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I've drawn the wrath of a few Twitter haters who are telling me I'm missing the point of this WSB / $GME story.
So I think now's a good time for me to explain what's going on behind-the-scenes. And why I think individual investors are getting the worst deal out of this fiasco.
So I think now's a good time for me to explain what's going on behind-the-scenes. And why I think individual investors are getting the worst deal out of this fiasco.
1) First, individuals gather on Reddit & agree to "stick it to the shorts."
They buy shares & call options of GameStop $GME in large quantities, at higher & higher prices.
They're placing the orders through Robinhood & other zero-commission brokerages.
They buy shares & call options of GameStop $GME in large quantities, at higher & higher prices.
They're placing the orders through Robinhood & other zero-commission brokerages.
2) But Robinhood isn't a charity. It makes money by charging margin interest to accounts who don't have enough cash to cover their trades.
It makes this far too easy to do, without adequately describing the risks. And that leads to terrible consequences. https://twitter.com/BillBrewsterSCG/status/1273273220905537538
It makes this far too easy to do, without adequately describing the risks. And that leads to terrible consequences. https://twitter.com/BillBrewsterSCG/status/1273273220905537538
3) On top of that, Robinhood has the orders fulfilled by high-frequency-traders, who act as the 'market maker' middlemen.
Those HFTs pay RH a portion of the spread of the trade. Meaning retail investors aren't getting the best/advertised prices.
(Pg 14): https://cdn.robinhood.com/assets/robinhood/legal/Robinhood%20Customer%20Agreement%20(June%2022)%20(1).pdf
Those HFTs pay RH a portion of the spread of the trade. Meaning retail investors aren't getting the best/advertised prices.
(Pg 14): https://cdn.robinhood.com/assets/robinhood/legal/Robinhood%20Customer%20Agreement%20(June%2022)%20(1).pdf
4) But the frantic Redditers buying $GME on RH works. As they intended, they drive up the price of GameStop's stock.
Melvin Capital becomes the poster child of the "evil short." It reports losing nearly $3 billion from betting against GME.
The Reddit crowd rejoices.
Melvin Capital becomes the poster child of the "evil short." It reports losing nearly $3 billion from betting against GME.
The Reddit crowd rejoices.
However, GameStock's valuation is now far out-of-touch with its fundamental business performance.
It's trading at an unsustainable level. And that's going to cause problems for speculative traders who will soon be looking to close their positions. https://twitter.com/7Innovator/status/1354447311695441927
It's trading at an unsustainable level. And that's going to cause problems for speculative traders who will soon be looking to close their positions. https://twitter.com/7Innovator/status/1354447311695441927
5) Meanwhile, the SEC is debating how to regulate this unusual behavior.
Market manipulation is illegal. But does this qualify?
Should it prevent people from banding together & driving up stock prices just to burn the shorts?
It has closed-door meetings as it deliberates.
Market manipulation is illegal. But does this qualify?
Should it prevent people from banding together & driving up stock prices just to burn the shorts?
It has closed-door meetings as it deliberates.
6) Simultaneously, many brokerages put a temporary hold on $GME's stock.
No one wants to be in the crosshairs of the SEC once they decide how to handle this.
Controversy ensues. Most users aren't able to buy $GME. Others report not being able to sell. https://www.wsj.com/livecoverage/stock-market-gamestop-amc?mod=hp_lead_pos1
No one wants to be in the crosshairs of the SEC once they decide how to handle this.
Controversy ensues. Most users aren't able to buy $GME. Others report not being able to sell. https://www.wsj.com/livecoverage/stock-market-gamestop-amc?mod=hp_lead_pos1
7) So those individual account holders are stuck.
There's a sudden cap on $GME's upside as no one's able to buy. Others are holding GME at its peak b/c they weren't able to sell.
Meanwhile, institutions & social media influencers close their positions & brag about their gains.
There's a sudden cap on $GME's upside as no one's able to buy. Others are holding GME at its peak b/c they weren't able to sell.
Meanwhile, institutions & social media influencers close their positions & brag about their gains.
8) And finally, Melvin Capital reveals it's getting a nearly $3 billion bailout from one of its deep-pocketed allies. https://www.wsj.com/articles/citadel-point72-to-invest-2-75-billion-into-melvin-capital-management-11611604340
9) So piecing this all together:
1) The 'evil institutions' close out their positions & get bailed out by others.
2) Robinhood sells its customers' orders to HFT & halts trading at the worst time possible.
3) The individual investors who bid up $GME get stuck holding the bag.
1) The 'evil institutions' close out their positions & get bailed out by others.
2) Robinhood sells its customers' orders to HFT & halts trading at the worst time possible.
3) The individual investors who bid up $GME get stuck holding the bag.
