of GME urging them to buy back their stock. The letter becomes public. Burry reveals that this is not the first time he has written and confirms that he has a 3% stake in the company. Hang on, this man is hardly representative of the individual investor? The student playing with the college grant or Joe Soap “investing” his redundancy money or stimulus check? Step forward Roaring Kitty. Roaring Kitty on YouTube and Twitter but “DFV” on the subReddit website r/wallstreetbets (WSB) forum. Kitty’s first post appeared in early September and revealed a $50k position in call options in GME that he had held well before Burry’s letter. The posts from Kitty kept coming on a monthly basis under the heading GME YOLO UPDATE. (you only live once I believe). In Feb 2020 he is down on his investment, but in April the stock goes from a low of $2.57 to almost $6. He has a healthy profit. He does not sell, stating that this is merely the start of “the big short squeeze”. In November 2020 another big fish, Ryan Cohen former CEO of Chewy the company he sold to PetSmart in 2017, issues a public letter (apparently his private ones were ignored) urging the company to basically become the Amazon of the video game industry. He reveals a near 10% stake. At around the same time it is thought that the “GME Gang” nickname was born on WSB (and yes, you can buy T-shirts). We have to bear in mind the amount of exposure these posts on WSB are getting. At the height of the frenzy the WSB forum added 2 million new subscribers in 36 hours!! The stock was trading at around $18 at the end of 2020. Kitty’s posts were now daily and on Jan 13th the stock took off. At one stage Kitty’s $50k was worth $22mln, absolute rocket fuel for all the WSB subscribers and would be investors. The stock hits an intraday high of $483 on Jan 28 two days after Melvin Capital reveal that they have closed their short position. The stock is worth $26bln and therefore eligible for entry into the S&P. All perfectly rational I think you will agree.
What happens next has to be part of the discussion on the consequences of this episode. Enter Robinhood and their CEO Vlad Tenev, the disruptor- in-chief of equity market trading for individual investors. Enter Citadel Securities (owned by Ken Griffin’s Citadel) the main broker that Robinhood uses to funnel its order flow and for which it gets paid.
AT ONE STAGE KITTY’S $50K WAS WORTH $22MLN, ABSOLUTE ROCKET FUEL FOR ALL THE WSB SUBSCRIBERS AND WOULD BE INVESTORS.
Small investors still own 35% of the $52 trillion worth of global equities. Not an insignificant proportion. However most of this is not traded it is bought to hold in a “one decision” deal. Robinhood and others, over perhaps the last five years, have revolutionised share trading for the individual. Transactions are commission free, there is an ability to trade fractional shares, generous credit is offered, there is easier access to options and all on an app on your mobile. Waiting for your coffee you can buy Tesla - for free! Robinhood like to claim that they have “democratised financial markets.” Indeed the proportion of total equity volume that is retail has gone from 10% a decade ago to 25% last year. Back to GME and the gyrations of the back end of January. Where were we? Ah yes GME was worth more that Delta airlines or Best Buy or Fifth Third Bancorp. You get my laboured point. On Jan 28 Robinhood, the punters pal, bans trading in GME and approximately 50 other securities. Democratic politicians are up in arms. Elizabeth Warren gets particularly animated. The scourge of Wall Street, she, among many others, are unhappy with the cosy relationship between Citadel (remember Robinhood’s broker) and Melvin Capital ( the hedge fund short GME) after the former injected $2bln in to the latter on the day before Melvin revealed that it had closed its short. On Feb 1 Vlad Tenev insisted that the rumours that Citadel market makers had pressured the company to ban trading in certain stocks was false and that the decision why some stocks were restricted to “position close only” was at the request of the National Securities Clearing Corporation (NSCC). The NSCC had, a week earlier, requested a deposit of $3bln that forced Robinhood to raise $1bln from existing investors (they subsequently had to raise another $2.4bln on Feb 1). The SEC chimed in with warnings of extreme stock price volatility “with the potential to exposing investors to rapid and severe losses while undermining market confidence….we will closely review the actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities.” A hearing in front of the House Financial Services Committee was pencilled in for Feb 18. However it was perhaps clear that the Democrats were complaining about their own legislation. Regulations that were imposed by the Dodd Frank Act required companies to lodge sufficient collateral with the DTCC to reduce systemic risk and the impact of financial speculation. Let’s not forget that many other brokers had to suspend trading with no obvious links to either Citadel or Melvin Capital. In a rather ham fisted way the regulations played out but what caught Robinhood out was that it failed to anticipate the sheer size of the trading activity that evolved. The episode did however highlight the plumbing of a two day stock settlement process that these days seems rather archaic.
24 | ADMISI - The Ghost In The Machine | Q1 Edition 2021
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32
