Summary
Today’s episode covers the incredible story of how retail investors are taking on billionaire hedge funds.
This David vs Goliath story heated up last week and the big wigs on Wallstreet resorted to insanely dirty tactics to try and break the internet army.
Some of the topics we cover are:
- What is GameStop?
- What does it mean to short a stock?
- Dirty/Ilegal tactics that these hedge funds are trying to implement to stop further losses from occurring
- Why this story is resonating with so many millennials
- Aussies were trying to buy $GME stock on the ASX which is actually a mining company 🤦♂️
#✋💎🤚
#🚀🚀🚀
#🦍💪🦍
#Wejustlikethestock
Transcript:
Heads up grammar Nazis, the following transcription is half human half machine and not 100% perfect so expect a few typos and errors…
Coming soon
Great Pod, love the increased frequency since your return!
It’s certainly going to be interesting to see what happens next. As you’ve touched on, the whole basis is for the retail investors to not sell to continue to drive the price up, however if i was in that position with large paper profits, there is no way i could continue to hold.
The test (chaos) is going to come when individuals start selling.
Anyway, I look forward to watching the movie they will make from it haha – The Big Short 2?
Cheers Sneak,
Not long now until the market opens. I’ve heard that more brokers have stopped people from buying $GME though so it’s not looking like the squeeze is going to happen. I guess we’ll just have to wait and see.
It is not just the millennials that find this fascinating.
Good stuff covering this AFB. Definitely a topic to discuss considering it shows just how rigged the game is.
Cheers, Dylan.
Thanks Dylan,
Usually, it’s behind closed doors, but when they legit stop people from buying a stock on a supposedly free market in front of all our eyes… wowee. It’s like they know they’re too big to touch/face consequences.
The story just keeps getting more crazy. Because the Robinhood app restricted buy orders on a number of stocks they received 100 000 one star reviews on the Google app store. Google then deleted all reviews for Robinhood. What happend to free market? Feel like we main stream investors are just rats in a cage..
It’s never been an equal playing field but it’s a slap in the face when they’re so open and arrogant about it.
I’ve gotta say I’ve found the commentary on Gamestop to be really strange.
As an ex “Wall Street” type it’s been quite weird to hear all the stuff about sticking it to “Wall Street” for their sins back in the GFC. Because this has basically been sticking it to a few equity long short funds, who weren’t even in existence back in the GFC, and wouldn’t have anything to do with mortgages anyway. Oh and those hedge funds most likely manage money for a bunch of pension funds (as well as their own money), so there are potentially underlying mums and dads losing money as a result of this.
It’s like if the state government compulsorily acquired my home for less than market value to put a freeway through it and then I went and threw a brick through the window of the local Medicare office and said it was revenge because it’s all big government. I get the anger, it just seems like it’s the wrong target? Or any target vaguely connected with Wall Street will do?
The whole it’s not a “free market” narrative is just weird. The stock market has a massive amount of regulation already. There’s an argument to be made that it favours bigger investors, but the SEC in the US and ASIC here in Australia actually work really hard to make it as level a playing field as possible. And there’ve been trading halts put in place for quite some time whenever stocks make big moves on no fundamental news, there’ve been clearing requirements for a long time which is what seems to have triggered RH users from being able to initiate new buys, margin calls etc. I’m really somewhat surprised that the SEC didn’t put GME into a day long trading halt when things started going crazy, or that the company didn’t ask for it itself.
And a lot of the restrictions/protections for retail clients that people are complaining about are there for a reason. There’s certainly an argument to be made that the average retail punter should be allowed to trade YOLO options to their hearts content, but if that’s the case then we have to accept that a bunch of them are going to blow up when things go wrong, and that’s their problem. Whereas historically the Australian approach at least has been that they didn’t understand what they were doing (very likely true!) and hold the institution responsible for selling them something that they shouldn’t have been allowed to buy.
Even the WSB community talking up the stock has parallels with a classic pump and dump scheme where some spruiker talks a stock up way past the economic value and then sells out to whichever poor punters buy in. I guess at least in this case nobody is pretending that Gamestop is actually worth $300 a share or whatever, but it’s going to have the same effect with a bunch of retail guys buying in at high price points and losing all or most of their money when the stock eventually crates and goes to its natural level, which presumably is somewhere below 20 bucks as that’s where it started before all this stuff. Is it still gonna be a case of sticking it to “Wall Street” then, even if it’s a bunch of “Main Street” people taking the loss?
So I feel like the narrative of how this has been talked about it is quite strange, and it could just as easily have been a nothing story or written in a totally different way. Maybe that’s just me though?
Always quality comments mate, and this is no exception, however… I’m going to have to fundamentally disagree with a lot of what you’ve written.
I’m assuming you’re referring to Melvin Capital as the hedge fund that hasn’t been around for that long (established in 2014) because they’re front and centre of this whole debacle. But they are not the only ones tied up in all this. And there’s plenty of other high profile hedge funds that are involved.
Melvin got bailed out by Citadel who is ran by math savant Ken Griffin. Citadel was saved in 2008 from going bankrupt and it was reported by AIG that Citadel (and Paloma Securities) received $200 million of taxpayer dollars.
If you haven’t already done so, I’d recommend reading ‘The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It‘, It really goes into detail how risky these hedge funds were being.
Some of the shit they were doing (credit default swaps being the main one I’ve read about) had an indirect relationship that helped set off a chain of events that lead to the GFC. These hedge funds might not have had a direct relationship with everything that went bad in the GFC but their speculative gambling did not help.
Most of them are in it together one way or another too. You talk about what WSB is doing is similar to a pump and dump scheme… As if hedge funds/people with a lot of money haven’t been doing this shit since the market was invented! The point isn’t about what is right or what is wrong, it’s that the 1% have a different playbook than the rest of us and we’re seeing it play out in front of our very eyes.
The SEC/ASIC try their best but c’mon mate, we know the government, in general, is always behind the 8 ball when it comes to shit like this. Have a squizz at this video. I mean… that’s Jim Cramer, blatantly admitted to market manipulation. He ran a hedge fund and was bloody conducting interviews like this without any repercussion… 😑. I know it was recorded back in the day but do you really think things have changed? It’s almost insulting to listen to this flog get onto CNBC now and tell everyone they’ve won and to sell their shares 🙄. Yeah, cheers cobba, real ethical of you.
You say there’s an argument to made that it favours bigger investors… brah… that’s the understatement of the decade. C’mon now.
I completely disagree with your point on restrictions/protection of the retail investors. If you invest in a hedge fund, and it goes belly up, bad luck! Why is it that everyone else has to accept losses except for the untouchable 1% that will move heaven and earth to weasel their way out of this situation. You and I don’t know why people are buying $GME at $350 and who are we (or anyone) to tell them they can’t? We can speculate, but at the end of the day, a free market should allow people to buy and trade based on their own accord. We don’t need some guardian angel hedge fund to ‘swoop in and save the day’ when people are going to lose money. Are retail investors going to lose a lot of money when $GME comes crashing down? I’d say it’s almost a certainty. But it should be their right to be able to speculate as they see fit. Just like a whole bunch of hedge funds did back in 2008. ‘We just want the same rules’ is the overarching theme with this whole situation.
And it’s frankly insulting that this narrative is being spun by financial reporters when it’s clear as day that the real incentive is NOT to protect the retail investor, but rather the old money who are set to lose billions and weld a lot of political power.
You don’t need to look any further than what unfolded in 2008 to see what the true motive is. I didn’t see the CEO’s of hedge funds back then jumping on CNBC trying to save ‘the little guy’. In fact, it was the complete opposite. The taxpayers bailed out a lot of these big financial institutions.
I hope I don’t come off as angry in this post mate, I genuinely enjoy hearing another perspective and look forward to your reply 🙂
Hey mate, I can see you’re passionate about it but not angry, fair enough!
What I’m saying is that the hedge funds involved seem to be mostly equity focussed hedge funds, rather than mortgage or credit focussed ones that blew up in 2008. And even then it was mostly investment banks and mortgage brokers that were the issue rather than hedge funds, and certainly equity hedge funds. So the general narrative that this is punishing the same people is just wrong, they’re very different groups of people, albeit they all work in finance. As in my example, it’s as though your state government did something to you and now you’ve done something to a federal agency and called it revenge.
Citadel (Ken Griffin) and Point 72 (Steve Cohen) seem to be the main new investors in Melvin, and I would imagine they pressed for very favourable terms when putting that money in. I guess you can call it a bailout in that it’s presumably kept Melvin afloat, but Melvin’s owners (and investors) likely lost a lot of money and it’s not as though Citadel and Point 72 are just handing them money to make them good, they are investing new money. So it’s almost certainly not oh you had $100 but you lost $40 so we’ll give you that money, it’s well you’ve still lost $40 but I’m putting money in as well in the hope this all comes good. Or it may have been structured even more favourably to the new investors, and even less favourably to the existing investors.
Are you sure you’re not referring to CDOs rather than CDS? Both has some role to play in the GFC, but the former much more than the latter. In any case, yes most investors talk up their own book, and the bigger guys get more of a platform to do it because they can go on CNBC or Bloomberg TV or get printed in the WSJ or AFR or whatever whereas nobody cares what you or I think of a stock. I don’t think anyone should be getting their stock picking ideas from any of those platforms, but at the end of the day some people do. The big name guys do have a lot of restrictions around what they can and can’t say, but they obviously have a much bigger microphone than the rest of us and more people will listen to you or to me.
I should have been clearer in talking about protections/restrictions for retail investors, because they can’t invest directly in hedge funds at all unless they have a lot of money, as in like millions. What I was referring to was that a lot of the action in Gamestop has apparently been retail buying call options. When they do that the option seller hedges by buying stock, but because of the way options work they have to buy a lot more stock than the amount you’ve spent on the call option. You might spend $1,000 on the call option, but the option seller then has to go out and buy $4,000 worth of stock.
So the option gives you a leveraged bet on the underlying stock with a capped downside, but also a much better chance of losing all your money. Historically over here ASICs approach was to try to protect retail investors by making it difficult to trade options, that may have changed though. Certainly in the US they seem to be more in favour of letting regular people buy them, but on the understanding that if things go wrong that’s your problem. If we want to go down that path then that’s fine, but we have to accept that a fair number of people are going to lose whatever they put in.
Different people are going to have different philosophies on how acceptable that will be, but I’m willing to bet that sooner or later we’d see some Today Tonight special on some poor retired couple that lost all their money and more on YOLO options and obviously it’s the evil banks fault for letting them trade options without knowing what they’re doing.
And yep, you’re absolutely right that a lot of the big financial institutions got bailed out in 2008. But it was almost all the banks that got bailed out, and they’re not involved in this at all. As far as I’m aware hedge funds didn’t get any direct bailout at all, although obviously they benefit if their counterparties get rescued and can repay their debts, which I think is what you’re referring to with the $200 mill? It looks to me like AIG got bailed out, and then was able to pay it’s debts to Citadel.
A lot of this probably seems like splitting hairs to you, and maybe it is to some degree, but I think there are a lot of misunderstandings of what happened and why they happened, and much of the anger seems to me to be misplaced.
A lot of this is splitting hairs and I’d hate to lump everyone in the same group.
But Ken Griffin/Citadel definitely played a part in the GFC and they indirectly received bailout money (as you noted). They now have a stake in Melvin which means they stand to lose money if people keep buying GameStop at the current price. The term and conditions are irrelevant for the point I’m making.
This is just one example as well. I’m sure you could find multiple people that directly/indirectly contributed to what happened in 2008 and connect them to this story. A lot of people change jobs, move firms, get poached etc.
Even pushing 2008 aside, you surely can agree with me when I say that hedge funds in general (I don’t care what they invest in) play by a different set of rules and wield politic power which, IMO, is wrong and unfair.
So while you might think the anger seems to be misplaced, I would have to respectfully disagree. There are people involved in this that helped cause the GFC, indirectly received taxpayers money, and are now trying to use their political clout and power to change the rules when they’re on the end of a bad bet.
As I said in my original comment I presumably look at this differently as an ex “Wall Street” guy, in the sense that I’ve worked for a bunch of investment banks in various roles. So I differentiate between sell side and buy side, long short equity vs mortgages, and all the various other distinctions that outsiders probably don’t see. So when the narrative is that this is hurting the people who caused the GFC, I gotta say I just don’t see that. The hedge funds getting hurt directly here seem to be a couple of equity long short funds. They just didn’t have anything to do with the GFC.
If the argument is that Citadel did, I must admit I haven’t read or seen anything about that and I’ve read quite a lot about the GFC, and was working in markets through most of it. In fact Citadel got absolutely hammered during the GFC when the rules got changed by the SEC to ban short selling because it hammered their convertible arbitrage positions. So they know what it feels like to actually have the rules change!
As far as them buying into Melvin and so now having a stake in what happens with Gamestop, Melvin said a few days ago that they’d closed out their position in Gamestop. I’m not sure if this was pre or post Citadel coming in, but in any case Citadel shouldn’t care one way or another what happens with Gamestop any more, unless of course they’ve decided that they want to get involved themselves.
I view the GFC as being caused mostly by a blowup in mortgages and credit. There really just isn’t much crossover at all between those two areas and equities. Similarly it was mostly the big banks that caused a lot of the problems, although others were definitely involved. Yes there are probably going to be some multi-strat hedge funds like Citadel that had some sort of involvement back then, but really they were at most a tiny part of the problem. So I guess some of the people involved will be the same, but for the most part it’s two entirely different groups of people, albeit all part of “Wall Street” or the 1%.
In any case, yes there are different rules for hedge funds and the little people like you and I. A lot of those rules are in place to protect/restrict us from taking big risks with options or short selling, although it is possible to do so if you really want. And yes, they wield a lot more power than the likes of you and I because they have a lot more money and a far bigger microphone so to speak. Similarly over here industry and retail super funds have a much bigger microphone and wield a lot more political power than you or I. I think we’re in 100% agreement on the reality of that.
I’m just really not seeing much evidence of them wanting to change the rules so far. RobinHood restricting trading in meme stocks seems to have been done on the basis of clearing house requirements rather than some behind closed door deal between RobinHood and Citadel or some cabal of hedge funds. Several other trading platforms did the same, and apparently even some of the big brokerage houses.
But it seems to be due to the way RH and other platforms hold the stock and the vastly increased volatility and volume in the stock and therefore margin/clearing requirements, not actually changing the rules. Likewise RH selling clients out of stock when they had a margin call, that’s always been the way things have worked rather than anything new.
Similarly nobody has asked for a government bailout, it’s all been private capital going into Melvin. If Melvin went down completely it’s not a risk to the financial system as a whole, although it would probably cause losses elsewhere.
About the only area where I have seen calls for regulatory/government action is with regards to the WSB crowd pushing up the price of these various stocks. Maybe it’s market manipulation, maybe it’s not, I believe that the SEC has said that they’re looking at it. There are certainly a lot of similarities to a pump and dump scheme which people do get in trouble for all the time, but it’s not exactly the same. I guess at some stage we’ll find out what the SEC decides.
What rules are you seeing hedge funds/Wall Street etc trying to change?
I’d strongly recommend reading the book I posted above (The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It) and if you still come to the same conclusion that Ken Griffin had no role in the GFC then I nothing else that I write will convince you otherwise.
Ken Griffin and Citadel are just one example. I can’t be bothered to go through everyone that’s involved here but I’m betting there are others too.
As for changing the rules. You don’t have to look further then what happened with the Depository Trust & Clearing Corporation (DTCC) last week. They didn’t disclose the change in margin requirements for clearing brokers.
The integrity of the stock market is put into question when a decision to raise the margin requirement on a specific set of extremely active stocks is communicated only privately to member firms of the DTCC?
It’s unacceptable to have a Wall St. owned clearing house kill millions of retail investors speculating on a short squeeze stock. Moves like this just solidify what we already know, most of the players on Wall St. have the upper hand in a rigged game.
At the end of the day, I’m sure the SEC is already investigating what’s been going on during the last week and neither of us will know what really happened for many months maybe years… and by that time, no one will care/will have forgotten.
I’ve bought the book on Kindle and will have a read, it sounds right up my alley anyway and it’s kinda surprising I haven’t heard of it before and bought it already. It might take me a while to get through it as unlike yourself I’m not a gentleman of leisure! 😉
Hopefully at some stage there will be a good report/book on what happened and we can see what went down, in the meantime though I don’t think either of us are going to change the other person’s mind so I’m gonna bow out.
All the best mate, looking forward to more content now that you’re back in Oz!
I understand that the optics of Robinhood and essentially all other broker platforms halting (buy) trades on these high-profile stocks for a short period of time aren’t good and lend themselves to conspiracies.
But as you touched on very briefly on the show, there is a completely legitimate argument for why it happened – although I appreciate that you probably have to be familiar with the nitty-gritty of how financial markets work.
When you make a trade, although everything appears instantaneous on your account, settlement only occurs 2 days later – i.e. the seller has 2 days to find the stock, and you have 2 days to find the money, until then you’re operating on trust that the other side will actually stump up the money. When settlement happens, you don’t deal with the other party directly, but you go through a ‘central clearing house’, the DTCC in the US. In order to protect the other participants, DTCC makes all the brokers (e.g. Robinhood) deposit enough cash with them to make sure their clients meet their obligations. When Gamestop stocks go completely bananas, the risk that the stock or option will be completely worthless is increased exponentially, so DTCC naturally decided to require all participants to stump up MUCH more deposits, which they naturally didn’t immediately have. Hence why brokers stopped new buy orders for Gamestop because they didn’t have the deposit available to cover it. And hence why they allowed sell orders because that would have just reduced the deposit requirements. To the contrary to what you say, (based on what we know now) brokers were just following their obligations – and not acting illegally at all.
While I’m not shedding tears for hedge funds (they ignored a tail risk, which came back to bite them), even if they lose all their money and go bankrupt, it’s not going to make a speck of a dent in wealth inequality. At the same time, I don’t feel sympathy for the Reddit gamblers either – they should know they are getting into a dangerous game (dangerous because it is a pump and dump scheme and you don’t want to be the one holding the bag at the end).
I would say the real story here is this is just another manifestation of the speculation mania that has erupted as more and more people realise that central banks have demonstrated over the past 20 years that they will never let the stock market decrease and will devalue money to the extent required to prevent that from happening. If stocks can only go up, that predictably leads to more and more crazy risk-taking and the stock market being more and more divorced from economic reality. It started with the stock market recovering from the Covid crash in a few months, then the speculation gripped gold, then bitcoin, then Hertz and other bankrupt companies. Now it’s Gamestop, and it looks like silver is the next flavour of the month. I would say that only thing that really has changed is that even the “little people” have recognised that capitalism is effectively suspended and you can’t lose money on the stock market… Who knows what the next speculative target will be and what the consequences will be when the pain we have been putting off for decades by taking on ever more debt and printing more money finally catch up with us…
There has been a lot of speculation around Robinhood halting trades and selling positions, and I think some of it is very conspiratorial, absolutely.
I touched on this briefly, but it’s obviously more nuanced. It’s not as simple as “user deposits cash and Robinhood takes that cash to buy stock”. Robinhood has to front their own capital for stock purchases to the clearing house. As a stock becomes more volatile, these clearing houses will ask for more collateral for the purchases. In reality, Robinhood probably just does not have the liquidity to facilitate the unprecedented number of trades that were happening on tickers like GameStop, hence the limitations. Their public announcement didn’t do them any service though and it would be dire for them to publicly say they have liquidity issues when they’re approaching an IPO. Robinhood drew down $500m from a line of credit and raised another $1bn to facilitate the trades and it still wasn’t enough.
As far as I can tell, Robinhood only closed positions for people on margin, which is absolutely in their right to do so during such times of extreme volatility. People on r/wallstreetbets have been made fun of users in the past for their margin being called, it’s kind of weird to see the forum blow up on Robinhood for suddenly calling in margin on these stocks and selling down positions to cover the lack of cash in people’s account. Definitely a lot of emotion behind these complaints and not a lot of logical thought behind it.
I do honestly believe as well that while retail investors have sparked this entire controversy and play a role in the stocks being purchased, a large amount of the volume right now going in and out of GameStop is likely to be other wall street investment firms using this as an opportunity to make cash off the entire event. Hedge funds have screwed over other hedge funds for years, and right now is probably no different.
One of the things I had in my notes but forgot to touch on during the episode is that Google reportedly removed thousands of 1 star reviews from their app store for the Robinhood app. While in their right to do so, these pretty much deems Google’s review system worthless. Sure, people are bombing the reviews, but if reviews can just be removed because people don’t like them, it sets a bad precedent for taking these reviews seriously when selecting an application from their Play Store.
If I had to think about it all and make a prediction about what I think will happen in the end, I think retail investors buying in at high prices like $300-$400 are going to lose their money. We touched on this on the episode. You have to assume if you didn’t sell on Friday or as quickly as possible, your money is going to be vaporised in the coming days or weeks. I think there is also a likelihood of Robinhood shutting down after this, which means ones less platform for retail investors to use to be involved in the stock market.
I won’t shed a tear for the hedge funds but the podcast overlooked the critical fact that most of the Gamestop trades are happening on margin and as noted above in previous comments via derivatives. This has monumental implications for brokers (RH etc). Margin requirements were a key driver in the trade restrictions that were implemented. Margin is provided by most US brokers by default. Aussie brokers don’t (you have to apply for it and the process is painful). Margin requirements for short sellers was not discussed either – they are pivotal in a short squeeze such as this.
Regarding free markets, be careful what you wish for. That would truly be the Wild West. It would turn predatorial traders (such as hedge funds) into apex predators. We (and the USA) have regulated markets, which is as it should be. Of course, regulations can always be improved. Swapping technologies (blockchain instead of relational databases) won’t change the need for sound regulation.
Anyway, this Gamestop will all end badly but only time will tell who those will be. Certainly many retail investors who were late to the party who bought on margin will be amongst them. In many cases, these “little guys” will lose more money than they put in.
G’day Matt ,
Great episode podcast 😁👍
Just shows you that the United States is a Oligarchy not a Democracy!!! …the writing was on the wall when Robinhood stopped the buying shares into the company for retailers!!! ….a definite coming Hollywood Blockbuster!!! ( where the academy rakes in the dough …of course!!!!! ….in true American fashion !!!
Hedge funds , The Trumps of the world got to where they are because the SYSTEM is rotten to the core !! …and when it comes to GAMBLING…which this GameStop saga is ( speculative and fuelled by irrational behaviour) ….unfortunately the rotten SYSTEM will reign supreme !!! ( sadly ) !!!! ..
Cheers
Very interesting topic, thanks for covering it! Hundreds of thousands of people are still holding, buying and directly registering their shares on other subreddits, like /r/superstonk. I’m still following the saga and it is very interesting, espcially since recent court documents have shown that hedge funds colluded with brokers.