Gamestop, Reddit, and regulation
January 30, 2021 at 6:31 pm #36296
Reddit, the Elites and the Dream of GameStop ‘To the Moon’
This insurgency against the hedge funds isn’t an unequivocal populist win. For some, the point and the money already made is victory enough.
In 2016, when I was a 23-year-old tech reporter in San Francisco, Robinhood — the low-cost financial trading app that has starred in this month’s retail investor revolt against the financial establishment — had only a million users or so. Over a coffee in SoMa, its communications chief (who was younger than me), pitched me on why the company would ultimately be much more than Uber for stocks.
In the end, I decided against profiling the start-up. Partly because I couldn’t take seriously its emancipatory rhetoric and advertising, its odes to “democratizing access to the markets and empowering personal investors.”
It turns out I was right to be cynical: The company’s primary customers are not its users, but other financial institutions. Just last month, the Securities and Exchange Commission fined Robinhood $65 million for trying to keep that income stream hidden. But I was wrong about the viability of Robinhood and the potential power of the reported 12 million users it has acquired in the past five years.
This week, countless Robinhood users teamed up with organizers in r/WallStreetBets, a Reddit forum, day traders on Twitter and onlookers in other online investor communities, to expose vulturelike hedge fund investors who had aggressively short sold stocks for GameStop, the flagging retailer. The Redditors made the hedge funds pay for this risky “shorting” maneuver (essentially, betting against the market value of the targeted asset) by collectively driving GameStop’s share price up by as much as 1,700 percent.
This, in turn, forced those who bet heavily against it to cover their losses by buying back more stock, driving prices even higher. The sometimes six-, seven- and even eight-figure payouts earned among several users in this online pack quickly became the stuff of meme legend.
By the time markets closed Wednesday evening, GameStop, once lingering below $20 a share, was selling at $350. AMC, the theater chain, had joined Reddit’s new crop of darlings, with its shares more than quadrupling at one point.
It was the exact sort of move that sophisticated, so-called institutional investors execute monthly, turned against them and multiplied by billions. At one point this week, GameStop was the most heavily traded security in the market. Business Insider estimates the gambit has taken at least $3.3 billion off hedge fund balance sheets. Melvin Capital, one of the “hot” Wall Street hedge funds targeted by the Redditors, had to take a $2.75 billion bailout from other industry insiders.
It’s unclear how many of these internet-fueled momentum trades can be neatly unwound or resolved. (When market forces began bringing the Reddit market plays back down to earth, my ex-girlfriend, who exited her GameStop position on Tuesday up 939 percent, told me she regretted doing so. She wished she’d “held in solidarity.”)
Yet it would be a mistake to interpret the emoji-filled banter, tongue-in-cheek pep talks and crude trolling associated with this crowdsourced movement as the stuff of either a Trumpist reactionary mob or the start of a benign revolution in the markets. The truth — that a completely decentralized scheme, prompted largely by middle-class people, siphoned billions from hedge funds — is narrower but still compelling.
As the tug of war between retailers and institutions continues, it’s clear this insurgency isn’t an unequivocal populist win. The world’s largest asset manager, BlackRock, whose 13 percent stake in GameStop may have delivered a $2.4 billion windfall, happened to find itself on the winning side of the GameStop trade. By Wednesday, the private equity giant Silver Lake had gained $284 million from the AMC mania. And rich people own a vast majority of stocks anyway.
It’s a sure bet that some small investors who get in too late and wager too much will take bad losses. But for those either actively in on these Reddit-led trades or living vicariously through them, the potential downside isn’t diluting the comic thrill of the moment, or the sense that there’s still a modicum of justice to be squeezed out of an unequal economy run by rapacious speculators.
Throughout Thursday, stock exchanges, government regulators and retail apps like Robinhood were looking to squelch this volatile trading energy. Several platforms have indefinitely halted trading on companies popular with the insurgent internet conglomerate. Robinhood alone put a pause on GameStop, AMC, Nokia, BlackBerry, American Airlines and Bed Bath & Beyond — a move that angered millions of users. “What do you call a market that removes retail investors’ ability to buy to save institutional investors’ shorts?” a Twitter account run by the moderators of r/WallStreetBets posted.
Representative Alexandria Ocasio-Cortez of New York, whose rapid political ascent was a product of the internet, sided with the aggrieved small investors. On Twitter, she called trading platforms’ halts “unacceptable” and pledged to “support a hearing if necessary.” Her fellow Progressive Caucus member, Representative Ro Khanna, who represents much of Silicon Valley, agreed, as did some Republicans. And a federal class-action lawsuit has been filed against Robinhood in the Southern District of New York.
Early Thursday evening, as further pressure mounted, Robinhood announced that it planned “to allow limited buys of these securities,” though it didn’t delve into specifics. And so, as with any revolution, this one has become very messy.
Shares in GameStop, which have taken a hit, remained high on Thursday relative to share prices at the start of the month. But as voices in the business press and large institutional investors talk down the Reddit-led movement, momentum for most of the other major picks — referred to by many as “meme stocks” — has stalled out.
Still, a quick perusal of message boards or the humbler corners of finance Twitter suggest that whether GameStop itself lives or dies now is beside the point. The push to “hold the line” is premised on schadenfreude as much as anything else, on raising the hackles of a condescending establishment. For some, the money that’s already been taken is victory enough.
“I can now write my mom a check and put my sister through lymes treatment,” a Redditor named Stammbomb wrote in a post on Wednesday, next to a screenshot showing a 349 percent return to his $64,000 Robinhood account. “This has been a very rough year, but I’m so thankful for every single one of you.”January 30, 2021 at 7:37 pm #36298
Talking with a financial guy last week and he indicated that erratic activity such as this, coupled with record lofty stock valuations usually signals the end of a “bull” run. We have adjusted the asset allocations in our portfolio accordingly. Gonna walk out of the casino with my chips in hand. The stimulus checks will delay the next crash maybe until 2022, but it is inevitable at these price levels of NASDAQ being worth over 30 times earnings.January 30, 2021 at 8:59 pm #36299
My fave edition of The Hill’s feed in a long time:
I love this Everyman kind of commentator on the Gamestop situation:
Will sine savvy person explain to me (assuming there IS some explanation) why we’re better off with hedge funds vs. without them?January 30, 2021 at 10:02 pm #36302
I never liked hedge funds, however every major index fund has an associated short fund that moves inversely. The popular NASDAQ index fund is called QQQ and the inverse ticker is SQQQ. Some day traders ping-pong back and forth taking tiny bets all day.
You might think of homeowners insurance as sort of a hedge fund, the big difference is that you are hoping the bad event does NOT occur (unless you are up to no good) whereas a short stock play is wanting the company to fail and jobs to be lost. I am sure some argue that it encourages efficiency but I think that is a stretch.
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