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Private investors confront Wall Street

The strength of the unification of private investors in the United States, who took advantage of easy access to trading on the stock exchange, led to revolutionary events on Wall Street when professional gamblers suffered incredible losses in volumes that are already estimated at billions of dollars.

The Reddit forum site became a platform for private investors who felt that the shares of GameStop (a niche video game company) were undervalued. Users began to buy these shares, turning the process into a flash mob, as a result, quotations skyrocketed, and the capital of professional Wall Street players fell significantly due to their losses.

Flash mobs still occur on the forum, but they target other promotions. There is no one to stop flash mobs, and more than 4 million users are registered on Reddit.

How the coup began

On January 27, the US stock market began to shake. Due to the restrictions imposed against the spread of the coronavirus, people sitting at home are bored, and unprofessional internet commerce has become an interesting area for them. For these players, forums on the Reddit site, for example, WallStreetBets, have become popular for communication.

Since the beginning of 2020, forum participants have been discussing a statement by a user with the nickname delaneydi about the devaluation of the market of the leading American video game seller GameStop. The humorous discussion of the idea turned into a decision to take serious action and, at the same time, create problems for the creators on Wall Street, especially since there has always been animosity between them and the retail investors.

In a nutshell, GameStop is a traditional retail company that sells consoles, game discs, movies, other content, and other merchandise in brick-and-mortar stores. For several years, competition from e-commerce led to a decrease in online trading volumes and a drop in the value of shares: from October 2015 to October 2020, the market value fell by 90%. If three years ago the shares were worth $40, then by the end of 2020 they would have reached only $3.

Some hedge funds were closed by almost 140% due to an increase in short positions on the bonds of this company, which propelled GameStop to the leading position in this indicator in the US market.

However, Reddit users feel that GameStop is underestimated and the company's potential for professional gamers is underestimated. For example, the company's board of directors has decided to expand its membership by adding Ryan Cohen, who previously served as CEO of Chewy, a successful online pet store. His goal was to drive online sales at GameStop.

On the WallStreetBets forum in January this year, users began to participate in a flash mob and massively buy up GameStop shares, and the number of subscribers to the forum has already exceeded 4 million. As a result of joint action, GameStop quotes began to grow rapidly. If at the beginning of the month 1 share was valued at $17, then on January 27 the quotes rose to $347.

For retail investors, buying GameStop stock was just the beginning. They continued to buy other securities where there were many short positions. The purchases of the flash mob participants concerned the shares of Nokia, BlackBerry, AMC Entertainment (the largest cinema chain). AMC Entertainment's one-day jump in stock prices only set a record 301% growth on January 27th. Then quotations rose to $19.90.

Wall Street investment funds have lost more than a billion due to the actions of non-professional investors. According to the Wall Street Journal, analysts at S3 Partners evaluated the results of the flash mob as follows: the sale of GameStop shares alone brought short market participants in losses of $14.3 billion. Losses of Melvin Capital Management, one of the top lists of US hedge funds, reached 30% of its value — $3.75 billion.

The fight between bulls and bears after such a turnaround reached another level: the funds' appeal to regulators led to pressure on brokers, which as a result disabled the Buy button for users.

The era of “Wolves from Wall-street” is coming to an end

In the future, of course, only negative fund dynamics can be expected. If now they manage to avoid bankruptcy due to additional capitalization, then the funds in the same volumes will cease to flow to them.

Specific funds CITRON, Omega Advisers, Melvin Capital Management, and some others, which were influenced by the actions of the participants of the flash mobs, can be saved from complete collapse, but they should not expect an influx of new investments. Most likely, they will be re-branded or closed without much hassle.

If we talk about hedge funds in general, they invested in them, because it was believed that investors' money fell into the hands of professionals who could achieve excellent results. And after these “professionals” in a panic mood rushed to the rescue of regulators and brokers, the opinion of clients, both current and potential, changed dramatically.

There is no need to talk about true professionalism after such actions. Going short when the market is full of money is already very dangerous, and they went short not only with leverage, but without specific stop-loss levels, and there were no hedging agreements at all.

The market situation has been developing for more than a day and more than a week. The purchase of shares by WallStreetBets users began in December when GameStop shares were worth $4 each, and on January 27, the price already climbed to $339. The funds had the opportunity to cut positions, close or hedge, for which there is an increase. And large leverage, which means zero or less loss. However, the “professionals” of the funds did not move to change the situation, they just saw the inevitability approaching and, when it was too late, their reaction was to turn to exchanges and regulators.

The MB began, first of all, to appeal to the restrictions on the purchase of shares by exchanges and regulators to which it resorted. Then came the reaction of the most massive platform used by retail investors, Robinhood: it banned the purchase of shares of GameStop, AMC, and Nokia, leaving only a put option. The platform was also designed to forcefully close certain client positions.

This is far from professional work. This situation is very similar to the work of the Russian Forex scam in the 2000s, when, when a buyer won, “technical problems” and delays in order execution appeared on his account.

We have already written about the end of the era of free speech in the United States, and now the freedom in the market is over. For many, this became especially evident in the example of the events mentioned.

Interestingly, information appeared about a close financial relationship between the new head of the US Treasury and the owners of Robinhood. In addition, accusations of connections with external forces and the fact that they are supporters of “Trumpism” rained down on WallStreetBets. It remains to be seen until the Kremlin claims to coordinate their actions.

But all is not lost for the market. Part of the community supports WallStreetBets and its fight against hedge funds. Including because the funds were determined to put an end to the same GameStop, which could have been resisted in this situation. Now this company and the participants of the WallStreetBets flash mobs feel much better.

Robinhood was indicted. In addition, users expressed massive dissatisfaction, and the rating of apps for iOS and Android began to plummet. This means that there will be an outflow of funds that Robinhood will not be able to cope with, especially since the owners of the platform have already turned to an urgent investment attraction due to the confrontation with Reddit. Then it was necessary to raise almost $1 billion, which is a critical figure given the total valuation of Robinhood's business at 12 billion. Thus, the platform again allowed buying shares, although the conditions for this were significantly tightened.

Now is going to be a difficult time for real estate agents who have acted inappropriately in this situation, and especially for Robinhood. Their reputation suffered greatly when they sided with Wall Street in this situation. It is unlikely that clicking the Buy button now can fix this.

The injustice in this situation became apparent: the market is considered a hunting ground. For Robinhood's retail customers who lost their money, all the leverage, options, and loans were geared towards making their money even faster. Many people remember that an inexperienced trader who entered trades with a noticeable disadvantage decided on a desperate step and died. Then he was offered neither a way out of the situation nor salvation from despair. Now that the unprofessional actions of billions of dollar funds have resulted in significant losses, ordinary retail traders simply have limitations in their actions, which saved hedge fund capital.

You can talk about justice here ...

People do not forget this, and the work of a broker is based on the trust and reputation of clients, and their restoration is impossible by simply attracting funds from an investor, as in the case of lost money capital. This means that the future of Robinhood is not as rosy as it was last week before this high-profile story.

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