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Last week, Wall Street became the newest victim of its own manufacturing. While the $30 billion settlements in Archegos’ hedging budget have shaken up stock markets, banks in diversity have asked how accurately a discrete circle of family members in the workplace had controlled to make them lose so much money.
Retail investors deserve to be even angrier. The episode exposed the warm relationships between bulging banks and hedge fund bosses. Wall Street not only turned a blind eye to misdeeds beyond those leaders (Archegos chief Bill Hwang pleaded guilty). These banks actively help wealthy clients get even richer at the expense of others, and while Robinhood has begun to democratize parts of the investment, they have unknowingly unrapped the worst parts of Wall Street excesses without offering the solution.
As the Archegos saga continues to develop, normal investors will be informed of how Robinhood has exacerbated worsening market manipulation.
Many of these primary banks also oversee market maintenance activities; instead of paying commissions like regular investors, they get a source of income from the transactions they make; it’s a formula that puts Wall Street forks first at the expense of foreigners.
But then they were given the SEC along the way. In 2015, the Volcker rule, a component of the Dodd-Frank Wall Street reforms, made it much harder for investment banks to exchange their own cash. Therefore, these banks have resorted to the most productive: making cash through cash exchanges. other people.
Since the adoption of the Volcker Rule, banks have been based on the coverage budget and the offices of the family circle such as Archegos. With the right relationships, those other rich people can simply borrow huge sums of cash from investment banks to make the best bets on the market.
Bill Hwang’s Archegos Capital took those relationships a step further.
“For some time after the SEC case, Goldman refused to do business with him for compliance reasons,” Fortune reporters wrote, “but [Goldman] relented while his rivals deserved credit for meeting their needs. “
Companies like Hwang’s have generated so many commissions through indirect swaps (known as contracts for difference) that banks have largely ignored the absurd risk-taking that goes through their noses. Last week alone those monetary corporations learned that Archegos had only about $10 billion in equity for $50 billion in shares, several billion dollars less than FINRA’s minimum margin requirements.
That’s why the 25% drop in Archegos’ assets last week didn’t just hurt: in 4 days, leveraged losses destroyed the entire company’s capital cushion plus an additional $6 billion in bank capital (i. e. money from public shareholders).
In June last year, Alex Kearns, a Robinhood trader, committed suicide after believing he owed nearly $750,000 in inventory market losses. The 20-year-old did not delight in negotiating functions and had only $5,000 in savings. Prevent Robinhood from allowing Mr Kearns to negotiate high-risk contracts with virtually unlimited drawbacks. Since then, his parents have filed a guilty murder lawsuit.
That has not prevented thousands more retail investors from taking over Mr. Kearns; Reddit’s R/WallStreetBets lists countless publications of equally devastating losses.
The challenge comes down to maximum rates, an impediment even coverage budgets face. Both monetary derivatives and characteristics have value structures that are compared to retail investors. average features, the trader will lose long-term cash. What about Robinhood’s “zero commission” structure?Application-based brokerage simply turns the commission into higher premiums, as does the way investment banks benefit from the hedging budget.
These unfairs persist because Robinhood has failed to democratize Wall Street’s even more critical detail—the data that drives investment decisions.
From the investor’s point of view, those “sales side” players value their weight in gold (whatever the skeptics say). The most productive investment analysts demonstrate greater wisdom from the corporations they cover, and many of those analysts are occasionally expecting corporate profits of up to a penny. Even if they’re not perfect, those professional analysts have the time and resources no wheelchair investor can expect to replicate.
The hedging budget benefited greatly, systematically exceeding market rates.
Meanwhile, regular investors are watching YouTube videos and Discord discussions about the next popular action. Often, much of the data privileges on the substance – “I like the title” is de facto the war cry of buyers. At other times, those online detectives are correct, however, their findings are exchanged without delay through high-frequency corporations before normal investors can act.
This means that, as a group, the functionality of retail investors is very similar to that of on-the-other hedge funds.
Robinhood has inadvertently exacerbated these inequalities. Your newsletter, Robinhood Snacks, only provides superficial data on inventory trends. And former workers describe Robinhood visitor projects as “a useless model: open visitor service agents to offer monetary advice, authorized agents too busy to help, and calls from unanswered consumers. “
Without a doubt, investment banks will be informed to the wrong classes of the Archegos fiasco. For them, it is more vital that Goldman Sachs and Morgan Stanley have avoided significant losses by liquidating nearly $20 billion in wholesale sales. Friday doesn’t matter on Friday, as do the losses suffered through normal investors. The holdings of Discovery (NASDAQ: DISCA) and CBS/Viacom (NASDAQ: VIAC) of the former Archegos continue to fall more than 40% and 52%, respectively. , since the sale began on March 22.
In the meantime, Robinhood will continue as if nothing had happened. Margin and feature accounts are lucrative profit generators, and Robinhood has all the short-term incentives to inspire investors to continue managing their accounts.
But until Robinhood levels the field of play, investors act cautiously. As the Archegos saga progresses, combining maximum leverage with ambitious trading works until it is not. After all, what better way to catch a lot of fish than with a high quality stick. dynamite?
At the time of publication, Tom Yeung did not occupy (or occupy) any position on the values discussed in this article.
Tom Yeung, CFA, is a registered investment whose project is to bring simplicity to the investment world.
Archegos’ publication shows that the market is manipulated. Robinhood makes things worse. First he gave the impression on InvestorPlace.