Category Archives: Current Affairs

To the moon… and back: the inner workings of financial markets

“Our mission is to democratize finance for all. We believe that everyone should have access to the financial markets, so we’ve built Robinhood from the ground up to make investing friendly, approachable, and understandable for newcomers and experts alike.”

            – Robinhood Markets, Inc. Mission Statement

Commission free trading is a great thing, right? Any time you can get the same service while paying less, in this case paying nothing, must be a good thing! To this question, one could debate many different perspectives. Yes, on the surface, commission free trading appears to be a clear win for investors, who benefit from lower costs. Fees, including trade commissions can dig into returns even if they are as low as €5 or €10. This eliminates a significant proportion of hard earned capital appreciation which investors desperately crave. Hence, zero commissions should always be of benefit to investment accounts.

Furthermore, digital brokers, which includes the likes of Robinhood among others, have provided transparency in financial markets which would once have been inconceivable. Trading apps now make tracking asset prices effortlessly simple in real time, allowing even the smallest of investors the opportunity to capitalise on market distortions. However, while smaller investors have rejoiced in this new found transparency, few have actually taken the time to question why and how digital brokers can offer commission free services. Robinhood’s (not-so) secret is simple: selling their order flow, and thus information about which assets are in demand, to other financial intermediaries.

The payment for its order flow model is very simple. First pioneered by financier and now convicted fraudster, Bernie Madoff, it is a way for market makers such as Citadel Securities and Virtu Financial to outsource the task of finding orders to fulfil. Market makers provide liquidity to financial markets by remaining ready to buy and sell securities at all times of the day. In order to offer free commission on trades, Robinhood sells trades to market makers such as Citadel, who pay a small fee in return, usually fractions of a cent per share. The money maker can then flip the trade by taking the other side of the order and returning the asset to the market, profiting the balance between the buy and sell price.

As J.E. Karla described, “If the service is free, you are the product. Robinhood users thought the service was accountable to them, but actually it exists to serve giant Wall Street institutions like Citadel and other market makers”. Simply put, the payment for order flow system makes a lot of money for everybody except Robinhood’s users. The system worked perfectly for Robinhood, that is until a team of amateur investors on the Reddit discussion board ‘WallStreetBets’ bid up GameStop (GME) shares over 1,700%. Some traders declared war on Wall Street hedge funds that had placed short positions against the company, most oblivious to the fact that the very institutions against which they were feuding were in fact profiting from their actions. Market makers are designed to prosper in times of uncertainty and high-volume trading. January 27th alone saw $29 billion worth of GameStop transactions.

Small investors were also mostly unknowing of the fact that share-price volatility creates a requirement for brokers, like Robinhood, to post cash with a clearing house — and meeting these demands can curb trading. A clearing house is the intermediary between buyers and sellers of financial instruments that ensure both sides honour their contractual obligations. Similar to a brokerage making a margin call to reach a maintenance margin, the National Securities Clearing Corporation (NSCC) required Robinhood to post $3 billion in cash as collateral for the risk that GameStop shares may plummet between when their shares are purchased and when they are cleared two days later.

However, Robinhood simply did not have $3 billion in capital to put down as collateral. Instead, it decided to limit GameStop trading and similar companies targeted in the Reddit movement. This left Robinhood with fewer volatile stocks on its balance sheet while also allowing earlier trades to settle, reducing the company’s overall risk exposure, and thus its collateral requirement. Crucially, this is when theories of Wall Street intervention in markets began to circulate. Many believed that Robinhood’s actions, among others, constituted proof that the capitalist economy is structured to do what is best for the business elite. Jim Chanos, famous American investment manager, summarised the events well in a recent interview with the Financial Times. He remarked that “We’re seeing a level of misunderstanding about how markets work that is being brought on by a whole new generation of investors who have never seen a bear market and somehow think that they’re being held back from their rightful place at the table by these evil hedge funds”.

When it comes to understanding the inner workings of the financial world, individual investors have always been disadvantaged in comparison to the investment powers found on Wall Street and beyond. Nevertheless, newfound transparency in the financial markets, brought about by the creation of digital brokers such as Robinhood, illustrates just how powerful retail traders can be when they rally around certain stocks. This is what happened when a team of amateur traders on a Reddit discussion board decided to wage war upon hedge funds.

Somewhat ironically, amateur traders’ misunderstanding of the extent of transparent relationships within the financial system seems to be exactly why the war appears to have been lost. Rebel investors may have succeeded in forcing short sellers to abandon their positions, but the bubble is beginning to burst, and Wall Street powers are likely making billions from new, and much higher priced short GameStop positions than ever before. To compound the irony, in order to take new short sale positions, institutions have had to borrow shares them from their actual owners, the rebel investors, most of whom won’t realise that their broker contracts allow their shares to be lent to other investors for a fee, which the trader will never see. 

Hence, traders are lending their shares to the exact institutions which will eventually bankrupt them, making Wall Street billions of dollars in the process. The recent GameStop saga is a perfect illustration that retail investors are collectively powerful enough to win the battle, but Wall Street will always win the war.

Brussels Faces Backlash Over Vaccine Controversy

The EU has faced international criticism over its new controls of coronavirus vaccine exports. The measures were the source of particular worry in the UK and Ireland after the EU indicated it would override part of the Brexit deal’s Northern Ireland Protocol.

What are the measures?

The EU announced measures to control exports of Covid-19 vaccinations produced within the EU this week amid disagreements over supply shortfalls. The transparency mechanism requires vaccine companies to seek permission from national governments before exporting excess vaccine doses. EU countries can deny authorisation for vaccine exports if the company making them has not met the supply agreed to in their contracts with the EU. The controls will affect 100 countries – most notably the US, the UK, Canada and Japan – with many poor nations exempt from the restrictions. Countries in the EFTA (Iceland, Liechtenstein Norway and Switzerland), Israel, Lebanon, Western Balkans, North Africa and many elsewhere are also exempt.

Why were the measures announced?

In 2020, the EU agreed to buy 400 million doses of AstraZeneca’s vaccine, and the vaccine received the approval of EU regulators last Friday. The bloc’s plans came after AstraZeneca announced that it would only be able to provide just over a quarter of the more than 100 million doses it had committed to the EU for the first quarter. The Commission’s discontent was clear. AstraZeneca’s announcement highlighted the fact that vaccine supply across the EU is dwindling. The company’s inability to meet its 100 million dose target also means that the EU’s vaccination rollout targets, based on advanced vaccine purchase agreements, will not be met. The EU initially suggested that AstraZeneca’s UK production plants make up the difference in vaccine doses, given that the company’s EU plants had supplied the UK when its factories faced supply shortages a few weeks ago. However, the company has railed against claims that it is failing to fulfil its contract, publicly released by the Commission, due to a “reasonable best efforts” provision. It claims that this clause does not commit the company to a hard date of providing a certain number of doses.

What was the Northern Ireland concern?

The EU’s export controls initially involved overriding part of the bloc’s Brexit deal with Northern Ireland. Under the deal’s Northern Ireland Protocol, which prevents the presence of a hard border between the Republic and the North, goods from the EU should be exported to Northern Ireland without checks. However, the bloc invoked Article 16 of the agreement, which allows aspects of the deal to be unilaterally overwritten. This course of action was taken to prevent Northern Ireland being used as a backdoor for vaccine exports from the EU to the UK. High-level politicians in Belfast, Dublin and London all criticised the move, which many say would effectively place a hard-border on the island. However, the commission revised the export rules after European Commission President Ursula von der Leyen’s engagement with Taoiseach Micheál Martin and Prime Minister Boris Johnson. Instead, compromised regulations will see northbound vaccines crossing the Irish border recorded in Dublin, but will not face a risk of being blocked.

While a compromise has been struck, much damage has still been done. The commission’s “grave error of judgement” has inflicted considerable reputational damage. Critics say that the EU, which argued so strongly (some even say patronisingly) in favour of the Protocol, was also quick to undermine its own arguments. In addition to this, many DUP members, already opposed to the Northern Ireland Protocol’s requirement for checks on goods between Northern Ireland and the UK, are furious at the EU’s short-handed approach. They believe that the bloc’s initial willingness to invoke Article 16 was an act of aggression and a sign that they will undermine the Protocol whenever the EU single-market is at risk of competition. The Commission’s decision to forego consulting the Irish government, whose leader discovered the bloc’s plans via public announcement, has also added to the bedlam and growing disquiet surrounding the EU’s vaccination programme.  

Who else has criticised the EU?

While a compromise was reached with the UK government, many third countries have voiced their displeasure with the EU. Worries about “vaccine nationalism”, initially raised by Boris Johnson, are echoed by representatives from Japan, Canada and South Korea, who now require approval from various national governments to acquire EU-produced vaccines. A significant possibility is that EU countries not meeting their own immediate, short-term vaccination targets will keep, rather than export, extra vaccine doses. This prospect is the main source of international criticism garnered by the EU. South Korea’s foreign minister warned the bloc against fostering “global disunity” by withholding vaccines, despite having ordered roughly enough to vaccinate its population twice, while Canada’s trade minister emphasised the importance of ensuring the openness and stability of world supply chains for effective vaccine rollouts. The WHO also repudiated the idea of vaccine nationalism, saying it would be a “catastrophic moral failure” that would slow down global recovery and increase economic inequality. More positively, President von der Leyen announced that AstraZeneca has committed to begin distribution a week early, in addition to providing an extra 9 million doses and increasing their European manufacturing capacity. Representatives of the EU have offered repeated assurances that the vaccine export controls are merely precautionary and are unlikely to be widely used. How true this is will be borne out in the coming months.

Trump’s predictably divisive presidential pardons

Donald Trump’s administration has recently published a list of 143 presidential pardons on the 45th President’s final day as Commander-in-Chief. The former president’s pardons were touted to include beneficiaries ranging from Trump himself and family members, to his personal lawyer Rudy Giuliani, to the subject of the Netflix series ‘Tiger King’, Joe Exotic. Perhaps because of his constant departure from presidential norms, Trump’s power to grant clemency has attracted abnormal attention.

What are presidential pardons?

Every American president is given the right to grant “Reprieves and Pardons for Offences against the United States, except in Cases of Impeachment”, according to Article II Section 2 of the US Constitution. It was intended to be an executive power that acted as a check and balance on the federal justice system and to afford mercy to offenders whose sentences outweigh the severity of their crime. In 1866, the Supreme Court ruled, among other things, that prospective pardons may also be granted by a president. This means a president can grant clemency to someone before any impending charges are filed. The most famous example of a prospective presidential pardon came in 1974, when Gerald Ford pardoned Richard Nixon after the Watergate Scandal. The potential of prospective pardons contributed to the unprecedented attention surrounding Trump’s pardoning process. It was thought that he would attempt to shield himself, his family and other close allies from myriad potential legal issues that may arise once he loses the protection gifted to him by America’s highest office. However, this did not occur.

Notable absentees

Surprisingly absent from the former president’s list of pardons are his family members, his personal lawyer, Rudy Giuliani, and Republican lawmakers possibly implicated in the breach of the Capitol earlier this month. Trump was convinced by his legal advisors only days before he left office to refrain from pardoning his family. They told him that to do so without citing specific crimes would convey an admission of guilt, leaving him and his family open to future legal difficulties. The Trump team also believe that pardoning Republican lawmakers potentially involved with the Capitol insurrection would result in him feeling the ire of Republican senators set to decide his fate in an impeachment trial next week.

Significantly, Trump has decided against self-pardoning. This course of action came as no surprise, but had been a significant worry throughout Trump’s entire tenure. The former president likely eschewed self-pardoning for the same reasons he didn’t pardon his own family; namely that it may be interpreted as an admission of guilt.  Additionally, the likelihood of a self-pardon being legally robust is quite slim. The presidential power to pardon, “except in Cases of Impeachment” excerpt of the Constitution is commonly interpreted as saying that a president cannot pardon themselves or others associated with their own impeachment. Basically, if Trump self-pardoned, he can still be impeached by Congress and prevented from running for president again. In fact, this would make it more likely for the Senate to confirm his impeachment. Thirdly, presidential pardons only apply for federal offences. Trump does not have the power to prevent state prosecutors from investigating his financial affairs, for example, as is currently happening in New York. The seeming admission of guilt, along with the Senate confirming his impeachment, that would come with a self-pardon are unlikely to help Trump’s state-level cases.

The most outraged responses to Trump’s list have been fuelled by the exclusion of WikiLeaks founder Julian Assange, who is currently imprisoned in Belmarsh Prison and NSA whistleblower Edward Snowden, who has been exiled in Russia since 2013. Both men are lauded as defenders of free-speech. Many see Trump’s omission of the two as, firstly, an attempt to pander Republican senators overseeing his impeachment trial next week and, secondly, as an attack on the free press and journalists attempting to hold officials accountable. Trump’s exclusion of the whistleblowers comes in the aftermath of his decision in December to pardon the Blackwater contractors convicted of killing 14 Iraqi civilians in 2007.

Notable inclusions

Steve Bannon, Trump’s former chief strategist, was granted full clemency. Bannon, who has been described as ‘the most dangerous political operative in America’, was charged last year with illegally extracting funds raised by Trump supporters to privately contribute to a Southern border wall. While Bannon left the administration in 2017 and was subsequently nicknamed “Sloppy Steve”, he and Trump rekindled their relationship in light of the former president’s false accusations of voter fraud. Also pardoned were Elliott Broidy, a Republican Party fundraiser who pleaded guilty to multiple charges of illicit financial activities, and Kwame Kilpatrick, the former Mayor of Detroit who received a twenty-eight year sentence for corruption in 2013. Various other convicted swindlers and criminals have seen their sentences reduced or scrapped in Trump’s final acts as president.

Two headline-grabbing recipients of presidential pardons were rappers Lil Wayne and Kodak Black, who face federal charges for firearm possession and for making a false statement to buy a firearm respectively. Lil Wayne’s pardon seems to have been granted due to his support for Trump during last year’s election campaign, while Kodak Black was praised for his philanthropic work.

Donald Trump’s time as US president has never been bereft of controversy and outrage. One can only admire how little his final pardons deviate from that trend.

The Shebeen and Covid-19 in Ireland

The shebeen (or síbín, in Irish) has seen a quiet revival in Ireland since the pandemic of loneliness accompanying Covid-19 lockdowns reached Ireland in early 2020. It is widely known that the pub is a temple of communal interaction, deeply entrenched in the psyche of many Irish people. Pub closures have left a void in Irish society and particularly in its rural communities, where pubs are not only social hubs, but economic pillars. It appears that some have reverted to the shebeen in an attempt to quell their craving for human contact that social distancing and lockdowns induce.

What is a shebeen?

A shebeen is an illegal, unlicensed pub, usually found in people’s homes or sheds. Their historical origin is in Ireland, but the illicit bars soon made their way around the world, appearing and evolving in countries like South Africa, the US and Canada. Interestingly, while shebeens have long been in decline in Ireland, they became an essential meeting-place for the black people community under apartheid in South Africa and most are now legally operated there. Shebeens have become far less numerous in Ireland, but have made somewhat of a comeback since the onset of multiple Covid-19 lockdowns, which left people craving physical and social interaction. While shebeens are not exclusive to the Covid-19 period, there has been an upsurge in shebeen raids and reports in Ireland since the first lockdown in March.

The problem with shebeens during Covid-19

Shebeens have raised concerns for two main reasons during the Covid-19 pandemic.

Firstly, leaving the pandemic aside, they are illegal. Defined as “unlicensed drinking premises” under the Intoxicating Liquor Act of 1962, to be found attending (or to supply alcohol to) a shebeen is to break the law. It is reasonably difficult to differentiate between a shebeen and a “man-cave” or legal home-bar. Gardaí are provided with vague metrics to instruct their course of action. The Act states that large quantities of alcohol stored on a premises and evidence of frequent consumption are indicators of incriminating behaviour. This allows for substantial variation in the make-up of a shebeen. They may range in sophistication from a crude few taps and some seating to being almost indistinguishable from a licensed pub. In addition, the law states that an unlicensed premises can serve alcohol to the owner, family members, residents, workers and “bona fide” guests. Hence, the distinction between a genuine private gathering space and a shebeen is precarious under this framework. However, these ambiguities are irrelevant in a time of national lockdown, during which household visits are banned.

Consequently, the second issue that the shebeen’s return to relative prominence in Ireland presents is that assembling in a shebeen likely breaks public health rules, even during milder levels of government regulations. Non-adherence to these rules can contribute to the spread of Covid-19, which is economically and physically undesirable, and may result in unnecessary burden being placed on an already inefficient national healthcare service. It can also cause undue tension between citizens making sacrifices to comply with regulations and those using shebeens, which carries its own undesirable ramifications. Likewise, licensed publicans and other business-owners feel aggrieved that their pubs, which must obey public health guidelines when open, have been labelled as virus-spreading “scapegoats” and forced to close while shebeens have become increasingly prevalent. It is important to note that while shebeens have become more pervasive since the outbreak of Covid-19, an Garda Síochána have repeated that their presence does not represent endemic lawlessness. Shebeens have always been in Ireland and probably always will be. The Gardaí have appealed to the public to report any shebeens, and will raid all illicit premises they are alerted to.

Understanding the Irish shebeen renaissance during the pandemic

Social drinking is a unique outlet for Irish people. The swathe of mental health issues that have arisen as a result of lockdowns and social isolation offer a simple explanation of why many have risked breaking the law and public health guidelines. People have become lonely, and one of their primary means of interacting with other humans has been placed off-limits. Generally, shebeens are not in the business of cramming in rabbles or making money. Rather, they are small spaces where a few people meet to satisfy their need for human connection. While the shebeen presents complex moral and legal quandaries, the reasons behind their upswing are as basic as any other human craving.   

The pandemic’s effect on food delivery services

The impact of the pandemic has affected companies in various industries differently. However, food delivery companies, have been on the receiving end of better performance unlike their hospitality peers. In fact, the pandemic completely turned around the situation for certain companies. 

Billions of dollars worth of losses for the food delivery sector were forecasted at the beginning of the year. One of the most notable food delivery businesses, Grubhub, was actually contemplating “putting itself up for sale after losing its foothold on the market.” 

The pandemic has proved to entirely reverse situations like these as more and more restaurants shut down during lockdown periods. As a result, people who were forced to stay indoors turned to food delivery. 

How did Uber respond?

As Uber’s core ride business drastically declined, it heavily focused on its delivery services. Sales for meal delivery increased by 135% in the US alone. With positive trends like this, Uber has planned a $2.65 billion acquisition of Postmates to increase its market share and reduce competition. This will allow Uber to control 37% of the food delivery sector in the United States, second behind DoorDash. The company also tried to merge with Grubhub but JustEatTakeaway beat the company to it, now allowing JustEat an entrance into the US market. Uber has also been focusing on diversifying its service portfolio by launching a grocery delivery service in the US. The idea is to create services that consumers form habits off of, to ultimately continue its boom growth trajectory post-pandemic.

How did DoorDash respond?

DoorDash has been taking full advantage of the soaring appetite of customers for its services and has secured an opportunity for an initial public offering. It was able to secure $2.5 billion in capital to expand from its original food delivery service to offer convenience and grocery store products as well. DoorDash also expanded its product portfolio to create Storefront to support restaurants in listing their stores on DoorDash without the charge of commission on items sold. It also set up Self-Delivery which allows restaurants to be listed on the app but use their own delivery services. DoorDash is aware of the benefits it is receiving from current circumstances and is not ignoring the possibility of its soaring demand potentially decreasing once the pandemic starts to settle. “Warnings in its IPO paperwork [that]… the circumstances that have accelerated the growth of our business stemming from the effects of the Covid-19 pandemic may not continue in the future.” Nevertheless, consumer dependence on such services continues to grow the longer the pandemic prevails, which is why DoorDash is now valued at $38 billion.

The holiday season

Food delivery services are now increasingly focusing on speed of delivery as a key source of competitive advantage – especially as orders increased during the holiday season. For example, Postmates is launching a new business model for retail that allows customers to get “instant delivery from clothing, home, beauty and wellness retailers, and allowing the delivery company to broaden its reach.” It seems as though companies that initially started off in the food delivery sector are now beginning to dip their feet in offering services similar to that of Amazon. Mike Buckley, the senior vice president of Postmates, notes that there has been a shift in consumer habits as they increasingly transition to online shopping. Companies are allowing faster provision of these products as they work to increase the speed of their deliveries.

This shows the new opportunities the pandemic has created for the food delivery industry. The use of digital marketplaces is now being broadened to provide a bridge for customers to virtually shop for both household essentials and recreational products from retailers.

« Older Entries Recent Entries »