Wednesday, February 3, 2021

Elizabeth Warren on GameStop

Sen. Elizabeth Warren asks Robinhood to explain GameStop trade restrictions  

Warren's key points from the article:

- Sen. Elizabeth Warren asked stock-trading company Robinhood in a letter to explain why it restricted trading in red-hot shares of GameStop after hedge funds suffered huge losses in a short squeeze.

- Warren noted that Robinhood last week abruptly changed trading rules for individual investors in certain stocks on its no-fee platform, while hedge funds and Wall Street institutional investors were allowed to keep trading in GameStop and the other companies.

- The letter asks Robinhood to disclose what led it to impose tight trading restrictions on GameStop and other stocks, and whether its hedge-fund investors or other financial services partners who had big stakes in such trading affected the app company's decision.

Also in the article is this: 

GameStop share prices fell Tuesday [Feb 2], sliding 51% to about $110 per share as of midday.

That sharp tumble follows a more than 30% drop during the regular market session Monday [Feb 1].

GameStop's stock price closed at $325 per share on Friday [Jan 29].

If GameStop closes at current levels, it would bring its two-day loss to roughly 66%. 

That's correct. (1-0.51)*(1-0.3)-1 = -0.657 or -66%. That was like the article says midday. The closing price was -72%.

Here is Warren's letter to Robinhood CEO Vladimir Tenev. While it was written on Feb, 2, the content of the letter says nothing about the two-day 66% loss. Her only mention of prices is: "In recent weeks, share prices for GameStop and other companies have undergone sharp changes in value." This sentence is footnoted by a Wall Street Journal article dated Jan. 26, which was before the two-day 66% drop in price.

Well, now that the price of GameStop stock plummeted and after hedge fund gains, is Loopy Liz going to write another letter to Robinhood asking the opposite sort of questions?:

- Why didn't Robinhood protect its "little guys" clients or customers against that 66% price drop?
- Why did Robinhood allow its "little guys" clients or customers to get snared into the speculative bubble in the first place? 
- Why didn't Robinhood foresee the bubble and its bursting?

A very plausible answer to the last question is that after seeing the bubble developing Robinhood did  act to protect its clients or customers by putting in place the trading restrictions that it did! The very ones that Loopy Liz assumes were wrong-headed in her letter! 

To a moral crusader like Loopy Liz a cherry-picked business such as Robinhood, it's "dammed if you do and damned if you don't" (link).

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