The GameStop Saga Exposed the True State of our “Free” Market
and why GameStop should buy Bitcoin
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Last week was a crazy week for the markets, to say the least. The retail bros were back to troll Wall Street. But this time, their victims were some of the biggest names on Wall Street. Hedge Funders like Ken Griffin, Steve Cohen, and Point72 (Steven Cohen’s fund) alumnus Gabe Plotkin.
Now wallstreetbets Redditors are claiming more victims and short squeezing more stocks. The retail traders are trading AMC, BlackBerry, Nokia, and Blackberry. More big hedge funds are getting hurt. MapleLane Capital has lost 33% thanks to its high amount of shorts. Daniel Sundheim’s hedge fund D1 Capital, which was heavily short AMC theaters lost 20%. Melvin Capital has seen a whopping 53% of losses. These are big losses to some of the biggest players on Wall Street. As the big Wall Street players got beat by the amateurs, big finance, and big tech colluded to go after the retail bros.
The Un-Robinhood
Robinhood was created by Valdimir Tenev and Baiju Bhatt. Both of these Silicon Valley bros were originally inspired by Occupy Wall Street and wanted to democratize the stock market and give the average person the chance to be part of the financial system. Robinhood growth then spiked during the pandemic thanks to fractional stock purchasing, stimulus money, and commission-free trading. Robinhood turned the stock market into a casino at your fingertips and kept everyone hooked on it like digital fentanyl. But Robinhood, who passionately said “let the people trade” and is named after the anti-hero from English folklore who stole from the rich, is actually the villain. First off, there is a reason why Robinhood is able to charge no commissions. When you trade a stock on Robinhood, it goes through a high-frequency trading firm (aka market makers) like Citadel (owned by our government tax dollar bailout loving friend Ken Griffin) and Virtu Financial. So let's say you buy Google stock (currently trading at 1827.36). But you actually do not buy Google at that price when you buy the stock through Robinhood. When you buy Google through Robinhood the trade goes through our high-frequency trading friends. Either Citadel and Virtu financial buys the stock and sells it back to you for 1827.40, thus profiting .04 cents (Michael Lewis explains how electronic trading works). Keep in mind that firms like Virtu and Citadel do millions of these trades a day, making these firms a lot of money. This is call market making. Robinhood, in return, gets paid a hefty sum of money from these market-making shops for being able to process your trade. In reality, Robinhood’s customers are not retail traders. Retail traders are the product. Retail traders are being “sold” to high-frequency trading shops like Citadel and Virtu. Citadel and Virtu are the real customers of Robinhood. In essence, our modern folklore hero Robinhood is actually stealing from the people of Sherwood and giving it to the Sheriff of Nottingham (thank you, Charles Payne).
So it is not surprising that Robinhood took the side of the hedge funds. Citadel, which has invested in Melvin Capital, is a customer of Robinhood. Daniel Sundheim’s D1 Capital lead major funding round for Robinhood, boosting the mobile trading platform’s valuation to $11.2 billion. As mentioned above, Robinhood serves the big boys on Wall Street and not the average joe. Under pressure from hedge funds, Robinhood halted trading for short squeeze stocks like GameStock. AMC, Nokia, and BlackBerry. If you are a Robinhood investor, you definitely got a message like this:
Some investors even had trouble buying non-short squeeze stocks. The goal here was obviously not to protect retail investors from “volatile markets.” Robinhood was making retail traders close out their positions so that hedge funds will not lose their money. It is also a bit of a coincidence that right after Robinhood took action against retail traders, the brokerage was able to raise $1 billion extra funds. Retail traders were rightfully livid, and #BoycottRobinhood trended all over social media. Many traders even took to the street to protest Wall Street and Robinhood, both near the NYSE and Robinhood’s HQ in Silicon Valley.
This is not the first time Robinhood has done the bidding to hedge funds. Robinhood was pressured to stop showing stock ownership data, which took down Robintrack. Many traders used Robintrack to front-run Wall Street. The most noticeable moment was when retail traders flocked to Kodak, making the stock value go up from $3 to $44. Robinhood also had “outages” during the massive sell-off of March, making it unable for many investors to buy stocks during the massive market sell-off. Robinhood also sold investor data to our good friends in Citadel (and other high-frequency trading shops). Here at Armchair Banker, we have discussed the unethical business practices of Robinhood. Account sign-ups for Robinhood’s Chinese rival WeBull increased by 1548%. It is very ironic again that Americans are leaving a Silicon Valley-based online brokerage platform only to join a brokerage platform based in China. I guess to front-run the sharks on Wall Street, you have to get help from the Chinese. But it was not just Robinhood that halted trading of these short squeeze stocks. TD Ameritrade, E-Trade, M1, and even WeBull halted trading of these stocks. I guess anyone who went against the lords of finance got the Parler treatment.
Finally, no story is complete without Big Tech. As more young traders and investors got frustrated with the trading app one-star reviews flooded the Apple App Store and Google Play Store. But both Apple and Google scrubbed many of these one-star reviews. Discord banned wallstreetbets from its platform.
The Market has been Rigged for a Long Time
One of my favorite things to do this week was to watch the financial media, financial elite, and politicians lose it thanks to Redditt traders. Many in financial media and politicians were quick to say the market was rigged and Redditors were committing fraud. Even some financial journalists and “comedian” Jimmy Kimmel blamed the rise of these short squeeze stocks on “Russian actors.”
But the market has been rigged and distorted for a long time. Here are a few examples:
- Late 1990s/early 2000s Dot-com bubble: Investment bank sell-side analysts pumped up worthless tech stocks in return for investment banking and, in particular, IPO fees. One analyst at Citigroup pumped up so much worthless tech stocks just to get a recommendation for an elite prep school for that analyst’s child from then Citigroup’s CEO Sandy Weil. I guess pumping worthless stocks is ok if Wall Street does it. The same people who yell GameStop’s stock price is not based on the company’s fundamentals are the same people who pumped up worthless tech stocks during the Dot-com bubble.
- Long Term Capital Management Collapse: A hedge fund started by noble prize-winning economists and creators of the Black-Scholes-Merton options pricing model Myron Scholes, Robert Merton, and hedge fund executive John Meriwether. By being on the wrong side of the Asian Financial crisis and the Ruble collapse in the late 1990s, the fund lost $4.6 billion and had to get bailed out from a consortium of investment banks.
- Amaranth Advisors, a former hedge fund based in Greenwich, Connecticut, lost $6 billion dollars thanks to bad bets on Natural Gas futures. Some of the investors in the fund who lost money include the San Diego Employees Retirement Association. Retirees paid the price for one trader’s love for gambling clients’ money with energy futures.
- Last but not least, hedge funds for years have been using activism tactics and spreading rumors to destroy to bring down businesses. Activist fund Elliott Management took down the outdoor retailer Cabela and destroyed a small town in Nebraska. Hedge funds and private equity firms have acquired retailers like Sears and Toys R Us only to bankrupt and strip these businesses to nothing while the owners of these firm walk away with millions of dollars thanks to their “investments”. Even Melvin Capital was shorting GameStop stock the firm did not have. This is called “naked short selling” (keep in mind that naked short selling is illegal). Hedge funds were short GameStop 140%.
I can go on and on. From LIBOR interest rate rigging, the 2008 financial crisis (where no one faced prison time) to High-Frequency Traders front running retail investors, markets for a long time have been rigged. Let’s also not forget that it was Wall Street that encouraged American manufacturing to offshore overseas, thus decimating the American middle class and creating the Donald Trump and Bernie Sanders phenomena during the 2016 and 2020 election cycles. Finally, for years thanks to QE, low-interest rates, and the Federal Reserve pumping trillions of dollars to capital markets, these actions have lead to the longest bull market in American history. Value investor Seth Klarman slammed the Fed for distorting the market and has said that price discovery has “simply vanished.” Basically, the market has been distorted and rigged for a long time. Wall Street has been making money on the backs of the American people. But financial “journalists,” financial elite, and politicians only are concerned about the stock market getting rigged is when the average joes beat Wall Street at their own game.
People are Angry at the System
If you read wallstreetbets’ Reddit threads, many of the traders are angry at the system. These are people who were affected by the 2008 financial crisis. Many consider the short-squeeze trade Occupy Wall Street 2.0. Protestors from the first Occupy Wall Street were mad at how Wall Street got bailed out while Main Street got sold out. Since then, thanks to Wall Street and monetary policy, the rich have gotten richer, the middle class has been further decimated, and the incomes of the bottom 40% of Americans have declined. The pandemic has exacerbated America’s worsening income inequality. While millions of people have lost their jobs, their employer-sponsored healthcare and many small businesses have closed down permanently, the billionaire class in America has only got richer. Also, how can we forget Senators selling out of their stock positions after the COVID-19 hearing on Capitol Hill? Both Republicans Kelly Loeffler, David Purdue, and Democrat Diane Feinstein sold their stock after this top-secret hearing on Capitol Hill. Instead of protesting on Zuccotti Park, young frustrated traders smelled blood and went directly after the biggest names on Wall Street. The firms felt the heat. Hedge funds are losing their shirt. The short-seller Andrew Left, who started this whole fiasco in the first place, said that his firm Citron Research has stopped producing short-selling research.
The Emergence of Unlikely Heroes and Strange Political Bedfellows
There have been a few heroes to come out from the GameStop saga. One of them is Barstool’s CEO and unofficial leader of the retail bros, David Portnoy. David Portnoy has slammed Robinhood’s CEO Vlad Tenev for not letting retail traders buy “short squeezed” stocks and manipulating the market. Another unlikely hero is Charles Payne from Fox Business and Shark Tank’s Kevin O’Leary, who have both cheered on the GameStop frenzy and called out Robinhood and other members of the financial elite for the way they have behaved during the rise of GameStop.
This wallstreetbets vs hedge funds drama has also created strange political bedfellows. Both Ted Cruz and Alexandria Ocasio-Cortez (AOC) agreed that Robinhood messed up. Commentators from both the right and left equally called out Robinhood, financial “journalists,” and hedge funds for market manipulation, market rigging, and going after retail traders.
Something More Sinister
Now it is obvious that the whole system is rigged. But last week exposed something more sinister. The reaction of Robinhood, the financial “press,” the exchanges, and powerful politicians and bureaucrats is really what exposed the true agenda of the financial and economic elite and who they represent. One of my favorite videos was when Joe Kernan from CNBC interviewed the CEO of NASDAQ Adena Friedman only to bash retail traders and complain about social media “misinformation.” My favorite gem from this interview was when Joe Kernan, who is more on the conservative side, said that he is all about having a light touch on regulations but not when it came to retail traders. In this same video, one trader comes on CNBC and claims that “foreign actors” are responsible for the rise of GameStop stock (this view was ridiculous to even Jim Cramer). CNBC allowed hedge funders like Leon Cooperman to come on TV to cry about retail traders who are living in their parent’s basements trading money they get from the government. Stephanie Ruhle from MSNBC, who is a former investment banker herself, threatened Reddit. Then came the former head of the SEC, who compared these Reddit traders to the people involved in the Capitol Hill intersection! From the media’s reaction, the response from current and former regulators, to the way Robinhood manipulated the market and attacked their own traders, it is now clear who the financial and economic establishment represents. They don’t represent you!!!
One Last Move for GameStop
While Reddit traders trolled Wall Street, GameStop became the biggest troll in corporate America. For a finishing move, GameStop should buy Bitcoin. Business Intelligence SaaS software company MicroStrategy has been buying a lot of Bitcoin and has made the company’s founder Michael Saylor a Bitcoin evangelist. The majority of mainstream financiers (bankers, hedge funders, and private equity tycoons), “journalists,” and policymakers hate Bitcoin so much that it would be awesome just to mess with the establishment one last time.
This move-in GameStop last week should also help Bitcoin go up. Many of these traders who profited from the “great short squeeze” will put their profits into Bitcoin.
Conclusion
Last week the world got to know how much the financial markets are rigged. We also learned how much our markets are “free.” Our markets are free as long as the richest of the rich benefit. But as soon as the average joe finds a way to play the market and make money on the backs of the elite, that is when regulators yell about rigged markets. Basically, our markets are free as long as our elites allow them to be. When hedge funders and banks lose money, they get bailed out while everyday people suffer losses. Even the majority of the Cares Act and second stimulus from Congress went to rich, creating the largest upward transfer of wealth in history. Also, don’t expect much from the new administration. The new Secretary of Treasury, Janet Yellen, got paid $810,000 to give a speech to our friends at Citadel. Sadly our system is socialism for the rich and laissez-faire capitalism for everyone else. The Reddit trading frenzy was regular people finally fighting back against their oppressors. This is only the beginning. I guess Gabe will have to sell his $44 million Miami beachfront home.
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