman, they're there, they're faster, they can execute things faster, and so They're always going to run circles around the little guy.
Even if it seems like they're losing
