I’m a bit dismayed with the quality of the news reporting I’m seeing over the past few days. I’m talking about that David-and-Goliath story featuring a gritty, if not mettlesome, band of small-time retail day-traders coming together on reddit to take down the greedy hedge fund billionaire shorts who’ve until now gotten away with colluding to screw over the “little guy” and all other vague sorts of evil deeds probably. Just as Main Street finally scored one over Wall Street, Wall Street of course did what they do best and rigged the game by leaning on supporting character, the traitorous no-fee trading app Robinhood, leading to their temporarily halting buy orders on some meme stocks. Then with the longs reeling from the blow, the hedge funds threw some short ladders at them, and the plot continues to develop.
It looks likely now that Congress is stepping in with hearings in both chambers, where they will give the Robinhood and hedge fund CEOs a good dressing down for the TV viewing public.
My contrarian take on the whole $GME (Gamestock) episode can be summed up in meme form:
Some info and reasoning in support of my meme position:
- Volume on $GME over the past 3 days (1/27 – 1/29) has ranged from 50 to 100 million shares. Looking at the price charts and figuring around $300 per share as a rough average price, that’s about $15-30 billion in trading each day. Retail investors on r/wallstreetbets are obviously not mustering $15-30 billion of buying power. I think it more likely that the denizens of reddit are an entertaining sideshow in what is otherwise a hedge fund vs hedge fund fight. The news media is focusing on the sideshow, while some crafty institutions go on pillorying the shorts.
- Now, an interesting (to me) story is how not one but multiple hedge funds (Melvin Capital, Citron Research being the two big names) failed so incredibly at the most basic of risk-management and fiduciary responsibilities, in Melvin’s case allowing this one position to drive an over 50% loss in the fund for the month.
- But you also can’t entirely blame the HFs who shorted a stock to 230% of float. They have to and do disclose their positions, so apparently fund participants were ok with them risking the squeeze by backing into that corner.
- Short funds have now assumed the evil mantle for Wall Street? Maybe Netflix needs to add “The Big Short” back for 2021. Short funds play an important role in markets by performing and publishing research exposing frauds, scams, pyramid schemes, and various other kinds of trickery, as well as plain old poor management. Think of short funds as non-governmental financial regulators who back up their research with their own capital. They are probably the least contemptible of actors in the financial markets. Of course they don’t do it out of a sense of volunteerism – they are looking to get paid off their research – but it does end up being one of those synergistic arrangements where the economics and business strategy align with the public interest to produce a net positive outcome for society.
- Let’s keep in mind who has the role of David in this saga – small time day-traders, primarily those who rely on a free trading app which temporarily halted buying in $GME and some other equities. We’re not talking about homeowners losing their homes, workers being laid off, retirees’ pension funds evaporating, or anything of that sort. I personally do not know many everyday working people who spend their days day-trading meme stocks.
- In the context of 4 and 5, Congress-persons tripping over each other to get to a camera and decry the Wall St. “sore losers” who regularly do all sorts of evils (remember, this is the short funds we are talking about now, who represent all the evil of Wall St.) to the rest of us but cry for mom and dad (SEC and Congress I think, here) to step in when the tables get turned on them by your salt-of-the-earth day-traders on reddit. There are going to be hearings now. This is a surprisingly pressing matter in the midst of a global pandemic, with evictions happening, stimulus negotiations seemingly not moving, and all other sorts of things that are…less important than a free trading platform startup not having the margin needed to fulfill a surge of orders.
- I’m really skeptical of the otherwise-baseless assertion that Robinhood (and some others) halted buying on $GME solely because of real or supposed business relationships they had with companies on the short side. Sorry but the shorts have no such leverage over a brokerage, and Robinhood has no incentive to completely undermine their business and their customer base. I’d place my own bet that this was plain old incompetence on the part of Robinhood – probably their not satisfying capital and margin requirements from the clearing houses. Keep in mind they have a track record of screwing up in different ways.
- The redditors are really exuberant now (and their ranks are swelling…), but as the shorts unwind their positions who’s going to ultimately be left holding that really shitty bag? They may all “like the stock,” hold fast with diamond hands etc., etc., but as discussed above, we know they are not the ones controlling the shares which the shorts need.
Update 2/4/2021:
A couple updates since I posted this on Sunday:
- Robinhood released this statement on Friday evening (so before I had written this, I wasn’t aware at the time) explaining that indeed the buying limitations were imposed due to the suddenly increased capital requirements coming from the clearinghouses, which in turn were driven by significantly increased volatility in their customers’ holdings (which probably include a disproportionate amount of $GME stock which was seeing a 1700% increase in volatility).
- This article from WSJ Wednesday evening about one hedge fund (Senvest) which bought up 25% of Gamestock in the run up (for under $10 a share) and turned a quick $700M profit in the squeeze…
- $GME quickly descending from the high of $468 to ~$92 at close on 2/3. WSB still talking about “holding the line” and “buying the dip.”