Rigged
After a tumultuous 2020, you would think it would be hard to be surprised by anything anymore. We truly are living in strange times, historic times at that, and this last week of January 2021 has been no different.
In case you haven't heard, a bit of a battle has been raging between two unlikely foes: retail investors that became organized on a Reddit forum called Wall Street Bets, and a couple of Wall Street hedge funds.
To make a very long story short, these hedge funds "shorted" Gamestop's stock, meaning they were betting that the stock price was going to fall. It's important to understand how shorting a stock actually works in practice though. When you short a stock, you borrow the shares from a lender, then sell them into the market with the hope that you will be able to buy it back at a lower price later, return it to the lender, and you get to keep the spread.
Obviously this can be very profitable, but it's interesting to note that your upside on a short is actually limited because the price can't drop any further than zero. So what happens when the stock goes in the other direction? Well, if you short a stock for $100, and it goes to $300, in order to return those shares to the lender you will have to buy the shares back at $300 and it will cost you another $200 per share to do so. So technically, on a short your upside is limited, but you're taking on unlimited risk.
The funds that execute these trades go to great lengths to ensure that their short bets pay off. They'll trigger news stories to get actual shareholders themselves to panic sell, and just the act of setting up a short position on a stock can cause it to move downward. In a nutshell, these funds are capable of systematically destroying a stock's price because it is in their interest to do so.
Whether out of greed or just stupidity, in the case of Gamestop, the hedge funds shorted more shares of the stock than actually existed. It's not clear why that's even allowed, but it happens regularly. The difference was that this time, Reddit noticed and it began to gain traction as more than just a way to make money. It was a way to stick it to greedy Wall Street suits that gave us 2008 and got bailed out by taxpayers.
Normally investors are at a disadvantage when it comes to most things on Wall Street because they don't have access to the kinds of information that the professionals have, and probably most importantly, they don't have the ability to organize and influence stock prices with sheer volume of trades like the big boys do. Now you might read that and think, "Wait, that doesn't even sound like it should be allowed." Well, that's exactly what a growing army of retail investors are thinking as well. And that's where Wall Street Bets, the Reddit forum, leveled the playing field a bit.
January 28 was a whirlwind of a day as right after market open, most platforms restricted trading of Gamestop, Blackberry, AMC, and others that had become lumped in with the Reddit crowd. They didn't restrict all trading, they made it so that retail investors using apps like Robinhood were not allowed to buy any more shares, they were only allowed to sell. Naturally, the price began to plummet which allowed the shorts to cover their positions at a more favorable price. Why would Robinhood do that to their users?
When you look under the hood, Robinhood has an arrangement with Citadel, a large Wall Street firm with a few different businesses. One of those businesses is a market maker - they essentially handle the trades that Robinhood sends them. And it's not just Robinhood - they handle close to half of all the trades that happen every day. Citadel also has a hedge fund arm, one that was believed to have some short exposure to Gamestop. So what did Citadel do? They restricted buy orders for retail investors all day which allowed them and their buddies to get out of the trades they made. The owner of the New York Mets, Steve Cohen, used his own hedge fund Point72 to help bail out some of the overexposed funds as well. He even tweeted about it, taunting everyone about how difficult trading can be after he and his friends changed the rules.
I personally got in on some of the action today and have no idea how it's going to turn out. I like to think that for once, normal people come out on top and send a message to Wall Street that they're not invincible and they can't do whatever they want. But I'm also not so naive to think that anything has changed from last time.
It's always baffling to me that people barely blink about putting their retirement savings into the stock market without a clue about how any of it works. I guess that's what happens when governments and Wall Street put their heads together to brainwash entire generations of people to save their money and hand it over to them to put into an account they can't touch for 40 years.
The events of the last week have only strengthened my resolve in owning hard assets like real estate. I've never heard of any "market maker" coming in and telling someone they can't buy or sell a piece of real estate. You buy it, you own it, you control it. Nobody can short my apartment building in hopes that it tanks. At the very least, I like to think that these events will at least bring some things out into the light about the stock market, and how it is in every sense of the word, rigged.
