I don’t own any GameStop stock… and I’m only semi-literate financially. But I’ve been learning a lot over the past few days, as I’ve watched the Reddit Wall Street Bets gang take on Melvin Capital and Citadel. “Short squeezes” and “gamma squeezes” and “call options”… oh my!
It does feel a lot like Eddie Murphy and Dan Ackroyd trying to take down the Duke Brothers in Trading Places.
Perhaps with shades of Tulip Mania thrown into the equation.
The best summary that I’ve been able to find about all the shenanigans is here. Here’s a great excerpt:
On CNBC, many people were freaking out about the Game Stop situation. Host Scott Wapner, for example, said that the rise in GameStop’s price was evidence of problems with the “integrity of the system.”
Investor Chamath Palihapitiya pushed back. “Just because you were wrong, doesn’t mean you get to change the rules. Especially because when you were wrong, you got bailed out the last time. That’s not fair,” Palihapitiya said.
But it sure does seem like the big dogs (i.e. institutional investors) are changing the rules. And at the risk of sounding QAnon, the connection between Citadel and Melvin Capital does make me suspicious of the motives of many retail trading platforms, who prevented Average Joe and Average Jane traders from buying (but not selling) GME.
Citadel just invested billions in Melvin Capital, so they have a vested interest in its success (or really just survival at this point). And because “Citadel Securities also accounts for 40 of every 100 shares traded by individual investors in the U.S., making it the number one retail market maker” (from the Financial Times, courtesy of the Popular Info article linked above), the trading platforms have a vested interest in keeping their cash cow happy. And throttling the market allowed the institutional investors to “unwind” their short positions.
If you’re wondering why this sort of populist uprising against “The Man” is happening, here’s something to ponder:
But the pandemic is causing a sharp divide in class wealth. COVID-19 brought the sharpest rise in the U.S. poverty rate since the 1960s, according to a study by the University of Notre Dame. The poverty rate in the U.S. increased by 2.4 percentage points during the latter half of 2020, meaning an additional 8M people nationwide are now considered poor. In the same time frame, the collective wealth of America’s 651 billionaires jumped by over $2.95T to over $4T, in a trend that’s likely to trigger more discussions about equality in the economic sphere. (Source: Seeking Alpha newsletter, 1/26/21)
It’s a Game… but the Game is rigged.