Welcome to Finance and Fury. In this episode, we’re going to cover the GameStop saga. It’s still ongoing at the time of recording this, so new information may be out by the time you listen.

  1. I wasn’t going to cover this topic – I saw this first pop up either Monday or Tuesday last week – looked like a funny story – retail traders sticking it to hedge funds – but has evolved over the last week to something much more – and has been making headlines everywhere –
  2. in this episode – want to give a quick recap about what is going on, between the initial rise of the GME shares, the market interference by Robinhood, why this went on and the greater market implications, looking at short selling and hedge funds in general – so lots to covers


To start with – what is the GME story –

  1. GameStop – GME – brick and mortar game retailer – owns EB games
    1. GME price history – Over the years brick and mortar retails have lagged behind – Steam, amazon, many online gaming services –
      1. Back in 2013 the price was around $50 USD – by the end of 2015 – trended down to $35, 2017 was in the $20s, then by the start of 2020, was around $4 – then with the lockdowns – many people thought this would be the final nail in the coffin – go the way of blockbuster –
      2. Many things have happened since them that are positive for the company – new billionaire investors/board members who have come aboard with expertise in e-commerce – which is where gamestop needs to head to survive – then new PS5 and Xbox came out – prices started to go up – but funds stared to double down on shorting positions –
  • So by the start of 2021 – there were around 71 million short positions taken – to put this into perspective – GME only has around 70 million shares – but around 20% of these shares are owned by insiders (CEOs, board members, etc.) – on top of this – managed funds and indexes own a large chunk as well – this takes the number of available for trade down to around maybe 30 – 40 million
  1. Short selling – if you think the price of a company is too high or is going to go down – or is already trending downwards – you profit off this through ‘shorting the share’
    1. You borrow the share off a broker or market maker – you then sell that share – taking the cash – you then wait – and if the price goes down – you buy the share back at a lower price, return that share from the lender and make a profit in the difference –
    2. As an example – Share A is trading at $2, I think it will go down – so I log into my brokerage account and apply for a shorting position – some fund which wants to hold this company for a while will then lend me this share, I sell it – then a few weeks later the price goes to $1 – I buy this share, return it to the fund and make a profit of $1
  • However – the net profit will technically be minus the borrowing costs – this is what can make this trade very risky – the fee to do this may normally be a few percentage points to the lower end of 1% – for some large companies is about 0.5% – so off this trade I will pay $0.1 so have made a $0.9 profit – still not bad
  1. But – Say you short a share – and the price goes up – well, why not just hold on for a long time and wait, hope and pray that the price comes back down at some point? Well – because you have to pay an ongoing fee for this – the fee is dependent on a number of factors and will change over time – but lets just say, that if the prices goes up – this fee gets larger
  1. This makes shorting closer to gambling in the short term that you are correct on your position –
  1. That is what shorting is in a nutshell – So as a quick recap – hedge funds were shorting GME – price started to go up – the hedge funds doubled down to the point there were around twice the number of shorted positions to available for purchase shares –
  2. People on Wallstreetbets realised this – companies like Melvin capital management was going to short on GME –
    1. Wallsteetbets – subreddit – has about 2 million members – but has a wider reach in the investor community
    2. People in these forums investors online on reddit decided to put a squeeze onto these firms –
    3. These investors banded together and started to buy these shares
      1. Market cap at around $4 per share is $280m – went to around $1.4bn at $20 per share – so if you get 2 million people are they each buy a few shares, say $200 worth each on a nil brokerage platform like Robinhood – then that is $400 million flowing into this share –
    4. If they then buy all the available shares – so 25-30m in total and hold onto these – pushing the price went up massively in a short space of time and limiting the supply of shares to buy back to exit the short positions – this triggered a short squeeze –
      1. Short squeeze is where people with a short position desperately try to buy the shares back to exit the position – they will still lose money but hope to cut their losses
      2. But when there aren’t enough shares to go around – the price goes up massively –
    5. This is what happened – price had a gradual increase – from Aug when the good news was coming out – price went from $4 to about $19 at the start of the year – then from the 20th of Jan – about a week and a half ago – started to sky rocket – hit $470 at the peak a week later on the 27th/28th of Jan –
    6. Over this time though – The process is borrowing the shares – hence the fees went up on the share – so if you find yourself in this position, you have to cover the costs in the differential – funds lost billions – ended up in
  3. This is where the story takes another turn – some of the trading platforms that investors were using to purchase GME, and a few of the other shorted positions restricted the trading of these shares on the 28th –
    1. Robinhood – restricted people from trading GameStop – well, not selling, only buying were restricted
    2. Not just Robinhood – E*Trade and WeBull, and a few other platforms restricted trades as well
      1. Not just on game stop – AMC, blackberry – and 10 other companies that were also heavily shorted
    3. They lifted this ban pretty quickly – On January 28 – same day as the banning – a class-action lawsuit against Robinhood for alleged market manipulation was filed in the Southern District of New York.
      1. The lawsuit alleges that the app “purposefully, willfully, and knowingly removing the stock ‘GME’ from its trading platform in the midst of an unprecedented stock rise […] deprived retail investors of the ability to invest in the open-market and manipulating the open-market.” Later that day, the company announced that it would reallow limited buys of the stocks on January 29
    4. However – limited number of purchases available – Limited it where if you already owned shares in GME you couldn’t buy any more, but if you were a new purchaser – limited to 5 shares – this then got updated to 2 shares –
      1. So you could own 2 shares in total as a new purchaser – but then this got updated again – Robinhood’s list has grown, with 50 stocks now considered volatile and thus with limits. Most of the stocks are now limited to holdings of one single share – GME and AMC included
    5. Who is Robinhood and why would they do this?
      1. Robinhood is a brokerage platform – they don’t execute the trades for buying and selling – Robinhood is meant to be for the everyday retail trader – the same people who were doing the buying of GME – so making this decision could sink their clientele – and they have received some very bad press –
    6. But there is more to the story – First – they don’t charge any commissions on this – market themselves as the anti-wall street – not charging commissions – so if you don’t pay them, are you really the customer?
      1. Robinhood – technically works for larger brokerage firms and market makers – Robinhood doesn’t actually execute the trades – they take it to a market maker – another large brokerage firm – who then in turn are the ones executing the trades –
        1. this practice can be called front running – where the market makers can get into a share and then sell it back to you for a slightly higher price if you are looking to buy
        2. Robinhood gets paid for this – as they are essentially selling your data to hedge funds – then wall street can use this data to trade – if lots of buys are coming in, they know the price is going up, put positions on – plug into algorithm – the price differences will be so small that it isn’t that noticeable – but if a company can make $0.1 per share and sell millions in a day, that is a decent profit for almost nothing
  • Going back to September 2020 – Robinhood was under SEC investigation for failing to fully disclose selling clients’ orders to high-speed trading firms – Robinhood paid $65 million to settle the SEC investigation on December 2020
  1. Think of FB – you aren’t the customer if it is a free product – you technically are the product
  1. Why would Robinhood restrict the trades on so many companies? We don’t know for sure – but following the links
    1. Likely some major pressure from wall street – who robinhood needs to work with and is who pays it – remember the retail trader pays nothing in commissions– market makers (the ones losing from short trade positions) are the ones who pays Robinhood – Their largest hedge fund that purchases buy order flows from robinhood is Citadel group – which is a hedge fund that buys the order flows from Robinhood – makes up around 60% of their purchases – so either pressure was placed on them, or these major hedge funds refused to take any buy order flows from the trades at robinhood –
    2. However – citadel is an investor in Melvin capital – which is the hedge fund losing the most money – at least publicly – on the short positions – was one of the two first that provided $2.75 billion USD after Melvin’s loss on the short squeeze position – the other is point72
  • This leads to some speculation that this is the reason as to why robinhood ceased trade – both Melvin and Robinhood have denied these claims – so who knows –
  1. Other explanation – is the leveraged nature of trades possible on Robinhood’s platform – as an investor – you can borrow funds to invest – RH have LOCs from large investment banks – like JP Morgan –
  2. Robinhood faced backlash in June 2020 after a 20 year old student committed suicide after seeing a negative cash balance of U.S. $730,000 in his Robinhood margin trading account – you can also trade options on leverage – this has been restricted heavily from the early days
    1. So the other explanation is that due to GME prices going up massively –Robinhood could have been trying to protect people – or themselves from lots of leveraged losses – if the price of GME goes back from around $325 to $20 – which would be a 94% loss

What are the implications of this

  1. The banning of trades – what happened to the price? what happens? Prices drop
    1. They resumed limited buys a day or two later – but the price dipped – either profit taking or the intended outcome – then went back up a bit – went from the peak at the market open on the 28th of $470 to $197 by market close – the next day when limited trades were available price went up to $380 – but is back to $325 as of the Friday close –
  2. Either way – this has really shown a lot of the public that Wallstreet hates outsiders –
    1. It is okay for them to affect market prices, gambling and lose funds, then get bailed out – but if the public does it and makes them look stupid – then look out – they have massive companies, billions of funds and government officials to help –
    2. The media for the most part is spinning this as some autists online are manipulating the market – destroying market integrity – hence the need for additional regulations to help protect unwearying investors for stumbling into these shares of GME at $325 –

Shorting shares and market manipulations – does it have a point in the markets? it isn’t unheard of for some investors to spread some doom and gloom information on a share they have a short position in –

  1. What is the point of short selling – profiting from a market decline – or a decline in the price of a share
    1. Beyond this – does it have a point – in theory – to create an efficient market – but that is where standard selling come into it – demand and supply of shares through buying and selling –
    2. Shorting shares is a method of profit maximisation –
  2. Has been banned in the past – post GFC – speculated to have increased the downturn –
    1. Self fulfilling prophecies of creating additional downside
  3. It is easier to make people afraid than hopeful about a company – this is where Hedge funds – seem to market manipulate in their own ways –
  4. Example – in march of 2020 – markets were going into panic mode – Bill Ackman – hedge fund billionaire went on CNBC
    1. ‘our economy may be done, dead and not coming back’ – “Hell is coming – America will end as we know it” – this was on March 18th
    2. Predicted that many companies were going to $0 – Hilton hotels as well as the majority of other hotel companies
    3. Got out of his short positions a few weeks later from spreading this message and then bought into the companies he was saying were going to $0 using the profits from his short positions – So why then did you buy it a few weeks later if he actually believed what he was saying?
  5. What is different – hedge funds have a lot of power – over the media, over politicians and regulators


Regulators won’t fight against it if it is done from the financial institutions – but may against retail traders

  1. Head of Treasury – Janet Yellen – was head of Fed for years – used to market manipulation from working at the biggest manipulator in history – the Fed
  2. She received $800k from Citadel group in speaking fees in 2019 and 2020 – plus many other fees over the years
  3. The point is, these speaking fees probably aren’t due to her being a talented public speaker – but it may be for some inside information
  4. In 1988 Executive Order 12631 established the President’s Working Group on Financial Markets. The Working Group is chaired by the Secretary of the Treasury and includes the Chairman of the SEC, the Chairman of the Federal Reserve and the Chairman of the Commodity Futures Trading Commission. The goal of the Working Group is to enhance the integrity, efficiency, orderliness, and competitiveness of the financial markets while maintaining investor confidence
  5. Based around their own charter – the banning of the trades in a company should be something that the SEC should look into – reduces the integrity and efficiency and competitiveness of a market – stacks everything on one side
    1. But when it comes to this – we will likely hear crickets –
    2. If anything – over the years this practice of restricting trades may become more prevalent – especially if more brokerage accounts adopt the robinhood method
  6. Still an ongoing issue – but time will tell how this plays out – but there may be an ongoing issue moving forward –
  7. This movement of shorting the markets – silver may be the next target of a short squeeze – may cover this in the next episode – market integrity

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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