It wasn’t so long ago that AMC was considered dead in the water. While the movement which took AMC from a PPS near $2.15 to $59 has revolutionized the way retail investment is viewed, the battle for the AMC stock short squeeze 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 story requires a reflection on how far it’s already come.
The Beginning: AMC Stock 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 as retail investors fought back against institutional interests.
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. These discussions appear to have 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.
AMC Stock Reddit Wallstreetbets
Yet, a pivotal moment in the battle for AMC stock short squeeze highlights another layer of the debate. On February 26th when retail investors forced a closing price of $8.01 in the final four minutes of market action, hedge funds were forced to purchase thousands of shares due 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.
Behind the Curtain
Citadel is widely thought to have one of the most complicated internal relationships. Working to keep its different functionaries separate, Citadel has consistently operated in a gray space that is leading 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. As such, one of the US’ largest hedge funds and its largest market maker – handling 47% of all stock trades in the US – are supposedly wedged together in perfect balance. But this balance has been called into question due to its potential conflicts of interest regarding attempts to kill the short squeeze in January. Now, the “industry’s top wholesale market maker” is 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 – a privately organized financial forum or exchange for trading securities – buy orders sent on Robinhood are matched to sell orders by Citadel. In this way, Citadel is able to set the transaction price, unlike open markets like the NYSE.
With this in mind, Citadel Securities could time selling and buying orders to match their own interests – thereby flattening price spikes or causing spikes and dips in price. These fluctuations could then trigger stop loss orders for Citadel Securities’ advantage. If it see’s retail orders submitted in real time, then Citadel could adjust its positions accordingly. In this way, Citadel’s information advantage could 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 prevented the AMC stock short squeeze 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. It goes without saying that Citadel Securities is technically a separate entity from Citadel, but Kenneth Griffin is still its principal shareholder.
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 restrictions were imposed on trading. However, this appears different from the story painted by Citadel’s CEO, Ken Griffin, when he was brought before Congress in February.
Asked about Citadel’s decision to invest in Melvin Capital Management, Griffin said, “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”. But when Griffin was asked to clarify Citadel’s role in January’s events, the company denied any involvement. In his prepared testimony, Griffin went so far as to say that he “first learned of Robinhood’s trading restrictions only after they were publicly announced”. However, Griffin appears to have done himself in when responding to Representative Juan Vargas’ question regarding collusion between both entities.
Despite denying the possibility of collusion, a leaked court document from the US District Court of the Southern District of Florida shows Robinhood’s internal conversations from January 27th. The document entitled, “January 2021 Short Squeeze Trading Litigation” shows a distinct conversation between Robinhood COO Gretchen Howard and CEO Vlad Tenev. Tenev specifically said, “Maybe this would be a good time for me to chat with Ken Griffin,” then COO of Robinhood Securities, Jim Swartwout, later said “you wouldn’t believe the convo we had with Citadel, total mess”.
In light of this potentially damning evidence, Citadel Securities 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” which is an obvious obfuscation since they could easily communicate through intermediaries.
Considering that this is Citadel’s less than triumphant return to Twitter after a nine month hiatus, Reddit’s investor community is rightly pointing out the specificity of these carefully phrased tweets. As this explosive new revelation adds gusto to the ongoing virtual battle, Citadel will doubtless have to come out swinging harder if it wants to beat back the wave of public opinion breaking on its shore.
The End of AMC Stock Short Squeeze?
This is welcome news for retail investors who have stayed loyal throughout the AMC stock short squeeze, holding it through recent dips while fighting to maintain momentum. Currently trading at $37.61, the stock could see a bump as eyes return to the stock, but this story is far from over. The legal battle between Citadel and retail investors has yet to be resolved and the cogs of Congress are moving slowly on this issue.
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”. While this could suggest a shift away from hedge fund politics, the SEC has also considered regulation intended to prevent high volatility and set caps on short interest.
Whether the SEC works to prevent more “meme stocks” from emerging or pursues a different path, 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 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. Happily, this proposal was passed in June but like most regulation – it lacks teeth. If short sellers keep up with margin requirements then the regulation will never come into play and ultimately has little effect.
Reflecting on the Occupy Wall Street movement from ten years ago, the “meme stock” retail investor movement has only recently emerged but seems to be taking on the mantle of the 99%. This has inspired a shift in investment sentiments and culture as investing becomes increasingly accessible. While it’s far from the end for the AMC short squeeze, its impacts extend well beyond financial gains and the future will show what’s next for the AMC community.
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