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The Uncontained Spark

Summary:
President Snow: Seneca… why do you think we have a winner? Seneca Crane: [frowns] What do you mean? President Snow: I mean, why do we have a winner? I mean, if we just wanted to intimidate the districts, why not round up twenty-four of them at random and execute them all at once? Be a lot faster. [Seneca just stares, confused] President Snow: Hope. Seneca Crane: Hope? President Snow: Hope. It is the only thing stronger than fear. A little hope is effective. A lot of hope is dangerous. A spark is fine, as long as it’s contained. Seneca Crane: So…? President Snow: So, CONTAIN it. And may the odds be ever in your favor! There is an uncontained spark in the financial world today. It’s a spark that emerged from the unlikeliest of places,

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The Uncontained Spark

President Snow: Seneca… why do you think we have a winner?

Seneca Crane: [frowns] What do you mean?

President Snow: I mean, why do we have a winner? I mean, if we just wanted to intimidate the districts, why not round up twenty-four of them at random and execute them all at once? Be a lot faster.

[Seneca just stares, confused]

President Snow: Hope.

Seneca Crane: Hope?

President Snow: Hope. It is the only thing stronger than fear. A little hope is effective. A lot of hope is dangerous. A spark is fine, as long as it’s contained.

Seneca Crane: So…?

President Snow: So, CONTAIN it.

The Uncontained Spark

And may the odds be ever in your favor!




There is an uncontained spark in the financial world today.

It’s a spark that emerged from the unlikeliest of places, a federal courthouse in Florida.

It’s a spark that has the potential to light a fire under one of the most prominent financial institutions in the world – Robinhood – and one of the most powerful financial institutions in the world – Citadel.

It’s a spark that might well sputter out, but for the first time in a long time I have hope for a searing change in the obscenity that is our oligarchic status quo. And not just a little hope, but a giant arc welder’s spark of hope that can become a bonfire of hope.

#BITFD.


The spark is found here, in the court filings for a class action suit against Robinhood and Citadel and a gaggle of other, smaller financial firms.

Specifically, the spark is found here, within the two primary plaintiff’s complaints laying out their civil case against Robinhood, Citadel, et al.

The first complaint, no. 409 in the list of documents in this docket, is focused on Robinhood.

The second complaint, no. 416 in the doc list, is focused on Citadel and the other market makers.

The spark is not found in the financial or markets analysis within these complaints. In fact, if you have a lot of experience in markets and you’re familiar with the Gell-Mann Amnesia effect, you’ll read one of the plaintiff’s not-exactly-right descriptions about how, for example, market-making or payment-for-order-flow works, and you’ll find yourself wondering if the legal arguments are similarly not-exactly-right.

To be clear, I have zero opinion on the merits of this case. Zero! I honestly do not know if this is a good case or a weak case from a legal perspective, and frankly I have misgivings about some of the conspiracy-based claims and accusations made here by the plaintiffs … not because I think the defendants are good guys (LOL), but because I think there’s a lot of random spaghetti thrown at the wall here by the plaintiffs in hopes that some of it will stick.

The spark is a set of internal chat conversations that someone inside Robinhood leaked to the plaintiffs and have been incorporated into these filings.

The public does not have access to all of these leaked internal conversations. All we can see is what the plaintiffs’ lawyers chose to put into these complaints (and as we’ll discuss later, we’re lucky to have this). Point being, I have no idea if there are other internal communications that take the sting out of these chat logs that are visible to us. I have no idea if these visible internal communications have somehow been taken out of context. Are these leaked internal communications enough to win this case for the plaintiffs? Once more with feeling … I don’t know and I don’t care!

But are these leaked internal communications enough to give the lie to much of the public posturing and narrative creation efforts made by Robinhood’s CEO Vlad Tenev and Citadel’s CEO Ken Griffin?

Yes, I think they are.

The Robinhood internal communications found in these court filings are a spark with the potential to change common knowledge – what everyone knows that everyone knows – about Robinhood and Citadel.

And THAT is the fire that burns well and true.

Here’s the first of the internal communications with the spark potential, IMO, to start a bonfire within this not-so-little corner of the speculation layer, taken from the Robinhood-focused complaint (doc 409).

The specifics of this chat message (what is a PCO? what does it mean to move GME to 100%?) are really not important for the spark and potential bonfire that I’m interested in. They’re important for the plaintiffs in this case (PCO = position closing order, GME to 100% = increase in margin requirement), but not for me.

What’s important to me is that Jim Swartwout – THE major decision-maker for Robinhood’s broker-dealer, someone who is privy to every piece of material non-public information (lower-case for sure, courts can decide if it’s upper-case MNPI) in the Robinhood casino, someone who is a FINRA-licensed registered rep – apparently day-trades meme stocks in his personal account, front-running Robinhood clients.

What’s important to me is that Jim Swartwout is apparently tipping off colleagues about that information in a conversation about personal account trades.

I say “apparently” because, like I say, maybe there are other internal communications that make this something other than raw, pure illegal front running. But it seems … errr … difficult to walk back or explain away a statement as black and white as “I sold my AMC today.”

And you know what’s really damning about all this? The sheer casualness of it all.

Hey guys, I sold my AMC today! And we’re gonna do some big market-shaking stuff in GME tomorrow, so you might wanna get your ducks in a row today, if you know what I mean!

Next you’ll be telling me that Federal Reserve presidents are day-trading mortgage REITS and rocking in and out of e-minis at $1 million+ per trade.

The Uncontained Spark
Mortgage REIT day-trader (and former Boston Fed president) Eric Rosengrem
The Uncontained Spark
SPX futures day-trader (and former Dallas Fed president) Robert Kaplan

Next you’ll be telling me that what’s truly important in our market compliance regime is giving the IRS transactional visibility into bank accounts with $600 in them.

And people wonder why I am angry.


Here’s the second of the internal communications that has the potential, IMO, to start a cleansing bonfire. This is from document 416, focused on the relationship between Robinhood and Citadel.

The Uncontained Spark
The Uncontained Spark
The Uncontained Spark

The reason these internal Robinhood communications are a spark is that it is Citadel CEO Ken Griffin’s testimony under oath that “We [Citadel Securities] had no role in Robinhood’s decision to limit trading in GameStop or any other of the “meme” stocks.

This testimony has been “clarified” by Citadel lawyers and Griffin’s personal lawyers as follows: “Citadel Securities never requested, intimated, agreed or otherwise sought to limit or to restrict the trading of such securities” and “Citadel Securities did not communicate with Robinhood about restricting trading in certain stocks in January 2021.”

Pretty clear-cut, right?

LOL. Do I think that Ken Griffin “lied under oath”? No, I don’t. Do I think that Team Griffin is parsing and litigating every word of this in Clinton-esque fashion? Yes, I do. Here’s how I think this will go down:

While Mr. Griffin was well aware of ordinary course-of-business conversations that took place about temporarily halting payment-for-order-flow in volatile names like Gamestop and AMC, it is outrageous — outrageous! — to suggest that this would have anything to do with Robinhood’s subsequent trading restrictions on those same names.

Why, Mr. Griffin is shocked — shocked! — that anyone would even suggest a connection between these two coincidentally contemporaneous events and has been assured that the words “restricting trading” were never uttered by anyone at Citadel Securities.

Ken Griffin did NOT have a phone call with that man, Mr. Tenev.

The Uncontained Spark
Not Ken Griffin

Did Citadel do anything tortious in their conversations with Robinhood? Again … I don’t know and I don’t care.

What I care about is changing the common knowledge – what everyone knows that everyone knows – about Wall Street and the market makers like Citadel that own the game.

What I care about is burning away the false and destructive narratives that companies like Robinhood are “democratizing” Wall Street or that oligarchs like Ken Griffin care about anything other than being a bigger oligarch.

My hope is that these smoking gun Robinhood internal communications can be a spark for all that.

An uncontained spark, President Griffin’s Snow’s greatest fear.

The Uncontained Spark
Also Not Ken Griffin

Our goal should not be to get democracy into Wall Street.

Our goal should be to get Wall Street out of democracy.


One last point, and you’ll want to hear this …

We almost didn’t get this spark.

Robinhood and Citadel obviously wanted to extinguish any record of these chat conversations, or at least keep them secret so that a settlement would bury them forever. But here’s the thing …

The plaintiffs wanted to keep these chat conversations secret, too.

I mean, I get it. The plaintiff lawyers here wanted to keep their smoking gun evidence under seal as leverage for a blockbuster settlement for their clients. What do you think Robinhood and Citadel would have paid to keep all this under wraps? $200 million? A billion? More? And since you’re working on contingency, well … you can do the math.

So that’s exactly what the plaintiff lawyers did, they filed a motion to keep their complaint under seal. NOT because they agreed with Robinhood and Citadel that the chat records were confidential or privileged (because if they agreed to that, then maybe the chat records would be thrown out or otherwise ruled inadmissable), but because they wanted more leverage in a settlement. From the defendants’ perspective, of course they’d prefer to throw out the recordings entirely, but keeping them under seal and away from the public eye was a good fall-back position.

So the plaintiffs filed an unopposed motion to keep their complaint and the damning chat records under seal, meaning that they would never see the light of day when Robinhood and Citadel settled.

But the judge said screw that.

Upon review of the Motion, the Court is left unconvinced the presumption in favor of public access should be cast aside. While Plaintiffs state the Stipulated Protective Order requires them to file the Master Complaints under seal (see Mot. 2–3), the parties fail to explain why it is necessary to deprive the public of access to allegations that form the foundation of the several cases in this MDL. …

Although portions of the Master Complaints may contain the type of confidential information that should be shielded from public disclosure, there is no apparent reason to seal the Master Complaints other than the parties’ agreement, which is insufficient. Redaction of those portions which contain confidential information, as Plaintiffs have already done, is more appropriate. …

Accordingly, it is ORDERED AND ADJUDGED that Plaintiffs’ Unopposed Motion for Leave to File Under Seal [ECF No. 357] is DENIED.

https://storage.courtlistener.com/recap/gov.uscourts.flsd.590042/gov.uscourts.flsd.590042.362.0.pdf

BOOM!

This is where the Nudging State and the Nudging Oligarchy would have seen the spark contained and extinguished. Thanks to this judge, it was not.

I give you the true hero in this case, Judge Cecilia Altonaga.

The Uncontained Spark

Judge Altonaga is the first Cuban-American woman appointed to the federal bench, by George W. Bush in 2003. She is the Chief Judge of the US District Court for the Southern District of Florida.

Not all heroes wear capes. But some wear robes.

Welcome to the Pack, Judge Altonaga.



About Ben Hunt
Ben Hunt
He is the chief investment strategist at Salient, a $14 billion asset manager based in Houston and San Francisco, and the author of Epsilon Theory, a newsletter and website that examines markets through the lenses of game theory and history. Over 100,000 professional investors and allocators read Epsilon Theory for its fresh perspective into market dynamics.

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