Deep breath in. Okay, here goes—
Day traders, occasional investors, and stock market newbies use this Reddit page called wallstreetbets. Much of its rhetoric and aesthetics are toxically masculine and ableist but tolerable. More than a year back, a few users picked Gamestop as an undervalued company for various reasons. One WSB (wallstreetbets) investor/day trader, DeepFuckingValue, invested $50,000 and went “long”, i.e. pledged not to sell for awhile.
Two other WSB users noticed that Gamestop is a big moneymaker for one particular hedge fund named Melvin Capital. Melvin made money off Gamestop by betting that its stock price would keep dropping, confident that COVID had nudged Gamestop’s business model into oblivion. Each quarterly Gamestop financial report brought more confirmation that it’s not suddenly turning a profit. Melvin made money by shorting Gamestop’s stock, i.e. borrowing shares at a certain price (for example: $5), selling them (for $5), then buying those shares back after the price drops (say to $4) then returning them to the lender. In this example, those short on GME (Gamestop’s NASDAQ symbol) would profit $1 per share they shorted.
Needless to say, a firm whose stock is heavily shorted doesn’t have great prospects on the open market. A heavily shorted firm is a firm with a massive stamp on its public face that says NO CONFIDENCE.
But some WSB users noticed that investors had borrowed over 100% of the available Gamestop stock, likely via temporary (i.e. short) owners re-lending their borrowed shares to other investors—essentially double-dipping into this fictional bottomless barrel of available GME stock. Without any central coordination, and over time, WSB users decided to take advantage of this situation by buying Gamestop stock, thus raising its price and forcing short sellers to have to buy and return their shares at higher prices (since they’re contractually obliged to do just that). This panicky buying of unexpectedly higher-priced shares would also drive up the price of GME shares, creating a price-raising feedback loop. This feedback loop and the disastrous losses it promises for short sellers is called a “short squeeze.” Short squeezes are such that those who’re short on the given stock will imminently lose a great deal of money, and those who’re long on that same stock—or who otherwise buy at the right time—can sell at its peak and make enormous amounts of cash.
This campaign to buy GME stock is legal, though vaguely so. It’s not a pump-and-dump strategy because there’s no central plan to raise the price to a certain point and then sell, and the information being used to justify purchasing GME stock isn’t false; this is why you’ll see “WE LIKE THE STOCK” [which is also a meme] and “the squeeze” plastered in WSB threads’ comments. More so this situation became an opportunity for savvy retail investors (a.k.a. individuals, most of whom are working class) to punish a hedge fund for hubristically shortselling a company’s stock at a ridiculous proportion (typical short interest percentages, i.e. percentages of a firm’s shares that are sold short against the total publicly available shares [i.e. “the float”], are anywhere between 2% and 15%. Gamestop’s short interest percentage before this squeeze? About 140%). And punishing this hedge fund would also make a lot of retail investors huge sums of cash. Win-win.
This disparity between professional (i.e. big boy) expectations and retail (i.e. little guy) market pressure was compounded immensely by the fact that many retail investors also owned call options, i.e. bets that the price of GME would rise past a certain point. Suffice it to say, plenty of pro derivatives traders underwrote those bets awhile back, believing then that no significant information would emerge to change the market’s glum-seeming outlook on GME. So market makers, i.e. option underwriters, are also slated to find themselves in a “gamma squeeze” since they have to hedge their positions by owning shares of their option contracts’ underlying stocks, i.e. the x of their f(x).
Cut to this week. Wall Street investors know what’s coming. Gamestop prices keep rising because more and more retail investors keep buying more and more available shares, thereby draining the pool of shares available for the short sellers to buy back then return. This raises the price of GME shares to incredible heights. Gamestop shares goes from about $40 to nearly $500. This morning’s prices were rising rapidly. Collectively, Wall Street folks shit their pants and decided to manipulate, manipulate, manipulate.
First, Robinhood, a popular brokerage app that lets people trade stocks and options, and the platform by which many (and maybe most) of WSB’s users invested in GME, stopped letting people buy GME shares.
Then they only let their users sell GME shares.
Then they cancelled and/or sold options contracts that their users held—without seeking any consent.
Next, the big dogs started manipulating. TD Ameritrade, a subsidiary of Charles Schwab, suspended users from buying GME shares (but of course allowed them to sell those shares so that underwater short sellers could buy them back at lower prices and then exit their positions at a much more manageable, i.e. survivable, loss). Then Schwab did the same thing. Then ETRADE did the same thing. Then… and then… and then…
Lots of rich finance guys got on TV and said the quiet parts loud, deriding retail investors as living off government handouts, claiming boisterously that the little guy is only doing this to fuck over the wealthy, and admitting to manipulating the market in order to “save” their asses.
The catchword for this market manipulation’s justification? “Volatility.” Read: “We’ve lost control of the ship we’re used to steering. SOS.”
But the plot thickens.
Remember Melvin Capital, the firm who was very, very short on GME? They took a big hit yesterday. Some estimate that they lost anywhere between five and fifteen billion (with a B) dollars—in one day. Primarily because a bunch of Reddit users decided to make them. Earlier in the week, two firms—Citadel and Point72—bought Melvin Capital in order to keep them solvent (and snag a hedge fund and its management at a steep discount).
Here’s where shit gets really wacky.
This is an excerpt from Citadel’s Wikipedia page: “In 2018 Bloomberg reported that 40% of Robinhood’s revenues were derived from selling customer orders to firms such as Citadel Securities and Two Sigma Securities.[58] Citadel Securities was fined $700,000 by FINRA in July 2020 for trading ahead of customer orders.[59] They delayed certain equity orders from clients to buy or sell shares while continuing to trade the same stocks in its own account, as part of its market-making activities, according to FINRA. Over a two-year period until September 2014, hundreds of thousands of large OTC orders were removed from its automated trading processes, rendering the orders “inactive” so that they had to be handled manually by human traders. Citadel Securities then “traded for its own account on the same side of the market at prices that would have satisfied the orders,” without immediately filling the inactive orders at the same or better prices as required by FINRA rules.[60] In September 2020, Robinhood was probed by the SEC into whether they properly informed clients that they sold stock orders to high-frequency trader and other Wall Street firms.”
That is: Robinhood lets its users make trades for free because Robinhood makes money selling info about those trades—before the trades have taken place—to other companies, including Citadel. Citadel pays quite well.
It doesn’t seem hard to connect the interests of Citadel, Robinhood, Melvin Capital, and the derivatives market at large, does it? Temporal coincidence (in the word’s physical sense)? Definitely. Collusion? Probably. We’ll see. Folks have already ginned up a civil lawsuit against Robinhood, accusing them of market manipulation (which runs afoul in the US of the Securities Exchange Act of 1934). Others targeting bigger brokerage firms and banks might follow. Some of the biggest fish like Blackrock likely made money for their clients on the spiked Gamestop prices; no good-ish deed goes unpunished.
But all this hasn’t seemed to deter the WSB crowd. Oddly enough, all this has also managed to unite ideologically-disparate politicians and public figures in a renewed, 2008-esque disgust for the big boys of Wall Street. This squeeze and its concomitant showdown have been covered by journalists and nerds and finance insiders and amateur researchers and writers and pundits and/or dipshits. Lots of spin. Hard facts, hard numbers, are harder to come by than you’d think. There have been many beautiful memes. The general rhetorical message I like is: When the poor play the rich’s game by their rules, the rich change the rules. If that doesn’t work, the rich just end the game.
In other words, it seems to me that “Citadel gets power by purchasing a firm for bargain prices while also protecting its ass” and “a few hedge funds lost a shitload of money on a bad bet” and “some individuals got rich betting against that bad bet” and “some individuals lost their shorts doing that, too” and “some bought shares to say ‘FUCK YOU!’ to big firms” and “some bought shares to try to dismantle ≥1 hedge fund(s)” and “PFOF is a scam” and “market manipulation from the top is as blatant right now as it’s ever been” and “naked shorts make no physical sense” and “stocks are detached nearly 100% from reality” and “politicians of wildly different ideologies agree that market manipulation is bullshit” and “perhaps this particular squeeze could’ve bottlenecked the entire market?” and “memes are good” are all living sentiments and notions, and if they’re not all true, they’re all at least plausible. This list isn’t exhaustive.
I’m yet to see an account that gives a proportionate weight to each aspect of this fascinating historical situation. So far we’re weighting and ignoring these aspects according to our standing prejudices and inclinations; no one person has yet published a rigorous account. I’d bet that account won’t emerge until after a few lawsuits have made their way through the courts.
Oh yeah: and that wallstreetbets guy who went long on Gamestop last year, DeepFuckingValue, saw his total investment of $754,000 bound to nearly $48,000,000.
I hope this all makes sense (insofar as any of this can make sense, when today’s sense is so hellish). I’m sure I’ve gotten details wrong here and there, and I’m sorry for that. We’ll see what happens.
Just when I thought the obvious contradictions and cruelties of American life couldn’t get any more naked…
