It wasn’t so long ago that AMC Entertainment Holdings, Inc. (NYSE:AMC) was considered dead in the water. While the movement which took AMC from a PPS near $2.15 to $72 has revolutionized the way retail investment is viewed, the battle is far from over. New revelations in the ensuing legal and regulatory debate have only heightened the debate on “meme stocks” and short squeezes, but understanding the next chapter of the AMC short squeeze story requires a look back at where it all started.
The Beginning of the AMC Short Squeeze…
After nearing bankruptcy multiple times in 2020 – largely due to the pandemic – AMC secured $917 million in funding to avert a meltdown on January 26th. Issuing 164.7 million new shares and signing commitment letters for millions in incremental debt capital, AMC raised new equity and debt capital to fund itself through the year. Now, this is known as the catalyst for what became a legendary AMC short squeeze.
Virtually overnight, AMC stock increased 310% blowing price targets and bears out of the water. Despite hitting $25 the next day, the first AMC short squeeze was infamously cut short when brokers – Robinhood, Charles Schwab, and TD Ameritrade – disabled buying through their platforms. Coincidentally, many brokers such as Vanguard and Fidelity Investments also cited unexplained “outages” while restricting trading.
For its part, Robinhood stated that it would be restricting transactions “for certain securities” due to “recent volatility”. Allowing traders to only close their positions on AMC and a treasure trove of other “meme stocks”, the coordinated actions of these brokers stymied what was destined to be the mother of all short squeezes.
Adding insult to injury, Robinhood raised its margin requirements for both GameStop and AMC to 100%. Although FINRA requires a standard 25% minimum maintenance margin, the broker’s decision to increase its margin requirements was easily explained by the extreme volatility of the stocks. But given the backdrop of outages and restrictions, the behavior of these brokers has hinted at a great deal more.
Given Robinhood’s decision to block investments in AMC and Gamestop over this two day period, its CEO was called before the House Committee on Financial Services. Robinhood CEO Vlad Tenev argued that the daily deposit requirement was unexpectedly high on the 28th which forced Robinhood Securities and other firms to restrict buying activity.
Defending Robinhood’s decision, Tenev added that the company doesn’t “answer to hedge funds,” because it instead serves “the millions of small investors who use our platform every day to invest”. Despite these statements, the complexity of Robinhood’s role in January’s events has since come under intense scrutiny.
According to Tenev, unexpected volatility drove the NSCC to ask for $3 billion in its daily collateral demand which led RobinHood to offer $1.4 billion instead. Over the course of the night, the amount was potentially halved due to negotiations with the NSCC.
But these discussions appear to have ultimately inspired RobinHood to limit trading on certain “meme shares” to reduce volatility and thereby limit the company’s exposure to risk. The paper trail supports that Robinhood spoke with NSCC executives to confirm this deal until the total security deposit was ultimately reduced to $700 million.
However, this hardly explains what happened next. A pivotal moment in the battle for the AMC short squeeze, on February 26th, retail investors forced a closing price of $8.01 in the final four minutes of market action – forcing hedge funds to purchase thousands of shares thanks to their options contracts.
Retail investors’ win on that day shows what could have been only weeks earlier had Robinhood and other brokers taken different actions. This has since fueled suspicions regarding the unique connection between Citadel Securities and Robinhood on the 27th and 28th of January.
What was Citadel’s Role in the Initial AMC Short Squeeze?
Widely thought to have one of the most complicated internal relationships, Citadel is supposed to keep its different functionaries separate but has consistently operated in a gray space. Its conflicting roles have led some to speculate its internal walls are not as impenetrable as some would believe.
Citadel Securities and Citadel are both under the leadership of CEO Kenneth Griffin. This means one of the US’ largest hedge funds and its largest market maker – which handles 47% of all stock trades in the US – are supposedly wedged together in perfect balance.
Obviously, this balance has been called into question due to potential conflicts of interest regarding attempts to kill the AMC short squeeze in January leaving the “industry’s top wholesale market maker” embroiled in a range of legal proceedings and battles of public opinion.
Citadel is at the center of this controversy due to its ability to route retail orders through its system and issue short shares for trades passed on to them through retail platforms. Because Citadel acts as a dark pool, buy orders sent on Robinhood are matched to sell orders by Citadel.
What is Dark Pools Trading?
Only a few years ago, dark pool trading was a term that even veteran investors had never heard of, but after recent scandals, its become increasingly important to fully grasp what it is, and how hedge funds can use it to take advantage of not just AMC investors but all traders.
A dark pool is a privately organized financial forum or exchange for trading securities. It serves as a type of alternative trading system that allows investors to trade without exposure. When an investor decides to buy a stock, their broker, such as RobinHood, will then send the buy order to dark pools such as Bloomberg Tradebok or Citadel. The dark pool then matches one’s buying order with another selling order. The way dark pools carry out this operation is by setting the price for the transaction, unlike open markets such as the NYSE.
The price may not differ at all, however, there are cases reported with differences as much as 25%. This dangerous volatility can be traced back to these marketplaces’ lack of transparency. By timing the selling and buying orders to match their own interests, dark pools can ‘flatten’ out price spikes as well as induce arbitrary price spikes and dips. However, these artificial dips and spikes are only momentary because the demand will eventually have to meet supply at an equilibrium point.
The danger of these temporary spikes and dips is that they generate fear or trigger stop-loss orders which Citadel can orchestrate to their advantage. They see retail orders submitted in real-time and can adjust their own positions accordingly, giving them an information advantage over the public who does not have access to the same information.
For example, if demand unexpectedly increases, they may pause their short ladder attack to let it decrease again before resuming the attack. Because of this, many investors are switching brokers in order to avoid dark pools.
Fidelity is a good option because it makes sure orders are sent to the top-performing market center for the best execution price. It also allows investors to determine where trades are routed using the Directed Trade feature available on the free Active Trader Pro platform. You can also use direct routing on an Ameritrade account to avoid dark pools.
But the most important thing to keep in mind when talking about dark pools, is that hedge funds are able to exploit stop-loss orders. They carry out short ladder attacks by heavily shorting a stock. This causes the stock’s value to dip, subsequently triggering stop losses in a massive chain reaction which forces the stock’s value to spiral.
Luckily hedge funds follow a predictable pattern to trigger this process. First, they begin by borrowing the maximum number of shares – usually a few million – before quickly starting to sell them off to force the price down. Eventually, the price will drop enough to trigger a stop-loss order chain reaction. Then hedge funds begin buying shares after hitting their target but if enough stop-loss orders are triggered, the stock will no longer be at its original price.
AMC Dark Pools
With this in mind, it’s easy to see how Citadel Securities could time selling and buying orders to match its own interests by flattening price spikes or causing dips. These fluctuations could then trigger stop loss orders for Citadel Securities’ advantage – possibly killing retail investors efforts like the AMC short squeeze. If it see’s retail orders submitted in real time, then Citadel could adjust its positions accordingly. This means Citadel’s information advantage could also allow it to pause its own short ladder attack when demand unexpectedly increases.
If this is the case, then Citadel’s interests could come into play as long as it is able to selectively process buy orders in dark pools and sell orders on the market. Price suppression of this kind has kept AMC and other stocks from reaching their full potential. If Citadel Securities were able to drive the price down, then its hedge fund could potentially maintain its short positions as a result.
Of course it goes without saying that Citadel Securities is a separate entity from Citadel, but that doesn’t eliminate the fact that Kenneth Griffin is still its principal shareholder – an issue that has repeatedly come up since the incident on January 25th.
The barriers between Citadel Securities and Citadel’s hedge fund came into play on January 25th when Citadel invested around $2 billion in Melvin Capital Management – a hedge fund shorting GameStop. With a vested interest in favor of short-sellers, Citadel Securities engaged in communication with high-level employees at Robinhood in the days before it imposed trading restrictions on certain meme stocks.
Citadel Securities & AMC: #kengriffinlied
But when Citadel’s CEO, Ken Griffin, was brought before Congress in February he painted a slightly different picture. When Giffin was asked to clarify Citadel’s role in January’s events, the company denied any involvement. Griffin went so far as to say that he “first learned of Robinhood’s trading restrictions only after they were publicly announced”. He took it a step further when CNBC pressed him to explain Citadel’s decision to invest in Melvin Capital Management, saying, “If I had to run my business to the possibility of an insane conspiracy theory emerging at any point in time, I would have no business”.
Since then, a leaked court document from the US District Court of the Southern District of Florida has reignited the debate and cast Griffin’s word in a new light. The document caught people’s attention specifically because it shows Robinhood’s internal conversations from January 27th.
The “January 2021 Short Squeeze Trading Litigation” document shows a distinct digital conversation between Robinhood COO Gretchen Howard and CEO Vlad Tenev. In the conversation, Tenev wrote, “Maybe this would be a good time for me to chat with Ken Griffin”. In a separate conversation, the then COO of Robinhood Securities – Jim Swartwout – wrote “you wouldn’t believe the conversation we had with Citadel, total mess”.
With this information now out in the open, Citadel has returned to Twitter. Giving a rather weak defense, the company tweeted that “Citadel Securities did not ask Robinhood or any other firm to restrict or limit its trading activity on January 27th”. Citadel went on to say that, “Ken Griffin and Vlad Tenev have NEVER met or spoken”.
While these denials are obvious obfuscations, Reddit’s WallStreetBets community has been quick to point out the specificity of these carefully phrased tweets. Citadel’s twitter defense also seems particularly weak given its nine month hiatus before these explosive new revelations forced it out of hiding.
This is welcome news for retail investors who have stayed loyal to AMC, holding it through recent dips while fighting to maintain momentum. The ongoing showdown between Citadel and the AMC community may have returned some attention to the stock, but this story is still far from over. The legal battle between Citadel and retail investors has yet to be resolved and the cogs of Congress are moving slowly. It’s fair to say the events of January 26th will continue to haunt Citadel for the time being.
But at the very least, the legal battle has helped bring dark pools into the light. As SEC Chair Gary Gensler mentioned in an interview, the regulatory institution “will be looking very closely” at dark pools as it works to promote maximum transparency. Even Gensler’s tone hinted at a change in dynamic as he highlighted the SEC’s role in guarding “against fraud and manipulation, whether from big actors, hedge funds, or elsewhere”.
The End of AMC Short Squeeze?
Whether the SEC works to prevent more “meme stocks” from emerging or pursues a different path entirely, the institution took little action during January’s debacle. At the time, the SEC merely filed a securities filing explaining that it would be investigating Robinhood’s practices and reasons for restricting these specific stocks.
Since then, the SEC has proposed new rules such as SR-NCSS-2021-002 which gives an automatic margin call system the power to margin call hedge funds with overleveraged accounts. If used effectively, the system could keep short sellers accountable virtually every day by identifying whether they must raise margin minimums or liquidate their positions. Even though this proposal was passed in June, like most regulations – it lacks teeth.
This has caused many to reflect on the Occupy Wall Street movement from ten years ago. While the “meme stock” retail investor movement has emerged only recently, it has already taken on the mantle of the 99% putting the investment community under more scrutiny. Many are left questioning the elitist investment culture of most hedge funds. But of course the AMC short squeeze is far from over. Yet one thing is for certain, wherever the ape community goes next will be a story of much more than financial gains as what once was a meme has become a movement.
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