OK, that's it. She's gotta go. It's time to retire Janet Yellen. Permanently.
In the midst of the first nine days of the Biden Administration, little attention had been paid to Treasury Secretary Janet Yellen. L'affaire GameStop (GME) has changed all that. In my view, Yellen is now a liability and needs to resign so that the markets can resume their normal functioning.
Why do I think this? Because Janet Yellen reportedly accepted a cool $810,000 in total speaking fees from Citadel Securities in the years 2019 and 2020. That conflict of interest was already galling, but now it's a deal-killer, in my opinion.
The issue here is the very business model that allows for so-called "$0-commission trading." In the case of Robinhood, which has been issuing gyrating comments on GME, AMC Entertainment (AMC) and other names seemingly hourly this week, that equates to payment for order flow. This practice is as old as Wall Street itself, but it used to be the icing on the cake of trading revenues for brokers.
With the move to online trading and the incredible compression of fees relating to any kind of investing, something had to change in the business model of Wall Street. So payment for order flow has become the only reliable way to profit from trading, as commissions are infinitesimal and no human can claim to provide better market-making than omniscient computers.
Robinhood's disclosures show very clearly what is happening. Citadel handled more than 50% of Robinhood's volume in the third quarter of 2020, the most recent period for which data is available, and Citadel paid tens of millions of dollars to Robinhood in the third quarter of 2020 alone, much of it for order flow in listed options.
That's how Robinhood exists without charging for its core service, but that still leaves one crumb on the table. Citadel is paying Robinhood for the privilege of executing those orders, and in return, Citadel gets to know...those orders. Imagine that. If you KNEW the flow of pipeline of orders on a given stock AND its underlying options contracts, do you think it would be possible to take an advantageous trading position in advance and more profitably execute those orders? Uh, yeah. Only a fool would ignore that virtuous circle of information. It's valuable, and in a world where the spread between bid and ask has been compressed to near-oblivion, forewarning of order flow is probably the surest way to make trading profits.
That's why I believe Yellen's acceptance of nearly a million dollars from Citadel to give speeches (having had to sit though many Fed calls with her droning monotone, I can bet that those Yellen-fronted Citadel events were some real barn-burners) is a disqualification for her current role. She can't have it both ways.
As those in Congress bloviate over the GameStop "problem"-- without even a scintilla of understanding of how the financial markets actually work -- I have just identified what I believe is a very real problem and a very real conflict of interest. Robinhood isn't the problem here, but payment for order flow is questionable at best and shady at worst. Having government officials accept lucrative perks from the private sector in their short hiatuses between government jobs simply defies explanation.
So, that's a fix. Boot Yellen. Would that fix volatility? No, of course not. How could anyone fix something they don't understand? Unfortunately, the only solution here is to let price discovery happen. It's ugly, but it has worked for 300 years, and it's really the only chance we have.
But don't get fooled by the narrative. The "little guys versus Wall Street" pablum being peddled by the media is almost as offensive as their coverage of the last political season.
I am just going to throw this out there: What if the Redditors are actually hedge fundies? Did your head just explode? Mine didn't. I can't think of a better way of playing the 2021 zeitgeist than creating a faux-populist narrative and getting actual populists to follow. And, of course making a few bucks along the way.
So, that's what we are looking at here. Not a battle of David versus Goliath, but, instead, an internecine battle among loafer-wearing hedgies that has risen in prominence enough to dominate the front pages -- not just the financial pages -- this week.
That's the great thing about our business, and why I do what I do. There is ALWAYS a scoreboard. But don't confuse something mercenary for something noble. Citadel is driving the bus here, not some random "bros" on Reddit. When Melvin Capital headed for insolvency this week -- presumably owing to bad short bets on GME and others -- did they start a GoFundMe, or appeal for money from individual investors on a Reddit forum? No, of course not. They asked for -- and received, apparently -- a bailout from none other than Citadel, with an assist from Steve Cohen's Point72.
Like water, the market for GameStop will find its natural level. Just make sure you don't get drowned when trying to swim with the tide.
