CKBlog: The Market
Saturday, January 30, 2021
by Steve Haberstroh, Partner
What is going on? I’ll try.
What initially sparked this is up for debate. But some actual news relating to GameStop (GME) caused an initial surge in the beleaguered company shares.
A well followed message board on Reddit called WallStreetBets (WSB) took notice. The traders in the chat also noted that GME was one of the most shorted stocks on the street (shorting is making a bet the stock price will go down).
The posts began referencing the large hedge funds that were short these shares and explained how a “short squeeze” would inevitably send these stocks to the moon! They were right.
The number of members in WSB grew, as did the stock price of GME and others. GME had been a single digit stock. It was now trading over $400 per share.
Vitriol against hedge funds also grew. David vs Goliath playing out on the web and Wall Street.
(The dirty secret is many of these “Davids” are also “Goliaths” piggybacking on WSB).
Less than a week into this battle the “trading mob” nearly broke a star hedge fund manager, Melvin Capital, requiring a roughly $2 billion lifeline from fellow billionaire fund managers. This spilled over to other hedge funds. Reported losses on several were 20%, 30%, even over 50%.
This emboldened the WSB crowd as the chatter moved to other stocks. The number of shares traded began to overwhelm certain brokerages (Robinhood, TD Ameritrade) and due to regulatory and capital requirements, these brokers had to restrict trading on GME and other stocks which were similarly affected. Robinhood reportedly drew several hundred million from their bank credit lines and raised $1 billion from investors in a “proactive” move according to their CEO. Going live on the nightly news to convince the public you are solvent is never ideal.
Restrictions meant that traders could sell these stocks but couldn’t buy them. This enraged the WSB crowd as their belief was only allowing sales was merely helping hedge funders push the stock prices back down (and make money on the shorts). Making matters worse, the billionaire that bailed out Melvin is also Robinhood’s biggest source of revenue ...
“The system is rigged!” the WSB crowd exclaimed.
This caught the attention of politicians, celebrities, and athletes. Suddenly AOC (Alexandra Ocasio-Cortez), Ted Cruz, and Nancy Pelosi were on the same side of an issue.
The story hit the network news.
Many Davids tripled their money in two days. Several Goliaths were broken and may shutter their multi-billion dollar funds. David is winning (as are many Goliaths along for the WSB ride) and the regulatory system has slowed the “common man’s” advance.
There’s more to the story. But that’s where we are.
What happens next?