The Reddit platform staged the big show in the city and the play may / may shock Wall Street – What happened this week with GameStop (GME), Reddit and Robinhood was shocking, unprecedented and unforeseen
The recent crazy fluctuations in several dozen stocks, led by GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC), are making headlines around the world, as not every day you see assets worth hundreds of percent, which “celebrations” of this kind allow for media sensations. A bit of variety and something that raises the ratings that are dropping. After all it is a show that contains every interesting element, suspense, greed, jealousy, dreams and in fact all nine sins in man’s way to meet the devil in hell as the Italian poet Dante Alighieri described in the “Divine Comedy” in the early 14th century, all inclusive. Everything that made the movies “The Wolf of Wall Street,” “Wall Street,” “The Big Short” and “Other People’s Money” “a big hit at the box office is happening in real time on Wall Street.
The headlines in the media, which rushed to the show with eagerness and ignorance, speak of “Class War,” “Main Street War on Wall Street,” and “the blow taken by the Hedgehog Barons.” They even searched and found the original Wall Street wolf, Jordan Belfort (who described himself as the “greatest Jewish man” in an interview with jewishjournal.com and recommended reading) who told the Fox network that he thought it was a great opportunity to “make order in a growing mess.” What happened here is shocking, unprecedented and requires many people to be sentenced to long prison terms and large fines. ”
But the plot unfolding to the world on Wall Street signals far beyond what is seen in the media, far beyond the replica profits and losses of the participants and far beyond the insane values the stocks display. The plot, it seems (also in light of the rise of the new administration in Washington and especially its “social” sector), points to a number of things, very significant about U.S. capital market activity, that may finally change especially in the regulatory field but not only. It should be understood that what happens in GME, AMC, CVM, NOK and others, unlike what we have seen in films in the past, can, if not properly managed, develop into an economic and financial disaster, macro and micro far beyond the stock market. “Now,” said leading economic commentator Dobes, “the opportunity has been created to make the stock market a much better and more effective instrument than it is and even change the negative image and conditions,” he added with a smile.
What happened in GME as a representative example? It is important to know first That the event is not new. There have always been investors looking for stocks that they think are trading far beyond their real value. Such investors have entered short positions (sell shares that they do not hope the stock will fall and they will buy back) after making the demands (lenders, from the shareholders, through the broker, sell these shares, sell and return the shares back to their owners. There is a topology filled and everything is kosher). These investors, historically, are not popular, to say the least, with traditional investors but this activity is not fundamentally negative because it is moderate. There have always been investors who fought the shortstops and since not all investors belong to the righteous, here too there have always been exceptions including activities in violation of laws and regulations that if and when they were discovered and proven the formidable IAA was “corrective” and the same films clearly showed.
The difference between the past and the present is that since 2008 and the advent of smart telephony, the technology and information revolutions have completely changed the playground. Both in the field of supply and in the field of consumption. On the one hand, sophisticated trading platforms have been created that are growing with technologies such as cloud, IoT, AI, etc. and allow the investor direct access to the trading arena and free access to all information sources and on the other hand, hundreds of millions of new investors from all over the world. Per game “in entry and execution costs significantly cheaper than in the past (the main and largest source of income of the brokerage industry in the twentieth century, commissions as an example have been erased, literally).
Young entrepreneurs and businessmen around the world, who grew up in the technology revolution, who understand software, etc., quickly realized that a door was opened, for every entrepreneur who manages to give millions of investors and institutional bodies and the entire system some relative advantage. , Which penetrated into it, seriously, before 2008, was almost impossible.
To all this matter it is important to add four more important developments that have appeared in the last decade, since 2008-9 in fact and following the merging of the technology and information revolution into the mainstream economy. The first development was created as a result of the 2008 crisis and continues to this day, liquidity. The second development (which actually began at the end of the last century and intensified in the last decade) was economic growth without inflation and low interest rates and the third development was the progress, faster than expected, of the technology and information revolutions, which completely changed consumption habits and streamlined the economy. These developments have also completely changed the rules of the game on Wall Street.
This happened because smart machines and platforms quickly entered the field and created a situation where technology is advancing faster than traditional investors are able to understand and adapt to progress. This gap in understanding, no less than the drop in costs, has led to a massive influx of new investors who are less understanding of asset valuations but know how to leverage trading technologies. To all this was added the fourth development, the many “dreams” created by technological progress (which the Corona plague “helped” to flood).
We must, at this point and before returning to the example of GME, point out that all of the above developments, which made it difficult for investors to assess their capabilities, led to a massive shift of investors to management, through funds, baskets and professional management and massive creation of DJ funds. Allow management bodies to grow to huge proportions.
GameStop was founded in Dallas, Texas in 1984. The company was the world’s largest retailer of video games, “the heiress of Blockbuster” was called at the time. Veteran marketing genius Leonard Reggio of Brooklyn, former major shareholder and later chairman of book giant Barnes & Noble organized the sale of the chain, in 2019, to Paul Singer’s Elliott Management fund, one of the leading hedge funds. $ 8 a share and in 2007 reached a peak of about $ 70 when it fell to $ 15 in the summer of 2008. But the company flourished after the crisis and the stock returned to 60 in 2014. From 2014, the company begins to lose market share in both online and offline trading. For normal competition and as a result the stock starts to decline again and since then it has been trading between $ 2.5 and $ 4. In June 2018 they tried to sell the company to the private equity fund Sycamore Partners but the big correction in the market caused the fund to retreat and we mentioned the story in one article then.
In the summer of 2019, the well-known shortlist (about whom the film “The Big Short”) Michael Berry announced to the PA his hedge fund, Scion bought over 3% of the company’s shares. In an interview with Barons, Berry said he invested long-term because of the potential and price. During the epidemic, in 2020, the company made great efforts to carry out a failed reorganization.
In January 2021 the stock suddenly rose 24 times in two weeks, from $ 20 at 12.1 to 483 at 28.1 and the turmoil began when a long line of stocks started raging due to what is known as Short Squeeze.
Since we have gone through and even participated in quite a few such moves during our years on Wall Street, we will note that such a “lack of sales pressure” is not done overnight, but is the result of planning a long-term activity that includes experience and wonder, lots of deception and information use.
But between what happened at GME and its “friends” to the traditional Squeeze on Wall Street is already a different story. This is a story that is made possible because of technological innovation and here come into the picture 4 “players”, Robinhood, Reddit, social platforms (tic tac especially in this case) and hedge funds. Who and what are these bodies? Let’s start from the end. Hedge funds They are funds that receive money for discreet management from various sources and that trade in liquid assets. The funds, which are managed by experts, use complex trading techniques, risk management, special structures of investment portfolio and use of leverage, derivatives, short sales, various means of protection and utilization of knowledge, all in order to achieve better performance. Hedge funds are not Under supervision.
The social platforms, Reddit, Robinhood and others like them, are the body that connects the investment groups. Reddit is an online bulletin board social media site where registered users can share content, such as texts or links on every possible and unlimited topic with higher-ranking posts appearing at the top, in a rotating view that leaves room for new posts that have not yet gained significant advertising. The content is organized according to the various areas of interest, called subreddits when the stock market investment area is most popular and is called WSB short for Wall Street Bets which at the end of December 2020 had 6 million subscriptions and the number is growing rapidly. These friends have an interesting slogan, “Like 4chan found a Bloomberg terminal illness” (you can understand why if you read the very interesting and terribly “American” article)
What is Robinhood? For the mass trading form, there through https://robintrack.net/ you can get all the information and trade in any stock you want. Most Wall Street Bets subscriptions are also subscribed to Robinhood.
The Reddit platform tracks, among other things, companies in special situations and especially companies of the GME type And the rest we mentioned, that their balance sheet situation is dilapidated and the short position on them is large (they also identify who the shortists are) so in the case of Short squeeze the stock will rise by hundreds and thousands of percent and this was the situation at GME where the short position reached 139% of the company. , Or the figure is incorrect and includes additional devices such as pots). The Wall Street Bets marked the stock and began to buy and aggressively which put the hedge funds and brokers from whom the shares were borrowed into panic. The investment houses that provided the shares for short, immediately put out a demand to close the shorts and the result, a 24-fold increase in two weeks and the bunch at Wall Street Bets happy and rejoicing. But not just because of the “blow” they did.
It turns out that on Reddit they discovered that beating “The Hedgehog Brunei” is a wet dream and not just on Wall Street, even the famous Democratic congresswoman Alexandria Oxio Cortez from New York sent a greeting to WSB investors, in her own way. Reddit actually issued a call for the six million subscriptions (a call that no doubt “resonated” on other networks as well) regarding joining GME buyers. This is the reason for the media interpretation as if it were a class war.
Risks and opportunities in developments: The big risk is associated with shocks that could encompass wider parts of the market and cause an earthquake that would lead to a major crisis that would also affect Main Street. Another risk is that even if the crisis itself is not caused, the process itself turns the stock exchange into a real casino and transfers control of what is happening there from supervised investors to “gamblers” in fact. On the other hand, if this activity finally awakens the House of Representatives that will work to strengthen regulation in the US (and this is only possible in a situation like the current one where Democrats control all areas of administration). The House of Representatives announced this week that it will be scrutinized. By an expert committee and without the politicians “and it’s a bit hard to do about an economic sector as powerful as the American yen market. What does that mean for the” small investor “? If until now you have difficulty valuing companies then it will only get harder so you should concentrate on funds and baskets This is what we have been saying for a decade.