I was going to post this tomorrow in keeping with my MWF publishing schedule, but this story is moving so fast that it’s going to be old news by tomorrow. Heck it’s probably going to be old news the minute after I hit publish today.

Oh boy, where to begin…

I was initially going to write something about how it was about time that retail investors, who make up an obscenely small amount of actual investors were finally getting their revenge on the (mostly) faceless hedge fund billionaires that live for no other reason than to make money off “investing” and driving our “economy” and all that.

As one friend said: “If it I lose it all, at least I was part of the French Revolution of Finance.”

“Do you hear the people sing? Singing a song of angry men?”

But then news this morning potentially made that all moot, and in what seems to be a massive conspiracy, Robinhood and their ilk are seemingly preventing their own customers from taking on the big boys, if for no other reason than to continue to have relationships with those same big boys.

But we’ll come back to that. First, we have to go back to the beginning.

GameStop (NYSE: GME) traces it’s beginning to Dallas, Texas in 1984, when two friends from Harvard opened a store called Babbage’s. The store initially sold Atari 2600 games, and expanded into Nintendo games in 1987, and by 1991, video games accounted for nearly two-thirds of their sales. Babbage’s became something called NeoStar Retail Group, then Babbage’s Etc., then was purchased by Barnes and Noble Booksellers in 1999. In 2001, the bookstore spun it off as GameStop, and ever since they have had a niche in the video game industry selling new and used games and systems ever since.

Like most “brick and mortar” retailers, GameStop began to decline when physical game media was no longer required to play your favorite game, and in 2016, the company began it’s slow decline. This was exacerbated by the COVID-19 pandemic, as GameStop was forced to close it’s 3,500 stores for much of 2020, which had a drastic impact on earnings and all the other things that investors tend to care about. This set about the perfect storm that erupted a few weeks ago.

Back in September 2020, Ryan Cohen, who made his money selling Chewy to PetSmart for over $3 billion, announced that he had made a significant investment in GameStop and was hoping to help them pivot more to online retail to save the company. His involvement led many investors – both retail and institutional – to believe that the company was undervalued after it had taken a beating due to COVID, and money began to flow into the stock to keep it viable.

On the other side of the equation, numerous prominent Wall Street hedge funds (whose names ultimately don’t matter because who cares about billionaires losing money) announced that they though GameStop was toast and opened short positions in the stock, either through the purchase of actual short positions or the purchase of “put” options. They were openly indicating that the company was going to fail and hoping that the stock price would go down so they could make money on a company hurt directly by a world-spanning pandemic. A total of 140% of available GameStop “float” was shorted, meaning that numerous shares had been “shorted” multiple times.

This made some folks pretty mad.

On the subreddit r/wallstreetbets, numerous users made this attack on the stock a rallying cry, especially among the people who believed in the vision of Ryan Cohen (Chewy was a favorite stock of this crowd before he sold to PetSmart) and wanted to follow him to success. One user in particular “yolo’d” $53k into GameStop shares and options back in the fall, a position that is now worth over $40 million!

Along with other retail investors at r/wsb, the stock price continued to climb, culminating in the action this week. As the price climbed, the shorts had to either cover their shorts to mitigate the loss or put up more collateral in the event of a larger loss. This caused a “short squeeze” of the stock, pushing to share price even higher, which caused the loss at the hedge funds to spiral out of control. For every $12 increase in the price of the stock, the hedge funds were losing $1 billion in value at one point. Though most of the hedge funds have announced they closed their positions, the stock is still heavily shorted, with over 120% of the outstanding shares shorted in one way or another.

What does this all mean to the average American? Not a whole lot. A bare majority of households (52%) of this country own individual stocks, with most people’s exposure to the “market” being relegated to the mutual funds in their 401(k)s or IRAs… if they are lucky enough to have those accounts. And the current stocks involved – beyond GameStop, other companies like Bed, Bath, and Beyond (NASDAQ: BBBY), BlackBerry (NYSE: BB), AMC Entertainment (NTSE: AMC), among others – represent a very small portion of the overall market, and even if all the stocks went to zero by the end of the week (not likely), the overall market would not collapse.

But the whole situation points to a flaw in the “market,” and helps to reinforce that the purpose of the market is not for “regular” people to invest, but instead to allow high-powered hedge funds and other institutional investors to continue to make even more money on the back of retail investors. The hedge funds believe they are the smartest simply because they have the most money, and the minute that they are challenged and start to lose money, they turn the screws to keep the status quo, and in turn, hurt the people that were causing them damage.

Does anything change because of this? Potentially, though I’m willing to wager that it happens on the side of Wall Street and not the individual investors affected. The big institutions have already all but shut down the retail investors’ ability to trade the stocks doing the most damage, only allowing current holders to sell their positions – or even forcing those positions closed for “risk” reasons:

Robinhood, a company started precisely, like their name implies, to help small investors take money from large investors, has used Citadel and other hedge funds to process all their trades, and when those funds threaten to shut them out from every stock and not just GameStop and their ilk, apparently they listen. That’s why everyone has been blocked from buying more shares of GameStop through their platform, and other retail investor apps have followed suit.

Why does it matter that they can’t buy more shares? Well, in order for the price to stay elevated, people need to be buying shares. If nobody can buy shares, the share prices starts to drift down as people exit trades, and if more people are selling than buying, the price will start to go down. The fact that the price is moving at all today is evidence that not all trading has been suspended; it simply means that some investors are currently being prioritized over others, and in the case of Citadel and other shorts, their positions are improving as the share price tumbles.

People that bought into the stock when it was $20 a share are doing fine; their investment, on paper, is still worth around 10x as much. It appears the stock is going to close around $200 a share, though I expect a lot of action after hours. How long this goes on is hard to predict, but with Friday looming tomorrow, and with it a lot of options contracts potentially executing to buy more shares, tomorrow could be wild. But if the retail investors on Robinhood (among others) are continued to be locked out, it could get messy. There’s already been one lawsuit filed against Robinhood for market manipulation. I expect many more over the next few days, weeks, and months.

At the end of last year, I traded a bit on Robinhood, learning to trade some options strategies that made me a decent, albeit limited, return. You can see all those trades catalogued here. I pulled out the bulk of my money (I have $4.55 left in my account at the moment) in December to help cover Christmas and some other costs, but was planning on returning to RH shortly. While I still plan on having some fun in options trading, if only to have something to talk with friends about during a pandemic, it won’t be on their platform. They’ve burned whatever goodwill they had through this fiasco.

The stock market has long stopped being the place for companies to get capital to do things. After an IPO, a company no longer actually makes any money off their stock being traded unless they do a secondary offering. In a perfect world, this whole situation would result in a decoupling of the “market” from any semblance of being a measure of our economy, regardless of what the previous president might have thought.

A Biden administration seems unlikely to return to heavy Wall Street regulation, though I’m willing to be surprised. Maybe this tweet from Ryan Cooper sums it up best:

“There are better ways to beat the rich than pump-and-dump schemes.”

While true, if the rich folks get to continue playing by different rules than the rest of us, maybe the only way to get them to take notice of their own shenanigans is to beat them at their own game.

Until next time…

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