Reddit Anarchy or New Paradigm
This article is very a propos to the events of the last week still on-going. I feel there’s a lot of noise all over the internet and old media. Through the noise, many questions arise to me in my thought process, as everyone on all sides scrambles in their argumentation, actual stock buy/sell strategies, social commentaries, revolution theories, socio-economic crusades etc…
What is this all about ? How did it start ?
First let me put myself within this context in order to give the reader insight into who’s writing this article. I’m a virtualization administrator working for one of the biggest gaming companies on the planet and in my pass time I trade and invest and have been doing so since 2009 in both the stock market and real estate industry. I am an avid listener of CNBC, I love the halftime report, I read everything from seekingalpha articles to stocktwits feeds to twitter blasts to marketwatchs articles and everything in between. So where was I when all this happened ? Like many, busy doing my own thing unlike over a million people congregating in a channel on reddit called wallstreetbets apparently. This channel along with their discord server is where it all started. A few smart retail investors or so I’m lead to believe figured out an ingenious trade play… they realized how big hedge funds had taken short positions above available share floats on certain companies in the market… one such name was gamespot ticker #GME where at one point short interest was at 144% of underlying stock float. Now before we even go there and answer the question as to how that’s even possible let’s continue with the initial storyline.
Now the goal was to buy deep out of the money call options to push the underlying stock price up and hold not allowing short sellers to exit their positions at lower prices causing a bidding war further pushing the stock price up making brokerages call in margins on those borrowed stocks for the shorts and it all becomes a vicious cycle… The end result being hedge funds losing a LOT of money since theoretically speaking short position losses can be infinite. In order to achieve this with limited funds what these redditers did was band together and galvanize each other to buy shares in GME at the same time and hold. This actually worked and news started getting out and more people started joining the channel and as more individuals jumped in and news got around on social media and classic media the number of investors now big AND small grew exponentially putting hedge funds on the ropes and even bankrupting one of them Melvin Capital. On Thursday, however tides somewhat turned on the reddit camp when brokerages such as RobinHood and Interactive Brokers stopped the processing of purchase orders for some of these stocks including GME. This prompted outrage across the board from people in all walks of life, from billionaires like Elon Musk and Mark Cuban to politicians on both sides of the isle like AOC and Ted Cruz to obviously redditers themselves to youtubers like Logan Paul and Gamers like Faze Banks etc… This is where we are now.
Let’s start talking about some of the issues on all sides being argued back and forth. Redditers being the camp of those that are fighting for the “little” people, the retail investors, the small money the “David’s” in this story to the “Goliaths” being the hedge funds, brokerages and wall street. Redditers argue that they wanted to stick it to “the man”. They state that the “Goliaths” have long manipulated and abused markets and stolen from the masses and the poor and gotten fat off their misery and this is their chance to get back at them.
The market makers, brokerages, hedge funds etc (the Goliaths) argue that although they fully support retail investors ability to join the marketplace and participate in markets and even encourage it, that the influx of such speculative behavior based on no fundamental analysis is dangerous and will end in tears for the retail investors themselves in the end.
Chamath Palihapitiya, venture capitalist and billionaire, did go on the half time report on Wednesday Jan 27th aired on CNBC, to argue on behalf of the redditers opposite the host Scott Wapner, stating multiple times that he himself saw actual analysis that made sense and touted the competency of said individuals repeatedly making the case that news media and others were simply dismissive of these very people and down right condescending… Now as for what he saw as analysis, it’s unclear if he was referring to the bet on the short squeeze or whether he was actually claiming there was fundamental analysis done on gamespots business justifying it’s price at over 400$ late Thursday evening… but many including the author of this article highly doubt any one is making that case with a straight face.
Are people as smart/competent as Chamath claims they are on these forums ?
Some clearly intelligent folks are on these forums doing sound analysis on trade strategies no doubt but the vast majority come across as simple FOMO(fear of missing out) investors looking to make a quick buck. With intelligible comments like “Hey quick question does anyone here like the stonk”- GTKFANL and “I LIKE BEER OK? AND I LIKE GME”- thekeezler or moreover comments such as “Even if I lose everything I invested and don’t make any tendies, i just want you bastards to know I love you. I’m so proud of what we’ve done. We’re making history here boys.”- anonymous-user1234 or “For a retard like me, is there any reason to not buy some GME tomorrow through my Schwab account? Has anything changed? I plan to buy and I plan to hold.”- Scotters23. It is hard for one to claim that the general conclusion an average reader here can reach is that of endowing the participants with great insight into what’s actually happening here. Fun and games ? maybe, sarcastic banter ? ok… But within thousands of threads containing thousands of comments such as the ones presented here one is hard pressed to find the true analyst white papers anywhere.
I was also able to join the discord servers and paid attention to the #main channel as well as the live voice channel… unfortunately, the server was banned by discord themselves for hate speech. I can attest to the fact that these channels were very reminiscent of the 4chan forums where people whether tongue and cheek. sarcastic and trolling or seriously used profanity, racial slurs and sexist commentary profusely. Again, I could not see where the fundamental strategic analysis for this movement was to be found.
To reiterate, based on my research although one could find some analysis initially supporting the short squeeze strategy in the beginning of the week it has degenerated into a frenzy of millions of FOMO investors rushing in to get the “make a quick buck” scoop with no real understanding of the situation at hand nor the extreme potential of financial pain they could incur.
Where do things stand now ?
As of the writing of this article, GME has rebounded from a crash at a mind boggling high of 513.12$ USD to 311.25$ at 9:20PM EST. RobinHood CEO and Interactive Broker CEO have both gone on CNBC to publicly explain why they each respectively made the decisions they made in stopping the purchases of some stocks such as GME, AMC, NOK and others stating that it was to protect their firms, the markets and their customers.
Many like Dave Portnoy founder of BarStoolSports cry fowl and even make incendiary statements such as :
“PRISON TIME. Dems and Republicans haven’t agreed on 1 issue till this. That’s how blatant, illegal, unfathomable today’s events are. It also shows how untouchable @RobinhoodApp @StevenACohen2C Citadel Point72 all think they are. Fines aren’t enough. Prison or bust”
and
“It’s very clear that @RobinhoodApp and Hedge Funds like Citadel are saying we’ll take our chances with class action lawsuits and white collar crimes and paying people off to stay out of prison rather than their firms going bankrupt #DDTG”
Claims many support without currently providing any hard evidence that there must have been collusion on the part of Citadel the financial service provider to brokerages like RobinHood(60% of their transaction are routed through Citadel) as well as hedge funds such as Melvin Capital to essentially bail the “Goliaths” out while once again “screwing” over the retail investor who finally found an edge.
As of the writing, there is a class action lawsuit going after RobinHood on behalf of it’s clients. We will see in time what the discovery process yields in evidence to support the accusations being made at the current time in mass by many public figures including politicians.
Is everyone involved on the buy side representative of the overarching supposed message of the initial action ?
It is clear, like in many revolts, or causes that the current group of people participating in this frenzy are not on message. There are many wealthy individuals that have greatly benefited from both the rising and falling in dizzying fashion expressed in extreme volatility in the stock, retail investors that simply opened an account in the last 24hours to be able to jump on what they believe is their ticket to riches, and the usual chaos junkies that simply want to “join in on the fun”. In other words, as a whole although there’s this sentiment being portrayed of David vs Goliath at this point the majority of participants couldn’t care less about that message and are simply in it for their potential of scoring a quick win.
Where is it going ?
On Friday 29th of January, RobinHood has promised to re-enable the ability of purchasing said stocks again, however, as most short positions have been covered one wonders what the ultimate goal for the retail investors promising to pile in will be ? In fact, what was the end goal from the get go ? Some claim they were ready to lose it all as a statement to the “suits” basically meaning they had no exit strategy from a purely market buy/sell standpoint but it’s unclear that that’s what all these retail investors, at least starting from mid-week, signed on for.
What’s the problem ? If retail investors keep buying GME for example AFTER shorts are already unwound or covered, it basically becomes a game of musical chairs amongst the retail investors themselves… Eventually the music WILL stop, and those that aren’t already sitting will LOSE BIG. We can take the tragic example of Alexander Kearns a 20 year old who committed suicide after incurring massive losses trading on RobinHood (CNN story here).
Comparing this trade at this point to TESLA is ridiculous to say the least. One is a company developing new technologies that will define the future, the other aka GameStop is an obsolete, archaic business that is not innovating are growing in any way and will not be around in the future. Please be careful when making such ludicrous comparisons.
UPDATE: Friday 29th 2021 10:08AM Shorts amount to 800 billion dollars in the current market, 20% of which are shorts exceeding the available float meaning only 40 billion in similar short positioning as #GME are still active in the market meaning the short squeeze hunt is moot at this point.
What has it changed ?
For one thing, we are all talking about shorts, who knew your grandmother who was an English literature teacher would ask you about short squeezes… I’m not sure the main public has been this interested in the stock market since the .com bubble and it’s a thousand times bigger this time around since the advent of social media and forums as well as no fee based trading platforms giving literally anyone with internet access the ability to trade.
Concretely, however, nothing has really changed yet. Perhaps hedge funds and “the street” will take the retail investor community more seriously but from a regulatory point of view we are still in the first inning.
UPDATE: As of Friday 29th 2021 9:00AM Citron has decided to STOP short side analysis after 20 years of publishing such work it will no longer do so and focus only on long research for their clients.
Are it’s initial tenants still true ?
This is debatable… The majority of the most vocal interlocutors are clearly on the side of the redditers. Stating repeatedly that wallstreet has always gamed the system to their advantage and taken no responsibility for their reckless behavior since the inception of the market system and that yet again they a blatantly in broad daylight been bailed out by their buddies while the small guy/gal has yet again been handed the short stick.
On the flip side, no one is addressing where the funds these firms use for their positions come from… Some of these are pensions, peoples life savings like school teachers etc… So when you’re sticking it to “the man” are you truly doing what you believe you’re doing ? I’m pretty confident in stating that the owners/founders/CEOs of these outfits will still be as wealthy as they were prior to all of this. The losses will impact the clients of those firms, not them. They might be out of a job but that’s hardly punishment for mismanagement of funds or gambling. So what does it achieve truly ? Furthermore, the question yet again arises. Should we bail them out BECAUSE they hold pensions and alike ? What happens when they start unraveling all their other trades to cover their short positions in the markets ? Is this not important to take into account ? Is there no responsibility on behalf of anyone to stop the type of move to maliciously with intent destroy these firms ? or is it all fair game ? Again no one, including this author, is claiming that there was, is and hasn’t been many many issues in the system but does that excuse all that has gone on simply in the spirit of revenge and comeuppance ?
What’s the role of regulators ?
This is the billion dollar question. Senator Warren, stated that the definition of market manipulation is not clearly defined and thus regulators often let things skate. Clearly there will be an investigation on their part in this and it will be scrutinized and all levels by everyone including the public, the politicians, the market makers, hedge funds, wallstreet and business community.
How much regulation do we want or need ?
This is yet another important question, on one hand we want to put guard rails to make sure there’s no abuses on the other we don’t want to choke the system. The delicate balance is hard to strike it seems as it has been elusive for quite some time now. Some say it’s simple but money corrupts… With literally billions of eyes on the topic now one can hope it will move in the right direction.
Does the fact that short selling guard rails were non existent excuse the behavior ?
Opinion here. I don’t believe one can argue simultaneously that the people have suffered enough yet tell them they can take such risks with their life savings. Not everyone is throwing caution to the wind of course but many are and many do NOT understand the consequences. Leveraging on margin many times over simply because your favorite CEO went on twitter and tweeted out a ticker or you followed a subreddit and decide this was your time to shine… is not a smart way to go about teaching people to be mindful of their money. Yes freedom is important, the right to make your own choices as well, but as we all know, we are not completely free to do as we like when we like however we like if that were the case we would not have laws, regulations or rules in place. The fact is, millions of people moving in a pack can greatly impact everyone's life positively and negatively… how we monitor the negatively is the question.
What is the responsibility of bullhorns like Elon Musk, Chamath Palihapitiya, Dave Portnoy etc… on inciting random followers on the internet to blindly go with the herd into what could be very costly for them and their families ?
It is somewhat interesting to see Billionaires and multi-millionaires like Marc Cuban, Elon Musk the richest man on earth, Dave Portnoy and Chamath Palihapitiya aka I just casually threw 120 thousand dollars in GME call options and made 400 thousand dollars in profits in a few hours that I will of course now donate to charity just too “learn”, all trying to represent the down-trodden masses… and don’t give us the “I was broke once and I came from poverty and misery and/or war” or “I’m an immigrant /my dad was an immigrant” sob stories, we all have them. I’m born in Lebanon, during the 80s war and as an Armenian my family escaped genocide in the first world war only to find themselves in yet another conflict they needed to escape from and start from scratch in North America all over again… NONE of this makes us anything alike, and none of this has any barring on the subject at hand even if you were born literally on the same date, in the same hospital and lived on the same street. You are ridiculously wealthy and have been so for at least a decade, so do NOT pretend you are fighting for the small guy while simultaneously taking advantage of the situation whether financially, politically, ideologically or otherwise. As stated by the wsb(wallstreetbets) channel post the people are not organized nor do they have a representative and it surely won’t be a wealthy individual who as profited via the status quo
What is governments role in all this ? Is there politics involved ?
One cannot ignore the political point scoring also coming in on both sides of the isle as well. AOC, democratic senator, has gotten very involved in the matter, also hosting or attempting to host a twitch conference with experts to talk about the matter as a whole. We have Ted Cruz talking about it many other politicians on both sides have gotten involved and sounded off in sound bites or tweets. Fox news and CNN are all over the story, seems something might finally unite the camps… one can always dream… Government MUST have a role in setting the guard rails and having them policed by a trustworthy institution. If the SEC cannot perform this function then it either needs to be reformed or disbanded and a new entity must take it’s place and be more efficient, clear, transparent and steadfast.
Do private companies have the right to do whatever they want as long as it’s in the initial signup contract ? after all many argued that over free speech for example, Facebook and Twitter to name but two, were within their right to ban, shadow ban, censor, de-platform anyone THEY deemed were contravening their policies and/or ideals. Are we to understand that this same logic does not apply to online brokerages like robinhood ? They claim after all that their actions were to safeguard the firm from not being able to cover the leverage needed at the clearance houses AND to protect their customers from blowing their accounts up… would that not be a valid reason for a private company to do what they did to insure their own cash solvency and survival ?
where’s crypto in all this ?
At this very moment Dogecoin seems to be another name that the “David’s” are piling into, why ? Other then simply because makes your guess as good as mine. Dogecoin is known as a joke coin… Why one would throw hard earned money into beats me, specially within this ecosystem where you at least have proven capable options like Bitcoin and Ethereum at your disposal. I digress.
Many argue that decentralization is one of the keys here to circumvent the issues laid out by the retail investor side, however this poses numerous regulatory questions as well as the multitude of hurdles still in place for cryptocurrencies and their underlying network to be leveraged in a way to bypass or correct the systemic issues that lie within the overall system.
In conclusion, if anything is clear to this author, it’s that the class warfare has now clearly spilled into the digital age and the first canon ball has been shot at the elites. Will this be a French revolution ? or a quashed rebellion ? The coming weeks will tell in which direction this sector of societies structure is headed. Compounded by lockdowns and Covid-19 now almost 12 months in and reeling from a contentious US election tensions are high. The old guard is in the peoples sights and one must hope for the smoothest, quickest and most advantages resolution to all parties all while insuring that justice, balance, transparency, truth prevail over all.
