Sunday, February 28, 2021

Escobar: Putin, Crusaders, & Barbarians

 Authored by Pepe Escobar via The Asia Times,

Moscow is painfully aware that the US/NATO “strategy” of containment of Russia is already reaching fever pitch. Again.

This past Wednesday, at a very important meeting with the Federal Security Service board, President Putin laid it all out in stark terms:

We are up against the so-called policy of containing Russia. This is not about competition, which is a natural thing for international relations. This is about a consistent and quite aggressive policy aimed at disrupting our development, slowing it down, creating problems along the outer perimeter, triggering domestic instability, undermining the values that unite Russian society, and ultimately to weaken Russia and put it under external control, just the way we are witnessing it transpire in some countries in the post-Soviet space.

Russian President Vladimir Putin during a meeting of the Federal Security Service Board in Moscow on February 24. Photo: AFP / Alexei Druzhinin / Sputnik

Not without a touch of wickedness, Putin added this was no exaggeration: “In fact, you don’t need to be convinced of this as you yourselves know it perfectly well, perhaps even better than anybody else.”

The Kremlin is very much aware “containment” of Russia focuses on its perimeter: Ukraine, Georgia and Central Asia. And the ultimate target remains regime change.

Putin’s remarks may also be interpreted as an indirect answer to a section of President Biden’s speech at the Munich Security Conference.

According to Biden’s scriptwriters, 

Putin seeks to weaken the European project and the NATO alliance because it is much easier for the Kremlin to intimidate individual countries than to negotiate with the united transatlantic community … The Russian authorities want others to think that our system is just as corrupt or even more corrupt.

US President Joe Biden speaks virtually from the East Room of the White House in Washington, DC, to the Munich Security Conference in Germany on February 19. Photo: AFP / Mandel Ngan

A clumsy, direct personal attack against the head of state of a major nuclear power does not exactly qualify as sophisticated diplomacy. At least it glaringly shows how trust between Washington and Moscow is now reduced to less than zero. As much as Biden’s Deep State handlers refuse to see Putin as a worthy negotiating partner, the Kremlin and the Ministry of Foreign Affairs have already dismissed Washington as “non-agreement capable.”

Once again, this is all about sovereignty. The “unfriendly attitude towards Russia,” as Putin defined it, extends to “other independent, sovereign centers of global development.” Read it as mainly China and Iran. All these three sovereign states happen to be categorized as top “threats” by the US National Security Strategy.

Yet Russia is the real nightmare for the Exceptionalists: Orthodox Christian, thus appealing to swaths of the West; consolidated as major Eurasian power; a military, hypersonic superpower; and boasting unrivaled diplomatic skills, appreciated all across the Global South.

In contrast, there’s not much left for the deep state except endlessly demonizing both Russia and China to justify a Western military build-up, the “logic” inbuilt in a new strategic concept named  NATO 2030: United for a New Era.

The experts behind the concept hailed it as an “implicit” response to French President Emmanuel Macron’s declaring NATO “brain dead.”

Well, at least the concept proves Macron was right.

Those barbarians from the East

Crucial questions about sovereignty and Russian identity have been a recurrent theme in Moscow these past few weeks. And that brings us to February 17, when Putin met with Duma political leaders, from the Communist Party’s Vladimir Zhirinovsky – enjoying a new popularity surge – to United Russia’s Sergei Mironov, as well as State Duma speaker Vyacheslav Volodin.

Putin stressed the “multi-ethnic and multi-religious” character of Russia, now in “a different environment that is free of ideology”:

It is important for all ethnic groups, even the smallest ones, to know that this is their Motherland with no other for them, that they are protected here and are prepared to lay down their lives in order to protect this country. This is in the interests of us all, regardless of ethnicity, including the Russian people.

Yet Putin’s most extraordinary remark had to do with ancient Russian history:

Barbarians came from the East and destroyed the Christian Orthodox empire. But before the barbarians from the East, as you well know, the crusaders came from the West and weakened this Orthodox Christian empire, and only then were the last blows dealt, and it was conquered. This is what happened … We must remember these historical events and never forget them.

Well, this could be enough material to generate a 1,000-page treatise. Instead, let’s try, at least, to – concisely – unpack it.

The Great Eurasian Steppe – one of the largest geographical formations on the planet – stretches from the lower Danube all the way to the Yellow River. The running joke across Eurasia is that “Keep Walking” can be performed back to back. For most of recorded history this has been Nomad Central: tribe upon tribe raiding at the margins, or sometimes at the hubs of the heartland: China, Iran, the  Mediterranean.

The Scythians (see, for instance, the magisterial The Scythians: Nomad Warriors of the Steppe, by Barry Cunliffe) arrived at the Pontic steppe from beyond the Volga. After the Scythians, it was the turn of the Sarmatians to show up in South Russia.

From the 4th century onward, nomad Eurasia was a vortex of marauding tribes, featuring, among others, the Huns in the 4th and 5th centuries, the Khazars in the 7th century, the Kumans in the 11th century, all the way to the Mongol avalanche in the 13th century.

The plot line always pitted nomads against peasants. Nomads ruled – and exacted tribute. G Vernadsky, in his invaluable Ancient Russia, shows how “the Scythian Empire may be described sociologically as a domination of the nomadic horde over neighboring tribes of agriculturists.”

As part of my multi-pronged research on nomad empires for a future volume, I call them Badass Barbarians on Horseback. The stars of the show include, in Europe, in chronological order, Cimmerians, Scythians, Sarmatians, Huns, Khazars, Hungarians, Peshenegs, Seljuks, Mongols and their Tatar descendants; and, in Asia, Hu, Xiongnu, Hephtalites, Turks, Uighurs, Tibetans, Kirghiz, Khitan, Mongols, Turks (again), Uzbeks and Manchu.   

Arguably, since the hegemonic Scythian era (the first protagonists of the Silk Road), most of the peasants in southern and central Russia were Slav. But there were major differences. The Slavs west of Kiev were under the influence of Germania and Rome. East of Kiev, they were influenced by Persian civilization.

It’s always important to remember that the Vikings were still nomads when they became rulers in Slav lands. Their civilization in fact prevailed over sedentary peasants – even as they absorbed many of their customs.  

Interestingly enough, the gap between steppe nomads and agriculture in proto-Russia was not as steep as between intensive agriculture in China and the interlocked steppe economy in Mongolia.

(For an engaging Marxist interpretation of nomadism, see A N Khazanov’s Nomads and the Outside World).

The sheltering sky

What about power? For Turk and Mongol nomads, who came centuries after the Scythians, power emanated from the sky. The Khan ruled by authority of the “Eternal Sky” – as we all see when we delve into the adventures of Genghis and Kublai. By implication, as there is only one sky, the Khan would have to exert universal power. Welcome to the idea of universal empire.

Kublai Khan as the first Yuan emperor, Shizu. Yuan dynasty (1271–1368). Album leaf, ink and color on silk. National Palace Museum, Taipei. Photo: Wikimedia Commons/National Palace Museum, Taipei

In Persia, things were slightly more complex. The Persian Empire   was all about Sun worship: that became the conceptual basis for the divine right of the King of Kings. The implications were immense, as the King now became sacred. This model influenced Byzantium – which, after all, was always interacting with Persia.

Christianity made the Kingdom of Heaven more important than ruling over the temporal domain. Still, the idea of Universal Empire persisted, incarnated in the concept of Pantocrator: it was the Christ who ultimately ruled, and his deputy on earth was the Emperor. But Byzantium remained a very special case: the Emperor could never be an equal to God. After all, he was human.

Putin is certainly very much aware that the Russian case is extremely complex. Russia essentially is on the margins of three civilizations. It’s part of Europe – reasons including everything from the ethnic origin of Slavs to achievements in history, music and literature.

Russia is also part of Byzantium from a religious and artistic angle (but not part of the subsequent Ottoman empire, with which it was in military competition). And Russia was influenced by Islam coming from Persia.

Then there’s the crucial influence of nomads. A serious case can be made that they have been neglected by scholars. The Mongol rule for a century and a half, of course, is part of the official historiography – but perhaps not given its due importance. And the nomads in southern and central Russia two millennia ago were never properly acknowledged.

So Putin may have hit a nerve. What he said points to the idealization of a later period of Russian history from the late 9th to early 13th century: Kievan Rus. In Russia, 19th century Romanticism and 20th century nationalism actively built an idealized national identity.

The interpretation of Kievan Rus poses tremendous problems – that’s something I eagerly discussed in St. Petersburg a few years ago. There are rare literary sources – and they concentrate mostly on the 12th century afterwards. The earlier sources are foreigners, mostly Persians and Arabs.

Russian conversion to Christianity and its concomitant superb architecture have been interpreted as evidence of a high cultural standard. In a nutshell, scholars ended up using Western Europe as the model for the reconstruction of Kievan Rus civilization.

It was never so simple. A good example is the discrepancy between Novgorod and Kiev. Novgorod was closer to the Baltic than the Black Sea, and had closer interaction with Scandinavia and the Hanseatic towns. Compare it with Kiev, which was closer to steppe nomads and  Byzantium – not to mention Islam.

Kievan Rus was a fascinating crossover. Nomadic tribal traditions – on administration, taxes, the justice system – were prevalent. But on religion, they imitated Byzantium. It’s also relevant that until the end of the 12th century, assorted steppe nomads were a constant “threat” to southeast Kievan Rus.

So as much as Byzantium – and, later on, even the Ottoman Empire – supplied models for Russian institutions, the fact is the nomads, starting with the Scythians, influenced the economy, the social system and most of all, the military approach.   

Watch the Khan

Sima Qian, the master Chinese historian, has shown how the Khan had two “kings,” who each had two generals, and thus in succession, all the way to commanders of a hundred, a thousand and ten thousand men. This is essentially the same system used for a millennia and a half by nomads, from the Scythians to the Mongols, all the way to Tamerlane’s army at the end of the 14th century.   

The Mongol invasions – 1221 and then 1239-1243 – were indeed the major game-changer. As master analyst Sergei Karaganov told me in his office in late 2018, they influenced Russian society for centuries afterwards.

For over 200 years Russian princes had to visit the Mongol headquarters in the Volga to pay tribute. One scholarly strand has qualified it as “barbarization”; that seems to be Putin’s view. According to that strand, the incorporation of Mongol values may have “reversed” Russian society to what it was before the first drive to adopt Christianity.   

The inescapable conclusion is that when Muscovy emerged in the late 15th century as the dominant power in Russia, it was essentially the successor of the Mongols.

And because of that the peasantry – the sedentary population – were not touched by “civilization” (time to re-read Tolstoy?). Nomad Power and values, as strong as they were, survived Mongol rule for centuries.

Well, if a moral can be derived from our short parable, it’s not exactly a good idea for “civilized” NATO to pick a fight with the – lateral – heirs of the Great Khan. 

Sunday, February 21, 2021

Demographics Is (Dark) Destiny

 Authored by Chris Hamilton via Econimica blog,

Some folks want to make economics seem complicated. It ain't. Any who, some charts depicting the US economy...through demographics.

First, 15 to 54 year old US population (blue line) and those employed among that population (green line). You may note the end of population growth among them in '07 and not only the end but a significant decline in employment among them since '07. This is the population segment that undertakes most of the credit (creating the new $'s via undertaking debt...vs. elderly who destroy $'s via deleveraging/paying off their loans), buys most the homes, spends the most, earns the most. The lack of growth among them is paramount in understanding what took place in '08 as potential new home buyers ceased to exist and banks gave credit to anyone to keep the party going...'08 (and what has come since) was an entirely predictable demographic caused crisis.

Same as above but plus Federal Reserve set Federal Funds Rate % (black dashed line) and it's relationship to marketable federal debt (red shaded area). When working age population growth ceased, the Federal Reserve implemented ZIRP (free money to the largest banks) and likewise free money to Congress. The explosion in debt since is entirely due to the Federal Reserve's encouragement via their interest rate policy.

Same as above but inclusive of Federal Reserve balance sheet (aka, QE...yellow line) and Wilshire 5000 (representing all publicly traded US equities...light blue line). Since the end of working age population and employment growth, virtually free money has been passed to the largest and best connected US institutions / individuals. This, alongside the Federal Reserve purchasing Treasury bonds (to artificially lower the cost of federal government borrowing and boost the supply of dollars chasing the remaining assets) and mortgage backed securities (to artificially lower mortgage rates) has resulted in an asset explosion. This explosion has rewarded asset holders with vast riches and punished young adults, the poor, those on fixed incomes. These folks in the latter group get none of the asset wealth effect but instead get the fast rising costs of living due to the asset appreciation. When the Federal Reserve continually suggests they aren't responsible for the exploding US is a bald faced lie.

Same as above, but focusing on the 15 to 54 year old employment to population ratio (not the silly unemployment numbers the BLS puts out...just dividing the population by those employed among them...white line). The Federal Reserve has two Congressionally mandated jobs..."promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates." You can forget stable prices (as the Fed has, via a system of discounting inflation) and just focus on full employment. As you'll note, the US has achieved "full employment" four times since the inclusion of females into the workforce...'89, '00, '07, '19...each time with employment around 75% of the available population. But note the declining rates, resulting in greater debt, resulting in soaring asset bubbles (and once those failed) notice the soaring QE and zero interest rate policy...resulting in the greatest rise in asset appreciation in US history. Asset holders made rich (for being asset holders)...those with little or no assets made poor (for not being asset holders). Simple stuff.

Below, again 15 to 54 year old horizontally moving population plus falling employed among them, ever lower Federal Funds Rate, and ludicrously vertical Wilshire 5000. In case you are wondering, this asset explosion is not a naturally occurring phenomenon against over a decade of zero working age population growth and seven million fewer employed among them. Nah, this looks like a currency collapse in progress...and once it goes vertical (Wilshire, Bitcoin, etc.) know you haven't got much longer to go (although we likely have significantly further to go in the vertical explosion...before the whatever it is that follows).

The two charts below throw Bitcoin into the mix, putting it's meteoric rise into context against demographics and the Federal Reserve's demographically driven Treasuries buying spree (and the concurrent hard stop of foreign buying of Treasuries).

While nobody can say whether immigration will return to high levels, fertility rates and births are scraping record lows...and simply gauging the feeder population that is the 15 to 24 year olds (chart below of population / employed among them), you should have a fairly good idea of why a return to a growing working age US population isn't likely.

Finally, here's how this plays out regarding the most fundamental of human needs...shelter or I'll stretch out to the 15-64yr/old population and employed among them versus annual housing starts and the Federal Funds Rate (%). The Federal Reserve purchasing of MBS / QE has artificially pushed mortgage rates to record lows to induce an artificial housing frenzy amid a secular turn to outright declining potential buyers and soaring quantity of potential sellers (elderly who already own homes). If I didn't know better, I'd think the Fed hates young adults and is setting them up to be the bag holder of an awful oversupply of very expensive housing when the bottom invariably falls out...again.

Some say these are the seeds of the second American revolution as a class of unelected, undemocratic central bankers enrich a tiny majority at the expense of the majority...but I just like making colorful charts.

Extra Credit - 15 to 74 year old population / employees

For those curious how this looks on the widest possible cross section of population/potential employees, the following are the same charts but showing the 15 to 74 year old population and employees among them.

Last chart is pretty important, because it really highlights the declining participation of the aging population...suggesting that "full employment" will be significantly lower than '06 and '19 at much greater expense and require significantly greater QE to enable it all.

Invest (wtf) accordingly.

Monday, February 15, 2021

Bill Gates Goes Full Captain Planet, Wants To Change 'Every Aspect Of Economy' While We Dine On Fake Meat

 From Zero Hedge:

Microsoft founder Bill Gates is pushing drastic and 'fundamental' changes to the economy in order to immediately halt the release of greenhouse gasses - primarily carbon dioxide - and 'go to zero' in order to save the planet from long-prognosticated (and consistently wrong) environmental disaster.

Changes we'll need to make in order to realize Gates' vision include:

  • Allocating $35 billion per year on climate and clean energy research.
  • Electric everything.
  • Widespread consumption of fake meat, since cows account for '4% of all greenhouse gases.'
  • Retooling the steel and cement industries, which Gates says account for 16% of all carbon dioxide emissions, to inject up to 30% of captured C02 into concrete, and create a different type of steel.
  • Widespread adoption of next generation nuclear energy to supplement wind and solar.

And since producing plants to make fake meat emits gases as well, Gates has backed a company which uses fungus to make sausage and yogurt, which the billionaire calls "pretty amazing."

"When you say fungi, do you mean like mushroom or a microbe?" asked Anderson Cooper in a recent "60 Minutes" interview to promote Gates' new book, "How to Avoid a Climate Disaster."

"It's a microbe," replied Gates, adding "The microbe was discovered in the ground in a geyser in Yellowstone National Park. Without soil or fertilizer it can be grown to produce this nutritional protein -- that can then be turned into a variety of foods with a small carbon footprint."

(Speaking of which, it appears that we're already rounding the corner on C02 emissions)

More via CBS News:

Gates isn't just looking to cut future carbon emissions, he is also investing in direct air capture, an experimental process to remove existing CO2 from the atmosphere. Some companies are  now using these giant fans to capture CO2 directly out of the air, Gates has become one of the world's largest funders of this kind of technology. 

But of all his green investments, Gates has spent the most time and money pursuing a breakthrough in nuclear energy -- arguing it's key to a zero carbon future.

He says he's a big believer in wind and solar and thinks it can one day provide up to 80% of the country's electricity, but Gates insists unless we discover an effective way to store and ship wind and solar energy, nuclear power will likely have to do the rest. Energy from nuclear plants can be stored so it's available when the sun isn't shining and the wind isn't blowing. 

Gates also admits he's a hypocrite - telling Cooper "I probably have one of the highest greenhouse gas footprints of anyone on the planet," adding "my personal flying alone is gigantic."

He's atoning for his climate sins by purchasing plant-based aviation fuel, switching to an electric car, using solar panels, and buying carbon credits to the tune of $7 million per year.

Gates' climate pivot is getting a full-court media press. As Paul Joseph Watson of Summit News writes:

Bill Gates has been lauded as the man to “save the world” and help the planet reach zero carbon emissions in a new report by Wired Magazine, despite such standards not being reflected in the billionaire philanthropist’s own lifestyle.

The article investigates how Gates plans to achieve a “zero carbon” world and promotes his new book which argues “it’s time we make real societal, economic and logistic changes to our way of life to avoid disaster.”

According to Gates, the planet needs to reach zero carbon emissions in order to “avoid catastrophe.”

Gates’ efforts to reduce CO2 emissions may have an environmentalist sheen, but that goal also risks reducing living standards in the west, something that Gates isn’t likely to embrace for himself.

As we previously highlighted, while Americans are being told that the dream of owning private property is over under a future ‘Great Reset’, Gates and other billionaires have been buying up huge amounts of farmland.

Gates is now the biggest owner of farmland in America, according to a Forbes report.

While the mainstream media continues to champion Gates’ influence, he has received harsh criticism elsewhere.

As we highlighted last week, Lawyer Robert F. Kennedy Jr., son of Robert F. Kennedy and the nephew of former U.S. president John F. Kennedy, wrote a comprehensive report accusing Gates of engaging in neo-feudalism.

Kennedy warns that, “To cloak his dystopian plans for humanity in benign intentions, Gates has expropriated the rhetoric of “sustainability,” “biodiversity,” “good stewardship” and “climate.”

He also accused Gates of attempting to monopolise and dominate global food production, labeling it “a dark form of philanthrocapitalism based on biopiracy and corporate biopiracy.”

Kennedy was subsequently banned by Instagram after his report was published.

As we highlighted earlier, pro-Gates messaging has also found its way into children’s television programming.

*  *  *

Does Gates have a plan to force the rest of the world to adopt his vision?

Sunday, February 14, 2021

Exposing The Robinhood Scam: Here's How Much Citadel Paid To Robinhood To Buy Your Orders

 From Zero Hedge:

Frankly, we've had it with the constant stream of lies from Robinhood and neverending bullshit from the company's CEO, Vlad Tenev.

With Tenev scheduled to testify on Thursday, alongside the CEOs of Citadel, Melvin Capital and Reddit, the apriori mea culpas have started to emerge - if a little too late - the former HFT trader spoke late on Friday on the All-In Podcast hosted by Chamath Palihapitiya, who had strongly criticized Robinhood over the trading restrictions, and Jason Calacanis, a Robinhood investor, and said that “no doubt we could have communicated this a little bit better to customers."

What he is referring to, of course, is Robinhood's outrageous decision to restrict the buying of 13 heavily shorted stocks on Jan 28 that had been driven to record highs, including GameStop, whose shares had surged more than 1,600%.

Tenev said the restrictions were necessary due to a large increase in collateral/deposit requirements by the DTCC, but that was not spelled out in automated emails sent to Robinhood customers early on Jan. 28.

Robinhood CEO Vlad Tenev

And then he decided to pull the oldest trick and deflect attention from his own mistakes by blaming "conspiracy theories."

"As soon as those emails went out, the conspiracy theories started coming, so my phone was blowing up with, ‘how could you do this, how could you be on the side of the hedge funds,’" he said.

What Tenev did not say, or explain, is why his company - which is merely a client-facing front of Citadel, which buys the bulk of Robinhood's orderflow to use it perfectly legally in any way it sees fit - was so massively undercapitalized that the DTCC required several billion more in collateral to protect Robinhood's own investors against the company's predatory ways of seeking to capitalize on the gamification of investing making it nothing more (or less) than a trivial pursuit to millions of GenZ and millennial investors, a point which Michael Burry made so vividly.

Incidentally we know why Tenev did not mention it: it's because Robinhood's back office is a shambles of a shoestring operation, one which never anticipated either such a surge in trading not a multi-billion collateral requirement; had Robinhood been a true brokerage instead of pretending to be one, and run merely to open as many retail accounts as it could in the shortest amount of time, thus generating the most profit in the quickest amount of time to allow its sponsors a quick and profitable exit, it would actually have been on top of this.

It's also why Tenev's ridiculous pleas for immediate settlement instead of the usual T+2 arrangement, which has not been an issue for any other brokers, is nothing but a strawman argument which he hopes to present in Congress.

Which brings us to a totally separate topic, and one which Teven will one way or another have to address: the fact that Robinhood is a de facto subsidiary of Robinhood, whose entire business model is to sell retail orders to a handful of HFT market makers first and foremost... Citadel. In doing so the only ones who benefited from the surge in retail trading are Robinhood itself, by pocketing millions more from selling orderflow to Citadel, Virtu, Two Sigma, Wolverine and other HFT frontrunning "market-making" venues, as well as Citadel which made billions by having an advance look at the biggest surge in retail stock and option orders flow in history, and being able to trade ahead of and around it.

And no, it's not a conspiracy theory Vladimir - it is the stone cold truth, as Jeffrey Gundlach suggested last week when he said "Robin Hood (sic) should be forced to change its name to Hood Robbin’.  I grow so weary of lies through nomenclature, which are ubiquitous these days" adding "To be clear, the name change would reflect Robinhood robbing the little guy, nothing else."

As an aside, how dare we allege that Citadel was buying orderflow to frontrun it? After all, that very allegation...

... coupled with the reminder that Robinhood engages exclusively in a practice called payment-for-orderflow (or PFOF)...

... which is what allowed Robinhood to provide "free" trading in the first place, that nearly destroyed us when last June Citadel's lawyer army threatened to sue us into the ground for suggesting precisely that?

Some key phrases of note from the above text:

  • "'Frontrunning' is an industry term of art that refers to an illegal form of trading."
  • "Citadel Securites does not engage in such conduct [i.e., frontrunning] and there was no factual basis whatsoever for ZeroHedge to publish such an incendiary, false, and reckless allegation to its 742,000 Twitter followers" [it's 771,000 now].
  • "ZeroHedge's statement obviously disparages the lawfulness and integrity of Citadel Securities' business pratices."
  • "Quite obviously, this most recent iteration of this same harmful allegation was not made in jest."
  • "We demand that ZeroHedge immediately retract this tweet by deleting it from ZeroHedge's Twitter page... A refusal to promptly take down these remedial steps will be seen as further evidence of actual malice and will only increase the already substantial legal risk faced by you and ZeroHedge."

Well, we now officially know all about Citadel's modus operandi because just a few days after we received that letter, none other than financial regulator FINRA, revealed that Citadel Securities was censured and fined for engaging in - drumroll "trading ahead of customer orders" as Letter of Acceptance No. 2014041859401 revealed:

Now we admit that our financial jargon is a bit rusty these days, but "trading ahead of customer orders" sounds awfully similar to another far more popular "term of art", one which we know very well: frontrunning!

Jargon aside, some of the other highlighted words we are very familiar with, such as "hundreds of thousands"... and "559 instances" in which Citadel traded ahead of customer orders.

And while we may be getting a little ahead of ourselves here, it was Citadel's own lawyers that informed us on more than one occasion that:

"frontrunning" is an unethical and illegal trading practice."

So, what are we to make of this? Could it be that Citadel was engaging in at least 559 instance of what its lawyer called "unethical and illegal trading practice." Surely not: after all the lawyers would surely know very well how ridiculous and laughable their letter and threats would look if it ever emerged that Citadel was indeed frontrunning its customers.

But wait, it gets even funnier.

Back in April 2004, long before Citadel became the dominant market maker - and buyer - of retail orderflow controlling a whopping 27% of total US equity volume market share in 2020 according to Bloomberg and a staggering 46% of retail orderflow, it was Citadel's own General Counsel, Adam Cooper, who urged the SEC to ban payment for orderflow because it "distorts order routing decisions, is anti-competitive, and creates an obvious and substantial conflict of interest between broker-dealers and their customers."

As Cooper also revealed...

"broker-dealers accepting payment for order flow have a strong incentive to route orders based on the amount of order flow payments, which benefit these broker-dealers, rather than on the basis of execution quality, which benefits their customers. Furthermore,  the  parties  making such payments (either voluntarily or through an exchange-mandated program) are forced  to  find  other  ways  to  recoup  the  amounts  of  such  payments,  whether  through  wider  spreads  or  a  reduction  in  other  benefits  that  otherwise  could,  and  should,  be  provided to customers."

And the punchline:

Payment  for  order  flow  is  a  practice  that  on  its  face  is  at  odds  with  a  broker-dealer’s obligations to its customers.  A broker-dealer has a fiduciary obligation to obtain the best execution reasonably available for its customers’ orders under prevailing market conditions.    We  do  not  believe  that  a  broker-dealer  that  accepts  payment  for  order  flow  and does not pass such payments on to its customers (either directly or through reduced execution fees or commissions) can consistently fulfill its best execution obligations.

Which leads us to the one time Citadel was actually telling the truth:

Because  payment  for  order  flow  creates  fundamental  conflicts  of  interest  that  cannot  be  cured  by  disclosure,  the  Commission  should  ban  payment  for  order  flow  altogether.  It is crucial that this ban include not only exchange-sponsored programs, but also  payment  for  order  flow  arrangements  entered  into  privately  between  order  flow  providers   and   market   centers. 

Little did Citadel know that just 15 years later it would be the single biggest beneficiary of paying for orderflow, a practice which has allowed Citadel founder to amass a trophy collection of some of the most expensive real estate in the world.

We also know all this is true because we were also among the first to expose Robinhood as a client-facing front for Citadel back in 2018, when we wrote "Robinhood Is Said To Get 40% Revenue From HFT Firms Like Citadel" in which we said that...

"Stealing from millennials to give to the rich. Robinhood app sells user customer data to make a quick buck from the high-frequency trading (HFT) firms on Wall Street," that is what we wrote last month, in one of the first articles that expressed concern over the popular Robinhood investing app for millennials, which has shady ties to HFT firms and undermines its image of an anti-Wall Street ethos. 

The conclusion was a searing prediction of what would happen a little over two years later:

A few anonymous venture capitalists told Bloomberg that Robinhood has already begun to see the consequences of their cozy relationship with Wall Street firms, which has degraded the company's image. 

With six million clients, most of whom are millennials -- seeking an anti-Wall Street investing culture, could soon find out, that, they too, have been conned by Robinhood founders into thinking the app offers free investing. The lesson at play: nothing in life is free, even if it is from Silicon Valley.

That said, we were not the first to expose Robinhood's ways. That honor falls to our friend Joe Saluzzi and Sal Arnuk, who for over a decade have led the crusade against high frequency trading, and who in November 2014 wrote "Beware of Those Offering Free Retail Trades."

We are always suspicious when somebody offers us something for free.  Usually, the one offering the free service has other ways of making money.  For example, Google offers lots of free services like Gmail, Google Maps or Youtube. While the services are free, Google is still making money by targeting ads and selling data. The latest free thing which is creating quite a buzz (the hot term for this is “disrupting”) is free retail trading by a company called Robinhood.

What is Robinhood?  According to an article in the Irish Times yesterday:

“Founded by Stanford mathematics graduate Vlad Tenev and  Baiju Bhatt last year, Robinhood is a stock brokerage that charges no commission.”

Robinhood is offering free stock trades and no-cost real time market data.  How do they do it? According to the company:

– They don’t have brick and mortar companies and don’t spend millions on Superbowl ads.

– Technology has allowed them to eliminate much of the human intervention and paper confirms.

And how do they make money?  According to their website:

“Robinhood has two key revenue streams; charging interest for margin trading, and collecting interest on cash balances.”

Call us crazy but relying on generating revenue from margin interest and collecting interest on cash balances (where the account minimum is $0) sounds a bit risky and overly ambitious in a market which has been saddled with zero percent interest rates for the past 5 years.  That’s why we think Robinhood must have another way of making money. Could it be that the founders, Vlad and Baiju, are planning on taking advantage of the rebates and payment for order flow that are embedded in the equity market?  But how could two guys who graduated from Stanford in 2008 know that much about the market structure of the US equity market? From their website:

After graduating from Stanford, roommates Vladimir Tenev and Baiju Bhatt moved to New Yorkwhere they built high-frequency trading platforms for some of the largest financial institutions in the world. They began to realize that electronic trading firms pay effectively nothing to place trades in the market yet charge investors up to $10 for each trade — and thus the idea for Robinhood was born. They soon ventured back to California to begin solving the problem of democratizing access to the markets.”

Seems like Vlad and Baiju know a lot more about US equity trading than we thought.  Heck, they may even know that when a retail limit order is sent to the DirectEdge stock exchange, that order could qualify for a special rebate if it is attributed and displayed as a retail order.  Here is how DirectEdge describe their retail attribution program​ :

“With this improvement, Members sending Retail Orders may elect to display those orders on the EdgeBook Attributed data feed with the generic retail identifier “RTAL” rather than their Market Participant ID (MPID).  Including a standard retail identifier gives retail brokers greater flexibility and choice to participate in the attribution program that has helped improve execution rates for retail orders.”

Talk about leading the lambs to the slaughter.  Retail orders that are being attributed are basically flashing bright lights telling the world that they are retail.

We’re not sure if Robinhood is planning on selling their order flow but it is certainly something that their customers should be asking them once they do start trading. While their website does not say anything about payment for order flow, in a CNBC interview from earlier this year, Vlad Tenev did say the company would be accepting payment for order flow:

 “So, Robinhood has many revenue streams on Day One. Those include margin lending, payment for order flow, interest on cash balances. We’ll have those on Day One,” Tenev said on CNBC’s “Halftime Report”.

Right now, Robinhood is still busy attracting some high profile investors which include Snoop Dog, actor Jared Leto, the venture capital fund Andreessen Horowitz and Google Ventures (Robinhood raised $13 million in their latest financing round).

Two points here: Vlad Tenev's entire background is HFT - he knew from day one that he could create a "free brokerage" if only he were to quietly sell all the orderflow to a generous sponsor, say Citadel. It's also why we find laughable his recent tweet asking, obviously rhetorically, "What exactly is high-frequency trading? And is it evil?"

Tenev then went on into a rambling, nonsensical defense of HFT and why it is not evil, concluding that "high-frequency trading is just what you get when you apply technology to trading and getting data moving faster between trading centers will enhance trading for us all"...

... what he did not say is that HFT is just a perfectly legal and widely accepted way of frontrunning retail orderflow (usually by the order of a few milliseconds, explaining the presence of lasers at the New York Stock Exchange in Mahwah), and then selling it to the highest bidder, something he knew almost a decade ago when he launched Robinhood. We almost wonder if he did so in some low-lit Chicago backroom while sitting across from Citadel's Ken Griffin (this would be the other Citadel, not the one from 2004 which found payment for orderflow loathsome and deserving to be banned, but a Citadel which now considered PFOF a source of almost unprecedented riches and profit).

The second point we would like to address from the Themis Trading 2014 post is that while back then it was unclear if RH sold their orderflow, we now know that not only is Robinhood selling your orders to other internalizers, but that sale represents the biggest source of RH revenue by orders of magnitude. And thanks to the company's just filed latest Disclosure Form 606 we know just how much Robinhood made from selling your orderflow to Ken Griffin.

The chart below shows Robinhood's monthly revenues for the full year 2020, broken down in the three key categories: i) S&P500 stocks, ii) Non-S&P500 stocks and iii) Options. And while Robinhood made a not-too-shabby $247 million in 2020 from just selling access to your retail stock orders to such non-directed orderflow venue as Citadel, Vitru, Wolverine, Two Sigma, G1X, Morgan Stanley and others, it is the sale of option orderflow that has emerged as Robinhood's golden goose, having generated an impressive $440 million in revenue in 2020.

Which then brings us to the punchline: Robinhood is kind enough to break down not only revenue by product (going down to such granular detail as market orders and limit orders), starting several years ago the company also started disclosing who its biggest clients were. And here it will come as no surprise that in 2020, Citadel accounted for more than half of all Citadel revenues, or $362.5 million, exactly 53% of the company's total revenues of $687.1 million.

Would it therefore be farfetched to say that Robinhood is nothing more than a client-facing subsidiary of Citadel, one which pretends to offer free trades to tens of millions of young, naive traders, but in reality merely allows Citadel Securities to trade ahead and/or against this orderflow for which it paid over $300 million... and to generate record revenues of $6.7 billion!

Probably not, but we won't have a definitive answer until we find out just how much profit Citadel made from buying all this critical data, which gives it an early glimpse into not only each discrete individual trade but also a sense of which way the retail horde is moving, critical and extremely valuable data which until last August was public and available to all (with a slight delay) courtesy of Robintrack, and which last August was inexplicably halted.

We are confident that this week's Congressional hearings will quickly get to the bottom of this critical question of just how profitable this orderflow - which it paid Robinhood $362 million to procure - is for Citadel, because anything less will confirm that this latest hearing is nothing but a kangaroo court meant to appease retail investors that someone in Washington is doing something... when in reality everyone knows that what Citadel wants, Citadel gets and there is no sign that Citadel will ever tire of making billions out of the same orderflow for which it paid subpennies on the dollar to Robinhood.

As for Robinhood's trite virtue signaling of taking from the rich and giving to the poor, all it took was 30 billion subpenny rebates from Citadel for the firm to remember who really calls the shots.