American Consequences - March 2021

GAME(STOP), SET, MATCH

What became clearly apparent was that the Reddit marauders were not interested in what’s “in their best interests,” as they were far too busy not just bidding up GME... but leveraging up... That’s because many were using options to achieve their pay dirt. And in many cases, it was short-dated options with two weeks or less to expiration. And these options were (originally) far out-of-the- money options, which are inexpensive to buy but can skyrocket in value if the underlying stock makes a move. To buy a share of GME stock and hope it rallies is not the same payoff as if I buy one GME out-of-the-money option, giving me the right but not the obligation to exercise it into 100 shares of GME. That folks, is when the leverage kicks in. Remember that one option purchase, put or call, gives you access to 100 shares. That’s where many of these hedge-fund slayers were profiting. As the stock went up, their low premium options, including ones bought dirt-cheap and out of the money, are now rather nicely in the money. And now you either sell it at a higher premium... or when properly margined in your account, exercise your right to acquire 100 shares of GME. Buy a cheap one-lot option, watch it rally, exercise into the stock, and sell your 100 lot of stock that was catapulted higher during the short squeeze. “Let it all ride” was the mantra... YOLO was the reverberating theme. Pretty easy, right? Just like house flipping... except there does exist an industry adage or maxim if you prefer. And that is, the bulls make money, the bears make money, and the pigs get slaughtered. Rooting for

"Let it all ride" was the mantra... YOLO was the reverberating theme. Pretty easy, right? Just like house flipping... Now, PFOF is not without its critics. At that very House Committee of Financial Services hearing, Rep. Alexandria Ocasio- Cortez (D-N.Y.) pointed out that in a 2016 report, the SEC found that the PFOF process created “a potential conflict of interest” with a brokerage’s duty to execute trades to the best possible standard and to maximize the payment for order flow. There has been criticism that this situation gives brokerages an incentive to increase the amount that their customers trade, even if it’s not in their best interest. In these PFOF cases, the brokerage does not necessarily route your buy order to an exchange. When you tap your app to trade, a brokerage like Robinhood or any of the other online brokerages that utilize PFOF will take your order and reroute it to a market maker, which will pay the brokerage (and generally does so on a per-share basis) for the opportunity to take the other side of the order. By design, the system allows the online brokerages to manage thousands of orders more effectively by routing them off to be executed by a market maker. Costs are kept low for the brokerage because of trade aggregation, and the market maker stands to gain due to the higher trading volume and ability to squeeze out volume-weighted edge.

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March 2021

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