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How Wall Street Learned About Last Week’s Labor Data Before the Public

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The Labor Department provided insight into a recent lapse in which revised payroll data was given out à la carte before it went online.Banks and research firms that serve hedge funds managed to confirm a closely watched economic data point last week as much as 20 minutes before the data was posted online, giving them a possible jump on financial market trading — the latest in a series of lapses at the Bureau of Labor Statistics.Now, details into what happened are beginning to emerge.A technical issue prevented the data, which showed a large downward revision to job growth in 2023 and early 2024, from publishing on the agency’s website at 10 a.m. as scheduled last Wednesday, according to details provided by the Department of Labor.In response, agency technology staff began to load the data onto the site manually. At that point, starting a bit after 10:10 a.m., other bureau staff could see the update on the website — even though it wouldn’t be visible to the public until 10:32 a.m. And bureau staff began replying to people, including those at Wall Street firms, who called or emailed with questions. That enabled some to get access to key data before others.It isn’t clear how many investors got early access to the data, or whether anyone actually traded on the information. The revisions ultimately did not have a huge effect on stock markets. But the fact that Wall Street funds that make money by betting on every minor move in economic data — including reports like this one — managed to get the figures before the public has raised serious questions about what happened.Part of the problem, according to the information provided by the department, is that the payroll revision data was not considered a “news release” like the monthly jobs data and inflation numbers. That data is subject to strict to controls to avoid leaks. Instead, it was considered a “website release,” which has fewer guardrails.The bureau had no backup plan to make sure there was a way to quickly push a website update out to the broader public, such as with prepared social media posts of data highlights.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Fed Frets About Shadow Banks and Eyes Treasury Liquidity in New Report

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    The Federal Reserve is watching the government bond market and investment funds as rate increases ricochet through finance.The Federal Reserve warned in its twice-annual report on America’s financial stability that the government bond market could be primed for disruption, and cautioned that financial firms that operate outside of traditional banks could increase fragility in the system.Investors have been warning that market conditions are becoming increasingly fraught nine months into the Fed’s fastest rate-increase campaign since the 1980s. While the central bank is determined to push ahead with its effort to slow the economy as it tries to choke off rapid inflation, officials are keeping a careful eye on market conditions. A financial meltdown would make the Fed’s job more difficult — potentially even forcing it to deviate from some of its tightening efforts.Financial stability issues are in focus as central banks around the world raise interest rates in synchrony and other markets around the world — including the government bond market in Britain — offer early warning signs that cracks are beginning to emerge.The Financial Stability Report, released on Friday, delved into widely discussed challenges that have been plaguing Treasury markets and detailed less prominent vulnerabilities. Those included elevated leverage at financial institutions beyond banks, what is often referred to as the “shadow banking” system.The ease of trading Treasury securities, called liquidity, has been strained in recent months, which is making analysts and investors nervous that the market could be primed for disruption. The Fed attributed the decline in liquidity “primarily” to volatility in interest rates and economic uncertainty.What the Fed’s Rate Increases Mean for YouCard 1 of 4A toll on borrowers. More

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    The Carried Interest Loophole Survives Another Political Battle

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    The latest effort to narrow the preferential tax treatment used by private equity executives failed after Senator Kyrsten Sinema objected.WASHINGTON — Once again, carried interest carried the day.The last-minute removal by Senate Democrats of a provision in the climate and tax legislation that would narrow what is often referred to as the “carried interest loophole” represents the latest win for the private equity and hedge fund industries. For years, those businesses have successfully lobbied to kill bills that aimed to end or limit a quirk in the tax code that allows executives to pay lower tax rates than many of their salaried employees.In recent weeks, it appeared that the benefit could be scaled back, but a last-minute intervention by Senator Kyrsten Sinema, the Arizona Democrat, eliminated what would have been a $14 billion tax increase targeting private equity.Lawmakers’ inability to address a tax break that Democrats and some Republicans have called unfair underscores the influence of lobbyists for the finance industry and how difficult it can be to change the tax code.In addition to doing away with the carried interest provision, the deal Democratic leaders cut with Ms. Sinema included a 1 percent excise tax on stock buybacks and changes to a minimum corporate tax of 15 percent that favored manufacturers.On Friday, the private equity and hedge fund industries applauded the development, describing it as a win for small business.“The private equity industry directly employs over 11 million Americans, fuels thousands of small businesses and delivers the strongest returns for pensions,” said Drew Maloney, the chief executive of the American Investment Council, a lobbying group. “We encourage Congress to continue to support private capital investment in every state across our country.”Bryan Corbett, the chief executive of the Managed Funds Association, said: “We’re happy to see that there is bipartisan recognition of the role that private capital plays in growing businesses and the economy.”Carried interest is the percentage of an investment’s gains that a private equity partner or hedge fund manager takes as compensation. At most private equity firms and hedge funds, the share of profits paid to managers is about 20 percent.Under existing law, that money is taxed at a capital-gains rate of 20 percent for top earners. That’s about half the rate of the top individual income tax bracket, which is 37 percent. A tax law passed by Republicans in 2017 largely left the treatment of carried interest intact, after an intense lobbying campaign, but it did narrow the exemption by requiring executives to hold their investments for at least three years in order to enjoy preferential tax treatment.An agreement reached last week by Senator Joe Manchin III, Democrat of West Virginia, and Senator Chuck Schumer of New York, the majority leader, would have extended that holding period to five years from three, while changing the way the period is calculated in hopes of reducing taxpayers’ ability to take advantage of the lower 20 percent tax rate.What’s in the Democrats’ Climate and Tax BillCard 1 of 6A new proposal. More

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    Carried Interest Is Back in the Headlines. Why It’s Not Going Away.

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    Changes demanded by Senator Kyrsten Sinema will preserve a tax loophole that Democrats have complained about for years.For years, Democrats and even some Republicans such as former President Donald J. Trump have called for closing the so-called carried interest loophole that allows wealthy hedge fund managers and private equity executives to pay lower tax rates than entry-level employees.Those efforts have always failed to make a big dent in the loophole — and the latest proposal to do so also faltered this week. Senate leaders announced on Thursday that they had agreed to drop a modest change to the tax provision in order to secure the vote of Senator Kyrsten Sinema, Democrat of Arizona, and ensure passage of their Inflation Reduction Act, a wide-ranging climate, health care and tax bill.An agreement reached last week between Senator Chuck Schumer, the majority leader, and Senator Joe Manchin III, Democrat of West Virginia, would have taken a small step in the direction of narrowing carried interest tax treatment. However, it would not have eliminated the loophole entirely and could still have allowed rich business executives to have smaller tax bills than their secretaries, a criticism lobbed by the investor Warren E. Buffett, who has long argued against the preferential tax treatment.The fate of the provision was always in doubt given the Democrats’ slim control of the Senate. And Ms. Sinema had previously opposed a carried interest measure in a much larger bill called Build Back Better, which never secured the 50 Senate votes needed — Republicans have been unified in their opposition to any tax increases.Had the legislation passed in the form that Mr. Schumer and Mr. Manchin presented it last week, the shrinking of the carried interest exception would have brought Democrats a tiny bit closer to realizing their vision of making the tax code more progressive.What is carried interest?Carried interest is the percentage of an investment’s gains that a private equity partner or hedge fund manager takes as compensation. At most private equity firms and hedge funds, the share of profits paid to managers is about 20 percent.Under existing law, that money is taxed at a capital-gains rate of 20 percent for top earners. That’s about half the rate of the top individual income tax bracket, which is 37 percent.The 2017 tax law passed by Republicans largely left the treatment of carried interest intact, after an intense business lobbying campaign, but did narrow the exemption by requiring private equity officials to hold their investments for at least three years before reaping preferential tax treatment on their carried interest income.What would the Manchin-Schumer agreement have done?The agreement between Mr. Manchin and Mr. Schumer would have further narrowed the exemption, in several ways. It would have extended that holding period to five years from three, while changing the way the period is calculated in hopes of reducing taxpayers’ ability to game the system and pay the lower 20 percent tax rate.Senate Democrats say the changes would have raised an estimated $14 billion over a decade, by forcing more income to be taxed at higher individual income tax rates — and less at the preferential rate.The longer holding period would have applied only to those who made $400,000 per year or more, in keeping with President Biden’s pledge not to raise taxes on those earning less than that amount.The tax provision echoed a measure that was initially included in the climate and tax bill that House Democrats passed last year but that stalled in the Senate. The carried interest language was removed amid concern that Ms. Sinema, who opposed the measure, would block the overall legislation.Why hasn’t the loophole been closed by now?Many Democrats have tried for years to completely eliminate the tax benefits private equity partners enjoy. Democrats have sought to redefine the management fees they get from partnerships as “gross income,” just like any other kind of income, and to treat capital gains from partners’ investments as ordinary income.Such a move was included in legislation proposed by House Democrats in 2015. The legislation would also have increased the penalties on investors who did not properly apply the proposed changes to their own tax filings.The private equity industry has fought back hard, rejecting outright the basic concepts on which the proposed changes were based.“No such loophole exists,” Steven B. Klinsky, the founder and chief executive of the private equity firm New Mountain Capital, wrote in an opinion article published in The New York Times in 2016. Mr. Klinsky said that when other taxes, including those levied by New York City and the state government, were accounted for, his effective tax rate was between 40 and 50 percent.What would the change have meant for private equity?The private equity industry has defended the tax treatment of carried interest, arguing that it creates incentives for entrepreneurship, healthy risk-taking and investment.The American Investment Council, a lobbying group for the private equity industry, described the proposal as a blow to small business.“Over 74 percent of private equity investment went to small businesses last year,” said Drew Maloney, chief executive of the council. “As small-business owners face rising costs and our economy faces serious headwinds, Washington should not move forward with a new tax on the private capital that is helping local employers survive and grow.”The Managed Funds Association said the changes to the tax code would hurt those who invested on behalf of pension funds and university endowments.“Current law recognizes the importance of long-term investment, but this proposal would punish entrepreneurs in investment partnerships by not affording them the benefit of long-term capital gains treatment,” said Bryan Corbett, the chief executive of the association.“It is crucial Congress avoids proposals that harm the ability of pensions, foundations and endowments to benefit from high-value, long-term investments that create opportunity for millions of Americans.”Jim Tankersley More

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    How a Trash-Talking Crypto Bro Caused a $40 Billion Crash

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    Do Kwon, a South Korean entrepreneur, hyped the Luna and TerraUSD cryptocurrencies. Their failures have devastated some traders, though not the investment firms that cashed out early.Do Kwon, a trash-talking entrepreneur from South Korea, called the cryptocurrency he created in 2018 “my greatest invention.” In countless tweets and interviews, he trumpeted the world-changing potential of the currency, Luna, rallying a band of investors and supporters he proudly referred to as “Lunatics.”Mr. Kwon’s company, Terraform Labs, raised more than $200 million from investment firms such as Lightspeed Venture Partners and Galaxy Digital to fund crypto projects built with the currency, even as critics questioned its technological underpinnings. Luna’s total value ballooned to more than $40 billion, creating a frenzy of excitement that swept up day traders and start-up founders, as well as wealthy investors.Mr. Kwon dismissed concerns with a taunt: “I don’t debate the poor.”But last week, Luna and another currency that Mr. Kwon developed, TerraUSD, suffered a spectacular collapse. Their meltdowns had a domino effect on the rest of the cryptocurrency market, tanking the price of Bitcoin and accelerating the loss of $300 billion in value across the crypto economy. This week, the price of Luna remained close to zero, while TerraUSD continued to slide.The downfall of Luna and TerraUSD offers a case study in crypto hype and who is left holding the bag when it all comes crashing down. Mr. Kwon’s rise was enabled by respected financiers who were willing to back highly speculative financial products. Some of those investors sold their Luna and TerraUSD coins early, reaping substantial profits, while retail traders now grapple with devastating losses.Pantera Capital, a hedge fund that invested in Mr. Kwon’s efforts, made a profit of about 100 times its initial investment, after selling roughly 80 percent of its holdings of Luna over the last year, said Paul Veradittakit, an investor at the firm.Pantera turned $1.7 million into around $170 million. The recent crash was “unfortunate,” Mr. Veradittakit said. “A lot of retail investors have lost money. I’m sure a lot of institutional investors have, too.”Mr. Kwon did not respond to messages. Most of his other investors declined to comment.Kathleen Breitman, a founder of the crypto platform Tezos, said the rise and fall of Luna and TerraUSD were driven by the irresponsible behavior of the institutions backing Mr. Kwon. “You’ve seen a bunch of people trying to trade in their reputations to make quick bucks,” she said. Now, she said, “they’re trying to console people who are seeing their life savings slip out from underneath them. There’s no defense for that.”Mr. Kwon, a 30-year-old graduate of Stanford University, founded Terraform Labs in 2018 after stints as a software engineer at Microsoft and Apple. (He had a partner, Daniel Shin, who later left the company.) His company claimed it was creating a “modern financial system” in which users could conduct complicated transactions without relying on banks or other middlemen.Mr. Shin and Mr. Kwon began marketing the Luna currency in 2018. In 2020, Terraform started offering TerraUSD, which is known as a stablecoin, a type of cryptocurrency designed to serve as a reliable means of exchange. Stablecoins are typically pegged to a stable asset like the U.S. dollar and are not supposed to fluctuate in value like other cryptocurrencies. Traders often use stablecoins to buy and sell other riskier assets.But TerraUSD was risky even by the standards of experimental crypto technology. Unlike the popular stablecoin Tether, it was not backed by cash, treasuries or other traditional assets. Instead, it derived its supposed stability from algorithms that linked its value to Luna. Mr. Kwon used the two related coins as the basis for more elaborate borrowing and lending projects in the murky world of decentralized finance, or DeFi.Read More on the World of CryptocurrenciesA Perfect Storm: A steep sell-off that gained momentum this week is illustrating the risks of cryptocurrencies. Crypto Emperor: Sam Bankman-Fried, a studiously disheveled billionaire, is hoping to put a new face on the still-chaotic world of digital assets.Crypto Critic: The actor Ben McKenzie, best known for “The O.C.,” has become an outspoken skeptic of digital currencies. Who’s listening?Fund-raising Efforts: Activists and nonprofits are considering digital currencies as a way to raise funds for causes like abortion rights. Can it work?From the beginning, crypto experts were skeptical that an algorithm would keep Mr. Kwon’s twin cryptocurrencies stable. In 2018, a white paper outlining the stablecoin proposal reached the desk of Cyrus Younessi, an analyst for the crypto investment firm Scalar Capital. Mr. Younessi sent a note to his boss, explaining that the project could enter a “death spiral” in which a crash in Luna’s price would bring the stablecoin down with it.“I was like, ‘This is crazy,’” he said in an interview. “This obviously doesn’t work.”As Luna caught on, the naysayers grew louder. Charles Cascarilla, a founder of Paxos, a blockchain company that offers a competing stablecoin, cast doubt on Luna’s underlying technology in an interview last year. (Mr. Kwon responded by taunting him on Twitter: “Wtf is Paxos.”) Kevin Zhou, a hedge fund manager, repeatedly predicted that the two currencies would crash.But venture investment came pouring in anyway to fund projects built on Luna’s underlying technology, like services for people to exchange cryptocurrencies or borrow and lend TerraUSD. Investors including Arrington Capital and Coinbase Ventures shoveled in more than $200 million between 2018 and 2021, according to PitchBook, which tracks funding.In April, Luna’s price rose to a peak of $116 from less than $1 in early 2021, minting a generation of crypto millionaires. A community of retail traders formed around the coin, hailing Mr. Kwon as a cult hero. Mike Novogratz, chief executive of Galaxy Digital, which invested in Terraform Labs, announced his support by getting a Luna-themed tattoo.Mr. Kwon, who operates out of South Korea and Singapore, gloated on social media. In April, he announced that he had named his newborn daughter Luna, tweeting, “My dearest creation named after my greatest invention.”“It’s the cult of personality — the bombastic, arrogant, Do Kwon attitude — that sucks people in,” said Brad Nickel, who hosts the cryptocurrency podcast “Mission: DeFi.”Earlier this year, a nonprofit that Mr. Kwon also runs sold $1 billion of Luna to investors, using the proceeds to buy a stockpile of Bitcoin — a reserve designed to keep the price of TerraUSD stable if the markets ever dipped.Around the same time, some of the venture capital firms that had backed Mr. Kwon started to have concerns. Hack VC, a venture firm focused on crypto, sold its Luna tokens in December, partly because “we felt the market was due for a broader pullback,” said Ed Roman, a managing director at the firm.Martin Baumann, a founder of the Hong Kong-based venture firm CMCC Global, said his company sold its holdings in March, at about $100 per coin. “We had gotten increasing concerns,” he said in an email, “both from tech side as well as regulatory side.” (CMCC and Hack VC declined to comment on their profits.)Even Mr. Kwon alluded to the possibility of a crypto collapse, publicly joking that some crypto ventures might ultimately go under. He said he found it “entertaining” to watch companies crumble.Last week, falling crypto prices and challenging economic trends combined to create a panic in the markets. The price of Luna fell to nearly zero. As critics had predicted, the price of TerraUSD crashed in tandem, dropping from its $1 peg to as low as 11 cents this week. In a matter of days, the crypto ecosystem Mr. Kwon had built was essentially worthless.“I am heartbroken about the pain my invention has brought on all of you,” he tweeted last week.Some of Mr. Kwon’s major investors have lost money. Changpeng Zhao, chief executive of the crypto exchange Binance, which invested in Terraform Labs, said his firm had bought $3 million of Luna, which grew to a peak value of $1.6 billion. But Binance never sold its tokens. Its Luna holdings are currently worth less than $3,000.That loss is still only a drop in the bucket for a company as large as Binance, whose U.S. arm is valued at $4.5 billion.Expand Your Cryptocurrency VocabularyCard 1 of 9A glossary. More

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    Why Tackling Gamestop's Wild Stock Rise Will be a Challenge for Gensler

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    #masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetCharting the Wild Stock SwingsWhat’s GameStop Really Worth?Your TaxesReader’s GuideAdvertisementContinue reading the main storySupported byContinue reading the main storyGensler Faces Big Challenge in Tackling GameStop’s Wild RideThere is broad agreement that the capital markets have been distorted but less consensus on what, if anything, the S.E.C. should do about it.Unlike the fraud or manipulation that regulators like Gary Gensler are used to pursuing, the GameStop frenzy involves investors who have publicly acknowledged the risks they are taking.Credit…Kayana Szymczak for The New York TimesFeb. 1, 2021Updated 4:13 p.m. ETWASHINGTON — During his last regulatory stint in Washington, Gary Gensler focused on reining in big Wall Street players that he believed were manipulating markets and assuming huge financial positions to the detriment of other investors.If confirmed to lead the Securities and Exchange Commission, Mr. Gensler will have to confront an entirely new spin on that same game: Thousands of small investors who have banded together to amass giant stakes in GameStop and other companies with the aim of toppling big Wall Street players.The frenzy around GameStop, whose stock has soared 1,700 percent in the last month, presents a huge challenge for Mr. Gensler and the S.E.C., which will have to reckon with a fundamental shift in the capital markets as a new breed of investor begins trading stocks in unconventional ways and for unconventional reasons.Rather than snapping up a company’s shares because of a belief in that firm’s growth potential, the investors who piled into GameStop, AMC, BlackBerry and others did so largely to see how far they could drive up the price. Their motivation in many cases had less to do with making money than with causing steep financial losses for big hedge funds that were on the other side of that trade and had bet that the price of GameStop and other firms would fall.Their ability to cause such wild market volatility was enabled by new financial apps — like Robinhood — that encourage investors to trade frequently and allow them to buy risky financial products like options as easily as they purchase a latte. Options — which are essentially contracts that give the investor the option to buy a stock at a certain price in the future — were what helped put the “short squeeze” on the hedge funds that had shorted the company’s stock.“What’s going on with GameStop has almost nothing to do with GameStop as a company,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “When you see the markets essentially turned into a video game or turned into a casino, that actually has some pretty serious repercussions for the way we use the markets to fund our economy.”The question for Mr. Gensler and the S.E.C. will be what they can — or should — do about it.In a statement on Friday, the S.E.C. said that it was “closely monitoring” the situation and that it would “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.”But unlike the typical type of fraud or manipulation that regulators like Mr. Gensler are used to pursuing, the current frenzy involves investors who have publicly acknowledged the risks they are taking and even boasted about losses. Forums like Reddit’s WallStreetBets have entire threads devoted to “loss porn,” where traders post screenshots showing their portfolios in the red, to applause from other investors. (“I’m proud of you” and “Respect” are among the typical responses.)That dynamic poses a challenge for an agency whose primary mission is to protect investors by ensuring they have enough information when deciding whether to trade and to enforce securities laws that were written before many of the GameStop investors were even born.“The S.E.C. has for years worried about hedge funds coordinating their positions and coordinating bear raids and otherwise engaging in activities to move around a stock,” said Tyler Gellasch, a former S.E.C. lawyer who heads the Healthy Markets Association, an investor group. “There are reporting requirements around that. But we’ve never really thought about that being done en masse and in public. The S.E.C.’s rules haven’t thought about what happens when it’s 100,000 people coordinating via Reddit versus three people coordinating via email.”Those who know Mr. Gensler say his first move will probably be determining what actually caused the momentum and who benefited. While many big hedge funds got crushed by the trades, there is speculation among market participants and securities lawyers that other big funds may have been fueling — and making money off — some of the volatility.“First of all, the S.E.C. has got to figure out what the hell was going on,” said James Cox, a securities professor at Duke University School of Law. “The first question is going to be an empirical one — how much of this momentum was created by the hedge funds having to cover their short position and how much of the rest was the impact of the options trading — either buying the options or just executing on the options.”A bigger issue for Mr. Gensler will be figuring out corrective actions. While the stock market has always been something of a game, Mr. Cox and others say the recent events have perverted their original purpose, which is to provide a place for companies to raise capital by giving investors the information they need to determine where to put their money.“When you see what’s happening with GameStop, you ask yourself, is this manipulation, is this mass psychosis or is there something wrong in our market structure that is causing this to happen,” said James Angel, a finance professor at Georgetown University’s McDonough School of Business. “This does illustrate some of the imperfections in our market structure and the real question is what, if anything, should be done about it.”Mr. Gensler has spent the past several years teaching at the Massachusetts Institute of Technology, focusing on financial technology, cryptocurrencies and blockchain technology. His classes have addressed some of the knotty issues he will have to face if confirmed to the S.E.C., including the rise of new financial technology companies like Robinhood and the so-called roboadviser Betterment.In a 2019 discussion at M.I.T., Mr. Gensler said it would be “best to show some flexibility” when considering whether to regulate fintech companies since heavy-handed rules could snuff out innovation. Mr. Gensler declined to be interviewed for this article.If confirmed to the job, Mr. Gensler will have to tread carefully. The motivation behind the GameStop squeeze has been embraced by lawmakers and others, who see the trades as a welcome rebellion against the power of big Wall Street players and persistent inequities in the economy. Last week, Representative Alexandria Ocasio-Cortez of New York, a progressive Democrat, and Senator Ted Cruz, a conservative Texas Republican, both condemned efforts by Robinhood to restrict trading in GameStop and other companies, saying the firm was putting the interests of hedge funds above small investors.Other lawmakers are warning against overreacting with more regulation. “When examining this episode, regulators and Congress should tread with extreme caution and avoid needlessly inserting themselves into equity markets,” Senator Patrick J. Toomey, Republican of Pennsylvania, said in a statement.Representative Ro Khanna, a California Democrat, said in an interview that simply blocking retail investors from certain stocks was the wrong decision and that Mr. Gensler should look to the bigger fish — namely lightly regulated hedge funds — when looking for areas to regulate.“We probably need to increase the capital requirements on short-selling for hedge funds, to make it more difficult,” Mr. Khanna said.That is an area that will be more familiar to Mr. Gensler, who spent his tenure as chairman of the Commodity Futures Trading Commission trying to stop big Wall Street firms from manipulating markets. That included bringing dozens of enforcement cases against big banks, which were accused of manipulating key rates that help determine certain prices across the financial system, including benchmark interest rates and foreign exchange rates.Dan Berkovitz, a C.F.T.C. commissioner who served as general counsel under Mr. Gensler, said breaking up “the old boy network” was a major focus during their time at the agency.“He wanted to break that whole culture up and introduce a culture of competition instead of a cozy coexistence,” Mr. Berkovitz said. “That was his philosophy, and coming from Goldman he saw from the inside how that worked.”Mr. Gensler, whose confirmation hearing has not yet been scheduled, will face pressure to bring a similar focus to the S.E.C. On Sunday, Senator Elizabeth Warren, Democrat of Massachusetts, said the GameStop episode underlined that S.E.C. regulators needed to “get off their duffs” and work to make the market more transparent. Among other things, she said new regulations should halt company stock buybacks for the purpose of pushing up share prices.“In the long run, if we have a market that is transparent, that’s level, that helps individual investors come into that market and, frankly, helps make that market more efficient,” she said on CNN’s State of the Union. “The hedge funds, many of the giant corporations, they love the fact that the markets are not efficient.”“GameStop is just the latest ringing of the bell that we have a real problem on Wall Street,” Ms. Warren said. “It’s time to fix it.”Jeanna Smialek contributed reporting.AdvertisementContinue reading the main story More

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    Gensler Faces Big Challenge in Tackling GameStop’s Wild Ride

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    #masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetCharting the Wild Stock SwingsThe Man Behind the Frenzy4 Things to KnowYour TaxesAdvertisementContinue reading the main storySupported byContinue reading the main storyGensler Faces Big Challenge in Tackling GameStop’s Wild RideThere is broad agreement that the capital markets have been distorted but less consensus on what, if anything, the S.E.C. should do about it.Unlike the fraud or manipulation that regulators like Gary Gensler are used to pursuing, the GameStop frenzy involves investors who have publicly acknowledged the risks they are taking.Credit…Kayana Szymczak for The New York TimesFeb. 1, 2021, 3:00 a.m. ETWASHINGTON — During his last regulatory stint in Washington, Gary Gensler focused on reining in big Wall Street players that he believed were manipulating markets and assuming huge financial positions to the detriment of other investors.If confirmed to lead the Securities and Exchange Commission, Mr. Gensler will have to confront an entirely new spin on that same game: Thousands of small investors who have banded together to amass giant stakes in GameStop and other companies with the aim of toppling big Wall Street players.The frenzy around GameStop, whose stock has soared 1,700 percent in the last month, presents a huge challenge for Mr. Gensler and the S.E.C., which will have to reckon with a fundamental shift in the capital markets as a new breed of investor begins trading stocks in unconventional ways and for unconventional reasons.Rather than snapping up a company’s shares because of a belief in that firm’s growth potential, the investors who piled into GameStop, AMC, BlackBerry and others did so largely to see how far they could drive up the price. Their motivation in many cases had less to do with making money than with causing steep financial losses for big hedge funds that were on the other side of that trade and had bet that the price of GameStop and other firms would fall.Their ability to cause such wild market volatility was enabled by new financial apps — like Robinhood — that encourage investors to trade frequently and allow them to buy risky financial products like options as easily as they purchase a latte. Options — which are essentially contracts that give the investor the option to buy a stock at a certain price in the future — were what helped put the “short squeeze” on the hedge funds that had shorted the company’s stock.“What’s going on with GameStop has almost nothing to do with GameStop as a company,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “When you see the markets essentially turned into a video game or turned into a casino, that actually has some pretty serious repercussions for the way we use the markets to fund our economy.”The question for Mr. Gensler and the S.E.C. will be what they can — or should — do about it.In a statement on Friday, the S.E.C. said that it was “closely monitoring” the situation and that it would “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.”But unlike the typical type of fraud or manipulation that regulators like Mr. Gensler are used to pursuing, the current frenzy involves investors who have publicly acknowledged the risks they are taking and even boasted about losses. Forums like Reddit’s WallStreetBets have entire threads devoted to “loss porn,” where traders post screenshots showing their portfolios in the red, to applause from other investors. (“I’m proud of you” and “Respect” are among the typical responses.)That dynamic poses a challenge for an agency whose primary mission is to protect investors by ensuring they have enough information when deciding whether to trade and to enforce securities laws that were written before many of the GameStop investors were even born.“The S.E.C. has for years worried about hedge funds coordinating their positions and coordinating bear raids and otherwise engaging in activities to move around a stock,” said Tyler Gellasch, a former S.E.C. lawyer who heads the Healthy Markets Association, an investor group. “There are reporting requirements around that. But we’ve never really thought about that being done en masse and in public. The S.E.C.’s rules haven’t thought about what happens when it’s 100,000 people coordinating via Reddit versus three people coordinating via email.”Those who know Mr. Gensler say his first move will probably be determining what actually caused the momentum and who benefited. While many big hedge funds got crushed by the trades, there is speculation among market participants and securities lawyers that other big funds may have been fueling — and making money off — some of the volatility.“First of all, the S.E.C. has got to figure out what the hell was going on,” said James Cox, a securities professor at Duke University School of Law. “The first question is going to be an empirical one — how much of this momentum was created by the hedge funds having to cover their short position and how much of the rest was the impact of the options trading — either buying the options or just executing on the options.”A bigger issue for Mr. Gensler will be figuring out corrective actions. While the stock market has always been something of a game, Mr. Cox and others say the recent events have perverted their original purpose, which is to provide a place for companies to raise capital by giving investors the information they need to determine where to put their money.“When you see what’s happening with GameStop, you ask yourself, is this manipulation, is this mass psychosis or is there something wrong in our market structure that is causing this to happen,” said James Angel, a finance professor at Georgetown University’s McDonough School of Business. “This does illustrate some of the imperfections in our market structure and the real question is what, if anything, should be done about it.”Mr. Gensler has spent the past several years teaching at the Massachusetts Institute of Technology, focusing on financial technology, cryptocurrencies and blockchain technology. His classes have addressed some of the knotty issues he will have to face if confirmed to the S.E.C., including the rise of new financial technology companies like Robinhood and the so-called roboadviser Betterment.In a 2019 discussion at M.I.T., Mr. Gensler said it would be “best to show some flexibility” when considering whether to regulate fintech companies since heavy-handed rules could snuff out innovation. Mr. Gensler declined to be interviewed for this article.If confirmed to the job, Mr. Gensler will have to tread carefully. The motivation behind the GameStop squeeze has been embraced by lawmakers and others, who see the trades as a welcome rebellion against the power of big Wall Street players and persistent inequities in the economy. Last week, Representative Alexandria Ocasio-Cortez of New York, a progressive Democrat, and Senator Ted Cruz, a conservative Texas Republican, both condemned efforts by Robinhood to restrict trading in GameStop and other companies, saying the firm was putting the interests of hedge funds above small investors.Other lawmakers are warning against overreacting with more regulation. “When examining this episode, regulators and Congress should tread with extreme caution and avoid needlessly inserting themselves into equity markets,” Senator Patrick J. Toomey, Republican of Pennsylvania, said in a statement.Representative Ro Khanna, a California Democrat, said in an interview that simply blocking retail investors from certain stocks was the wrong decision and that Mr. Gensler should look to the bigger fish — namely lightly regulated hedge funds — when looking for areas to regulate.“We probably need to increase the capital requirements on short-selling for hedge funds, to make it more difficult,” Mr. Khanna said.That is an area that will be more familiar to Mr. Gensler, who spent his tenure as chairman of the Commodity Futures Trading Commission trying to stop big Wall Street firms from manipulating markets. That included bringing dozens of enforcement cases against big banks, which were accused of manipulating key rates that help determine certain prices across the financial system, including benchmark interest rates and foreign exchange rates.Dan Berkovitz, a C.F.T.C. commissioner who served as general counsel under Mr. Gensler, said breaking up “the old boy network” was a major focus during their time at the agency.“He wanted to break that whole culture up and introduce a culture of competition instead of a cozy coexistence,” Mr. Berkovitz said. “That was his philosophy, and coming from Goldman he saw from the inside how that worked.”Mr. Gensler, whose confirmation hearing has not yet been scheduled, will face pressure to bring a similar focus to the S.E.C. On Sunday, Senator Elizabeth Warren, Democrat of Massachusetts, said the GameStop episode underlined that S.E.C. regulators needed to “get off their duffs” and work to make the market more transparent. Among other things, she said new regulations should halt company stock buybacks for the purpose of pushing up share prices.“In the long run, if we have a market that is transparent, that’s level, that helps individual investors come into that market and, frankly, helps make that market more efficient,” she said on CNN’s State of the Union. “The hedge funds, many of the giant corporations, they love the fact that the markets are not efficient.”“GameStop is just the latest ringing of the bell that we have a real problem on Wall Street,” Ms. Warren said. “It’s time to fix it.”Jeanna Smialek contributed reporting.AdvertisementContinue reading the main story More

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    Robinhood, in Need of Cash, Raises $1 Billion From Its Investors

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    #masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetBeating Wall Street4 Things to KnowUnderstanding Stock OptionsA Long Time ComingAdvertisementContinue reading the main storySupported byContinue reading the main storyRobinhood, in Need of Cash, Raises $1 Billion From Its InvestorsThe no-fee trading app, which is popular with young investors, has been strained by the high volume of trading this week in stocks such as GameStop.Increased trading has forced Robinhood to seek additional funding.Credit…Amy Lombard for The New York TimesøKate Kelly, Erin Griffith, Andrew Ross Sorkin and Jan. 29, 2021Updated 6:07 a.m. ETFacing an onslaught of demands on its cash amid a stock market frenzy, Robinhood, the online trading app, said on Thursday that it was raising an infusion of more than $1 billion from its existing investors.Robinhood, one of the largest online brokerages, has grappled with an extraordinarily high volume of trading this week as individual investors have piled into stocks like GameStop. That activity has put a strain on Robinhood, which has to pay customers who are owed money from trades while posting additional cash to its clearing facility to insulate its trading partners from potential losses.On Thursday, Robinhood was forced to stop customers from buying a number of stocks like GameStop that were heavily traded this week. To continue operating, it drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin, or lending, requirements from its central clearing facility for stock trades, known as the Depository Trust & Clearing Corporation.Robinhood still needed more cash quickly to ensure that it didn’t have to place further limits on customer trading, said two people briefed on the situation who insisted on remaining anonymous because the negotiations were confidential.Robinhood, which is privately held, contacted several of its investors, including the venture capital firms Sequoia Capital and Ribbit Capital, who came together on Thursday night to offer the emergency funding, five people involved in the negotiations said.“This is a strong sign of confidence from investors that will help us continue to further serve our customers,” Josh Drobnyk, a Robinhood spokesman, said in an email. Sequoia and Ribbit declined to comment.Investors who provide new financing to Robinhood will receive additional equity in the company. The investors will get that equity at a discounted valuation tied to the price of Robinhood shares when the company goes public, said two of the people. Robinhood plans to hold an initial public offering later this year, two people briefed on the plans said.Robinhood’s emergency fund-raising is the latest sign of how trading in the stock market has been upended this week.An online army of investors, who have been on a mission to challenge the dominance of Wall Street, rapidly bid up the price of stocks like GameStop, entrapping the big-money hedge funds that had bet against the stocks. Some of these individual investors have reaped huge profits, while at least one major hedge fund had to be bailed out after facing huge losses.Robinhood, which is based in Silicon Valley, has been key to empowering the online investors. Adoption of the app has soared in the pandemic as the stock market surged and people took up day trading in the void of other pastimes. The company has drawn in millions of young investors who have never traded before by offering no-fee trading and an app that critics have said makes buying stocks feel like an online game.Without fees, Robinhood makes money by passing its customer trades along to bigger brokerage firms, like Citadel, who pay Robinhood for the chance to fulfill its customer stock orders.In May, Robinhood said it had 13 million users. This week, it became the most-downloaded free app in Apple’s App Store, according to Apptopia, a data provider.Critics have accused the company of encouraging people to gamble on stock market movements and risk big losses. Brokerages including T. Rowe Price, Schwab and Fidelity have imitated Robinhood by lowering their trading fees to zero. Many of them were also hit by the crush of trading this week.Robinhood has had no trouble raising money over the last year, drawing $1.3 billion in venture capital backing and boosting its valuation to nearly $12 billion. Its other investors include the venture capital firm DST Capital, New Enterprise Associates, Index Ventures and Andreessen Horowitz.Yet the company has faced many issues, including fines from regulators for misleading customers. Last March, it raised more money after its app went down and left customers stranded and nursing big losses, leading to a still ongoing lawsuit.In recent weeks, many online investors have used Robinhood to make bets that pushed up the price of GameStop, AMC Entertainment and other stocks that had been widely shorted — or bet against — by hedge funds. That changed on Thursday after the company curbed customer trading in the most popular stocks. “As a brokerage firm, we have many financial requirements,” Robinhood said in a blog post Thursday. “Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment.”In protest, hundreds of thousands of users joined a campaign to give Robinhood’s app the lowest one-star review and drive the company’s rating down. Some investors also sued Robinhood for the losses they sustained after the company cut off trading in certain stocks and several lawmakers urged regulators to exercise more scrutiny of the company.AdvertisementContinue reading the main story More

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    The ‘Roaring Kitty’ Rally: How a Reddit User and His Friends Roiled the Markets

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    #masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetBeating Wall Street4 Things to KnowUnderstanding Stock OptionsA Long Time ComingAdvertisementContinue reading the main storySupported byContinue reading the main storyThe ‘Roaring Kitty’ Rally: How a Reddit User and His Friends Roiled the MarketsA Massachusetts man who goes by ‘Roaring Kitty’ on social media helped fuel the frenzy around GameStop. His $53,000 investment in the company briefly reached $48 million in value.Credit…Max-o-maticNathaniel Popper and Jan. 29, 2021, 5:00 a.m. ETIn mid-2019, a Reddit user — known as “Roaring Kitty” on some social media accounts — posted a picture on an online forum depicting a single $53,000 investment in the video-game retailer GameStop.The post attracted little attention, except from a few people who mocked the bet on the struggling company. “This dude should sell now,” a Reddit user named cmcewen wrote at the time.But Roaring Kitty was not deterred. Over the next year, he began tweeting frequently about GameStop and making YouTube and TikTok videos about his investment. He also started livestreaming his financial ideas. Other Reddit users with monikers like Ackilles and Bowlerguy92 began following his every move and piling into GameStop.“IF HE IS IN WE ARE IN💎💎💎,” one user wrote on a Reddit board called WallStreetBets on Tuesday.Roaring Kitty — who is Keith Gill, 34, a former financial educator for an insurance firm in Massachusetts — has now become a central figure in this week’s stock market frenzy. Inspired by him and a small crew of individual investors who gathered around him, hordes of young online traders took GameStop’s stock on a wild ride, pitting themselves against sophisticated hedge funds and upending Wall Street’s norms in the process.Their actions — pushing up GameStop’s price by buying so-called options contracts that offer a cheap way to bet on a stock’s direction — have shocked established investors because Mr. Gill and his online comrades are the antithesis of the Wall Street titans who have long ruled the stock market.A screenshot of Keith Gill from his Roaring Kitty’s YouTube channel.Credit…via YoutubeWorking far from well-heeled financial offices, Mr. Gill and his fans socialized on Reddit and YouTube and used no-fee online trading platforms like Robinhood and WeBull. Many were so devoted to their GameStop investment that they spent hours each week chatting in the comments section of Mr. Gill’s videos, delving into the company’s financial filings and arcane details about free-cash flow and video game consoles.Their show of force this week underlines how the financial markets have changed by merging with the world of social media and a younger generation of traders who have been empowered by online platforms. It has also made some in this new generation wildly wealthy.On Tuesday, Mr. Gill posted a picture on Reddit that showed his $53,000 bet on GameStop had soared in value to $48 million. (His holdings could not be independently verified.) The post was “upvoted” — the equivalent of being liked — more than 140,000 times by other users. GameStop, which traded at $4 a year ago, closed on Thursday at $193 after reaching more than $480 earlier in the day.“Your example has literally changed the lives of thousands of ordinary normal people,” a Reddit user named reality_czech wrote this week to Mr. Gill. “Seriously thank you.”Larry Tabb, the head of market structure research at Bloomberg Intelligence, said the rise of traders like Mr. Gill “would have been impossible even a few years ago” because every trade came with a fee and there was less focus on the markets on social media. But with people now stuck at home in the pandemic with easy access to free trading at online brokerages, “these guys saw an opportunity and they took it,” he said.Mr. Gill did not respond to requests for comment. His online accounts and email addresses were tied to his old office in New Hampshire and his Massachusetts home. Mr. Gill’s mother, Elaine, confirmed in a brief phone call that her son was Roaring Kitty.“I’m proud,” she said, before hanging up.Mr. Gill’s life as Roaring Kitty began in 2014 when he started a limited liability company with that name. Before that, he was an All American runner in college who could cover a mile in 4 minutes 3 seconds, according to local newspapers. After graduating, he worked as a chartered financial accountant and a financial wellness educator, a recently deleted LinkedIn profile showed.In August 2019, he began posting on Reddit. Like many other Reddit users, he showed familiarity with memes and internet expressions like YOLO (you only live once) and exhibited a love for profanity. The middle letter of the acronym of his Reddit username, DFV, refers to an expletive. On YouTube, TikTok and Twitter, he went by Roaring Kitty.Mr. Gill’s first posts on WallStreetBets showed the screenshot of his E-Trade portfolio with the options trades he had made on GameStop, all of them betting the stock would go up. In the comments, he explained that Wall Street did not appreciate how much GameStop would benefit as new video game consoles were released.Shortly after Mr. Gill placed his trades, Michael Burry, an investor made famous by the Michael Lewis book “The Big Short,” also expressed interest in GameStop. On Reddit, Mr. Gill pointed to Mr. Burry’s post as validation. When others questioned the investment, Mr. Gill held firm.“Dude everyone thinks I’m crazy, and I think everyone else is crazy,” he responded to a commenter when GameStop announced sales had dropped 30 percent in late 2019.Last summer, Mr. Gill started a Roaring Kitty channel on YouTube where he talked for hours about GameStop. He had 418 YouTube subscribers through last November, according to the web tracking firm SocialBlade.In one of his first YouTube videos, he wondered aloud, “Maybe there’s going to be no one tuning in, so this is silly.”He explained that to avoid disturbing his 2-year-old daughter, he was filming in a basement room called the “Kitty Corner,” with a stuffed animal cat on the doorknob.Fast-talking and cracking jokes in between analyzing stocks, Mr. Gill sipped beer, brandished cigars and told viewers he sometimes used a Magic 8-Ball to guide his investments. He often wore a baseball cap over his long hair and a T-shirt with a cat in sunglasses.The comments section of his videos soon became a gathering place for a small group of other GameStop fans. One YouTube follower, Joe Fonicello, known as Toast on Twitter, said he tuned in from an old van that he was traveling across the country in with his girlfriend.Mr. Gill often posted pictures of his GameStop investment.Credit…via Youtube“She thought I was crazy until she heard the thesis” for what GameStop could be worth, said Mr. Fonicello, 21, who said he and his girlfriend’s investment in the stock has grown to over $250,000 this week from less than $10,000 originally.Mr. Fonicello said chatting with Mr. Gill and others online was not just about money. “What went from a great few hours of stock analysis turned into a few hours of just spreading positivity,” he said.Last August, Ryan Cohen, the founder of the pet food site Chewy.com, announced that he had taken a big stake in GameStop. A few weeks later, Mr. Gill’s investment hit $1 million, according to pictures he posted of his portfolio.Through financial filings, Mr. Gill’s crew also discovered that hedge funds such as Point72 and Citron Capital were betting that GameStop’s price would fall, in a maneuver known as short-selling. That angered them.“That’s your ignition switch. A common enemy, so to speak,” said Rod Alzmann, 31, a corporate strategist in Florida who has bet on GameStop for even longer than Mr. Gill and posted online as Uberkikz11. “The speculation is a rush, plus fighting the man.”In December, Mr. Gill’s wife made a cameo on YouTube when her hand appeared on a livestream to clink glasses with him to celebrate GameStop’s stock reaching $20. Mr. Gill wore a pink party hat and sunglasses and sipped what appeared to be champagne.“I certainly do not drive a Lambo,” he said in the video, referring to a Lamborghini. “We rent this house that you see, so it’s been a wild ride for us as a family.”Earlier this month, Mr. Cohen joined GameStop’s board. That caused the company’s stock to rise, enriching Mr. Gill and others. When Mr. Gill showed another picture of his investment on Jan. 13, some of the 44,200 people who looked at the post said his decision not to cash out even a penny of GameStop kept them going.“Daddy’s still in!” said a Reddit user named freehouse_throwaway. “Feels so good.”Late last week, 190,000 viewers tuned in to the Roaring Kitty YouTube channel, which now has more than 74,000 subscribers, as Mr. Gill, in a red bandanna and sunglasses, said he would be stepping away “for a bit.” That day, he livestreamed for seven hours while watching a chart of GameStop’s surging stock, laughing and calling out to longtime comrades in the comments.On Thursday, several online brokerages shut down trading in GameStop, causing the company’s price to plunge by almost two-thirds before steadying. Even ardent supporters wondered if Mr. Gill had finally caved and sold.Mr. Gill then posted another picture on Reddit showing he had stayed firm — and had lost $15 million. His fans cheered.“IF HE’S STILL IN, I’M STILL IN,” over 100 different followers responded in quick succession.Kitty Bennett contributed research.AdvertisementContinue reading the main story More