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For today we have a very different topic.
We are going to cover pretty much all on Citadel, GME, contagion and everything in-between but in a fast and fluid way.
Of course feel free to shoot any questions or DM if needed.
So lets go...
We are going to cover pretty much all on Citadel, GME, contagion and everything in-between but in a fast and fluid way.
Of course feel free to shoot any questions or DM if needed.
So lets go...
Capital Adequacy Like usual we will start at the beginning.
=> First you need to understand everything that has happened this week has to do with capital adequacy.
Every bank is mandated to have a certain amount of capital on their balance sheet.
The regulator dictates this amount and the same applies to brokers.
What is noteworthy about Citadel and the other capital market degens (btw you need to remember markets are a game) is that they have to play by the rules of said game.
But the regulator owns the rules.
What is noteworthy about Citadel and the other capital market degens (btw you need to remember markets are a game) is that they have to play by the rules of said game.
But the regulator owns the rules.
Even if we don't really care about the specifics it's important to know that because we are playing with large scale regulated entities, they know how to trigger the rules.
Banks have to abide by Basel 3.
So they need to keep +/- 10% on the balance sheet (moved up after 2008).
Banks have to abide by Basel 3.
So they need to keep +/- 10% on the balance sheet (moved up after 2008).
So if they hold $1 they can lend out $9.
Meaning...
If you are the broker, when the price of a stock goes up (a stock that's being heavily shorted) it requires margin.
If they can't cover, they will need to close out of positions or provide collateral.
Meaning...
If you are the broker, when the price of a stock goes up (a stock that's being heavily shorted) it requires margin.
If they can't cover, they will need to close out of positions or provide collateral.
So the first chapter was Citadel keeping Melvin Capital on life support.
This was the first step.
This was the first step.
The game playing comes in here.Citadel is also the HFT that settles RobinHood flows.
RH is just an app that roots its transactions through Citadel.
So RH doesn't need to tend a big balance sheet as Citadel take the flow and information.
Of course they will say securities are different and *insert Chinese walls here* but the same team is now on both sides.
So Plotkin did a deal.
"I won't sell you my fund, but I will allow you to take a rev share off the top".
So Plotkin did a deal.
"I won't sell you my fund, but I will allow you to take a rev share off the top".
Once you have done that you have opened the conflict of interest. One side the flow going to Citadel, the other towards capitalising the trade.
=> Then because RH is not well capitalised enough, the regulator says...
"You can't trade because you don't have enough margin"
Now Citadel says we won't cover you and so RH have to stop trading.
No one wants to get caught with their pants down in a margin call.
They got played.
The regulator owns the game and Citadel know how to trigger the regulator.
No one wants to get caught with their pants down in a margin call.
They got played.
The regulator owns the game and Citadel know how to trigger the regulator.
And from a contagion perspective we can assume everyone is on margin to stay inside capital constraints.
So you can trigger a liquidity cascade (the last time this happened was LTCM). https://twitter.com/ridepigs/status/1355189702362599425?s=20
So you can trigger a liquidity cascade (the last time this happened was LTCM). https://twitter.com/ridepigs/status/1355189702362599425?s=20
