by Ryan DeLarme,
January 28th, 2021
A band of anonymous Redditors have come together to stick it to some big-money hedge funds, the historic financial event is being described as a populist rebellion against Wall Street.
Regardless of what methods you rely on to shape your world view, be it mainstream media, social media, or the alternative media; you’ve likely at least heard of the fiasco happening between Redditors and Wall Street.
What Exactly Occurred
Enter Wall Street bets. Wall Street Bets is an online community based primarily around YOLO stock plays and is likely not some shadowy cabal of elite hedge fund executives. It appears to be mostly just regular people having fun in an online community, though it’s always a possibility that there’s more to the story.
Wall Street Bets anon via Reddit: In the coming days and weeks, you will likely be seeing coordinated attacks against this board and any others like it. You will probably hear them labeled as “alt-right” or “incels”, you will probably hear the word GamerGate or Nihilist or Nazi. Do not listen to them, these tired tactics have been pinned on just about anyone who dissents from or threatens the establishment. This is a group of people who joke about and invest in various stocks, that’s all. And the community has exploded to new sizes since then. But when all this began, it was just retail investors communicating and having fun anyways.
Wall Street Bets is a Reddit investment board that covers a number of stocks in a number of different strategies (The group also had a Discord channel, both have since been removed from the respective platforms). For a while now, there’s been a specific focus in these communities on GME or GameStop. GameStop has been in a financial toilet recently, they posted a half a billion-dollar loss in twenty eighteen and have posted higher than expected losses in two consecutive quarters of twenty-twenty. The physical to digital conversion of purchasing habits have made them a sort of brick-and-mortar dinosaur in a mostly digital world.
Regardless of what the company is or is not, and who sits on the board (a data point of particular interest to a lot of people for long term strategies), none of it really matters at all because Reddit, spearheaded by Wall Street bets, just used the company as a weapon against Wall Street short-sellers to devastating effect. Many of them have gotten rich in the process.
The basic principles that allowed this to happen are as follows: You can either buy long or sell short, buying long as the simplest method, which involves getting a stock and just waiting for it to rise, get bought out, or just be worth more than you paid somehow, etc. Selling short is effectively borrowing shares from a broker and then selling them onto the market with a promise of “I will buy shares again to return to you in the future”
It’s sort of like an upside-down version of traditional stock investing. And an easy example would be if I buy 10 shares of a company worth ten dollars for one hundred dollars total and it rises to twenty dollars, I sell for 200 making a hundred dollars. But if I short ten shares of a company worth ten dollars and it falls to five dollars, I can cover my shares, rebuy them and pocket the fifty dollar difference. Hedge funds utilize this concept regularly and are almost guaranteed to see profits while adversely affecting other investors.
the basic principle of leverage is that you can increase your buying/selling power beyond what you actually have. This is dangerous because it creates margin calls. A margin call is an official warning by your broker or your bank that essentially you have overextended and you need to reduce your risk, deposit more cash, or otherwise fix this in some way
A margin call can happen when, for instance, the price of a stock climbs rapidly when you are short selling a leveraged amount that is greater than your actual holdings. To summarize, borrow shares, borrow even more shares than you have the money for or are capable of paying back betting on the price to go down. Highly dangerous, but if the price goes up too fast, you get squeezed and you’re in big trouble. That is what investors on Reddit were counting on, and that is what caused GameStop over the span of just a couple of weeks to rise by orders of magnitude that otherwise would have been completely impossible.
Now to get to the brilliance of it, although users on Reddit identified that GameStop was being sold short by not just some but most investors on Wall Street, the company was under so much downward pressure that it had actually gone negative. Essentially, the company had issued more shares to be sold onto the market than it even has, and the potential to create a “short squeeze” was tremendous. So the word goes out on Wall Street bets and other online message board communities, people begin to marshal their forces and their capital.
The goal was to make Wall Street bleed, over the past week we’ve seen their results. It absolutely worked.
The big money elites need to preserve their investments so naturally, they created a trading freeze. The trading freeze mechanic is in place to prevent automated systems from going haywire, but they put in certain safeguards to prevent catastrophic movements in the market. GameStop trading was halted because Reddit users had brutalized Wall Street, the play had worked and it worked so well that all the fail-safes kicked in.
Reddit outplayed Wall Street, squeezed the shorts into oblivion on GameStop, driven the price up by over 20 times its bottom value to all-time highs period ever. The only way it got stopped, for now, was a cold freeze on trading to let the suits breathe.
For some reason, when the tables are turned and it is the independent retailers getting in on the action and the hedge funds are getting smoked, it suddenly becomes illegal. This fellow sums it up pretty well:
Now, this is where we get into territory that our readers are more familiar with. Here are some names to familiarize yourself with if you haven’t already:
Robinhood Markets, Inc. an American financial services company headquartered in Menlo Park, California. Robinhood is a FINRA regulated broker-dealer, registered with the U.S. Securities and Exchange Commission, and is a member of the Securities Investor Protection Corporation.
Citadel LLC: Founded by billionaire Ken Griffin, the hedge fund has a “partnership” with Robinhood. Have recently been accused by a swarm of investors on social media of colluding with the online brokers to freeze the purchase of shares in companies that have in recent weeks experienced short squeezes.
“Vampires All the Way Down”
This whole situation has put a lot of eyes on Wallstreet, the Central bank, hedge funds in general. The people are learning that there are 2 sets of rules for the ruling financial elite and the everyday Joe/Joanne. Now the world has seen how the establishment protects itself, it took less than a day for big-tech, big-government, and the corporate media machine to spring into action and protect their hedge fund buddies on Wall Street.
Robinhood, one of the most popular free trading apps in America, stopped ordinary investors from being able to buy shares in GameStop, after users from the subreddit r/WallStreetBets and others engaged in the short squeeze. Many other trading apps and exchanges also stopped the buying of the “meme stock” shares and delisted them from their platforms.
In a statement, Robinhood claimed that they had to shut down the buy orders on GameStop and other “meme stocks” because of “the recent volatility” in the market. “We’re committed to helping our customers navigate this uncertainty,” the firm said.
However, accusations began flying that Robinhood was not doing this for the good of their customers, but for the good of Wall Street, with some highlighting that Robinhood’s “primary revenue stream” last year was from selling orders to hedge funds like Citadel Securities. Citadel bailed out Melvin Capital, the hedge fund that took the biggest hit from their attempt to short GameStop.
In a letter to the Department of Justice, Representative Paul Gosar said that he was “greatly troubled with the events that have unfolded on Wall Street,” and is demanding action from them. Robinhood’s “unilateral move” to stop the buying of GameStop shares “was done so in a concerted effort to de-platform and silence individual investors,” he argued.
Gosar also drew a suspicious link between Melvin Capital, Citadel, and Robinhood, highlighting an article from Bloomberg that noted roughly 40% of Robinhood’s revenue was down to Citadel and other big Wall Street hedge funds.
“Knowing the involvement Citadel has with Robinhood, it is clear that the actions taken today were motivated by anti-competitive reasons, not for concerns of volatility claimed by Robinhood,” Gosar argued. “Because of this blatant conflict of interest and obvious monopolistic activity, I am calling on an immediate investigation by the US Department of Justice into Robinhood and the hedge fund of Citadel LLC.”
@toxic laid out their perspective:
Step 0: Citadel pays Robinhood for order flow. Citadel gets to see RH’s orders a few milliseconds before they’re filled. Citadel may choose to front-run some of those trades.
Step 1: RH’s customers and WallStreetBets start manipulating $GME. This is happening in the open.
Officially, they’re manipulating $GME (and $BB and $KOSS) because these low-value stocks are being very heavily shorted, and if something moves the value of the stock up (like tens of thousands of retail investors acting in near unison), those short-sellers may be forced to sell to cover their borrowed shares. If most shares are held by retail investors who won’t sell, the price will skyrocket (supply/demand) until someone does. The bear hedge funds and such will still have to buy to cover, which may cause a bit of a liquidity crisis for the funds. The concept of “Screw the hedge fund vampires who exist only to destroy companies like Gamestop” is a big part of /r/WallStreetBets’s messaging. It’s a compelling message and a decent secondary reason for this. The primary reason to manipulate markets remains profit, though.
Step 2: HFTs buy shares ahead of Robinhood users. Remember Citadel, the firm that can front-run Robinhood trades, and got to see all of that RH data a little early because they paid for flow? Yeah. When do you think they started buying $GME in front of RH traders on momentum? Because the volume of shares exchanged suggests that the HFT folks were all over this, all the way to $150. The message on WSB might be “lots of little guys screwing big Wall Street”, but the truth is that the HFT robots were screwing everyone while paying Robinhood a kickback.
Step 3: A hedge fund becomes insolvent. Today it was Melvin Capital Management. It very likely won’t be the last. Melvin immediately sells off a portion of itself, because it needs the influx of cash or it will vanish in a poof of smoke, vaporizing ~$15 Billion in the process.
Step 4: Who’s the lead investor, picking up part of a usually successful fund at fire-sale prices? Right. Citadel, probably with some of the cash they made by repeatedly profiting in the milliseconds before filling the trades that collapsed this fund.
Step 5: Citadel still has access to RH order flows, is still allowed to front-run them and/or pocket the spread and can use that and other information to determine the next over-leveraged fund that’s going to get squeezed. They might even be able to accelerate the squeeze. So, the next time you discount the impact of “4chan with a Bloomberg terminal”, remember that they are not the only ones who stand to benefit from intentionally screwing exposed short-sellers. The professionals are all too happy to amplify the efforts of the amateurs for profit. Because if amateurs manipulate the market, uh, truthfully, then nobody loses their license. “I (retail investor) bought because I hate Citron & hedge funds, and we’re going to screw them for profit. Join us, but do your own due diligence. YOLO!” might just be legal. IANAL.
If a licensed broker/dealer did this, they’d lose their license, and probably go to jail. Martha Stewart did time for less. But Citadel, by paying for order flow and sitting in the middle, gets to legally ride-along, printing money the whole way.
So, when you ask yourself, “who pays for no-commission trades, and why?” or “what’s the harm of RobinHood’s business model?”, take a look at what happens behind the scenes, in the milliseconds after you press buy, but before you own those shares. It’s vampires all the way down.
And now we have a class action complaint about Robinhood filed in the southern district of NY
A Heartwarming Turn for AMC
Gamestop or GME may be getting all the buzz, but it’s not the only stonk involved in the shenanigans. As we mentioned earlier, the trading of AMC and EXPR was also halted by Robinhood via Citadel after the internet mischief-makers targeted those stocks. These folks may be getting a bad rap from folks like Elizabeth Warren and the SEC, but these Reddit rebels may have just saved AMC Theatres from more than half a billion in debt.
The theater chain, like pretty much all theater chains, has been ripped by the COVID pandemic. It’s difficult to remember, since “two weeks to flatten the curve” turned into “we’re never ever ever getting back to normal,” but theater chains were enjoying something of a revival in late 2019 and early 2020. Then COVID struck and no one could go to the movies.
AMC Theatres was just about dead as of Monday this week. But along with GameStop and BlackBerry, Reddit’s r/wallstreetbets (WSB) targeted AMC’s stock for a revival. “We like the stock,” they said. Well, it worked!
[O]n Wednesday, a private equity firm named Silver Lake — and private equity firms are popularly considered the “bad guys” in this snobs-versus-slobs drama — elected to convert the corporate bonds it held into AMC Entertainment Holdings stock. Although the theater chain’s stock price has tumbled and soared since the move, the debt relief is permanent.
Wiping out more than half-a-billion dollars in debt, though, should take a lot of pressure off AMC in the short term. “A week ago, it was not crazy to think this company was doomed,” Bloomberg’s Matt Levine wrote on Thursday. “Now it is entirely possible that it will survive and thrive and show movies in movie theaters for decades to come because everyone went nuts and bought meme stocks this week.”
That’s thanks to a few million retail stock buyers who constantly insult themselves and swear they’re financial idiots between swearing revenge on the architects of the 2008 financial collapse.
The contrast between them and the hedge-fund predators they’re targeting on the GameStop stock could not be more dramatic now. WSB targeted GameStop because Melvin Capital had overleveraged itself betting that GameStop would lose value and die. They wanted to save the video game seller, sure, and they wanted to draw blood from the company that was betting on GameStop’s death.
Here, they’ve put their cash on the line and given AMC a significant reprieve just in the nick of time. Maybe it will last long enough for normal to return after all.
Alleged Robinhood “Insider”
An anonymous person has come forward alleging to be a Robinhood “insider” and has claimed on Reddit that the Biden administration contacted the broker to pressure it to close trading on GME. The post has since gone viral, receiving over 23,000 upvotes.
The full post is reprinted below;
I work for Robinhood. Don’t kill me.
Low-level, technical shit, comp sciences major, not finance side.
Guess what we overhead today?
Vladimir, yes founder Vladimir, and the C-Suite, received calls from Sequoia Capital and the White House that pressured into closing trading on GME etc. I guarantee you the same took place at E-Trade and the others who closed trading.
File reports on the SEC page. If I wasn’t scared to be out of work in a pandemic I’d quit. I’m disgusted. We all need to rise up, this is as bad as it gets when we talk about how the rich get one set of rules, and the rest of us get screwed over, and over, and over again left to bail them out and pick up the tab for their trillion dollar tax breaks. We need to pile pressure on every government and financial institution involved in this travesty of justice.
I’m taking a massive career risk even posting here but f-ck these motherf-ckers.
The Biden White House said it was “monitoring” the GameStop situation yesterday but hasn’t announced any action publicly. Meanwhile, in an email sent out thursday, Robinhood says it will allow “limited buys” of GameStop and other similar stocks tomorrow.
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