What the hell is going on with Robinhood, WSB, and Gamestop: a primer

What the hell is going on with Robinhood, WSB, and Gamestop: a primer

Gamestop, AMC, Blackberry, and Nokia are all stocks that redditors at r/Wallstreetbets (WSB) identified as stocks that were being shorted by hedge funds, to the point where there were more shorts than stock.

Here’s the problem: Robinhood (an app used for buying and selling stocks) is sus (suspect. Play Among Us sometime.)

Robinhood sends all of the trade data to Citadel, before executing trades.

Citadel invested $2.75 Billion into Melvin Capital.

Melvin Capital are the hedge fund that shorted Gamestop (GME), and are being short squeezed by the WSBers.

That’s the thing to keep in mind here: Robinhood, an app used by regular people to trade (some 60% of its users hold a GME position), spies on its users’ trades and gives that information to institutional traders before it executes the regular person’s trade. If you don’t feel violated, you should.

What are the redditors doing?

The redditors aren’t doing anything pernicious to pump the stock up and dump it, they’re simply people who like the stock, tell others in the subreddit why they like the stock, and are openly interested in squeezing the hedge funds holding the shorts.

Basically, the short sellers are attempting to drive the price down, because they profit when the stock goes down. The redditors driving the price up means the hedge fund is losing money and may go bankrupt.

A few things happened. Public, Webull, and Robinhood, are all apps that enables trading, options, and after-hours trading. They all blocked users from trading only the stocks that WSB are focused on.

Public and Webull resumed trading after a few hours. Robinhood did a few things differently:

  • Robinhood stopped all purchases of GME, AMC, BB, NOK during this time.
  • Robinhood allowed sales of these.
  • Robinhood hid the charts, prices, and returned no results for these stocks when searching for their tickers.

If you don’t feel violated, you should.

Only after trading had ended for the day did Robinhood relent and say that trading could resume for these stocks the next day. An entire day of trading took place where the hedge funds could continue to trade, but many retail traders were prevented.

Casino?

Professional Eddie-Munster-lookalike Ben Shapiro posted saying, “The stock market is not a casino,”

What Shapiro gets wrong is, “(3) proper pricing of assets,” has to be given the same weight as the eBay valuation rule, which says, “something is worth what someone is willing to pay for it in that moment.”

One difference between a casino and brokerages like Robinhood is that when you’re winning, the casino lets you win.

But let’s get back to pricing for a moment. Benedict Evans says, ‘don’t these WSB heathens know the stock isn’t really worth the hundreds they’re bidding it up to?’

They know. They’re aware that the business is not worth $1000. They don’t care. They’re not buying for the gains, they’re buying for a number of reasons:

  • The stock could be worth that much higher number, if the company took the new funds and worked on game streaming, cellular sales, and retail banking (customers used to pre-order games, cancel them, generally using them like a bank / ATM as a store of money)
  • The point isn’t the worth, the point is to punish the hedge fund managers who have been bailed out in the past – hold it high until the short options expire, so that the hedge funds take the loss.
  • The point is, they just like the stock
  • They just like the excitement of the charts rising and falling, and the loss is acceptable

The author holds some AMC stock, one of the stocks the Wallstreetbets community has talked about. This is not financial advice.

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