Did A Robinhood Executive Commit Securities Fraud?
Plus: Dark pools, CurveGlobal, earnings, and more
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News
January 2021 Short Squeeze Trading Litigation: If you’re the kind of person who enjoys an elitist outrage story, you must be loving the deluge of news making waves the last few weeks. There are the well-known stories like that of Nancy Pelosi, a powerful Congresswoman who’s so active trading the same tech stocks she regulates it’s become a popular, almost over-played meme. There are more recent stories, like the one where two Federal Reserve presidents resigned over questionable trading practices during their time in office, raising deep ethical questions within arguably the world’s most powerful economic institution.
And then there’s Robinhood. A Florida class-action lawsuit against Robinhood released new court documents this week, giving us a look at internal emails & chat messages between executives at the broker & its largest clients.
Here’s the part that most caught my eye:
“Robinhood Securities President and COO, James (Jim) Swartwout, who Tenev points to as making the ultimate call to PCO, says in an internal chat on January 26, 2021, “I sold my AMC today. FYI – tomorrow morning we are moving GME to 100% - so you are aware.”
(Source - page 4)
Let’s break this down simply. Jim Swartwout, a long-time brokerage executive with experience in C-suite roles at ETrade, Scottrade & OptionsHouse, took a job with Robinhood in mid 2019 as head of one of its major subsidiaries. We don’t know when, but at some point prior to January 26 Swartwout bought shares of AMC, a stock that was squarely in the crosshairs of the Reddit retail crowd. When Robinhood received its $3 billion margin call from the DTCC Swartwout decided to implement a PCO - a position closing only policy - in certain Reddit stocks, AMC one of them. But before he implemented this PCO, he conveniently sold his shares in AMC to avoid the inevitable drop in the coming days.
As an owner of AMC, wouldn’t it be nice to know when a major broker was about to restrict trading in your stock before the public knew? Considering Swartwout’s privileged position within Robinhood upper management, this seems like a pretty clear example of insider trading on material non-public information. As a broker-dealer executive Swartwout & the rest of Robinhood’s management should not be allowed to trade in & out of single stocks for short-term gains. Especially during chaotic periods like the week of January 27.
I hope the SEC investigates the trading history of all Robinhood executives around the key dates when it restricted trading to everyday investors. If wrongdoing is confirmed in this case, I hope justice is served. However, considering the other instances of powerful politicians & executives avoiding punishment, I won’t be holding my breath.
‘Dark Pool’ Trading Platforms LeveL ATS and Luminex Set to Merge: Off-exchange trading in US equities gets a ton of coverage in the media these days. The focus mostly centers on wholesalers & their growing market power amid paradigm-shifting levels of retail interest & trading activity. Wholesalers control ~35% of trading today, yet receive nearly all of the media attention. The other 65% of the market is split between exchanges, who control ~50%, and dark pools that make up the other ~15%.
In recent weeks we’ve seen the relationship between exchanges & dark pools get blurry, which I find extremely interesting. First it was CBOE’s acquisition of BIDS, a mid-sized dark pool with average daily volume of ~72 million shares. Then came TP ICAP’s purchase of Liquidnet, a large European & US equities dark pool crossing network. Most recently it’s been Nasdaq’s investment in LeveL ATS, one of the largest non-bank ATSs with ~130 million shares traded per day. The quick succession of deals in the dark pool space, the Luminex merger being the latest, is no coincidence & signals to me that more potential M&A may be on the horizon.
Another interesting piece of this news is the fact that exchanges can’t integrate their new dark pools into their lit exchange venues. The reason dark pools are attractive is because they offer anonymity - customers can trade large blocks of shares without alerting the market to their intentions & risk getting worse execution than they otherwise would. If CBOE were to make BIDS a lit trading venue it would lose the very thing that makes it valuable. If integration is off the table, why buy a dark pool in the first place?
I believe exchanges like Nasdaq & CBOE are watching wholesalers amass power & want to shore up their control of US equities trading while they still can. The top dark pools are controlled by banks like UBS, Goldman Sachs, Credit Suisse and JP Morgan - groups that have given up power to exchanges in the past. Who’s to say their dark pools won’t be the next thing to either be bought by exchanges or regulated out of their grasp? I’ll be watching for comments by NYSE, Nasdaq & CBOE management for clues as to the next dark pool domino to fall.
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Other Stories I’m Reading
The Good, The Bad & The Ugly Of Payment For Order Flow
Virtu Fires Opening Shot in SEC Tussle Over Trading Rules
Dark Pool Sold Some Order Flow
IHS Markit Reports Third Quarter 2021 Results
FactSet Reports Solid Results For Third Quarter 2021
Cboe’s Harkins to Join Electronic Bond-Trading Platform Trumid
IEX Exchange Assembles Advisory Committee on Retail Trading
Chart of the Week
Pour one out for another European exchange challenger. CurveGlobal, a European interest rate futures exchange launched in 2016 and owned by LSE, announced it’s winding down its operations by early 2022. For five long years CurveGlobal tried to take market share from ICE in short-term interest rate futures, offering aggressive fees, margin savings via LCH, and a more innovative, anti-monopolistic market. Brexit, LIBOR transition & COVID volatility dampened performance in 2020, but volumes & open interest were recovering in 2021 when LSE decided to pull the plug.
Why call time on CurveGlobal’s advance now? My guess is a combination of new leadership at LSE, changing corporate focus (Refinitiv), and uncertainty around the unit’s long-term vision contributed to the decision. CurveGlobal has been a loss-making venture since day 1; if 5 years isn’t enough time to become profitable, what is?
To me this also serves as a dire warning to CBOE’s European derivatives launch, which is an attempt to do exactly what CurveGlobal failed to do for index derivatives. Plenty of exchanges have tried to disrupt the status quo in Europe - nearly all have failed. The CurveGlobal saga is yet another example of why I’m a CBOE Europe skeptic & will continue to be until I start to see numbers that prove otherwise.
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Disclaimer: I am not a financial advisor. Nothing on this site or in the Front Month newsletter should be considered investment advice. Any discussion about future results or projections may not pan out as expected. Do your own research & speak to a licensed professional before making any investment decisions. As of the publishing of this newsletter, I am long ICE, CME, TW, NDAQ, COIN and VIRT. I am also long Solana.