REDDIT VS WALL STREET
This is amazing. I really believe this is a defining moment and it’s unfolding right before us. What we are seeing is a true fork in the road and as this saga gains more attention, and the microscope is now focused on ‘institutions’, how they will handle this pulls back the curtain on who we really are as a country.
By now, you have likely seen the story. For those that have not and even for those that have, here is a brief summary:
-Hedge funds short a company called ‘Gamestop’. This is a standard move, albeit a notoriously risky one, where a person or entity borrows shares, sells them, then takes that $ and buys back the stock in the same volume to return it to the original owner. The bet is that the value of the stock will go down and the profit is the difference (when it works) between the initial sell price and the buy price at the end. It’s a reverse of the normal procedure of buy at ‘x’ and sell at ‘x + y’.
-You can clearly see how this is a riskier move than a normal. If the value goes up, the borrower is required to buy those shares at the increased value (more on that in a minute)
-A reddit discussion group noticed this short position from a couple of hedge funds. Thousands of individuals begin buying Gamestop stock and hold onto it for dear life. The price goes up. More and more people get in. The price goes way up. Now, the borrowing entities have to return the stock they borrowed and sold. They lost their bet. Big time. All of a sudden, the stock of a failing company, limping along, is now in short supply. The price goes up. The hedge funds have to pay for huge volumes of this stock that went up as much as 188 times its original value from a year ago. This cost billions of $. $ BILLIONS in cash have to be injected to purchase the required shares.
Now, the fallout. It’s fascinating.
-The reddit group, with 10s of thousands of members, is banned for ‘hate speech’ (then later restored). Listen, I did not read every word/post on there as there are simply too many. I’m sure some naughty words slipped by the bots/mechanisms the moderators use. When you have that many people, it’s inevitable. I don’t know what was said by whom and I don’t endorse hate speech etc. Hard to say that ‘hate speech’ was really what this was about.
-The Robinhood stock purchasing app which bills itself as the way for the common person to gain entry into the stock market, stops allowing trades on stocks they deem ‘volatile’, aka the stocks that have been shorted by hedge funds and are now being bought by redditors. Robinhood, in a statement, insinuates these moves are to protect customers from volatility. Robinhood has a financial relationship with another hedge fund called ‘Citadel’. This is critical and we’ll come back to it in a moment.
-Other trading vehicles have similarly halted or slowed the ability to trade these stocks and the values are dropping as a result to the benefit of the hedge funds.
That is a quick and dirty summation of a constantly developing story. So what are our takeaways? I believe there are several:
1)Let’s say none of these redditors had noticed that Melvin Capital had a $55 million, highly leveraged short position on Gamestop. Another hedge fund, as I understand it, could absolutely have done what these collection of individuals did a few thousand $ at a time. In fact, hedge funds do this all the time.
2)The reaction of 2 interested parties speaks volumes. The ‘institutions’ at play here and ‘Wall Street’ at large are in a frenzy. When multiple hedge funds do this, no issue, it’s how the game is played. When the common man does this, it threatens their very existence. First, it makes them less ‘necessary’ and intrinsic to the process of trading stocks. Second, and more importantly, it interferes with their belief that it is their fundamental right to WIN and make unspeakable amounts of money despite reckless behavior and cavalier attitudes about other people’s money. The second group, if you want to call it that, is made up of socialists, libertarians, populists, right wing pundits, and a wide swath of Americans across the spectrum that have not agreed on anything in years.
3)The most important thing happening here, to me, is not a group of ‘regular’ folks potentially getting rich. To me, it is the mechanisms and means to this deciding, that this cannot be tolerated. Robinhood, under the guise of protecting consumers from over leveraging themselves and getting burned, has decided that they simply cannot allow trading to continue on these volatile stocks. Switch the parties. Would they take the same action when a hedge fund was over leveraged? Say to the tune of $55 million on a short position on Gamestop that would cost them billions? Of course not. That’s it. That’s THE story in all of this. No matter the results of these freezes are causing the value of the stocks in question to drop, thus ‘hurting’ the consumers, to them, this HAS to stop. One must look no further than where the money is coming from and where it is going. Remember above when $billions had to be injected to cover the positions of Melvin Capital? Enter Citadel.
4)Citadel is another hedge fund that senses blood in the water. They are pouncing on the weakness and desperation of Melvin Capital. Again, minus the redditors, this is another day on Wall Street. They inject capital with a near certain promise of an excellent return. They’re doing it on the backs of the redditors and their investments. Good explanation here: https://www.fool.com/investing/2021/01/28/gamestop-when-elephants-fight/ The rub here is that Robinhood is complicit in this move, wether it’s intentional or inadvertent, their actions are now hurting the people they purport to want to help. Make no mistake, the market is being manipulated. And again, the is a direct benefit to Citadel on this and Citadel has a financial relationship with Robinhood.
5)This is a populist movement. It cannot be ignored. Bernie Sanders on one end, Donald Trump on the other, different versions ending up at the same point. Regardless of political affiliation, there is 1 clear, distinct, powerful theme at play here: The elite class playing by their own rules, taking advantage of their special access, is due for a correction.
A couple points worth mentioning here. I don’t endorse any manifestations of this populism that turn into violence or destruction. No one should. I do fully, 100% endorse the little guy, playing by the same rules as the establishment. Laws, rules, norms from a functioning society, in theory, should mostly be about protection. There’s a reason I cannot act in so many ways in public, because it might endanger others. One manifestation of this revolves around finances. Such protections from bodily harm don’t extend into the world of finance and money. Of course there are inherent risks to investing, saving, spending and so on. Those risks are lessened and even removed for Wall Street players to the ruin of the common man. This moment, in so many words, is about the common man trying to fight back.