What the **** has gone in in the market this week. It’s certainly one for the history books, at the time of writing this (28/01/2021) it is the day that brokers and hedge funds around the world revealed how corrupt they really are. Today, brokers stopped retail investors (You and me) from buying stocks that were running hot and ‘sticking it to the man’. Why? Because hedge funds like Melvin Capital and Citadel were on the losing side of the trade for once.
How it started: a hedge fund named Melvin Capital had a huge short position in GameStop (GME), some people think GME was being ‘naked shorted’ which means there are more shares short than there are available, which is illegal. The boys on WallStreetBets (WSB) picked up on this and it began to gain traction – thousands of call options and shares were bought driving the buying volume up. This newfound buying volume led to an increase in the price of GME, this leads to something called a ‘Short Squeeze’ where investors who are short (betting on the price going down) have to ‘cover’ their position by buying back the shares they borrowed and sold – this is done as a risk/margin requirement. This ‘covering’ drives up the buying volume, causing the price to increase even more and causing more ‘shorts’ to be ‘covered’. As GME was the most shorted company on the market based on outstanding float, this short squeeze was pretty impressive. Within a week GME has gone from $40 to $480 and all the way back to $190.
This is not an abnormal thing to happen, short squeezes happen all the time, but most of them don’t happen at this scale. GME was effectively Retail Investors v Institutional Investors, and as soon as the Institutional Investors realised they were losing, they decided to change the rules of the game. This is where it gets interesting but also at the same time, not surprising. Financial Markets have always been rigged, so we shouldn’t really be surprised it happens. But when it was so obvious as it was yesterday, how has no regulatory body or the SEC done anything about it. Let me talk you through the shady stuff.
Here are the main entities you need to know: Melvin Capital, Citadel, Robinhood, GME, Retail Investors.
Melvin Capital (MC) is the hedge fund that was short on GME.
Citadel is another hedge fund, they have a large stake in both Melvin Capital and Robinhood.
Robinhood is a large broker in the US that most retail investors use as it has no commission. (Ironically named as well).
Retail Investors, that’s me and you, the normal guy/girl who invests.
How do all these pieces fit together? Well, when the short squeeze was in full effect, Melvin Capital lost billions as they had to cover their short positions in GME and they effectively went bankrupt. Citadel owns a large stake in Melvin Capital (MC) and so now Citadel is a little pissed off because they’re losing billions on their investment in MC. Citadel knows most of the buying volume is coming from Robinhood, so Citadel (Part owner of Robinhood) forced Robinhood to stop the buying orders of GME but still allow the holding and sale of GME stock. (For me this is where it is so obviously market manipulation because you’re only allowing investors to have one option here, which is sell.) Once Robinhood stops buying orders, the volume dries up, the stock price starts to dip, investors cash out their gains and some investors stay holding GME stock on principle. (Principle in the stock market pays you penny. My tip is make your money and get out, there’s no bonus points for staying on principle).
While the stock price was dipping it, hedge funds took full advantage. Some hedge funds got out of their short positions for minimal cost and some started shorting GME at market open. This proved to be profitable since GME sunk by 40%.
As a retail investor, the hedge funds have bent us over a table twice, when they shouldn’t have been allowed to at all. The stock market is supposed to be a free market, you win sometimes and others lose, others win sometimes and you lose. But the only time where the hedge funds are the loser and the little retail investors are the winners, the game has to be changed? How unfair and undemocratic is that? This is the reason I believe this fiasco gained so much popularity, it was a blatant sign that the big suits can control the game no matter how obvious and fraudulent it is. Something needs to change.
Today 29/01/21, most brokers have allowed buying orders to continue in GME. Why is it ok to buy today but it wasn’t on the 28th? That’s because the hedge funds have made their money and have closed out any risky positions. How is this allowed? Back in 2008 when banks were letting anyone have multiple mortgages and selling CDO’s to the market whilst lying bout their credit rating, where was the halting of transactions back then? Also, where was the accountability? Hedge funds and banks single handedly destroyed the market and the economy, leaving the tax payer to pick up the bill. But all that was ok? No one went to prison no one was held accountable and no one tried to mitigate any risk. But when retail investors are making money off a stock at the expense of hedge funds, the rules change, there’s intervention and brokers prevent retail investors from buying more to ‘mitigate risk’. It’s utterly bonkers.
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