January 31, 2021

Reddit Becomes the Biggest Hedge Fund in the World ๐Ÿ’ธ

Mesh Lakhani Headshot
Mesh Lakhani

Hey All,

Welcome to Talk Money Weekly - where I cut through the noise and curate the best money related topics from Twitter and the occasional podcast.

This week we released Episode 3 of Season 3. "A Dorm Room of One's Own". As online learning takes over, both students and parents are reconsidering the cost -- and necessity -- of traditional college. This is a must-listen.

Today's curation will be completely devoted to the Wall Street Bets/Gamestop fiasco. I wanted to wait till the end of the weekend to provide the most recent updates.

๐Ÿ“ˆ Markets & Business

It All Begins a Year Ago on a Reddit Forum

A year ago, a Redditor by the name of โ€œdeepfuckingvalueโ€ made a bullish case for Gamestop stock. He bought call options - which is the right to buy a stock at a specific price. After, other people started to notice the trade and thought it had legs. Why be bullish on a stock that had a failing business and a bunch of hedge funds that were against the company?

This started it all.

Gamestop's Business & the Short Sellers

Gamestop is a retail business that sells videogames and consoles. Now, while it has struggled, a lot of their stores were actually producing healthy cash flows. This is when deepfuckingvalue took notice, all while seeing a few large hedge funds were short the stock. As the stock started to move up, we saw a short squeeze and then a gamma squeeze which caused the stock to shoot up.

To learn more about short squeezes and gamma squeezes, read Sahil Bloom's post. He's very good at explaining it.

Gamestop Became the Most Traded Stock

Between Reddit, Twitter, Tik Tok and other social platforms, it seemed everyone wanted to get in on this. Some wanted to stick it to Wall Street, some wanted to make money, and some just followed blindly. Gamestop became the most traded stock mostly led by retail investors.

Wall Street and the hedge funds have a massive amount of capital. They can control the markets. This is the first time we've seen retail investors come together and show how powerful they are.

Chamath & Elon Musk Get Involved ย 

Adding fuel to the fire, investor Chamath Palihapitiya threw his own money in support of the retail movement. He donated all his profits to charity. Elon Musk also tweeted "Gamestonk" linking the Wall Street Bets Reddit forum.

Mark Cuban Shows His Support

Everyone wants to show their support for the "little guys" against Wall Street. Funds on Wall Street use high-frequency trading to make money. They use technology to make trades in milliseconds, and we've never been able to compete with them.

Robinhood, the trading app, makes their money by selling orders their customers make to high-frequency hedge funds. In particular, they sell orders to funds like Citadel. Citadel then executes those trades and pays Robinhood for them. That's how Robinhood offers free trading to its customers. But, as we know, nothing is ever really free.

Now, using platforms like Reddit and Tik Tok, information spreads so fast that literally millions of people can jump in on a trade. That is exactly what happened with Gamestop, and it caused havoc for funds that were short the stock - blowing them up.

How Does Gamestop Benefit From the Stock Rally?

Investor Karen Finerman makes an excellent point. Given the attention, Gamestop has received and where the stock price is, they need to issue new shares to raise money. I believe they have over $1billion in debt, and they can use the money to pay down debt and invest in the business.

Unclear whether this is happening. As of now, nothing has been announced.

Did Robinhood Do Something Ilegal?

Melvin, one of the funds shorting $GME, was bailed out by Citadel. Citadel basically owns Robinhood given that it pays Robinhood a lot of money to receive order flows from Robinhood customers.

Robinhood and all the other trading platforms halted trading of Gamestop and other names like AMC. Why? They claimed that they needed more cash on the balance sheet because of how much the stock was trading, and therefore, had to stop people from trading the stock. People were not allowed to buy the stock, but they were able to sell the stock.

This appeared to be market manipulation. Technically, it's not clear if anyone told Robinhood to shut down trading, but there are conspiracies going around. It appears that Wall Street doesn't like the fact that a bunch of retail investors are messing with their short position on Gamestop and other stocks. Retail traders were going after the hedge funds, and the hedge funds wanted to shut this down.

This created a TON of backlash.


Everyone Unites Against Robinhood.

So, here's where we are now. There's a class action complaint against Robinhood from its customers. They're saying that trading was rigged. Over 20 stocks were halted from trading for Robinhood customers. To be fair, other trading platforms did the same thing saying that the stock clearinghouses were requesting this.

AOC, Elizabeth Warren, Ted Cruz, and Trump Jr. have spoken out against Robinhood.

Barstool Sports' Dave Portnoy is on a mission to destroy Robinhood and the hedge funds involved. He is going on every news channel speaking out against them. And heโ€™s literally the last person you want trolling you. LOL.

A Robinhood employee also came out against the company.

Here's Chris Cuomo putting Robinhood CEO in the hot seat.

It's been a PR disaster. The company that was "democratizing investing" is now being seen as the enemy.

๐ŸŽ™ Podcasts

All In Podcast: Breaking Down Robinhood's GameStop Decision: Why Did It Happen and How Can it Be Prevented in the Future?

This episode was excellent. Listen to Chamath discuss what happened and what rules can be put in place to prevent this from happening again. The discussion gets heated.

The Compound Show with Josh Brown: Gamestop Short Squeeze

This is another great episode on the topic. Josh tells it like it is. Wall Street doesn't like losing. They constantly change the rules so that they will never lose. You'll also get a history lesson on one of the first short squeezes - the general store chain - Piggly Wiggly.

That's all for this week!

If you haven't already subscribed to my podcast, Talk Money, do so here. New episode next Wednesday!

Want to chat? Tweet me at @meshlakhani. If this email was forwarded to you by a friend, subscribe here for updates!

Past Email Newsletters