GameStop Investing Craze ‘Proof of Concept’ For Bitcoin Success
A campaign by members of a Reddit investor forum have caused GameStop stock to spike to record levels in the last week. GameStop Investing Craze ‘Proof of Concept’ For Bitcoin Success
The Real Reason Why Hedge Funds Lost Billions Betting Against Gamestop
GameStop shares ended Tuesday up 93%, lifting Cohen’s fortune to an estimated $1.7 billion.
Fueled by a massive short squeeze pinning Reddit traders against a storied Wall Street short-seller, a mindblowing rally in GameStop shares has minted a new billionaire in Ryan Cohen, an activist investor eager to forge a turnaround for the brick-and-mortar gameseller.
According to regulatory filings, Cohen—the founder and former CEO of Chewy, a booming e-commerce firm focused on pet supplies–spent about $76 million buying up more than 9 million GameStop shares at the tail-end of last year as he mounted an effort to restructure the Grapevine, Texas-based firm.
“Unfortunately, it is evident that GameStop currently lacks the mindset, resources and plan needed to become a dominant sector player,” Cohen said in a public letter to GameStop’s board of directors in November, blasting the stock’s dismal performance at the time—it was down 85% over the prior five years. “GameStop needs to evolve into a technology company that delights gamers and delivers exceptional digital experiences–not remain a video game retailer that overprioritizes its brick-and-mortar footprint and stumbles around the online ecosystem.”
It’s unlikely that Cohen, or anyone for that matter, could have predicted what would play out over the next couple of months. GameStop shares are up more than 800% since his declaration, and the value of Cohen’s stake has skyrocketed to about $825 million.
Tack that onto the proceeds Cohen received from PetSmart’s $3.4 billion acquisition of Chewy in 2017, and Forbes estimates the 35-year-old is worth about $1 billion. A spokesperson for Cohen said he was not available for an interview at press time.
Given how volatile GameStop stock has been, it’s not clear how long Cohen will hold onto his billionaire status. But, for now, GameStop keeps climbing. Shares are up a staggering 25% as of 12 p.m.
Tuesday, after climbing 20% Monday. Analysts are pinning the gains to a surge in interest from retail investors, which has in turn fueled a short squeeze. In other words, institutional traders that were betting against the stock are now buying borrowed shares to cut their losses or secure gains on the possibility that the firm could actually be in for a turnaround.
Retail traders, meanwhile, have lauded Cohen’s involvement, with Reddit discussion boards including r/WallStreetBets (which counts more than 2 million members) revealing a slew of bullish at-home traders driving up the stock’s price despite widespread bearishness from institutional investors.
The momentum came to a head in recent days, after storied Wall Street shop Citron Research went public with a short on GameStop shares at $20–about one-fifth of current levels. The move triggered so much online backlash that the shop’s founder said he turned in threatening comments from “an angry mob” of shareholders to authorities.
“The retail trader just picked a fight with Citron and won,” Oanda Senior Market Analyst Edward Moya said Monday of the “crazed buying” behind GameStop’s meteoric rise. “What’s happening with GameStop’s stock is a reminder of how times are changing: A new army of traders are not focused on valuations, but rather on momentum opportunities they see from Reddit’s WallStreetBets, Youtubers, TikTok or Robinhood.”
In the meantime, Cohen’s just getting started with GameStop. His growing investment helped him nab three seats on GameStop’s board earlier this month–one for himself and two for a couple of his former Chewy executives.
The son of a teacher and a glassware importer, Cohen got his entrepreneurial start at the age of 15, collecting fees for referring customers to e-commerce sites. About a decade later, in 2011, he founded Chewy and pushed to expand its volume from the start, pulling in 3 million patrons by 2017.
“We’ll be done growing when we’re 6 feet under,” he said in a 2017 interview with Forbes, a few months before he sold the business to PetSmart.
Reddit traders seem convinced he’ll bring the same growth to GameStop, but Wall Street experts are much more skeptical. The average GameStop price target, from eight analysts issuing such guidance, remains about 80% below current price levels.
“It doesn’t make business sense,” Doug Clinton, the cofounder of Loup Ventures, told Bloomberg Monday of GameStop’s retail trading frenzy.
Still, the frenzy has proved fruitful for new billionaire Cohen–even if at the whim of an insane social media battle. And even if the outcome remains incredibly unclear.
“Gamestop shorts and longs are in a knockout battle being waged in the stock market–and social media platforms,” S3 Partners Managing Director Ihor Dusaniwsky said Tuesday, noting that short-sellers betting against the stock are down about $5 billion this year.
“Both sides are holding their ground with strong conviction, but in the end, one side will be the outright winner, and in the later rounds of this fight, the long shareholders are way ahead.”
Robinhood Is Said to Draw On Credit Lines From Banks Amid Tumult
The firm has tapped at least several hundred million dollars, one of the people said. The company’s lenders include JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to data compiled by Bloomberg. Representatives for Robinhood and those banks declined to comment.
The behind-the-scenes rush to bolster Robinhood’s finances adds to signs that recent market havoc is putting a strain on the company, which has signed up throngs of retail investors for its app during the pandemic. The firm is among brokerages that clamped down on trading in shares of GameStop Corp. and AMC Entertainment Holdings Inc. on Thursday, setting off outrage among customers. Robinhood also told users it may close out some of their positions as it takes steps to reduce account risks.
“As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits,” Robinhood said in a blog post Thursday. “Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment.
These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.”
With its user-friendly app and commission-free trades, Robinhood grew swiftly in recent years and then all the more during the pandemic, becoming the platform of choice for legions of people turning to stock markets to earn money and pass time during lockdowns. For months, the firm has been expected to hold an initial public offering this year.
But this month’s drama around a surge in prices for GameStop and AMC, coordinated by investors on Reddit, has put Robinhood at the center of controversy. The company said after the close of U.S. trading on Thursday that it will allow “limited buys” to resume in certain affected securities.
Robinhood has leaned on its credit with banks to weather turmoil before. In March, the firm drew down an entire $200 million facility from a trio of lenders, people familiar with the matter said at the time, as the coronavirus pandemic set off a flood of transactions and steep market swings, during which Robinhood’s trading platform suffered repeated outages.
See Below For The Next Opportunities Where Short-Sellers Get Rekt
On Tuesday, a volatile trading session largely driven by a campaign by members of the Reddit forum r/WallStreetBets saw GameStop jump 92.7%. Trading of the stock has been halted multiple times in the last week as price spikes triggered market protections.
After Elon Musk joined the fray, tweeting “GameStonks,” shares rose 50%. The video gaming stock is now worth $10 billion and classified as a large-cap stock, according to Bloomberg.
Scaramucci said in an interview with Bloomberg that this strong individual trader market action is “proof of concept that [b]itcoin is going to work,” and should be taken “seriously.”
He suggested the “decentralized” investor activity is similar to the fundamental concept behind bitcoin, while mobile-based and low-cost trading are “democratizing” formerly insular markets.
“How are you going to beat that decentralized crowd? That to me is more affirmation about decentralized finance,” Scaramucci said.
In early January, SkyBridge launched a new bitcoin fund, saying its exposure to bitcoin was already worth $310 million.
Is Reddit Group WallStreetBets Planning To Short Squeeze Silver [$SLV] Next?
Wallstreetbets, the infamous Reddit group is now calling for Short Squeezing the silver Bullion market, what many consider to be the most shorted asset in the trading market. The group moderators have now changed its access to private mode. Silver is currently heavily shorted and a majority of those short positions are bought by JP Morgan.
The r/wsb gang might well be onto something with silver… nice wedge. pic.twitter.com/QivqNeWFMA
— Raoul Pal (@RaoulGMI) January 28, 2021
Just like Melvin Group, JP Morgan could be at the receiving end of “short the Wall Street” sentiment.Another Twitter user explained that for every $1 rise in Silver price, Wall Street will lose nearly $2 million to explain how heavily the Silver market is shorted.
It all started with GameStop when a Reddit user found that Melvin Group, a wall Street Hedge Fund worth $13 billion has bought a significant short position against GameS top, and went on to create a group asking everyone to buy the shorted stocks as much as possible leading to dramatic and never seen before the turn of events, where the GME stocks rose above $300 making the dying video game chain a Fortune 500 company.
Melvin Group had to finally close their short position as their losses mounted more than their valuation. While GameStop stock reached another high today breaching the $420 mark for the Options contract.
Is JP Morgan the Next Melvin Group?
JP Morgan, one of the top banking giants in the US who have moved past their fair share of debacles including money laundering charges and fake gold scam, might not have thought that the biggest financial scare would come from a Reddit group.
Max Keiser, the popular podcaster cum full-time bitcoin proponent has called for shorting the silver market and reminded about a similar campaign back in 2010 which led to Silver price climb from $15 to $50. He also reminded me that a potential Silver short squeeze could mean doom for wall street.
Unlike the $GME short-squeeze, where the company can issue new stock so hedge funds can cover, a Silver short-squeeze could continue indefinitely because you can’t print Silver.
Ultimately all capital looking to defund Wall St, Central Banks, and fiat money will end up in #BTC
— Max Keiser (@maxkeiser) January 28, 2021
Melvin Group has paid the price for biting more than what they could chew, a term often used by bankers for retailers similarly losing heavy money, but as the tables have turned, Wall Street is trying to change the rules.
I know this GameStop stuff is funny, but you have to remember this is hurting real people who own multiple boats
— Kevin Farzad (@KevinFarzad) January 27, 2021
NASDAQ yesterday announced that they would halt any stock trade with high volatile market movement created due to social media frenzy and went on to halt GME stocks trading. The world seems to be divided on what happened yesterday where one side believes it’s a revolution of a kind where retail is showing its power to the institutions and hedge funds while Wall Street calls it a fall play.
The Reddit group has already been turned to private in the wake of GameStop development while Discord banned the group altogether. It seems Wall Street has started the crackdown to stop the retailers to beat them in their own game.
U.S. Mint Rationing Silver Coins Amid ‘Exceptional’ Demand
The Reddit-fueled run-up in silver prices might be stalling, but the U.S. Mint said it is still rationing its sales of silver coins because of “continued exceptional market demand,” as well as limited supplies and manufacturing capacity.
The Mint is also allocating gold and platinum coin sales to authorized purchasers, it said in a statement Tuesday. The policy will be in place “for the foreseeable future.”
The mint’s silver coin sales jumped 24% to 4.775 million ounces last month, marking the highest for a January since 2017. The Mint’s announcement comes after retail sites were overwhelmed with demand for bars and coins. Investors on Reddit ignited a buying frenzy that roiled precious-metals markets and squeezed physical supplies. Some dealers said over the weekend that they were unable to process orders until Asian markets opened because of record demand.
Throughout the past year, and in part due to the effects of the coronavirus pandemic, the Mint was unable to meet demand due to precious metal blank availability and plant capacity issues.
The Mint also said it will have a limited production window to produce current design American Eagle gold and silver coins, as it’s scheduled to start production of redesigned coins in the summer of 2021, and coins for that program must be produced in advance of the launch date.
Silver Is the Latest Market Hit by Reddit Day-Trader Frenzy
Reddit investors have discovered silver, with everything from silver miners, silver ETFs and the actual price of the physical metal itself soaring on Thursday.
The first signs came late Wednesday, when comments appeared on internet chatroom r/wallstreetbets, the same investor board that started the wild short squeeze in Gamestop Corp. and other companies. The comments centered on iShares Silver Trust, the biggest exchange-traded instrument backed by the metal, calling it “THE BIGGEST SHORT SQUEEZE IN THE WORLD,” and citing banks manipulating gold and silver prices.
Precious metals have long been the home of conspiracy theorists ranting against central banks and big government, which may make it fertile ground for retail investors’ rage against the financial machine. While commodities markets are hardly immune from wild swings, they typically have a much higher barrier to entry, so squeezes tend to come from actions by institutional, rather than retail, investors.
Small miners had the biggest moves, though the physical metal also rallied. First Majestic Silver Corp., which was cited as a short-squeeze target, soared as much as 39% in New York on Thursday, while iShares Silver Trust gained as much as 7.2% and spot silver gained 6.8%, the biggest jump since August.
“There’s a short squeeze going on in silver. The ‘hoodies are all rolling into silver and the party is on,” Phil Streible, chief market strategist at Blue Line Futures LLC in Chicago, said in a phone call. “All those other stocks like GameStop and AMC, they’re dumping because they’ve been restricted, and they gotta go into other short opportunities and silver is an easy identifiable target.”
The economic data that came out Thursday morning, which included a larger-than-expected drop in jobless claims, have become “a moot point” for traders, Bob Haberkorn, senior market strategist at RJO Futures said by phone. “This isn’t predicated on any global events, it’s just people on a message board putting all their guns towards the precious metals markets.”
Options markets were bid up in the frenzy, with traders and brokers seeing wide bid/ask spreads on the IShares and Comex contracts.
“The implied volatility being quoted in the options market at this moment is wider than I’ve ever witnessed.” James Gavilan, principal and adviser at Gavilan Commodities LLC, said in a phone interview.
“The market is factoring in large swings in the silver price, and an already illiquid market is showing extremely wide quotes for options, which means that traders are concerned about the difficulty of hedging their positions.”
To see such wide volatility spreads is “mind boggling, breath taking, it’s shocking really,” said Gavilan.
The buying in silver and gold spilled over to the base metals complex on the London Metal Exchange, with copper erasing early losses, while “Chinese night desks buying” also helped the metal, according to Tai Wong, head of metals derivatives trading at BMO Capital Markets. Copper for three-month delivery rose 0.7% to $7,910 a ton in London.
Reddit Investors Piling Into Silver Drive Up Prices A Second Day
Silver jumped for a second day as the market remains on high alert after a call by Reddit posters to create a short squeeze sparked sharp moves on Thursday.
Spot silver rose as much as 4.3% as prices resumed an earlier climb after dollar gains eased. Silver futures increased as much as 7.1% on the Comex, and gold prices advanced.
On Thursday, silver miners’ shares spiked and the largest silver exchange-traded fund, iShares Silver Trust, saw a frenzy of options buying after the market emerged as a target on the Reddit forum r/wallstreetbets. The moves “have been extreme in some cases and have had little fundamental justification,” Eugen Weinberg, an analyst at Commerzbank AG, said in a note.
“Retail investors who have been swapping tips on such information platforms have caused massive shifts in the prices of some shares,” Weinberg said. “We are confident that the influence of retail investors on silver will not last all that long, and that ultimately industrial and institutional demand will be the key factor in the longer term.”
Still, “in the very short term, I would think people would be cautious about holding a short in precious metals, irrespective of the fundamental view/what other markets are doing,” said Marcus Garvey, head of metals and bulks commodity strategy at Macquarie Group Ltd.
Comments about the metal began appearing Wednesday on the investor board that’s now famous for driving up GameStop Corp. shares this week. They centered on conspiracy theories long-held by the fringes of the precious metals world, alleging the metal’s price is suppressed by banks and the government to mask inflation.
If there’s another short squeeze, “I think it will be fairly muted,” said Jason Teed, Director of Research at Flexible Plan Investments Ltd. “A short squeeze on a mid-cap stock with heavy short interest is one thing, but the commodity markets are extremely vast.”
Spot silver rose 1.8% to $26.98 an ounce at 3:32 p.m. in New York. Futures for March delivery rose 3.8% to settle at $26.914 an ounce. Gold for immediate delivery rose as much as 1.8% before trading little changed. The Bloomberg Dollar Spot Index was up 0.3%.
Silver Prices Surge To Eight-Year High Amid Reddit-Fueled Frenzy
Silver jumped to an almost eight-year high, extending a surge that started with the retail investor frenzy sweeping through markets.
Most-active futures rose as much as 13% to $30.35 an ounce on the Comex, the highest since February 2013. That followed a weekend buying binge that overwhelmed online sellers of silver coins and bars from the U.S. to Australia. BlackRock Inc.’s iShares Silver Trust, the largest exchange-traded product tracking the metal, recorded an unprecedented $944 million net inflow on Friday.
Like the buying stampede in GameStop Corp. and other small-cap stocks that has captivated the financial world in recent weeks, silver’s initial advance can be traced to Reddit’s WallStreetBets forum. One post last week declared the metal “THE BIGGEST SHORT IN THE WORLD” and encouraged traders to pile into the iShares trust as a way to stick it to big banks. Exactly what kinds of investors are behind the current run-up in silver prices is unclear.
No doubt that “the market is more than happy to let the Reddit Legion push it wherever it wants to push it,” said Tai Wong, head of metals derivatives trading at BMO Capital Markets.
But there are conflicting messages about silver on the forum now and it’s unclear how long retail investors will stick to the silver trade. Already some prominent members of the WallStreetBets forum have advised against it, with some noting that Ken Griffin’s Citadel Advisors LLC, a favorite bogeyman of the Reddit crowd, is listed as one of the biggest shareholders of the iShares silver trust.
“I can envisage a scenario where maybe a hedge fund has purchased maybe a short-term tactical long position, so the upside could be a combination of several factors now,” said Philip Newman, managing director at consultancy Metals Focus.
The CME Group said it continues to monitor its markets. The exchange’s dynamic circuit beakers in silver are 10%. This means that a 10% move, up or down, within any rolling one hour window will trigger a 2-minute pause in trading.
Short-term forward rates on the London silver market flattened on Monday, indicating strong demand for the metal in coming weeks.
Silver differs in important ways from stocks like GameStop. For one, the scope for a short squeeze in silver is far less obvious: money managers have had a net-long position on the metal since mid-2019, futures and options data from the Commodity Futures Trading Commission show.
The market for silver is also by some measures much deeper than those for smaller stocks like GameStop. The bricks-and-mortar video-game retailer had a market capitalization of about $1.4 billion in mid January, before the Reddit frenzy sent the company’s value soaring more than 16-fold.
By contrast, London vaults held 1.08 billion ounces of silver at the end of November, according to London Bullion Market Association data. That’s worth almost $32 billion at current prices.
Why Reddit Traders Will Learn Commodities Aren’t Stocks: Macro View
Even if the rally fizzles, it could have ramifications beyond what has typically been a relatively niche corner of the commodities world. As the first high-profile target of the retail craze to start trading on Monday, silver may help set the tone this week for managers trying to gauge how Reddit-fueled volatility will impact their risk models and potentially cascade from one asset to the next.
“Last week’s events have shown it to be unwise to doubt the purchasing power of retail investors, and this has been sufficiently demonstrated again on the silver market,” said Howie Lee, an economist at Oversea-Chinese Banking Corp. “They may find it a bit harder to squeeze the silver market than they did with GameStop — the former is much bigger and more liquid — but the momentum looks like it rests with them at the moment.”
The iShares Silver Trust rose 6.6% at 2:54 p.m. in New York. Futures for March delivery advanced 9.3% on the Comex to settle at $29.418 an ounce, after rising more than 5% last week. Spot silver climbed to as high as $30.1003 an ounce. Other precious metals also advanced. Spot gold rose 0.7%, while platinum jumped 5%.
The buying furor also fed into mining shares. Mexico City-based silver explorer Fresnillo Plc surged as much as 21% in London trading. China Silver Group Ltd. rose as much as 63% in Hong Kong, while Australia’s Silver Mines Ltd. gained as much as 49%.
Silver prices shot up to their highest level in almost eight years Monday after Reddit traders turned their sights on the volatile precious metal, having prompted wild swings in GameStop Corp. shares last week.
Most actively traded silver futures jumped more than 10% to $29.63 a troy ounce, their highest level since February 2013, outpacing a modest 0.9% rise in the price of gold. The surge put silver on track for one of its biggest one-day advances of the past decade and compounded the precious metal’s climb of more than 5% last week.
Shares of precious-metal miners that stand to profit from higher silver prices surged. Fresnillo PLC, listed in London and with mines dotted around Mexico, gained 12%. Canadian miner First Majestic Silver Corp. jumped 24% and Pan American Silver Corp. rose 16%. Platinum futures prices jumped 4.7% to $1,129.50 a troy ounce.
The leap in silver prices is the latest in a series of big market moves sparked by day traders swapping tips and banter on online forums like Reddit.
Silver first began to rally late last week after users on Reddit’s WallStreetBets forum posted about executing a short squeeze similar to ones credited with fueling recent gains in other stocks popular on the internet.
Outsize attention from day traders has powered significant gains in stocks such as GameStop, a struggling videogame retailer, captivating Wall Street as individual investors take on professional traders and investors who are betting on prices falling.
“Mall retailer? Small potatoes. Global silver market? The greatest short squeeze in history,” wrote one user on WallStreetBets.
Several Reddit users pushed back against reports that they were behind the price rise. “DON’T BUY SILVER. IT’S A DISTRACTION. HOLD GME,” one wrote, referring to GameStop’s stock-market ticker.
Thinly traded silver has a long history of extreme price moves and Monday’s rally led traders to ask whether individual traders are a big enough force to push prices higher still.
“I think they can cause very significant disruption because silver is a market with a history of very, very high volatility,” said Tai Wong, head of metal derivatives trading at BMO Capital Markets. “But can they replicate a GameStop? Unlikely.”
The move into silver marks the biggest target yet for Reddit traders. Even after the run-up in its share price, GameStop has a market capitalization of under $23 billion.
Depositories at CME Group’s Comex—the biggest marketplace for silver futures—are brimming with almost 400 million troy ounces of silver, valued at around $12 billion at Monday’s prices. Vaults in London housed a further 1.1 billion troy ounces—valued at $32 billion at today’s prices—as of November, according to the London Bullion Market Association.
Silver Coin Sites Seize Up As Buying Frenzy Takes Hold
Retail sites for silver have been overwhelmed with demand for bars and coins, suggesting the frenzy that roiled commodities markets last week is spilling over into physical assets.
Dealers including Money Metals, SD Bullion, JM Bullion and Apmex said over the weekend they were unable to process orders until Asian markets opened because of unprecedented demand. Buying continued on Monday, and spot silver and futures jumped to breach $30 an ounce.
“Pretty much physical silver is almost all gone in terms of live inventory,” Tyler Wall, president and chief executive officer at SD Bullion, said in a Bloomberg TV interview. “Currently we’re seeing the premium — the price you pay over spot to get actual physical silver in your hands — is skyrocketing. Most stuff on our website’s at least 30% over spot and we can’t source it for much less than that right now from our wholesalers.”
Phones were ringing non-stop at Swiss dealer Gold Avenue, said CEO Alessandro Soldati.
“Demand was 10 times a typical Sunday yesterday, and today I would say six times,” he said on Monday. “Everyone is calling us saying ‘I want to buy gold and silver ASAP.’”
Retail traders, inspired by Reddit posters, stormed into the silver market last week and successfully drove up prices of the physical metal, silver miners and exchange-traded funds. Spot prices, silver futures on the Comex and the largest silver exchange-traded fund, iShares Silver Trust, all climbed more than 5% in the week.
Reddit’s Silver Rush Is Another Symptom of Market Madness
Attempts to push up the metal’s price seem guided by mistaken ideas about the depth of this market and the monetary value of precious metals.
In 1896, former U.S. lawmaker and silver lover William Jennings Bryan attacked those that would “crucify mankind upon a cross of gold.” Reddit investors now risk building their own cross of silver.
On Monday, the price of silver futures jumped about 11% to around $30 an ounce—its biggest one-day move since 2009—after becoming the latest target of the individual investors who spent last week foiling Wall Street’s short bets. By coordinating security purchases online, these amateur day traders have triggered surges in unloved stocks such as GameStop, BlackBerry and American Airlines.
“Silver Bullion Market is one of the most manipulated on earth,” user RocketBoomGo wrote Saturday on Reddit, encouraging individual investors to push the silver price up to $1,000. “Any short squeeze in silver paper shorts would be EPIC. We know [that a] billion banks are manipulating gold and silver to cover real inflation.”
The Reddit crowd may have—so far—been successful in upending the market for little-traded stocks. In the far more liquid silver market, though, they may have worse luck.
Previous attempts to corner the silver market have failed. Back in 1979, three of the sons of Texan oil billionaire H.L. Hunt managed to push silver prices up eightfold, only for them to crash following a change in rules on leveraged purchases of commodities—notably on March 27, 1980, known as “Silver Thursday.”
That happened despite the Hunt brothers owning more than a third of the world’s non-governmental supply of silver, which speaks to the difficulty of manipulating this deep market. Also, official data suggests hedge funds are betting in favor of silver, not against it. The chances of retail investors inflating a bubble that hurts Wall Street more than themselves seem even slimmer than with GameStop shares.
To be sure, as with the videogame retailer, there are some reasonable arguments as to why silver might have been undervalued. Precious metals tend to be inversely correlated to the yields of inflation-protected Treasurys, which are hovering around all-time lows.
Also, silver and platinum used to trade roughly in lockstep with gold, but have consistently underperformed the yellow metal for about a decade. A catch up could be in order, especially if the post-pandemic recovery boosts industrial demand for silver and platinum.
More likely, though, many retail traders have fallen prey to the siren song of precious metals as “real money.”
So-called gold bugs are convinced that “real inflation” is much higher than reported consumer-price increases. They believe that an age of paper-money printing by central banks will eventually force a return to something like the Gold Standard that reigned before World War I, when prices were allegedly set by the market-determined flow of specie.
Silver bugs, who could be construed as having the Argentine version of this pathology, are fewer in number but even more passionate. They hark back to an even earlier era when both precious metals served as commodity money, and to the “bimetallist” debates of the late 19th century that were led by politicians of the U.S. populist movement such as Mr. Bryan.
But most of these ideas are based on misconceptions about how the Gold Standard and commodity money actually worked. Claims of runaway inflation in the present also aren’t backed up by evidence.
Reddit investors may still have room to upend some hedge fund trades. But they would do well to stay away from the shiniest targets.
Citadel Silver Holding Exposes Rifts In WallStreetBets Army
Ken Griffin’s Citadel has once again found itself at the center of a WallStreetBets drama, this time over the firm’s holdings of silver.
The precious metal has become a popular buying target for retail investors keen to inflict losses on hedge funds, after posts on WallStreetBets claimed the market was ripe for a short squeeze. Yet some members of the Reddit forum have responded with pleas to avoid the trade, saying Citadel stands to benefit as a major holder of the largest silver exchange-traded fund.
“CITADEL IS THE 5TH LARGEST OWNER OF SLV,” one WallStreetBets user wrote on Sunday, referring to the iShares trust’s ticker symbol. “IT’S IMPERATIVE WE DO NOT ‘SQUEEZE’ IT.”
Citadel Advisors LLC owned about 6 million shares of the iShares Silver Trust as of Sept. 30, equivalent to a 0.93% stake, data compiled by Bloomberg show.
While these holdings may well be related to its role as one of the world’s largest market makers — the firm also held shares in at least 17 other silver companies and ETFs — the debate they have caused highlights that traders in the WallStreetBets forum are far from a homogeneous group.
They stunned the world by banding together to fuel epic gains in heavily shorted stocks including GameStop Corp. In the past few days investors have been watching the metal’s rally for clues on the staying power of this David-vs-Goliath buying spree.
Silver futures on the Comex jumped as much as 13% on Monday. That pushed prices above $30 an ounce to the highest level since 2013, but the gains are so far tiny relative to GameStop’s 16-fold surge since mid-January.
Silver wasn’t the only chatroom target that also happens to be a Citadel holding, rallying on a short squeeze call. BioCryst Pharmaceuticals Inc. surged 36%, jumping to the highest since October 2015 as Reddit users declared a “#BIOWAR“ over the biotech stock.
Citadel’s BioCryst stake is worth about $95 million, according to Bloomberg data.
A phone call to Citadel’s Chicago office outside regular business hours went unanswered. It’s unclear whether the firm’s holdings of iShares Silver Trust or other silver-related securities have changed since September — given its market-making role, it is likely they would. Inflows into the iShares trust surged by a record $944 million on Friday as trading in the ETF soared.
As well as being one of the biggest market makers, Citadel runs one of the largest hedge funds in the world. The firm drew the ire of the WallStreetBets crowd last month after it injected cash into hedge fund Melvin Capital, which lost about 53% in January after being hit by a short squeeze on shares including GameStop.
Anger toward Citadel among WallStreetBets users only increased after Robinhood Markets imposed curbs on trading GameStop last week. Some alleged that Griffin, whose firm helps execute orders from Robinhood customers, might be behind an attempt to stamp out the rebellion of individual investors. Citadel and Robinhood both denied any involvement by the billionaire in the decision.
GameStop Short-Sellers Reload Bets After $6 Billion Loss
Despite a punishing two weeks and relentless chat-room taunting, GameStop Corp. haters are showing no signs of surrender.
GameStop stock equal to 139% of its available shares has been borrowed and sold short, a bearish position showing mark-to-market losses of over $6 billion year-to-date, according to data from financial analytics firm S3 Partners. That figure is little changed since last Thursday’s 141% short-interest reading, even though GameStop shares have surged roughly 78% in the past two days alone.
The still-high level of bearishness indicates that even though shorts are being squeezed out of their positions, new traders looking to bet against GameStop are rushing in, according to Ihor Dusaniwsky, S3’s managing director of predictive analytics. That’s occurring even as the cost-to-borrow shares for the purpose of selling them short spikes — the stock borrow fee is currently 23.6%, S3 data show.
“We are seeing a short-squeeze on older shorts who have incurred massive mark-to-market losses on their positions, but are seeing new shorts coming in and using any stock borrows that become available to initiate new short positions in hopes of an eventual pullback from this stratospheric stock price move,” Dusaniwsky wrote in an email.
GameStop shares have surged 285% since activist investor Ryan Cohen and two allies and fellow Chewy Inc. alumni gained seats on the video-game retailer’s board. The news was an inflection point and lit the fuse for retail investors betting the company could undergo a complete digital transformation.
The stock’s surge was in part fueled by an army of Reddit-charged day traders who used the website’s WallStreetBets forum to pump up shares and fight back against the eye-popping levels of short interest. Bets by Gabe Plotkin’s Melvin Capital and Andrew Left’s Citron Research have faced a reckoning in the battle with GameStop’s retail fans.
Left, who decided on Friday to no longer discuss the company, faced backlash from vocal Reddit users over his critiques of the company on Twitter and in a YouTube video. The noted short-seller referred to actions from “an angry mob” which responded to his argument for shares to “go back to $20” when he said he’d go dark on the stock.
Still, even with Citron standing down, the mania has only gained momentum — and spread to other stocks. GameStop closed up 18% after soaring as much as 145% on Monday and then briefly dipping to a loss. Express Inc., who some on Reddit have speculated will be the next GameStop, jumped 132%. Meanwhile, BlackBerry Ltd. climbed 28% after more than doubling in 2021.
That’s piled on punishment for short-sellers, who were already smarting. A Goldman Sachs Group Inc. basket of the most heavily shorted stocks rose as much as 4.5% in New York Monday. That brought its month-to-date return above 30%, the most since at least 2008, as far back as data for the index goes.
“What that does is it makes it much harder to run a short book, because the companies with the weaker fundamentals are not realizing those fundamentals the way they used to,” Stuart Kaiser, head of derivatives research at UBS Group AG, said in a Bloomberg Television interview Monday. “If you’re short a stock right now, you’re really running serious risk to your portfolio to be in those stocks.”
In the eyes of S3 founder Bob Sloan thinks there’s more pain to come for the short-sellers still targeting GameStop.
“Get prepared for another round of short squeeze,” Sloane said in a Bloomberg Television interview Monday. “You are going to see GameStop go way higher.”
He added that the people who originally shorted the stock have been “taken out” only to be replaced by new investors who are going to short it again.
But action in the options market suggests the tide may eventually turn, according to Susquehanna International Group. The pace of bearish put-contract buying outpaced that of call purchases on Monday, with roughly 500,000 puts purchases versus 275,000 calls. That follows a similar dynamic on Friday, after six consecutive weeks of call volume clocking in higher than put buying.
“The GME rally is unlikely to last forever, and investors looking for a sign we are closer to the end could look at the 6 week streak of call volume outpacing put volume finally being broken,” wrote Susquehanna co-head of derivatives strategy Chris Murphy in a note Monday.
Bankrupt Blockbuster Joins Reddit-Inspired Retail Rally
The latest nostalgia stock to jump on the Reddit rally is BB Liquidating Inc., the final remnant of bankrupt video-rental company Blockbuster.
The penny stock surged as much as 302% Wednesday, adding to Tuesday’s 774% spike, on volume that was 70 times the three-month average, showing that even the most retrograde of old-technology stocks isn’t immune to the ebullience of retail investors and day traders.
Blockbuster filed for bankruptcy in 2010 as competitors like Netflix Inc. eliminated the need for bricks-and-mortar video-rental stores. Only one Blockbuster store survives, in Bend, Oregon.
While equity owners typically are left with nothing in a bankruptcy, investors have flocked to such stocks before: Hertz Global Holdings Inc. soared last year after filing for Chapter 11, prompting the company to warn new investors they were all but certain to be wiped out.
Cuban’s Advice For Day Traders Who ‘Get Long And Get Loud’
Mark Cuban has one major piece of advice for day traders: Do your homework.
To the billionaire investor, there are more concerning things about the financial markets — including risks in derivatives and foreign exchange — than a horde of nascent stock pickers rushing into names such as GameStop Corp. after reading about them on a Reddit message board. While it’s risky, losing money sometimes is part of the game, he said.
“At the end of the day, get long and get loud has been the narrative to move stocks for generations,” Cuban said in an email interview. “Now that tool is available to small traders and can be empowering for them.”
Cuban, a serial entrepreneur and owner of the Dallas Mavericks basketball team is worth $4.9 billion, according to the Bloomberg Billionaires Index. He’s both owned stocks — investing for instance in Netflix Inc., Amazon.com Inc. — and he’s shorted equities over the years.
He says he wouldn’t buy any of the shares that are part of the current frenzy — “just not my thing” — and advises newbies to do their homework.
“That’s part of the learning experience,” Cuban said of the risk. “It’s a whole lot less dangerous than forex trading that gets promoted all day every day.”
The rally in GameStop and other stocks has lifted them to heights that many professional investors see as unimaginable, and now it’s drawing attention from regulators.
The U.S. Securities Exchange and Commission said it’s “actively monitoring” volatility in options and equity markets. Senator Elizabeth Warren called for the SEC to take a look at the market, criticizing hedge funds for using equity trading as their personal casino.
Cuban said regulators should be monitoring for whether the rally in certain stocks is a pump-and-dump scheme.
“Otherwise how is this any different from an investment bank putting out a call to clients with a price target and calling it a strong buy?” he wrote.
GameStop Skeptics Citron, Melvin Succumb To Epic Short Squeeze
Melvin Capital and Citron Capital closed out of their short positions on GameStop Corp. as the firms succumbed to the stock’s meteoric ascent.
Melvin Capital closed its position after repositioning its portfolio, according to a spokesperson. Citron Capital’s Andrew Left also said Wednesday that the firm covered the majority of its GameStop short bets at “a loss of 100%” in a YouTube video.
The gaming retailer surged even higher in U.S. premarket trading after an Elon Musk tweet fanned the flames of the stock’s rally that has sent the company’s market value beyond $10 billion.
Short sellers have come under ferocious attack as crowds of retail investors pile into the least-loved names on Wall Street. The 50 most-shorted companies on the Russell 3000 Index have surged 33% so far this year, with the Goldman Sachs Group Inc. basket set for its best month since at least 2008.
GameStop’s stock whipsawed after the Melvin Capital move was first reported by CNBC. The shares were up 66% at $245 as of 6:37 a.m. New York time, having earlier more than doubled from the last close of $147.98.
Hedge fund titans Ken Griffin and Steve Cohen this week injected $2.75 billion into Melvin Capital after the firm lost about 30% this year. The capital infusion comes after Melvin Capital, which started the year with about $12.5 billion in assets saw short bets, including GameStop, go awry.
The stock has risen more than eightfold this month in a dizzying rally fueled by Reddit-charged day traders. Melvin Capital’s retreat comes amid a warning by famed investor Michael Burry, who had a bullish stance on GameStop in 2019, that the surge has gotten out of hand.
“This is unnatural, insane, and dangerous,” Burry, best known for his successful bet against mortgage securities before the 2008 financial crisis, said in a tweet on Tuesday.
Plotkin’s Melvin Capital Extends First-Quarter Losses To 49%
Melvin Capital Management, the once high-flying hedge fund that lost billions of dollars after its bearish wagers were caught up in a Reddit-fueled rally, saw its first-quarter decline extend to 49%.
The fund slid 7% last month, reversing a gain of almost 22% the month before, according to people with knowledge of the matter. In January, the fund dropped 53%.
The firm, founded by Gabe Plotkin, was among several that took heavy losses after retail traders banded together to push stocks including GameStop Corp. to new heights. Plotkin, who had been short the company, then took a $2.75 billion investment from Citadel, Point72 Asset Management and others.
Plotkin in February was called by Congress to testify about the debacle. He told lawmakers that the hedge fund industry will adapt to avoid the kinds of market dynamics that led to his fund’s losses.
A spokesman for the firm declined to comment.
Another firm caught in the cross hairs of the GameStop saga, Maplelane Capital, which lost 45% in January, is starting to recover.
The fund rose 6.5% in February and 2.1% in March, according to people familiar with the matter, and ended the first quarter with a loss of 39.5%. The fund benefited from its long and short wagers on technology and consumer-focused companies, one of the people said.
Maplelane has made money in 14 of the past 15 months, one of the people said.
The $3 billion New York-based firm, run by Leon Shaulov and Rob Crespi, declined to comment.
Overall, the hedge fund industry struggled to make money last month amid higher equity market volatility. The average fund was about flat in March and gained 2.2% in the first quarter, according to Hedge Fund Research Inc. The S&P 500 index rose 4.2% in March and 6.2% for the quarter, with dividends reinvested.
Lone Pine Capital, Tiger Global Management and Whale Rock Capital Management, which often focus on tech wagers, posted dismal March returns.
Meanwhile, Glenview Capital, which ended 2020 with a 9.5% gain despite steep losses earlier in the year, soared 25% in its flagship fund through March thanks to successful wagers on health care stocks, including DXC Technology Co., Cigna Corp., AmerisourceBergen Corp. and McKesson Corp.
Here’s how other hedge funds fared in March and in the first quarter, according to people familiar. Representatives for the firms declined to comment.
GameStop’s Steep Stock Rally Lives Another Day As Shorts Give Up
GameStop Corp. had the biggest day yet of its dizzying rally, adding more than $10 billion in market value, as bullish day traders kept the upper hand over short sellers.
The shares advanced 135% to $347.51 at the close Wednesday after triggering three volatility halts. The video-game retailer’s market value has risen more than 18 times this month to about $24 billion, making GameStop bigger than almost half of the companies in the S&P 500 Index.
Euphoria born in day-trader chat rooms has turned GameStop into the biggest story of the retail era, its improbable surge an emblem of the newfound power of individual investors. At the same time, it’s become a major headache for institutional investors betting it would fall.
The meteoric rally has left short sellers counting the cost in a battle with day traders who have taken to the Reddit social media platform to encourage others to follow their lead. Melvin Capital closed out its short position, while Citron Capital’s Andrew Left said the firm covered the majority of its short in “the $90’s at a loss of 100%.”
“It does feel like rationality and fundamentals are just kind of dead,” J Capital Research co-founder Anne Stevenson-Yang said by phone. “If you’re short you’re in a very difficult position because you have to buy the stock to get out, so you end with a heavily overvalued stock.”
The story catapulted past the market and was said to have caught the attention of Treasury Secretary Janet Yellen and others in the Biden administration. Senator Elizabeth Warren said she intends to make sure regulators “wake up and do their jobs.”
Federal Reserve Chair Jerome Powell sidestepped several questions about the market implications of GameStop’s rally, refusing to comment on any individual stock or a single-day move in the equity market. Instead, he said that financial-stability vulnerabilities overall are “moderate.”
GameStop didn’t respond to requests for comment.
The stock’s gains were fanned late Tuesday after Tesla Inc. chief Elon Musk tweeted a link to a Reddit thread about the company. But famed fund manager Michael Burry warned that the manic rally has gotten out of hand, calling the stock’s rise “unnatural, insane, and dangerous.”
Venture capitalist Chamath Palihapitiya, who pushed the gains higher Tuesday after tweeting about buying calls, said on CNBC that he closed his GameStop position. He said he will donate $500,000 from his profits and original position to the Barstool Fund for small businesses.
“It really just goes to show the classic saying that markets can stay irrational longer than you can stay solvent,” said Greg Taylor, chief investment officer at Purpose Investments. “So you can try to fight this as long as you want but at some point you just have to give in and just step to the sidelines. That feels like the phase of the market we’re in right now, where things are going a little crazy and definitely divorced from fundamentals.”
Another note of caution was provided Wednesday by Bank of America Corp. analysts. While raising their price target to $10 from $1.60 to reflect the stock’s recent surge, they noted that GameStop is in “a weaker not a stronger place” and reiterated their underperform recommendation.
“While it is difficult to know how much very high short interest and retail ownership could continue to put upward pressure on the shares, we think fundamentals will again factor into valuation,” analysts led by Curtis Nagle wrote in a note. “We remain skeptical on the potential for a turnaround.”
“It is unwise to try to stand on principle against an angry mob,” said Wedbush Securities Inc. analyst Michael Pachter, who had a price target of $16 for GameStop as of Jan. 11. “The shorts have to mark their investments to market value, so if they’re short at $20 thinking the stock will go to $10 and it goes to $300, they lost $280 trying to make $10. Frankly, I’m surprised they didn’t close much lower than here.”
The epic short squeeze has set off a search for other companies that might be similarly vulnerable, with Express Inc., Bed Bath & Beyond Inc. and AMC Entertainment Holdings Inc. among stocks surging on Wednesday.
Online brokerages including Robinhood Markets and Charles Schwab Corp. were hit again by service disruptions as the wild swings transfixed traders. TD Ameritrade told clients in a message that it has put in place several restrictions on some transactions in GameStop, AMC and other securities.
“The thing about these manias is there’s always enough people who make 600% or 1,000% and tell everybody about it that everybody gets excited about it,” said Anne Stevenson-Yang. “The thing is it’s not the majority of those people and eventually a whole bunch of people lose money.”
Customers Sue Robinhood Over GameStop Restrictions
A group of individual investors has filed a class action complaint against Robinhood after it restricted users from buying GameStop shares on Thursday.
The nine-page complaint, filed in the Southern District of New York, alleges that Robinhood “deprived their customers of the ability to use their service” as well as potential gains from trading for “no legitimate reason.”
Robinhood said in a blog post that transactions for certain securities, including eight stock tickers that it listed, were restricted to “position closing only.” Users reported seeing messages that they could close out their positions in some stocks but couldn’t buy more shares of the companies.
The complaint, which asks for a jury trial, requested that Robinhood immediately reinstate GameStop trading on its platform and pay damages to its traders.
Robinhood didn’t immediately respond to a request for comment.
The GameStop Short Squeeze Shows An Ugly Side Of The Investing World
Short sellers are thick-skinned, but the nasty comments, insults and threats leveled at them feel like political fights, not investing differences.
Andrew Left is no stranger to conflict when it comes to investing. He makes a living betting that companies will stumble, and he calls out executives by name.
Companies and their supporters fight back, but the criticism he normally gets is nothing compared with the venom spewed in recent days by stock traders who have come together online to drive up shares of an unlikely momentum stock, mall retailer GameStop Corp.
“It makes you feel vulnerable,” Mr. Left, 50, founder of Citron Research, said in an interview. “We live in a world where we’re all exposed and people don’t understand boundaries.”
The angry traders have shared his personal information, hacked into Mr. Left’s social-media accounts and texted Mr. Left and his two children, using threatening, profane and personal language, according to people close to the matter.
Other short sellers have also been targeted in these forums. In the past week, there has been an uptick in references to well-known short sellers like Mr. Left and Muddy Waters LLC’s Carson Block on Reddit channels, blogs and other social-media venues, according to a review by Meltwater, a global media intelligence company.
Muddy Waters’ Mr. Block, who made his name shorting Chinese stocks, said he has received death threats and other nastiness in the past, though the abuse always seemed tamer in the investing world than in politics.
“People have always been much more pragmatic about their money than their political beliefs, which allows activist short sellers to get a hearing with investors,” Mr. Block said. “Maybe what happened with Andrew is an evisceration of that pragmatism that’s similar to the rabid delusions you’re seeing in politics and elsewhere.”
Online forums like Reddit’s WallStreetBets are full of traders boasting that they are beating up the big investors who normally control the market. It is an ironic twist, or a sign of their lack of understanding, that they equate short sellers with the Wall Street establishment.
Short sellers are fringe players who go after companies and institutions the rest of the financial world is largely backing. They often make bets based on deep research, sometimes exposing fraud. Recent successes include firms like Nikola Corp. , Wirecard AG and Valeant Pharmaceuticals International Inc.
But they are often rich. And in some cases, individual investors have been burned by their short-selling campaigns. Nikola, for example, was a favorite stock of retail momentum traders.
This time, Mr. Left targeted GameStop, which soon became the subject of a short squeeze, where rising prices prompt bearish investors to buy back shares they had sold short to cut their losses, pushing the stock higher still. Traders have driven the price of GameStop up threefold since Thursday when Mr. Left held a livestream presentation arguing the stock would fall by 50%.
The company’s fans have ordered dozens of pizzas sent to his home, well past midnight. Mr. Left even reached out to one online critic after he asked Mr. Left why he made his Twitter account private. “We spoke on the phone, he sounded like 15 years old,” Mr. Left said.
But Mr. Left has also contacted the Federal Bureau of Investigation and the Securities Exchange Commission about the more vicious abuse and what he sees as collusion among the investors. In a YouTube video posted on Wednesday, Mr. Left said he has now closed most of his short position.
Current and former regulators say that authorities do have means to crack down on online groups that band together to pump stocks. There are several cases where authorities have successfully won cases against groups of investors that have acted together online to manipulate a stock’s price. In most cases, they have targeted those that spread false information online.
It is unclear whether what is happening online now could be considered manipulation. Many of the posters are simply announcing their intention to drive a stock higher, and not attempting to deceive other investors by making false claims.
The current and former regulators say that there are mechanisms for the SEC to quickly limit some of this activity. Much like when the SEC banned short selling in hundreds of companies at the height of the financial crisis, it can take emergency measures that would make it harder to trade options, which many traders are using to juice their returns and drive the stock higher.
The vitriol against Mr. Block, Mr. Left and hedge fund Melvin Capital Management’s Gabe Plotkin largely began in the past 10 days, according to Meltwater. Mr. Plotkin had a short position in GameStop.
Mr. Left has received the majority of so-called negative sentiment. Most of the online content has stemmed from the U.S., though users from China have also been a large part of the effort.
Mr. Left said the traders’ attacks on him are a sign of the risks they are taking by trading options and buying into stocks with the markets near all-time highs. The fact that so many investors are cooped up amid the coronavirus pandemic puts even more people on edge.
“It’s extreme capitalism gone wild,” Mr. Left says. “We’re a nation of gamblers.”
Mr. Block believes this will end badly for the traders, who are ignoring the “investing lessons of the past,” such as not chasing expensive stocks. In time, he believes the new investors will be burned. “Frenzied retail speculation always leads to tears,” says Mr. Block.
Tootsie Roll At Record Highs Amid Surge Of Shorted Stocks
The maker of Tootsie Pops has spiked to a record as retail traders pour into heavily-shorted stocks fueled by excitement over GameStop Corp.’s meteoric surge.
Shares of Tootsie Roll Industries Inc. soared as much as 53% into record territory Wednesday, adding to its gains this week, and triggering a brief trading pause. As of 11:23 a.m. in New York, the stock had pared its advance to 14%. A spokesperson for the company didn’t immediately comment.
The company, which makes its namesake candy along with other consumer brands like Junior Mints, has had a challenging year as traditional candy-consumption events like Halloween and birthday parties were disrupted by the Covid-19 pandemic. Sales fell 14% in the latest quarter and both planned and impulse purchases of the products declined.
But while falling retail sales traditionally lead to lower share prices, Reddit-charged day traders have been piling into previously unloved tickers in recent sessions, driving them to record highs. Short interest in the candy maker is 46% of its float, with 22 days to cover, according to data from S3 Partners.
Ellen Gordon, the 89-year old chief executive officer, owns just over half of the company’s common shares and 81% of its B shares, according to company filings. Her stake in the business, which she owns both directly and on behalf of other family members, is now worth more than $1.8 billion at current levels.
Carson Block Cuts Short Bets, Ducking Bear-Hunting ‘Mob’
Carson Block said his Muddy Waters Capital “massively reduced” its short positions in recent days, mostly avoiding the buying frenzy that has burned at least two other hedge funds.
“There are no medals for valor in this business,” Block said by phone from California. “Being one of the more high-profile short-sellers, it would not be smart for us to have appreciable risk on in any name.”
As an activist who mostly seeks to profit by exposing fraud and accounting shenanigans, Block is a regular target for bullish investors who willfully disregard his findings or consider short-sellers a pox on the stock market. But he said the Reddit-fueled attacks on funds that shorted GameStop Corp., including Melvin Capital Management and Citron Research, are like nothing he’s seen before.
Block began scaling back its positions about two weeks ago, when he recognized that a squeeze might be building in one of his shorts, GSX Techedu Inc., a Chinese maker of education software that Melvin also bet against. Then, after day traders drove up the price of GameStop by 51% on Friday, he decided it was time to take cover before they zeroed in on Muddy Waters.
“The mob is specifically hunting short-sellers,” he said. “We didn’t have the misfortune of being in GameStop.”
Muddy Waters bought stock to cover most of its shorts on Monday and today was able to reduce risk in the last big position, Block said.
The frenzied buying of GameStop and other heavily shorted stocks, such as bed Bath & Beyond Inc. and AMC Entertainment Holdings Inc., underscores the perils of contrarian wagers in a market buoyed by central bank stimulus and increasingly driven by rumor-chasing punters. Block emphasized that retreating to the sidelines was a tactical decision to safeguard his clients’ capital, not a pullback from short-selling.
In recent days, Muddy Waters also largely withdrew from a short bet on Nano-X Imaging Ltd. after the stock was added to the ARK Israel Innovation ETF. That exchange-traded fund is managed by Cathie Wood, who rocketed to star status in Reddit forums and on Twitter after becoming one of the best-performing investors of 2020.
“We expected a retail-buying mania,” Block said.
FTX Lists Gamestop After Reddit-Fueled 200% Rally In Two Days
Reddit’s r/Wallstreetbets is beating hedge funds at their own game.
Crypto exchange FTX has listed GameStop, a global video game retail chain, after the stock became by far the most popular choice on Reddit’s infamous r/Wallstreetbets, a community dedicated to trading stock market options.
The FTX listing on Wednesday morning allows crypto traders to get in on the action as well. The offering comes as part of FTX’s tokenized stocks program, which features both spot and futures markets for popular stocks and indices. This allows crypto traders to get exposure to stocks using crypto and stablecoins, in addition to fiat options.
GameStop’s stock, trading under the ticker GME, has generated massive media attention after a dramatic rally has resulted in more than tenfold gains since Jan. 12.
The rally is largely attributed to r/Wallstreetbets, a subreddit for stock market traders. GameStop has long been one of the favorites of the community, though it shared the spotlight with other high growth stocks like Tesla or Nio.
GameStop itself has been in rough financial shape for a long time, as digital video game delivery has steadily eroded its brick-and-mortar business in the past few years. The COVID-19 closures further depressed the company’s prospects.
These factors likely contributed to Melvin Capital Management’s decision to enter a short position in the stock, betting that its price would go down. Unfortunately for the company, someone at r/Wallstreetbets discovered this short position due to mandatory disclosures with the United States Securities and Exchange Commission.
The subreddit then rallied behind the stock in a concerted effort to squeeze the short out — to force the price to go up so much that the short position must be liquidated. After GME topped out at $320 in pre-market trading, it appears the Redditors were successful in their mission, as the hedge fund announced it closed its position.
The unfortunate trade reportedly caused a $3.75-billion loss for the fund since the start of 2021, amounting to more than 30% of its capital. Other hedge funds “bailed out” Melvin Capital Management with a $2.75 billion investment. Still, some details of the story remain unclear.
For example, the initial short position discovered by Redditors was just $55 million in put options. The losses from buying options are limited to 100% of their value, which could suggest that other positions had a strong contribution to the supposed multibillion-dollar loss.
The story has a very similar analog within the crypto space. In the summer of 2020, the Chainlink community rallied against an announced short position opened by a company named Zeus Capital. The details of that event led many to question the true motives of announcing the supposed short position.
As of writing, GME has fallen by over 33% since being listed on FTX.
Reddit Crowd Bludgeons Melvin Capital In Warning To Industry
The first sign of trouble for hedge fund wunderkind Gabe Plotkin came in late October: A poster on Reddit’s popular wallstreetbets forum was taking aim at his wildly successful investment firm.
“GME Squeeze and the demise of Melvin Capital,” wrote the user, Stonksflyingup, referring to stock ticker of GameStop Corp. and Plotkin’s $12.5 billion firm. Before long, veryforestgreen weighed in: “Melvin Capital New Short Attack.” Then, greekgod1990: “Melvin vs WSB! And GME to the moon.”
So it was that the tables turned on Wall Street — and a hedge fund star suddenly found himself at the mercy of the day-trading Reddit bros who have become one of the most powerful, if improbable, forces in the stock market today. The attack on Plotkin’s six-year-old Melvin Capital shifted the balance of power in ways that would have seemed unimaginable only months ago. By Wednesday, the firm had capitulated to the amateurs and covered the GameStop short.
The explosive growth in retail day-trading, powered by platforms like the Robinhood trading app and forums like wallstreetbets, has turned the old order on its head. Melvin Capital’s mistake, if it can be called that, was leaving footprints behind in the marketplace. Reddit users were able to identify stocks that Melvin was wagering against and then buy those en masse, unleashing a violent run-up in prices that turned Melvin’s winning bet into a loser.
So steep were the losses — about 30% through last week — that Melvin on Monday turned to billionaire hedge fund founders Ken Griffin and Steve Cohen — Plotkin’s former boss — to shore up the firm.
As of Tuesday, the fund’s losses had increased even with the portfolio repositioning, though investors wouldn’t say by exactly how much for fear of angering the money manager, which they expect can still fight its way back.
A representative for the firm declined to comment on performance, other than saying the portfolio had been repositioned in the past few days and “the social media posts about Melvin Capital going bankrupt are categorically false. Melvin Capital is focused on generating high-quality, risk-adjusted returns for our investors, and we are appreciative of their support.”
The risk of going long is intuitive: Buy $50 of shares, and if the price drops you lose that amount. But losses on bearish bets can be more severe and swift. A classic $50 short can lose multiples that amount if the stock soars. And while using options may limit losses, investors can get wiped out quickly if the stock rises.
The shorts that were listed in Melvin’s regulatory filing from the third quarter all rocketed in recent weeks. Names include Bed Bath & Beyond Inc., iRobot Corp. and GSX Techedu Inc. GameStop, the stock that seemed to set off the short squeeze, soared 634% in the month through Tuesday. That night Elon Musk tweeted a link to the Reddit thread with the caption “Gamestonk!!” And by mid-Wednesday in New York, the stock more than doubled again.
Investors caught in a short squeeze can close out bets and eat their losses, or try to ride out the price surge — typically requiring they put up more money.
Melvin’s cash infusion was almost unheard of in hedge fund land. Griffin, his partners and the hedge funds he runs at Citadel threw in $2 billion and Cohen’s Point72 Capital Management, which already had about $1 billion invested in Melvin, ponied up another $750 million.
Cohen, one might argue, was bailing out his own investment. For Griffin, it was a rare opportunity to invest in a talented manager on the cheap. Both firms got a minority revenue share from the firm for stepping in.
Late Tuesday, Cohen broke his usual habit of only tweeting about his New York Mets. “Hey stock jockeys keep bringing it,” he wrote on the social media platform.
Rough crowd on Twitter tonight.Hey stock jockeys keep bringing it
— Steven Cohen (@StevenACohen2) January 27, 2021
Until this year, Plotkin, 42, had one of the best track records among hedge fund stock pickers. He’d worked for Cohen for eight years and had been one of his biggest money makers before leaving to form Melvin — named after his grandfather — in December 2014.
So good was Plotkin’s reputation that the firm closed to additional investors before word had even spread that he was setting out on his own. Despite a loss in 2018, he’s posted an annualized return of 30% since opening, ending last year up more than 50%, according to an investor.
Then came January, when Melvin first became aware that a Reddit crowd had put a target on the firm’s positions, ramping up an attack on GameStop and other shorts.
Why they singled out Melvin remains a mystery. As far as hedge fund managers go, Plotkin is considered low key. He doesn’t show up at many conferences or hobnob at society balls. Former colleagues and current investors say he’s a nice, quiet guy — not the type to make enemies.
The most obvious explanation is that his positions were in some sense knowable. Hedge funds generally go to great lengths to guard their short positions. If they use put options, for example, they buy them over the counter, which means they don’t have to list them in regulatory filings. Plotkin’s filing in the third quarter showed put options on 17 companies, many of them highly shorted names.
“There’s no targeting going on – WSB is far less organized than all the articles are making it out to be,” said Lucas Severyn, a member of wallstreetbets. “From time to time, WSB gets obsessed with some stock, now it’s GME, and for the first time ever this stock just keeps giving.”
Melvin’s losses mounted in January, and after they passed 15% last week, it had conversations with investors and got commitments of about $1 billion for Feb. 1. By the end of last week, losses had mounted to about 30%.
On Monday morning, Plotkin reached a deal with Point72 and Citadel to provide him with more liquidity to help put Melvin back on the offensive. That Cohen would step in made sense, given his longstanding relationship with Plotkin — and an initial investment of about $200 million in the firm that had grown to about $1 billion.
Griffin, who started Citadel in 1990, has a history of swooping in when others are in distress. He’s hired teams or took on assets from hedge funds such as Sowood Capital Management, Visium Asset Management and Amaranth Advisors after they imploded. He may also have welcomed the chance to invest in Plotkin’s fund. Melvin generally manages money for charitable organizations like endowments and foundations.
Investors have been expressing faith that Plotkin will climb out of this hole.
Griffin said Monday that he and his partners “have great confidence in Gabe and his team.” Cohen called him “an exceptional investor and leader.”
A person familiar with the thinking inside Plotkin’s firm said one lesson is clear: Don’t leave a trace and only buy put options over the counter.
“This phenomenon of retail investors jumping on a bandwagon to dominate trading activity is a new kind of portfolio risk,” said Jay Raffaldini, global head of sales and distribution at UBS O’Connor. “It’s going to cause a lot of hedge funds to rethink how they approach their long and short investment strategies.”
How ‘Flows Before Pros’ Is Disrupting Stock Markets
It seems inevitable that the populist forces that have disrupted almost everything else in recent years would eventually arrive to democratize investing. But the sheer impact of retail trading has been shocking, primarily to financial professionals who appear ill-equipped to deal with it.
Organizing via social media, the amateurs have been able to send so-called “meme stocks” like GameStop Corp. soaring, while hedge funds that have been betting against the chosen companies are in pain. Some worry that the battle between the “flows” generated by small investors and the “pros,” or professionals, are artificially pumping stocks higher in a feedback loop that could lead to a collapse. Others worry the wild trading is ruining the purpose of capital markets entirely: the efficient allocation of capital.
1. How Did This All Start?
Online brokerage Robinhood Markets Inc. and other app-based platforms have brought a new wave of at-home traders into the market — many of them working from home or idled by the pandemic — raising concerns about the “gamification” of investing.
Those on r/wallstreetbets — the Reddit forum dedicated to “making money and being amused while doing it” — have set their sights on exploiting a financial system that’s perceived to have locked them out for years. Much to the horror of the financial establishment, r/wallstreetbets then figured out a way to capitalize on this system and bend it to their own will.
2. How Are They Changing The Way Markets Work?
Traditional value investing used to be about finding an undervalued company and buying the stock while it’s relatively cheap, in the hope that it would appreciate. To the retail traders, it’s not clear whether value matters very much. Some of the stocks targeted are seen as a long way from profitability and from the type of fundamentals that would normally attract investors. Yet once a stock gets going now and the price starts rising, it attracts even more attention and flows from the r/wallstreetbets crowd.
One way of thinking about this is that prices used to be self-limiting. Stocks would rise to a point where valuations (earnings multiples or price-to-book) would become unattractive, which would cause the stock to go down and give valuations a chance to normalize. Nowadays, prices can go much higher than traditional security analysis might suggest.
3. Why Is That?
Flows before Pros is one way to put it. The simple premise here is that in an environment where flows matter more than fundamentals, the guy trading stocks in his basement might be better equipped to judge where money is going next. He might have a better sense of the strength of a stock’s particular “story,” for instance, or a better sense of where the forum’s hive mind will go next, than portfolio managers wedded to their valuation models. In a more-than-a-little-ironic turn of events, the professionals may now be chasing retail flows.
4. Who Are Some Of The Pros Here?
Short sellers — funds that borrow a stock and sell it, betting that the price will have gone down by the time they have to buy it to give it back — have become the target. Such firms usually would unveil a new position to great attention, expecting to cast a cloud over the company’s shares. The scrum this year over GameStop — in which retail traders have gone head-to-head with short-selling firm Citron Research — suggests that could become a thing of the past.
A hedge fund or short-seller advertising a bet against a stock might now be the equivalent of waving a red flag to r/wallstreetbets’ herd of bulls: a signal to charge in with call options and force a move higher. The predators have turned prey.
5. What’s The Strategy?
The folks on r/wallstreetbets often target stocks where they see a possibility of exploiting a structural weakness in markets. For instance, some have been upfront about buying stock options to try to squeeze share prices higher. (Options are contracts that give the holder the right to buy or sell the underlying security at a predetermined price after a set period of time, and the new and commission-free apps such as Robinhood have made options trading far easier.)
The idea is that buying a ton of options forces market-makers — the middlemen in the transaction — to hedge their own exposure by buying the stock in the underlying company. That dynamic may be enough to move a target share price upwards, which can then spark more call-buying in a frenzied feedback loop: The stock goes up, short sellers give up, they buy stock to surrender, and their buying pushes the stock up more.
6. Can The Small Really Outweigh The Wall Street Whales?
The Thing To Look At Here Is Not The Amount Of Money That Retail Investors Are Spending, But The Amount Of Leverage Embedded In That Spend. Here’s One Scenario:
* Bob has a Robinhood account. He bought a single $3,250-strike weekly call option contract on Amazon stock on Aug. 14 for $1,500. That option happens thanks to a market-maker — call her Jenn — sitting at a large dealer-bank. But Jenn isn’t taking the other side of Bob’s trade, instead she is aiming to be a neutral facilitator. Her job is to make markets, not bet on them, so she wants to hedge her position. She does this by buying Amazon shares, making a calculation based on what’s called the delta of her position.
The delta is how much the option will change in value based on the price of the underlying stock. In this case, she judges that she needs to buy $66,100 worth of Amazon stock to get to neutral. If shares of Amazon go up, she might have to pay out on Bob’s option, but at least that will be offset by the gain on her Amazon stock.
* A few days later Amazon stock does indeed rise, going up 5%, so Jenn needs to rebalance her books in order to keep her position neutral. This time, because the delta of her position has moved higher, she needs to buy even more stock. In fact, she needs to buy $230,000 worth of Amazon shares. Bob’s puny $1,500 outlay has been transformed into $230,000 worth of share-buying.
* By targeting dealers’ exposure in a concerted way, some retail traders are in effect trying to take advantage of a phenomenon known as a “gamma squeeze” — betting that as the value of Amazon stock gets closer to an option’s strike price, dealers will have to buy more and more of the underlying stock.
7. What About The Hedge Funds’ Shorts?
Gamma squeezes can be more effective when coupled with a “short squeeze” in a company’s shares. Traders on r/wallstreetbets have often identified companies with a lot of short interest and a limited number of shares available for trading. That makes things harder when short sellers have to scramble to buy back shares and close their positions. This kind of dynamic also helps push the price of a stock up, feeding the loop. The hedge fund Melvin Capital revealed Jan. 25 it had accepted an injection of $2.75 billion from rivals Citadel and Point72 Asset Management after short positions left it with losses of 30% for the year.
8. Is This Just A Game?
It would be tempting to dismiss all of the above as a game if it weren’t actually moving stocks and impacting real companies. Shares of GameStop, a software retailer, have surged exponentially this year — drawing attention even from Elon Musk, whose own soaring stock made him the world’s richest person this year. Message boards have been alight with suggestions for what GameStop could actually do with that very real money (think strategic acquisitions and expansions to grow its market share).
So at some point these random flows start impacting fundamentals too. AMC Entertainment Holdings, another meme stock, avoided bankruptcy in late January by capitalizing on a stock rally fueled largely by retail traders. Some hedge funds may be selling some of the stocks they’re most bullish on to cover losses, which would hurt performance.
— Elon Musk (@elonmusk) January 26, 2021
9. How Long Can This Last?
No one knows. For the U.S. Securities and Exchange Commission, fighting online commentary that hypes stocks is an uphill struggle, mainly because it’s hard to prove such posts are part of an illicit scheme to manipulate the market. In December, Massachusetts regulators filed a complaint against Robinhood alleging it aggressively marketed its platform to novice investors and failed to put controls in place to protect them.
In the meantime, Conor Sen, founder of Peachtree Creek Investments and a Bloomberg Opinion columnist, has argued that dealers might need to start pricing options differently to make up for this behavior. Big market squeezes tend to end sharply and in tears, which may ultimately be the fate of GameStop. But then, the r/wallstreetbets fans and their flows might just move on to the next target.
Reddit Favorites Eye Stock Sales After Retail-Fueled Rallies
Some of the Reddit day-trading crowd’s favorite companies are capitalizing on their newfound popularity by selling shares to raise fresh capital.
American Airlines Group Inc. on Friday announced plans to sell up to $1.1 billion of shares after a 17% climb over the past two sessions amid Reddit chatter about squeezing shorts.
Also on Friday, pot stock Sundial Growers Inc. erased a premarket surge after announcing a $100 million stock sale at a discount to Thursday’s closing price. Small-cap pharma stock JanOne Inc. raised equity Friday after shares more than doubled over the past two days in a surge that traders linked to retail speculation. Shares in all three stocks fell on Friday after the deals were announced.
Those share sales follow a $305 million raise by AMC Entertainment Holdings Inc. earlier this week. Traders are expecting even more deals as firms like these seek to repair pandemic-battered balance sheets while demand for shares is high.
The stocks are among those that surged of late as investors continue a relentless buying spree in firms touted on Reddit. Traders are keeping their eyes on other Reddit picks, such as GameStop Corp., Express Inc., Bed Bath & Beyond Inc., and Naked Brand Group Ltd., for potential stock sales of their own after shares further extended run-ups on Friday.
AMC is weighing a second offering, people familiar with the matter said earlier, while at least one analyst has called for GameStop to bring a stock sale for “as much as the market can absorb.”
American Taps Equity Again
American’s at-the-market offering replaces an equity distribution agreement from last year, under which the company raised $882 million amid an unprecedented travel collapse caused by the coronavirus pandemic. Like its rivals, the company has also received billions of dollars in federal aid.
The Fort Worth, Texas-based carrier is still reeling from losses and an uncertain outlook as travel remains depressed. American, the most shorted stock among U.S. airlines, gave a cautious outlook Thursday on when a recovery would materialize. U.S. passenger totals this week averaged about a third of year-ago levels.
American ended last year with $14.3 billion in total available liquidity.
After GameStop Backlash, Citron Research Will Stop Publishing Short-Seller Reports
Founder Andrew Left has been the target of ire from stock traders following GameStop reports.
A short seller is calling it quits.
Andrew Left, founder of Citron Research, on Friday said his firm will no longer be publishing short-seller reports, on the heels of backlash to his recent public skepticism about shares of GameStop Corp. Instead, the firm will pivot to providing insight into companies the firm thinks investors should buy, Mr. Left said.
For more than a decade, Mr. Left had been well known for attempting to expose fraud at larger companies, publishing lengthy reports and making significant bets that these firms’ shares would decline in value. Among his more well-known calls was a successful bet against Valeant Pharmaceuticals.
But this week, Mr. Left has been the target of ire from stock traders who have come together online to drive up shares of an unlikely momentum stock, mall retailer GameStop. Mr. Left, 50 years old, had been publishing negative reports about the firm in recent weeks.
Some of these traders have shared his personal information, hacked into Mr. Left’s social-media accounts and texted Mr. Left and his two children, using threatening, profane and personal language, according to people close to the matter.
“The risk-reward of being a short seller is not worth it; it’s not worth it for me or my family,” Mr. Left said in an interview.
The decision, he says, is a reflection of the new market.
“Young people want to buy stocks. That’s the zeitgeist. They don’t want to short stocks, so I’m going to help them buy stocks,” he said.
Mr. Left said he is still critical of GameStop’s stock and others that are popular lately, but he says he felt a need to change his business to appeal to the new traders.
“I’ll take the skepticism and mentality of short selling and apply it to the long side,” he said.
Mr. Left announced the decision in a YouTube video early Friday. He called the move a simple pivot.
“When we started Citron, it was to be against the establishment. We’ve actually become the establishment,” said Mr. Left in the video.
Still, he is proud of the work Citron did.
“We uncovered more fraud than any nongovernmental agency out there,” he says.
Stock Investors Are Hunting For The Next Gamestop On Reddit And Twitter
AMC, Express, BlackBerry and Nokia are some of the firms that are rising due to their popularity on social media and internet forums.
For a generation raised on the idea that you can get almost anything you want online, it’s only natural that the next hot investment is lurking on the internet waiting to be found.
That belief is driving a hunt among some investors for the next GameStop Corp. After watching how members of the WallStreetBets forum fueled a dizzying rally in the company’s stock and upended Wall Street’s expectations, they’re now scouring Reddit and Twitter to join in on the next potential opportunity.
Kevin Aldrian, 19, is one such trader. He’s looking specifically for a stock that could trigger a short squeeze — a trading phenomenon that’s at the center of GameStop’s wild ride. “After GME, I started searching for the next potential squeeze,” said Aldrian, an economics sophomore at the University of San Diego, referring to GameStop’s ticker symbol. “There’s no way to actually predict the squeeze, but I will monitor WallStreetBets and finance Twitter.”
Following GameStop’s boom, movie-theater chain AMC Entertainment Holdings Inc. and apparel retailer Express Inc., as well as telecom companies of yore such as BlackBerry Ltd. and Nokia Oyj are already making gains after their names were circulated around forums and social media.
The internet has always been a playground for indulging in both popular and niche obsessions — everything from politics to music and Hermes Birkin bags to film noir cinema. Flicking through the unverified celebrity gossip on Deuxmoi’s Instagram feed won’t cost you money, but basing your investment decisions on which emojis appear next to stocks on TikTok, Twitter and Reddit could prove financially catastrophic. Or at least that’s what experienced industry hands say.
It’s difficult for any stock trader to consistently beat the market, said Douglas Boneparth, the president and founder of Bone Fide Wealth in New York. “Many will call this a bubble while contrarians will say it’s different this time. We will certainly see.
But my best guess is that some folks will make a lot money, but even more will lose trying to chase the next big thing.”
The new breed of internet-focused investors is undeterred, though. Some members of forums such as WallStreetBets pay close attention to financial metrics and argue passionately on behalf of their investment decisions. But others treat time-tested metrics such as valuation, debt-to-equity ratios and free cash flow as financial jargon that can be ignored.
Mike Janavey, a 30-year-old investor who uses the Robinhood trading app, says Twitter has been the first place he turns to when he has to make financial and investment decisions. The clothing and footwear production specialist from New York says he has been seriously investing for the past two years.
“What’s funny is I don’t know anything about stock charts, I literally have no idea about finance,” Janavey said. “I go off of what accounts I follow on Twitter, research the tickers on Twitter and if it makes sense to me, I buy it. I can’t read charts or anything like that. I go purely by being on social media.”
Janavey recently put money into BioNano Genomics Inc. and Churchill Capital Corp. IV after seeing them hyped up on Twitter. He acknowledges that there’s risk in his strategy, but says he’s managed to make solid gains so far.
Aldrian tends to focus more on Reddit. He says he clicks on the daily discussion thread of the WallStreetBets forum — a community of about 2 million traders — and scrolls all the way down to load as many messages posted by users as possible.
Using the “control F” shortcut on his keyboard, he scans comments to see which stocks are most talked about. The quantity of comments, likes or shares are indicative of where the market might be going.
“I see how many posts there are, what the comments are saying, and the amount of comments and likes,” said Aldrian, who has already bought some AMC stock. “That’s just for watching which companies will be targeted so I’ll search any stocks with super-high short interest. For catching due diligence to get in before they move, you just have to browse the Reddit frequently and look at the daily discussion threads.”
The surge in retail trading last year came with a boom in online communities focused on stock tips, trading tutorials and investment strategies across social media platforms. On TikTok, there’s StockTok, and on Twitter, it’s FinTwit. Online messaging platform Discord has investment chats, Reddit has forums and Facebook has specialized groups.
All that means that while trading has become more accessible to millions of investors, so has bad financial advice. Largely unregulated and with little oversight against financial misinformation, it’s hard to decipher the good advice from the bad. Financial industry veterans are calling for government regulation.
“I suspect our market system will survive social media, but god, this points out the need for, as we used to say in the Treasury in the 90s, a regulatory system as modern as the markets,” Larry Summers, the former director of the National Economic Council under President Obama, said in an interview with Bloomberg TV last week. “There’s always a need to regulate bucket shops and to regulate various ways in which retail investors are taken advantage of and we’re in a situation where it’s an old theme but there are new ways of doing it.”
Yet GameStop’s rally has been held up as vindication by believers against skeptics. Joey Celentano, a 19-year-old sophomore at Pace University, never spent much time on WallStreetBets, but now it’s on his radar. He’s looking at buying a small position of AMC or BlackBerry stock.
“I would have to read the WallStreetBets subreddit, and see what their plan is,” Celentano said in a text message. Asked about Gamestop, he said it was too risky of an investment, so he decided not to join in.
“I never got in,” Celentano said, followed by a facepalm emoji.
Crypto’s Young Believers Stoke A Craze For Bitcoin Penny Stocks
Marko Vulicevic, just 19 years old, has accounts on eight different trading platforms, spends his free time reading blockchain whitepapers, and has a portfolio of ETFs, crypto coins and cannabis stocks.
His best bet so far: a 1,400% gain on bitcoin miner Argo Blockchain Plc, he claims. Vulicevic, who lost his job in retail during the pandemic, is one of the many individual investors behind a frenzy for crypto trading — lured by the thrill of big returns and a belief that blockchain technology is on the cusp of revolutionizing the world of modern finance.
Vulicevic says he first got hooked trading foreign exchange on a demo Trading212 account, but then started using his savings to buy stocks and crypto coins, doing his own research on Reddit boards like r/pennystocks.
“When I started to see the price fluctuations, it was like a dopamine rush,” said Vulicevic, who lives in Surrey, a county southwest of London. “But when I started to learn more, like understanding the technology, the under-the-hood stuff and how it could perhaps change the world, that is when I realized this could be a serious chance for me to profit on a technological evolution event.”
Even though blockchain technology is still relatively niche, Vulicevic said he’s confident in the potential for it to create more trustworthy, transparent financial system, like “smart contracts” that directly connect counterparties.
“We don’t know how our banks lend out our money, who they give that money to or just in general how they operate in terms of risk management,” he said.
There’s only a handful of listed crypto-related stocks worldwide, most of them like Argo run high-speed computers working on time-intensive puzzles to “mine” coins. Speculative investors are gravitating to the mining stocks and more obscure crypto assets, with names like Dogecoin and SushiSwap, as a way to mint bigger returns. And the fact that Bitcoin miners tend to be unprofitable or just barely in the black isn’t much of a deterrent.
Argo was the most-active stock on U.K. trading platform Hargreaves Lansdown last week, making up 4% of all purchases and 3% of sales. The the stock has pulled back along with Bitcoin, but still up some 500% since December.
While Bitcoin prices tend to move in the realm of 5% to 10% a day, it’s not uncommon for the mining stocks to swing 20%. The volatility cuts both ways, and when crypto prices fall, the miners crash. In the 2017 run-up, Riot Blockchain Inc. peaked at $38 and sank to $1.50 a year later.
The popularity of crypto stocks has mirrored the rise of GameStop Corp. and other small companies on Reddit’s boards, where a get-rich-quick attitude and distaste for the financial establishment lures new traders into some extremely risky bets.
“The typical crypto investor is young and male, which means that they are more predisposed to take risk than the median investor,” said David Yermack, finance department chair at New York University Stern School of Business. “The volatility of crypto doesn’t faze them, and to many, it’s actually part of the attraction.”
Here’s A Look At Some Of The Most Popular Bitcoin-Related Stocks:
Founded in 2018, Argo counts itself as the only crypto miner listed on the London Stock Exchange. The company runs data centers in North America, including a 40,000-square-foot facility in northern Quebec.
Market value: $280 million
12-month return: 1,100%
Financials: 91,000-pound profit in six months to June
The Castle Rock, Colorado-based company was formerly a biotech firm called Bioptix before rebranding in 2017 to focus on crypto. It has a mining facility in Massena, New York.
Market value: $1.3 billion
12-month return: 1,500%
Financials: $16.6 million loss in the nine months to September
Marathon Patent Group has computers in Montana and North Dakota, and recently announced it bought $150 million worth of Bitcoin for its Treasury reserves.
Market value: $1.7 billion
12-month return: 1,800%
Financials: $5.2 million loss in nine months to September
Retail Mania Spurs Veteran Trader To Scour Chat Rooms And Charts
The turmoil in parts of the U.S. stock market caused by the WallStreetBets crowd has prompted a veteran U.S. trader to ditch his old playbook built up over decades.
Larry Peruzzi, the head of international trading at Mischler Financial Group Inc. and a more than three-decade veteran of market action, said he’s spending less time looking at stock fundamentals and a lot more time on technicals and in chat rooms.
“We are currently looking a lot less at the balance sheets and a lot more at the chat rooms, trade quickly and avoid trying to use any valuation while trading,” Peruzzi said. “It doesn’t make sense, but in 2020/2021 would we expect anything less?”
Markets have been upended in the past week as day traders swarmed over stocks like GameStop Corp. and AMC Entertainment Holdings Inc. in hopes of squeezing out short sellers. It’s worked: Melvin Capital closed out its short position and Citron Capital covered the majority of its short at a loss of 100%. That has the crowds at places like WallStreetBets newly confident, even if the activity is attracting attention from the likes of the Securities and Exchange Commission.
Historically, institutional investors tended to welcome retail traders because they added liquidity into the markets, Peruzzi said. But now it’s causing major trading and liquidity issues, and speculation is growing that funds could be forced to sell some holdings to meet margin calls, he added.
For now, there is a silver lining, at least for the companies whose stocks are being boosted by all the activity, Peruzzi said.
“Most of these firms are fallen angels and many are living on borrowed time,” he said. “The positive in all of this irrational trading is if these firms are able to act quickly, additional share offerings could give them the much needed capital to survive.”
WallStreetBets Founder Reckons With Legacy Amid Stock-Market Frenzy
Jaime Rogozinski likens recent surge in GameStop shares to a ‘train wreck happening in real time’
The man who created Reddit’s WallStreetBets isn’t who you think he is.
He is 39 years old. He lives in Mexico City with his wife, a physician, and spends his weeks chasing after their 3-year-old twins and tending to his day job as a consultant—hardly the sort of character one might associate with the roiling investing forum.
He never imagined the Reddit community he created in 2012 would morph into a force so powerful that it would send GameStop Corp. shares into overdrive, nearly topple a hedge fund and leave professional money managers around the country staring at Twitter with their mouths agape.
“It’s a little like watching one of those horror films where you can see the bad guy slowly going up the stairs,” Jaime Rogozinski said. “You see this train wreck happening in real time.”
Mr. Rogozinski started WallStreetBets while working as an information technology consultant for the Inter-American Development Bank in Washington, D.C. Back then, he was single, making a decent living and looking for something to put some play money into. The only problem was the conventional wisdom of sticking with index-tracking funds bored him.
“I’d go on different forums and ask them, ‘Hey, what do you think about XYZ?’ And most times the sentiment would be ‘It’s too risky, don’t try to pick stocks, you’re never going to win,’” he said.
The sober advice doled out in online communities like Bogleheads wasn’t cutting it for him. Neither was the commentary of investment banking analysts on cable TV, fixated as they were on net present values, cash flows and price-to-earnings ratios.
He decided to create a hub on message-board operator Reddit where like-minded people could gather to exclusively discuss the type of trades that would make a financial adviser’s skin crawl. Their approach would be more akin to gambling than spreadsheet analysis, and their motto something along the lines of “YOLO,” short for “you only live once.”
The group counted only a few thousand subscribers in its first few years—among them, former pharmaceutical executive Martin Shkreli, who briefly served as a moderator before being convicted of securities fraud. (WallStreetBets’ Twitter account wished him good luck on his sentencing in March 2018.)
‘A massive group of people have organized where they collectively have a seat at the poker table, which was previously invite-only.’
— WallStreetBets founder Jaime Rogozinski
Everything changed in 2019. Brokerage giants Fidelity Investments and Charles Schwab Corp. eliminated trading commissions. Interest in retail trading exploded, and the number of WallStreetBets subscribers swiftly crossed 500,000—then one million during the market selloff of March 2020 and 2 million during the now-notorious campaign to drive GameStop shares higher.
WallStreetBets users have driven headfirst into bets on everything from cruise-line operators hit by the pandemic to Lumber Liquidators Holdings Inc., the company embroiled in scandal following reports that it had installed flooring with excessive amounts of formaldehyde.
And they have done so unabashedly, celebrating both their victories and their losses with gusto. (The community has dubbed posting screenshots of the latter, which frequently garners thousands of upvotes, as “loss porn.”)
“A lot of other places that discuss trading are really pretentious. At WallStreetBets it’s both, ‘Look at my money!’ but also ‘Look at all this money I lost,’ and I think that’s what’s refreshing to people,” Mr. Rogozinski said.
At its best, WallStreetBets showed trading didn’t have to exclusively be a Patagonia-vested man’s game. It was part of the nascent movement to democratize the investing world by breaking down the barriers to entry, even if some people would be stung by brutal losses along the way.
Many years ago, Mr. Rogozinski recalls having to call Wachovia and shell out a $30 or so commission fee to buy Google Inc. shares. Now, anyone with a phone or an internet connection can get trading in minutes—and show off their prowess or lack thereof to thousands of other individuals.
“A massive group of people have organized where they collectively have a seat at the poker table, which was previously invite-only,” Mr. Rogozinski said. “You can’t ignore them anymore.”
Looking past the forum’s banter and Jerome Powell memes, it became clear to Mr. Rogozinski that the WallStreetBets community had a seedy underbelly—a side that he increasingly struggled to reckon with.
First, there were the potential legal issues. As WallStreetBets grew, it faced accusations—often lodged by angry short sellers—of market manipulation. Moderators urged users not to make posts “for the purpose of instigating or coordinating a group effort to move the market for a security.” But that didn’t silence the community’s critics.
Then there was the hate speech. Last year, Mr. Rogozinski decided to do some housekeeping and scrub some of the more distasteful content being shared in the community. In an off-Reddit chat room associated with WallStreetBets, he found language rife with obscenity, racism and antigay views that moderators let stand.
“There were a handful of mods who were straight up white supremacists,” he said. As a Jewish man married to a Mexican woman, he found it impossible to stomach.
“I have really thick skin and people can say whatever they want to me, but at some point there’s a moral standpoint—like with my kids, I don’t want them to think, ‘Well, they can say whatever they want about you,’” he said.
Mr. Rogozinski wound up deleting the private chat room hosted on Discord where the offensive messages were exchanged. He also removed some of the moderators. The backlash was swift: Enough users chafed at his actions—along with his promoting a book based on WallStreetBets, as well as an esports-style trading competition under the WallStreetBets name—that he was booted out by other moderators. He hasn’t moderated the community since April.
It has been impossible for him to escape his legacy, though. Just last week, he got a phone call from Citron Research founder Andrew Left. The short seller, who has been publicly betting against GameStop, begged Mr. Rogozinski for help. He said he had been attacked by hordes of angry investors online, some of whom had even targeted his children.
A Reddit spokeswoman said the company prohibits users from posting or soliciting illegal transactions, doxing others and engaging in threats of violence. She added that the company would “cooperate with valid law enforcement investigations or actions as needed.”
Mr. Rogozinski, unable to do much from the sidelines, was pained by Mr. Left’s call.
When big investors like Carl Icahn and Bill Ackman get embroiled in a public spat, “it’s like watching a heavyweight boxing match,” he said. But when an online mob goes after an investor’s kids or spouse—that crosses the line, he said.
“It’s no longer what it used to be,” he said.
Why Reddit Loves Elon Musk, Cathie Wood And Chamath Palihapitiya
Three of the biggest names in business and finance have benefited hugely from coopting retail investors. Can it last?
The GameStop Corp. saga that has gripped the investing world this week was fueled in part by anti-establishment rage, as my colleague John Authers has written.
On one side were retail investors who see themselves as crusaders for a democratized stock market, where even the shares of an ailing brick-and-mortar retailer must only go up. On the other were wealthy hedge fund managers who wagered that the price of equities should have something to do with financial fundamentals. The latter were crushed.
Most of the financial elite is either running for cover or baffled as to why amateur day traders might exhort each other on the r/wallstreetbets forum to sink their college savings or pandemic stimulus checks into such a company. A year ago GameStop’s market value was about $250 million, now it’s $13.5 billion.
Three people from the world of business and finance might be able to offer some insight. Tesla Inc. boss Elon Musk, serial SPAC promotor Chamath Palihapitiya and fund manager Cathie Wood of Ark Investment Management have all succeeded in coopting the retail investing public, rather than be run over by it. This may become a less happy position when the stock market bubble eventually bursts.
For now the trio are adored by Reddit, Stocktwits and other online investing communities — there’s even a line of Cathie Wood merchandise — and they’re proof that it’s possible to be both part of the establishment and against it, something we’ve seen a lot of recently with populist politicians. Palihapitiya is angling to become California governor.
Though Wood hasn’t commented, Musk and Palihapitiya were quick to associate themselves with the Redditors. Palihapitiya told his 1 million twitter followers that he’d purchased GameStop derivatives (he’s since closed out the position and donated the profits).
Defending himself against accusations of being an irresponsible Pied Piper leading neophytes toward inevitable ruin, Palihapitiya insisted “this retail phenomenon is here to stay. There are 2.7 million 1 people inside of wallstreetbets, I think they’re as important as any hedge fund or collection of hedge funds.”
All three are evangelists for innovation, and they’re idolized by people betting on tech stocks. None is overly concerned by old-fashioned business priorities like profitability and cash flows. It helps too that Palihapitiya and Wood are Bitcoin believers. Musk has been more circumspect but on Friday he jumped fully on board the bandwagon by adding #bitcoin to his twitter bio page.
The trio in turn have retail investors to thank for their enormous success, which has developed a reflexive quality: The more popular they become, the more money flows they attract, which in turn fuels their businesses.
Seeing this success, and the pitfalls of getting on the wrong side of retail investors, I’m sure others will try to copy. Charming young Redditors in an authentic way isn’t an easy act to pull off, however, and it might not be sustainable. Will Musk, Wood and Palihapitiya be as adored when the tech mania subsides?
Unlike the publicity-shy Wall Street barons they’re displacing, the new establishment is more transparent. “I care about two constituents: One is myself and then two is retail,” Palihapitiya said during a recent interview with the cofounder of Stocktwits.
I’m skeptical about the inflated values of companies such as Opendoor Technologies Inc. and Virgin Galactic Holdings Inc. that the former Facebook Inc. executive has taken public. Palihapitiya has, though, made launching SPACs an artform. He already has six, and aims to add at least another 20. Each time there’s even a hint of a Palihapitiya deal, the shares have rocketed.
Palihapitiya pens a simplified one-page summary of each investment case so they can be read hundreds of thousands of times on social media. He also gives a four-minute deal pitch live on CNBC, creating yet more shareable content.
“I think it really tweaks the [financial] establishment when I do those things,” he said in the StockTwits interview, and it appears he’s not done shaking things up. “The real escape velocity for me would be to figure out a way to be more part of a Stocktwits community, or wallstreetbets, or whatever it is … being more connected to retail.”
Cathie Wood also relies on unorthodox ways to attract retail investors to Ark’s actively managed ETFs, which focus on hot sectors such as robotics, fintech and genomics. Her firm received massive inflows last year and the flagship Ark Innovation ETF returned about 150%.
Making Ark’s research available for free and publishing information about its trades daily, so retail investors can follow along, has played a big part. So too has social media, which has helped her firm punch “far above our weight,” she told Bloomberg’s Erik Schatzker. “It has given us a competitive advantage because the compliance departments in other organizations won’t let their portfolio managers or analysts talk about their research.”
Wood’s team of young researchers builds links with people in industries they cover online. “I don’t think any one of [my researchers] dreamed they would enter the financial services industry, in fact some of them thought that was the dark side of the world,” she told a Goldman Sachs Group Inc. interviewer. “Our analysts are out there on Twitter, Linkedin, Medium, Telegram, any social network that will help them engage with and become a part of the communities they’re researching.”
As for Musk, he wrote the book on how to charm retail investors, who he says often have more intelligent insights than Wall Street. His attacks on Tesla short sellers helped neutralize them and were doubtless an inspiration for this week’s action.
If you’re surprised by the intensity of GameStop’s retail boosters you haven’t been paying attention: Tesla fandom — like that of Bitcoin — long ago became cultlike. The strategy worked: Tesla’s market value is almost $800 billion, letting it raise heaps of cheap capital.
With power comes responsibility. Each of these three has, in their own way, encouraged young investors to plow money into extravagantly valued tech stocks. So what happens if things go belly up? Wood, Musk and Palihapitiya are the new captains of the democratized stock market. Leadership can easily become a burden.
Hedge Fund Behind Shorting Gamestop Reports 53% Loss In January
A Melvin Capital client claims that the firm has “massively de-risked” its investment portfolio following the controversy involving short-selling GameStop stocks.
Melvin Capital started 2021 with $12.5 billion in assets before retail investors from Reddit caused the firm to lose billions on its GameStop short positions.
According to a Wall Street Journal report, the hedge fund has a little more than $8 billion in assets at the end of January, which includes a $2.75 billion investment from Citadel and Point72 Asset Management earlier this month. This represents a 53% loss, according to people familiar with the firm.
In the report, a client claims that Melvin has “massively de-risked” its investment portfolio following the controversy involving short selling GameStop stocks. People familiar with the hedge fund said Melvin has restructured its portfolio to improve its ability to exit securities easily. The hedge firm, as well as Citron Capital — another firm involved in the shorts — reportedly closed out their positions with GameStop last week.
Many of the major players involved in the GameStop short squeeze are facing outrage online after Robinhood — a platform with financial ties to Melvin — and other investment tools restricted trading for GameStop stock in the middle of a price surge. Retail investors seemingly being cut off from financial tools afforded to major hedge funds prompted allegations of market manipulation.
The U.S. Securities and Exchange Commission announced on Friday that it would be “closely [reviewing] actions taken by regulated entities,” purportedly in connection to the situation surrounding Citadel, Melvin, Robinhood, and potentially the retail investors from the r/WallStreetBets subreddit. In addition, Robinhood is facing two class-action lawsuits in federal courts in Illinois and New York.
The price of GameStop stock was $325 when markets closed on Friday, having risen 67% in the previous 24 hours.
Melvin’s losses are the most visible wound in an extraordinary tussle playing out between professional hedge-fund investors and amateur traders congregating on forums such as Reddit’s WallStreetBets. The amateurs have made Melvin their principal enemy and have gleefully seized the upper hand. “Only 47% left to go!!” one user posted Sunday. They are exhorting one another to keep buying GameStop stock and call options.
The frenetic trading is almost certain to continue Monday and into the week. Brokerages restricted purchases of GameStop and other hot stocks last week, pulling volumes down. But more than 50 million GameStop shares still changed hands Friday; a year ago volume was just a few million a day. On the other side, while Melvin has ceased betting against GameStop, and other funds have exited or trimmed their bets, the stock remains heavily shorted.
Melvin was founded by Gabe Plotkin, a former star portfolio manager for hedge-fund titan Steven A. Cohen. It started the year with about $12.5 billion and now runs more than $8 billion. The current figure includes $2.75 billion in emergency funds Citadel LLC, its partners and Mr. Cohen’s Point72 Asset Management injected into the hedge fund on Jan. 25.
As part of the deal, they got noncontrolling revenue shares in Melvin for three years. So far, Citadel, its partners and Point72 have lost money on the deal, though the precise scope of the loss was unclear Sunday. Citadel’s Melvin investment had an immaterial impact on its flagship multistrategy hedge funds, said a person familiar with the Chicago firm, who added that it made up a tiny fraction, about 1%, of Kensington’s and Wellington’s 3% loss for January.
Melvin has massively de-risked its portfolio, a client said. People familiar with the hedge fund said its leverage ratio—the value of its assets compared with its capital from investors—was the lowest it has been since Melvin’s 2014 start.
They also said the company’s position-level liquidity, or its ability to jettison securities in its portfolio easily, had increased significantly.
New and existing clients have signed up to invest money into Melvin on Monday, according to the people familiar with the matter. It was unclear how much they would be adding.
Melvin had established itself in recent years as one of the top hedge funds on Wall Street, but a short position in GameStop Corp. hurt the firm in recent weeks. Losses extended beyond GameStop, with declines coming from throughout its portfolio during a period of market turmoil in January.
Positions in which Melvin had publicly disclosed owning put options—bearish contracts that typically profit as stocks fall—in its last quarterly regulatory filing soared, while positions in companies it held sold off.
Bed Bath & Beyond Inc., New York-listed Chinese tutoring company GSX Techedu Inc. and National Beverage Corp. were up 78.4%, 62% and 99% at their intraweek highs last week, respectively. Meanwhile, Booking Holdings Inc. and Expedia Group Inc. were down 9.9% and 13.4% at their intraweek lows.
Traders said as GameStop continued to soar—from $30 to $75 and higher—there was a contagion effect. Managers lost confidence that short positions would stop rising in value and covered heavily shorted names, worried social-media-fueled investors would focus on companies they were short. They also started cutting their stakes in companies to reduce the risk in their portfolios, hurting other investors in those companies. Last week alone, GameStop shares soared more than four times.
“The performance pain…has been record breaking,” read a note from Morgan Stanley to its trading clients last week.
Indeed, hedge funds set near-daily records of various sorts last week for how much they pulled back their exposure to the U.S. stock market by covering their shorts and selling out of their wagers on companies, according to client notes from Morgan Stanley and Goldman Sachs Group Inc. On Wednesday, this type of degrossing contributed to the largest one-day drop in funds’ use of leverage on record, a Goldman note said.
Maplelane Capital, another hedge fund that has sustained significant losses this month, ended January with a roughly 45% loss, a person familiar with the fund said. It managed about $3.5 billion at the start of the year.
The frenetic trading that catapulted GameStop, AMC Entertainment Holdings Inc. and BlackBerry Ltd. into the ranks of the most traded stocks in the U.S. market and captured the attention of the White House and regulators also hit prominent hedge funds Point72 and D1 Capital Partners.
D1, which ended the month down about 20%, was short AMC and GameStop, people familiar with the fund said. One of the people said D1 had exited from both positions by Wednesday morning but that those were small drivers of losses. Shares of travel-related companies declining were another factor.
Some fund managers said the episode is likely to change how the industry works.
Fewer hedge funds are likely to highlight their bearish positions by disclosing put options, they said. Instead, funds might use Securities and Exchange Commission rules to keep confidential those positions, a tool activist investors have long used to build positions in companies quietly. More funds also might institute rules about avoiding thinly traded, heavily shorted stocks.
Bitcoin ‘Ascendant’ As Gamestop Saga Unfolds, Bitfinex CTO Says
The GameStop short squeeze and Bitcoin have a lot more in common than appears at the surface, according to Paolo Ardoino.
The sudden rise of stocks like GameStop (GME) have shined a positive light on Bitcoin (BTC), as more retail investors look to “rail against” the financial status quo, according to Bitfinex CTO Paolo Ardoino.
Bitcoin’s price peaked north of $38,500 on Friday, just as U.S. stocks concluded their worst week of trading since October. The divergence between BTC and stocks was partly due to a massive short squeeze of institutional investors by a Reddit group called r/WallStreetBets. The Reddit buying frenzy was centered around GameStop, the video game and consumer electronics retailer.
Elon Musk, the world’s richest man, also added the Bitcoin symbol to his Twitter page, possibly signaling his newfound support of the digital currency.
Paolo Ardoino believes the GameStop saga is only the beginning of a mass revolt against the financial status quo and that Bitcoin stands to benefit significantly from this narrative.
“Bitcoin is ascendant again as the GameStop issue takes center stage,” Ardoino tells Cointelegraph. “As advocates for retail investors rail against the current structure and practices of financial markets, it is important to note that much of the work being done in the blockchain space has been inspired by these barriers.”
“Removing obstacles to normal, everyday working people that are building and seeking wealth growing opportunities has always been part of the ethos of crypto.”
The retail crowd was dealt a significant blow last week after Robinhood – a trading platform that supposedly empowers the little guy – suspended trading of GME and other stocks over fears of extreme volatility. A class-action lawsuit was filed against Robinhood shortly thereafter.
Ardoino isn’t the only one who thinks Bitcoin will benefit from the GME short squeeze. Anthony Scaramucci, the founder of billion-dollar hedge fund SkyBridge Capital, believes GME is “more proof of concept that Bitcoin is going to work.”
Meanwhile, Galaxy Digital’s Mike Novogratz called the GME melt-up a “giant endorsement of DeFi,” or decentralized finance, which represents one of the largest use cases for blockchain technology.
GameStop Frenzy Puts Spotlight On Trading Giant Citadel Securities
Firm owned by hedge-fund billionaire Ken Griffin executes orders for Robinhood customers.
Small investors banding together online to pump up stocks like GameStop Corp. say they are defying Wall Street. But one of the biggest players in global markets stands to benefit from their frenetic trading.
Citadel Securities, the electronic-trading firm owned by hedge-fund billionaire Ken Griffin, has played a quiet but critical role in the frenzy of the last two weeks.
The firm—an affiliate of Mr. Griffin’s hedge fund, Citadel—executes orders placed by customers of Robinhood Markets Inc., TD Ameritrade and other online brokerages that have enjoyed surging volumes during the coronavirus pandemic.
Citadel Securities makes money by selling stocks or options for slightly more than it’s willing to buy them. The difference is often just a fraction of a penny per share. But repeated millions of times a day, it adds up to serious money.
Last year, net trading revenue at Citadel Securities was $6.7 billion, almost double the previous high in 2018, a person familiar with the matter said.
Among the forces propelling that growth was an influx of newbie traders, many stuck at home due to Covid-19 lockdowns.
Lured by easy-to-use trading apps and an industry shift toward zero-commission trades, individual investors opened more than 10 million new brokerage accounts in 2020, JMP Securities estimates.
Meanwhile, a thriving subculture of day traders grew in corners of the internet like Reddit’s WallStreetBets forum, setting the stage for last week’s manic trading in GameStop, AMC Entertainment Holdings Inc. and several other popular stocks.
“This is the market that Ken Griffin and Citadel Securities have been waiting for,” said Christopher Nagy, a former TD Ameritrade executive who is now a director of Healthy Markets Association, an investor group. “The last time the environment was this good for retail market-makers was back in the dot-com bubble.”
The firm drew scrutiny last week when its majority owner, Mr. Griffin, participated in a $2.75 billion emergency cash infusion into Melvin Capital Management, a short seller that was facing steep losses due to the huge rally in GameStop’s stock.
Announced Monday, the deal meant Citadel, the hedge-fund firm, was propping up a fund that had bet against GameStop stock, while Citadel Securities had been profiting from the order flow of small investors placing bullish bets on GameStop.
Citadel Securities says it’s separately managed from the hedge-fund side of Mr. Griffin’s business. The firm also released data showing that during the past week, retail orders pouring into its systems for GameStop were roughly balanced between buyers and sellers, casting doubt on the popular narrative that small investors drove the stock to its record close of $347.51 on Wednesday.
‘The last time the environment was this good for retail market-makers was back in the dot-com bubble.’
— Christopher Nagy, director of Healthy Markets Association
The data showed that 29% of GameStop trading volume Monday through Thursday was handled by Citadel Securities, underlining its huge role in the market for stocks popular with individual investors.
Overall, about 41% of U.S. retail stock-trading volume goes through Citadel Securities, while the next-biggest player in the business, Virtu Financial Inc., has a market share of around 32%, the firms say.
“We witnessed an extraordinary level of retail trading last week,” a Citadel Securities spokesperson said. “At many times over the course of the week, the large brokerage firms depended upon our capabilities to handle the deluge of orders.”
Citadel Securities also accounts for a large chunk of trading volume on public markets like the New York Stock Exchange as well as in options, futures, Treasurys and many markets overseas.
Founded in 2002, the firm became a dominant player in electronic trading due to its technological prowess, quantitative skills and a hard-driving company culture. Rivals say it has grown increasingly tough to compete with Citadel Securities’ scale and efficiency.
“They’re really trying to take an Amazon approach to trading, where they try to squeeze out everyone else who’s not on their scale,” said Scott Knudsen, a former executive at rival trading firm IMC Financial Markets who now leads Cove Markets, a cryptocurrency-trading startup.
Citadel Securities’ retail business has repeatedly drawn controversy. Like Virtu and other market makers, Citadel Securities pays brokerages for the right to trade against individual investors’ orders. During the first three quarters of 2020, the firm made over $700 million in such payments to major online brokerages, according to Piper Sandler.
Critics say this practice, called payment for order flow, skews brokers’ incentives so they seek to maximize revenues rather than ensure customers get the best price. The practice is banned in some overseas markets, like the U.K. Earlier this month, former U.S. Sen. Carl Levin published an op-ed piece in the Financial Times urging the incoming Biden administration to ban payment for order flow, calling it “a conflicted practice that siphons billions out of U.S. investors’ funds each year.”
Brokers and trading firms, including Citadel Securities, say payment for order flow benefits investors, because they get a better deal than if the orders were sent to the NYSE or the Nasdaq Stock Market. Citadel Securities says it saved individual investors a total of $1.3 billion last year by executing their orders at better prices than those available on exchanges.
The argument is that, in fact, both sides win: Citadel Securities can offer individual investors better prices on stocks than it would on an exchange, because it knows it’s trading against a player too small to move the market. In contrast, when Citadel Securities trades on an exchange, it may end up trading with a fund manager that is driving a stock up or down with institutional-size purchases or sales—a situation that could result in losses for Citadel Securities.
Still, regulatory penalties have fueled suspicion about the firm’s handing of individual investors’ orders. In 2017, Citadel Securities paid $22.6 million to settle Securities and Exchange Commission charges that it misled customers about providing the best price on investors’ trades.
Last year, the firm paid $700,000 to resolve claims by the Financial Industry Regulatory Authority that it traded ahead of customer orders in over-the-counter securities. In both cases, Citadel Securities didn’t admit wrongdoing.
How To Find The Next Moonshot Stock, According To ‘Roaring Kitty’
Keith Gill, the man who inspired the infamous GameStop trade, says value investing isn’t dead, and shoots for 100% in annual returns.
Keith Gill, aka Roaring Kitty, aka DeepF—–gValue, aka the slayer of short-sellers, is suddenly one of the most influential stock pickers in America.
After he inspired a dizzying 400% rally in GameStop Corp. that shook Wall Street this past week, Gill has built a legion of passionate followers on Reddit and YouTube who gush over how he made them — at least temporarily — rich. Now, knowing what other stocks, or kinds of stocks, he likes is a matter of investor interest.
Dressed in the kind of ironic, tacky cat themed t-shirts you’d expect to see hanging in a Jersey shore boardwalk shop, the 34-year-old former marketer for Massachusetts Mutual Life Insurance Co. appears on YouTube videos that provide a view into the investing process he uses to target annual gains of 50% to 100%.
The posterchild for an online army of traders that tends to ignore value when making picks pursues an approach that’s traditional at its core.
“I’ll drop this bomb on you right at the start, I’m a value investor and I feel like some of you are rolling your eyes now and laughing at me,” Gill said in his first investment style video. “I’m not in the camp that thinks value’s been under-performing, I actually think it’s been tremendously successful over the past decade.”
The problem, according to Gill, is that the value style of investing has been pigeon holed. In order for exchange traded funds to track the style, it’s been reduced to formulaic rules, while the heart of the approach is highly subjective. And those ETFs have become the yardstick by which the approach has been measured, he explained in the video. Gill didn’t respond to a request for comment from Bloomberg.
Consider the rules for the $62.3 billion Vanguard Value ETF, the largest such fund in the world. It tracks the Center for Research in Security Prices U.S. Large Cap Value Index, which puts stocks into the value bucket based on five factors: book to price, forward earnings to price, historic earnings to price, dividend-to-price ratio and sales-to-price ratio.
As you might expect, the ETF is heavy on classic U.S. companies like Warren Buffett’s Berkshire Hathaway Inc. and Johnson & Johnson, and missing the tech stocks that have driven the market for the past decade.
“We all lean on those over-simplifying ETFs to measure the style’s success,” he said. “But that’s not a good way to measure a bona fide value approach. Part of that is because value is so subjective, it’s not so simple that you can just boil it down to a couple of metrics.”
Unlike what you might expect from a typical value investor, Gill was outright dismissive of discounted cash flow modeling, calling it a “waste of time.” And Gill embraced the use of technical analysis, using stock price charts to find good entry and exit points for his positions, a technique often dismissed as a form of financial voodoo by followers of value-investing icons like Benjamin Graham.
Gill gives his own value investing criteria in his second introductory video. And like the CRSP Index, he too relies on five factors, albeit using them as guidelines rather than rigid rules.
* A discount: “It’s often in relation to my crude fundamentals based value, but sometimes it’s just based on the chart.”
* Leverage: “I don’t shy away from leveraged companies, I know some people do, but the way I see it is that that’s where some of the best opportunities are.”
* Insider buying: “I weight this quite heavily I’ve learned, especially during market selloffs, and what I find is that any insider buying is better than no insider buying.”
* Insider ownership: “Generally, higher insider ownership is better, I like to see at least 20%.”
* Confidence: “It’s a simple introspective question, but I find it’s just really helpful for keeping myself honest.”
And in a great bit of irony, back then in July, before his E*Trade account swelled to $33 million, according to the Wall Street Journal, Gill made an admission: he was a short-seller.
“I occasionally short stocks, it’s becoming a bigger part of my process, I’m trying to incorporate it more and more, but I still focus mostly on the long side,” said Gill on July 13. “You’ll see me short, sometimes just because I’m bored. The timing of it is so difficult as everyone knows.”
GameStop Executives Sitting on $1.3 Billion Gain From Frenzy
GameStop Corp.’s manic ride is transforming the fortunes of its leaders — at least on paper.
The video-game retailer’s top executives have seen the value of their holdings surge about $1.3 billion in the wake of a Reddit-fueled trading frenzy that has sent GameStop shares soaring more than 1,500% this month, according to data compiled by Bloomberg.
Chief Executive Officer George Sherman has the biggest holding among the company’s senior employees, with stock awards expected to vest over the next few years that were worth more than $700 million as of 10:45 a.m. in New York. Chief Financial Officer James Bell owns a stake valued at about $170 million, while Chief Customer Officer Frank Hamlin’s is worth more than $120 million.
Some of the awards are tied to the company’s performance, and for executives to realize those payouts, GameStop would need to maintain its frothy share price. The rally has inflated GameStop’s market value to more than $20 billion from $1.3 billion at the end of 2020 even as the retailer’s sales fell 22% in its last fiscal year and the company lost $471 million.
A GameStop representative didn’t immediately respond to a request for comment.
GameStop is among the companies that have surged lately as investors continue a relentless buying spree of heavily shorted stocks touted on Reddit forum WallStreetBets. While the focus of the forum’s campaign has been hedge funds that shorted the companies’ shares, some of the more outspoken Reddit traders have portrayed their efforts as taking a populist stand against generational inequality and bail-outs of the wealthy.
The firm’s shares were up $77% to $342 at 12:17 p.m. in New York.
Other beneficiaries of GameStop’s rise include Chewy Inc. co-founder Ryan Cohen, who joined the company’s board this month after building a 13% stake worth more than $2 billion, according to the Bloomberg Billionaires Index. The run-up has also boosted the wealth of Donald Foss, founder of subprime auto lender Credit Acceptance Corp., who owns a stake in GameStop worth about $1.1 billion.
GameStop board members other than Cohen have added almost $175 million to the paper value of their holdings since early January. A group of directors offloaded shares worth about $20 million in the week Cohen joined the board.
The Grapevine, Texas-based company’s shares have since jumped more than 500%.
The Reddit Army Bailout: Desperate Companies Get New Lifelines
It’s the kind of rescue that the most indebted companies in America can only dream of: a fresh injection of cash that doesn’t hurt their already depressed stock price or load even more costly debt onto their balance sheet.
Yet thanks to the army of day traders who use Reddit to tout and bid up out-of-favor stocks and squeeze short sellers, firms such as American Airlines Group Inc. and AMC Entertainment Holdings Inc. have found themselves on the receiving end of just such a lifeline.
Both took steps over the past week to sell hundreds of millions of dollars worth of shares and secure much-needed liquidity.
Besides the companies themselves, there’s perhaps no bigger winner from the massive stroke of good fortune than their creditors.
Just weeks ago many were staring at the possibility of significant losses as pandemic-fueled slumps had traders betting up the odds of default. Now the companies are suddenly in a position to raise fresh piles of cash to weather the storm, and could even use the funds to start paying down debt.
“We certainly didn’t have a row for ‘surprise equity offering’ in our AMC model,” said Bill Housey, a senior portfolio manager at First Trust Advisors, who used to own AMC debt but fully sold out of his position in recent days. “Companies that were otherwise facing real financial challenges are finding an unexpected source of capital.”
American Airlines declined to comment on their share sale beyond a Friday regulatory filing, while AMC didn’t respond to requests seeking comment.
It’s no coincidence that some of the most troubled borrowers are now the ones benefiting the most from the retail-driven rallies. Their huge debt loads, combined with the devastating impact that Covid-19 has had on their ability to generate revenue, were among the reasons their stocks were so heavily shorted in the first place.
American Airlines revealed plans on Friday to sell as much as $1.1 billion of stock through what is known as an at-the-market program, which allows companies to issue additional shares at market prices. The announcement came after their stock was up as much as 38% at its peak last week.
Just a couple days earlier, AMC said it had raised more than $300 million through a similar program. Investment firm Silver Lake, one of the company’s main creditors, also seized on AMC’s surge to convert $600 million of bonds into equity, before selling the shares in the open market for a gain of over $100 million.
The movie theater operator, whose stock soared 278% last week, is considering additional share sales, Bloomberg previously reported.
Facing pressure to address the recent moves, the U.S. Securities and Exchange Commission on Friday said it’s evaluating the “extreme price volatility” of certain stocks and is working to identify potential wrongdoing. It added that companies “must ensure compliance with federal securities laws for any contemplated offers or sales of their own securities.”
Most companies benefiting from the surge in their stock prices should consider taking similar steps, especially if they face near-term debt maturities or have liquidity challenges, according to Lloyd Sprung, head of debt advisory and restructuring at UBS Investment Bank.
“They can use the cash to pay down debt, selectively fund open-market debt repurchases, tenders or targeted exchange offers,” he said.
American Airlines, the most indebted major U.S. carrier, paid 11.75% in June to raise $2.5 billion via the bond market, and resorted to equity offerings and convertible notes to raise billions of dollars of additional liquidity.
AMC, for its part, earlier this month secured a 400 million pound ($547 million) loan tied to its Odeon Cinemas unit that pays a rate of 10.75% in the first year before climbing to 11.25%. The deal is part of the $917 million the company has assembled since mid-December as it tries to stay solvent until vaccines bring back moviegoers.
After rallying the past four days, American Airlines’ 5% unsecured notes due June 2022 now yield less than 1,000 basis points more than similar-maturity Treasuries for the first time since March 2020.
AMC’s benchmark 12% bonds due 2026, meanwhile, have climbed from about 22 cents on the dollar at year-end to 74 cents on Friday, though they still yield over 18%.
Traders are now keeping their eyes on other Reddit picks, such as GameStop Corp., Express Inc., Bed Bath & Beyond Inc., and Naked Brand Group Ltd., for potential stock sales after shares further extended run-ups on Friday.
“It’s just so fortuitous,” said First Trust’s Housey. “While the trades may have hurt the shorts, in many names they helped the creditors.”
Short Sellers Face End Of An Era As Rookies Rule Wall Street
The latest assault on Wall Street short sellers has a long tradition, dating back to, well, at least Napoleon. “Treasonous,” he called them for betting against government securities.
They survived that and numerous other attacks over the next several centuries. But the GameStop uprising could mark the end of an era for the public short — the long-vilified folks who try to root out corporate wrongdoing, take positions betting a stock will fall and then wage public campaigns.
The biggest casualty came Friday, when Andrew Left’s Citron Research said it will discontinue offering short-selling analysis after 20 years of providing the service. Others are already adopting less-aggressive tactics or evolving into different forms and shapes altogether.
Melvin Capital was forced to retreat by dumping its short position on GameStop, Carson Block and others have cut bets, and some of the mightiest hedge funds are nursing double-digit losses and exploring their next steps.
Few on Main Street or in corporate America, who see short sellers as detestable vultures with dubious practices, are shedding many tears, of course. Yet some investors, who say shorts serve to police the markets, might be.
Time and again, short sellers, who practice the risky art of selling borrowed stocks to buy them back at lower prices, have been seen as a critical antidote to sniff out fraudulent companies, those with questionable accounting and business plans, or just to keep valuations under check. Enron is the most notable example.
“I’m still in business, so nowadays I think that’s well enough,” said Fahmi Quadir, a short seller best known for her successful bet against Valeant Pharmaceuticals and founder of New York hedge fund Safkhet Capital. The more fundamental problem, she said, is that fewer and fewer firms are spending substantial money to research companies or, in her case, “identify businesses that are predatory or fraudulent.”
Even before the attack from Reddit’s wallstreetbets forum, where a 6-million strong mob has joined forces to fire up stocks most hated by hedge fund elites, short selling was hard enough. A vast majority of shorts were already irrelevant, thanks to the popularity of index funds and the longest-running bull market in history.
Their numbers have been dwindling for some time. Of the thousands of hedge funds in the $3.6 trillion industry, only about 120 specialize in mostly betting against stocks. And they have seen combined assets sliced by more than half to just $9.6 billion over the past two years alone, according to data compiled by Eurekahedge.
“It is like watching the police doing a bank raid,” Crispin Odey, one of the world’s most bearish hedge fund managers, said of the trend. “There were already fewer short positions in the market before the Reddit mob began their attack than we have seen for 15 years.”
Some of the most-feared short sellers are ducking for cover. Block, whose forensic research notes have sparked precipitous declines in a number of companies, has “massively” cut his short bets. A $1.5 billion London-based hedge fund with one of the best records of short selling declined to be even named in this story on fears of being hunted down by the retail investors.
Another has assigned a staffer to scour the wallstreetbets page for signs of brewing revolts as it reassesses its bets.
Short seller Gabriel Grego, founder of Quintessential Capital Management, said he is pausing bearish wagers in the U.S. While he thinks “short-selling is alive and kicking,” he said it’s time for caution. The GameStop rebellion shows that retail investors are now conscious of their power and that won’t disappear, he added.
Hated But Necessary
Shorts have faced such sieges time and again in their more than four centuries of existence. The first such trade is said to have occurred in 1609, when Flemish merchant Isaac Le Maire attempted to short Dutch East India Company’s shares.
A year later, the company convinced the Dutch government to outlaw short-selling, saying the likes of Le Maire were harming innocent stockholders, including “widows and orphans.”
Napoleon banned the practice 200 years later and during Wall Street’s crash of 1929, short-seller Ben Smith hired bodyguards because of threats from angry investors.
When the financial crisis intensified in 2008, U.S. regulators restricted short selling of financial stocks. Many other countries followed. More recently, billionaire Elon Musk has taken to social media lambasting short sells, calling them a scam.
But in the more favorable view, shorts are seen as the ultimate cop on Wall Street, devoting countless hours of detective and forensic work, taking on mighty companies and regulators and exposing themselves to potentially unlimited losses.
Supporters say that in a world where the traditional stock research industry has lacked the spine to put sell recommendations on struggling companies and as passive investing plays an even bigger role, the descendants of Le Maire are badly needed.
Take for example Enron’s accounting scandal. Jim Chanos, the founder of hedge fund Kynikos Associates, helped expose the fraud and rode its decline from an average $79.14 per share in 2000 through December 2001, when it collapsed to 60 cents. And as recently as last year, German regulators praised short sellers after initially banning them for exposing Wirecard AG, which filed for insolvency proceedings after revealing that 1.9 billion euros ($2.3 billion) of cash was missing.
New Rule Book
Other observers are less sympathetic. Before the financial crisis in 2008, U.S. regulators modified certain rules to make shorting easier, according to Brian Barish, chief investment officer of Cambiar Investors. Some hedge funds used that as a tool to brutalize companies that were viable but in need of capital. Insolvencies that were preventable followed and real people got hurt, Barish said.
“I don’t think hedge fund books need any help,” Barish said. “Let them taste their own medicine.”
For now, hedge funds that tactically put on leveraged bets against companies for short-term profits face the biggest risk to their survival. They are expected to be selective, avoid crowded trades, borrow less and stay away from companies with heavy retail investor participation. Most importantly, they may retreat if required.
Peter Borish, chief strategist at Quad Group, predicts lower returns for such funds as they shy away from outright shorting of lower-priced stocks and take profits more quickly. “If you’re looking for a short-seller to hit home runs, you’re more likely to get singles and doubles,” he said of the new outlook.
Other funds may opt for using discrete over-the-counter put options to place short bets, since they don’t need to be disclosed in regulatory filings. Melvin Capital’s shorts being listed in their public filings helped make them a Reddit bro target.
Many still believe that ethical short-selling, or going after criminal companies, will survive. Retail investors may even be less motivated to revolt against a well-intentioned short that exposes a fraudulent company.
They are less certain, however, about the resilience of passive short-selling, where traders bet against a stock not for criminal reasons but based on the fundamentals of a company. Melvin’s wager on GameStop, for example.
Tomorrow am at 11:30 EST Citron will livestream the 5 reasons GameStop $GME buyers at these levels are the suckers at this poker game. Stock back to $20 fast. We understand short interest better than you and will explain. Thank you to viewers for pos feedback on last live tweet
— Citron Research (@CitronResearch)
January 19, 2021
Some bears are taking the uproar mostly in stride. Jim Carruthers, who once ran Third Point’s short book and now heads Sophos Capital Management, is reported to be winding down some positions, but he’s not all that bothered.
“We believe this speculative fervor that has turned the stock market into a casino of late will eventually hit a wall, as all bubbles do, and will provide as target-rich an opportunity set we have seen in our careers,” he said.
For now, GameStop’s saga represents an unprecedented shift in power where a cocktail of cheap money, easy commission-free trading, a bored and quarantined society and a stick-it-to-The Man sentiment among masses of retail investors prompted them to hunt down the hunters.
As Citron’s Left put it in a YouTube video announcing his departure from the short world: “Twenty years ago I started Citron with the intention of protecting the individual against Wall Street — against the frauds and the stock promotions.” Since then, he added, Citron lost its focus: “We’ve actually become the establishment.”
Here Are The Biggest Short Squeezes In The Stock Market, Including Gamestop And AMC
Dozens of heavily shorted stocks have rocketed 50% or more during 2021.
Short squeezes will remain a big story in the financial-news media until heavily shorted stocks that have been pushed up by individual investors connected through social media come crashing back to earth.
The biggest “winners” during this craze have been GameStop, up 1,745% for 2021 through Jan. 27, and AMC Entertainment, which has popped a more modest 839%. There are many others listed, below.
There Is More Than One Way To List Short Squeezes. Before Moving To The Lists, Here Are Three Definitions:
Short selling is when an investor borrows shares and immediately sells them, hoping to buy them back later at a lower price, return them to the lender and pocket the difference.
Covering is when a person with a short position buys the shares to return them to the lender, hopefully to profit if the shares have gone down in price since they were shorted, or to limit losses if they went up after being shorted.
A short squeeze is when a mass of investors looking to cover short positions start buying at the same time. The buying pushes the share price higher, making short investors accelerate their attempts to cover, which sends the shares spiraling higher in a feeding frenzy. The action in shares of GameStop Corp. GME, +67.87% and AMC Entertainment Holdings Inc. AMC, +53.65% have illustrated this phenomenon perfectly over the past week.
Even if you don’t buy the argument that these short squeezes are temporary phenomena and that the prices will normalize, consider this: Shares of GameStop closed at $347.51 on Jan. 27. The company is expected to show a loss for calendar 2021, but a profit of $1.22 a share in calendar 2022.
The business has its challenges because so many videogames are now downloaded, rather than purchased at stores. The pandemic has also, of course, hurt sales. But if we look back 10 years, the company’s best earnings came in calendar 2015, when it earned $3.86 a share. Even if GameStop were to improve its earnings to that level, the stock would be trading at a price-to-earnings ratio of 90.
Short Squeeze Lists
These lists are culled from the Russell 3000 Index RUA, -1.86%, which encompasses the 3,000 largest publicly traded U.S. stocks by market capitalization. Such a large group was the basis in order to include some stocks that had been trading at microcap levels before ballooning in value.
This means some aren’t yet included in other broad indexes. GameStop’s market capitalization was $24.2 billion at the close on Jan. 27, up from $9.6 billion the previous day and $1.3 billion at the end of 2020, according to FactSet.
During an interview on Jan. 25, Brad Lamensdorf, who co-manages the AdvisorShares Ranger Equity Bear ETF HDGE, (which is meant to be used as a hedging tool), said that a percentage of short-sales to total shares available for trading of “over 30% to 40% is outrageously high.”
Among the Russell 3000, there were 68 stocks with at least 25% short interest as of the close on Jan. 27, according to FactSet.
The data provider uses the total float at of the end of the previous month as the denominator, but the numerator — the number of shares sold-short — is updated twice a month, typically on the 25th day of the month. So the data is rather fresh, and the percentage short for GameStop was down to 120% from 138% only two days earlier, according to FactSet’s data.
GameStop Day Traders Are Moving Into SPACs
So-called blank-check companies are a hit with individual investors looking for speculative trades.
Day traders fueling enormous gains in popular stocks such as GameStop Corp. are also powering big swings for another suddenly hot investment: so-called blank-check companies.
Special-purpose acquisition companies—shell companies planning to merge with private firms to take them public—are rising more than 6% on average on their first day of trading in 2021, up from last year’s figure of 1.6%, according to University of Florida finance professor Jay Ritter. Before 2020, trading in SPACs was muted when they made their debut on public markets.
Now, shares of blank-check companies almost always go up. The last 140 SPACs to go public have either logged gains or ended flat on their opening day of trading, per a Dow Jones Market Data analysis of trading in blank-check companies through Thursday. One hundred and seventeen in a row have risen in their first week. The gains tend to continue, on average generating bigger returns going out to a few months.
The gains in companies that don’t yet have any underlying business underscore the wave of speculation in today’s markets. Merging with a SPAC has become a popular way for startups in buzzy sectors to go public and take advantage of investor enthusiasm for futuristic themes.
But lately, day traders are even putting money into SPACs before they have revealed what company they are buying. At that stage, they are pools of cash, so investors are wagering that the company will eventually complete an attractive deal.
Despite the risks, many are embracing the trade, underscoring how online investing platforms and social-media groups now send individuals flocking to new corners of markets, including shares of unprofitable companies such as GameStop and AMC Entertainment Holdings Inc.
That trend also is playing out in everything from shares of silver miners to SPACs, which were relatively rare before last year but are suddenly ubiquitous in finance.
“I would just have a bad case of FOMO if I wasn’t in SPACs,” said Marco Prieto, a 23-year-old real-estate agent living in Tucson, Ariz., referring to the fear of missing out that is driving many individuals to put money into markets.
He has a roughly $50,000 portfolio and about 60% of his holdings tied to blank-check companies. Some of his positions are early on in shell firms such as Social Capital Hedosophia Holdings Corp. VI, while others are based on rumors tied to possible deals by companies including Churchill Capital Corp. IV.
Shares of that company have more than doubled since Bloomberg News reported on Jan. 11 that it is in talks to combine with electric-car firm Lucid Motors Inc. Trading got so frenzied that the SPAC put out a statement a week later saying it wouldn’t comment on the report and that it is always evaluating a number of possible deals. The stock has still been gyrating in the days since.
Investors betting on SPACs even before such reports is extraordinary because the underlying value of a blank-check firm before it pursues a deal is the amount of money it raises for a public listing. That figure is typically pegged at $10 a share.
Still, it has become common for investors to buy at higher prices such as $11 or $12 to back big-name SPAC founders such as venture capitalist Chamath Palihapitiya and former Citigroup Inc. deal maker Michael Klein.
In another sign blank-check firms are now frequently traded by individuals, several SPACs and companies that have merged with them recently joined GameStop and AMC on a list of stocks that had position limits on Robinhood Markets Inc., a popular brokerage for day traders.
Those restricted included Mr. Klein’s Churchill Capital IV and a few of Mr. Palihapitiya’s SPACs in the Social Capital Hedosophia franchise.
The flood of money pouring in is a concern for skeptics who worry that everyday investors don’t understand the dangers of the trade. Even recent losses in a few hot companies such as electric-truck startup Nikola Corp. and health-care firm MultiPlan Inc. that merged with blank-check firms aren’t deterring investors because of the gains in other SPACs.
“It’s a tremendous amount of speculation,” said Matt Simpson, managing partner at Wealthspring Capital and a SPAC investor. His firm invests when SPACs go public or right after, then takes advantage when shares rise and typically sells before a deal is completed. He advertised an expected return from the strategy of 6% to clients, but last year it returned 20%.
Ninety-one SPACs have raised $25 billion so far this year, putting the market on track to shatter last year’s record of more than $80 billion, according to data provider SPAC Research.
Fast gains in the shares can result in big payoffs for their founders and the first investors in blank-check firms like Mr. Simpson. These earliest investors always have the right to withdraw their money before a deal goes through. The traders who get in later don’t have those same privileges, but that hasn’t been a deterring factor.
“If you don’t take a risk, there’s really no opportunity at all,” said Chris Copeland, a 36-year-old in upstate New York who started day trading on the platform Robinhood with his girlfriend last month. Roughly three-quarters of his portfolio is tied to SPACs such as GS Acquisition Holdings Corp. II.
Trading volumes in many popular blank-check firms have increased lately, an indication of investors’ heightened activity. That trend is even drawing attention from some SPAC founders.
“It worries me,” said veteran investor and SPAC creator Bill Foley. Trading volumes have surged in one of the SPACs founded by the owner of the Vegas Golden Knights hockey team, especially since it announced a $7.3 billion deal to take Blackstone Group Inc. -backed benefits provider Alight Solutions public last week.
One reason traders are getting into blank-check firms when they are just pools of cash is that the time it takes for a SPAC to unveil a deal has dwindled. Blank-check firms normally give themselves two years to acquire a private company, but many these days need only a few months.
It also doesn’t take long for investor speculation about a blank-check firm’s acquisition to build, particularly because SPACs can indicate the sector in which they hope to complete a deal.
Excitement can be triggered by a SPAC pioneer like Mr. Palihapitiya, who sometimes hints to his more than 1.2 million Twitter followers when activity is coming. The former Facebook Inc. executive took space-tourism firm Virgin Galactic Holdings Inc. public in 2019 and last month reached a deal with Social Finance Inc.
Even though he invests in a number of blank-check firms other than his own—often when SPACs need to raise more money to complete deals—shares of his own companies can climb following such tweets. One example came Jan. 21, when one of his blank-check firms rose about 4% after Mr. Palihapitiya started a tweet by saying “I’m finalizing an investment in ‘???.’”
The SPAC has since given back those gains after no news about an acquisition came out and it was revealed that Mr. Palihapitiya’s investments were in companies unrelated to his own. He declined to comment.
Mr. Palihapitiya also has thrown himself into the frenzy of activity around GameStop trading, publicizing an options trade last week in the stock and taking profits on it.
Reports about possible mergers like those surrounding the Churchill Capital IV SPAC and a possible combination with Lucid Motors also quickly attract hordes of buyers. That blank-check firm is now owned by many individuals, including Messrs. Prieto, Copeland and Jack Oundjian, a 40-year-old who lives in Montreal.
“I’m very excited that we have a chance to be able to participate in what could be future unicorn companies,” or startups valued at $1 billion or more, Mr. Oundjian said. He said he views SPACs as long-term investments rather than fast trades, and holdings tied to the sector make up about 30% of his roughly $1.2 million portfolio.
Hedge Funds Have Infiltrated WallStreetBets
Longtime WallStreetBets followers ask moderators to ban new users or limit where they appear.
Longtime members of the Reddit forum that was the launchpad for the GameStop frenzy are lashing out at the group’s millions of new users, asking whether they can be trusted and accusing them of working for hedge funds.
WallStreetBets has been hit by bots that question some of the members’ investing initiatives and pitch commission-free brokerage accounts, according to a Wall Street Journal analysis of the posts.
Messages that promote stocks that don’t have large short positions—where traders sell borrowed securities betting the price will be lower when they buy it back—are blasted by members as being controlled by moneyed interests to sap momentum from the GameStop bet.
Longtime followers have reacted to the deluge of new content by asking moderators to ban new users or take additional steps to limit where they appear. “Seriously, the 6 million new users have f— this place up,” one user wrote Monday. “New users are coming here to screw us,” a post last Wednesday read.
Longtime members say the site, while always boisterous, now has more of a mob mentality. At least 180 posts submitted in January discussed new users or threads along with variations of the word “ban” and other terms describing account restrictions, up from 14 in December, according to the Journal’s analysis.
Last Thursday, when silver became a trending term on the forum and some members claimed it would be the next GameStop, others called the effort a misinformation campaign pushed by hedge funds and promoted by the media. On Monday, futures prices of the metal hit their highest level in eight years.
Prices of GameStop and silver both tumbled on Tuesday, and dozens of posts submitted in the past 24 hours blamed bots for spreading a concerted message to sell.
The success of WallStreetBets has also changed the forum from a place that covered a range of investing ideas to one with a near-singular focus on one company. Some of the most popular discussions in January 2020 centered on Donald Trump, John Deere and Virgin Galactic, according to the Journal’s analysis.
In July, companies announcing Covid-19 vaccine trial results and electric-vehicle makers were among the most popular topics. By the end of last month, discussions on GameStop and a handful of other stocks dominated the most-popular posts.
Mentions of GameStop’s ticker symbol overran the forum jumping from 43,600 mentions in December to at least 193,000 last month, the most of any ticker mentioned by far, according to data from TopStonks.com. The popular topics on the board almost exclusively revolved around GameStop and a handful of other picks that were heavily shorted by hedge funds.
Some of the posts are seemingly submitted by bots because they are posted in rapid succession containing the same text. One such post, “cant the hedge funds just drive the price down further like today and then cover their short position at a lower cost? and then no short squeeze?”, appeared dozens of times. The Journal identified at least 65 submissions posted since Wednesday that contain the same text, including five advertising a commission-free brokerage startup.
“The entire financial industry is now wide awake at the power reddit has to move the markets and as a consequence heavy investment is coming in learning and manipulating it to the advantage of anyone with enough spending power,” one Redditor wrote Sunday.
Crypto Version of WallStreetBets (AKA SatoshiStreetBets) Push Crypto Pump And Dumps
The retail trading frenzy that drove up shares of GameStop Corp. and AMC Entertainment Holdings, Inc. has again spilled over into digital assets as prices on little-known alt coins surge.
“You have a whole new population of people coming in who are primed to participate in pump and dump who maybe wouldn’t have previously,” said Tyler Moore, a professor at the University of Tulsa who co-wrote a peer-reviewed paper ‘An Examination of the Cryptocurrency Pump and Dump Ecosystem’ that looked at more than 3,400 schemes hatched in 2018.
He says all indicators are that it’s happening again in the cryptocurrency sphere after the run-up in Bitcoin earlier this year and the frenzy in retail stocks, with traders seeking to inflate prices so a small group of investors can profit off the surge.
With day traders bored and stuck at home, some flush with cash from stimulus checks, the rapid appreciation in prices from GameStop to Dogecoin has taken the market by storm. But with little in fundamentals to back up the case for buying these assets, the likelihood of them cratering is high, leaving novice traders who jumped in on the hype vulnerable to steep losses.
Last week Dogecoin — the Shiba Inu-themed token which was originally created as a joke by software engineers Billy Markus and Jackson Palmer — surged after Tesla Inc. co-founder Elon Musk posted a photo of faux magazine “Dogue” featuring a dog in a red sweater. Retail investors took this as a signal to invest in the token, sending its price soaring about 300% over the past week, according to Live Coin Watch.
XRP, the token at the center of a lawsuit brought by the U.S. Securities and Exchange Commission against Ripple Labs Inc., spiked 76% last week before paring gains. Online retail traders have urged investors to pile into the coin after it was delisted from several exchanges. It is currently the fourth-largest coin by market capitalization.
Cat Token (CAT) is up around 400% in the last week, according to Live Coin Watch. The coin has since pared its gains, but that hasn’t stopped groups from promoting the feline-themed coin. Shiba Inu (SHIB), not to be mistaken with Dogecoin, popped in trading volume from about $523 worth of trades on Jan 29. to over $48.2 million by Feb 1. amid online promotion before plunging Tuesday, according to CoinMarketCap. The coin is trading at a fraction of a dollar.
“You’ve got the get-rich-quick guys who see the price movements and go ‘Let’s keep this party going. I want to make a lot more money and I want to make it really quickly. I want to capitalize on this trend before it inevitably bursts into flames,’” said Craig Erlam, senior market analyst at OANDA Europe.
While pump-and-dump schemes have traditionally been most associated with penny stocks, the crypto market has some unique characteristics that may make it particularly vulnerable, Moore and his colleagues say.
There were nearly 1,600 actively-traded tokens as of July 2018, according to CoinMarketCap. Since then that number has ballooned to nearly 4,000.
Jeff Dorman, chief investment officer for Arca, an investment management firm specializing in digital assets, says that while there may be little reason on a fundamental basis for the price jumps in speculative coins, the moves aren’t necessarily an indicator of pump and dumps.
“Ripple (as XRP is often referred) absolutely moved artificially,” he said. “I wouldn’t call it a pump and dump, per se, so much as I’d call it misinformation and a gambling mentality.”
When assets that have little underlying value surge in price, that could spell trouble for those buying in for the sake of jumping in on the zeitgeist of the moment. Prices will almost revert back — as GameStop is doing Tuesday — and somebody will be left holding the bag.
“XRP just happened to be the latest one to be caught up in the Reddit crossfire, but it won’t be the last,” Dorman said. “It’s the same game happening across a lot of semi-liquid assets right now and we’ll see how long it lasts. It generally will end in tears.”
The Fed Can’t Ignore Its Role In GameStop Saga
Negative real interest rates are the chief source of today’s excessive speculation because it means holding cash is a losing strategy.
I have very specific memories of the dot-com bubble. Working as a clerk on the Pacific Options Exchange in San Francisco some two decades ago, I can recall normal yellow taxicabs that suddenly became Yahoo! taxicabs. They were painted purple and provided internet access for passengers. It seemed like every billboard was for some startup internet company.
A reporter from the San Francisco Chronicle found his way to the trading floor one wild day and got one of the traders on the record saying, “I can’t believe how much money I’m making!” Nothing captured the zeitgeist of the moment better.
It may be a cliché, but it’s generally true that the more things change, the more they stay the same. Today, again, it seems like everyone is getting rich, whether it be in Special Purpose Acquisition Vehicles (SPACs), whatever Chamath Palihapitiya is touting, the latest stock-of-the-day in Reddit’s WallStreetBets forum, or digital currencies.
And similar to 2000, there is a group of people now who are questioning the mania, deciding to stay invested in stocks with actual revenues and earnings instead of those built on hopes and prayers.
The current mania is different for one key reason: monetary policy. Back then, the Federal Reserve had raised interest rates to 6.5% heading into the new millennium. I had most of my money sitting in a money-market account, not seeing a great deal of incentive to risk it in the stock market.
Much higher interest rates made the certainty equivalent of cash more attractive than it is today with the easiest monetary policy imaginable and negative real rates, which is probably the chief source of all this speculation.
Real, after inflation, interest rates that are positive have a tendency to refocus people’s attitudes towards risk. If you’re getting a significant positive return in a risk-free instrument, then why take risk in stocks?
People don’t have the luxury of that option today. The Fed has two mandates: price stability and full employment. It is spending much more time thinking about full employment these days with more than 10 million Americans out of a job due to a pandemic and inflation rates being low and stable.
As a result, interest rates are pinned near zero, and are actually negative after taking account even moderate levels of inflation. It’s also pumping $120 billion directly into the financial markets each month, and sees no reason to slow the pace to ensure the recovery from the worst downturn since the Great Depression doesn’t digress.
With so much easy money sloshing around the economy and financial markets, and money- market accounts paying less than zero after inflation, it’s no wonder that many indicators show that investor sentiment is at beyond euphoric levels.
The market strategists at JPMorgan Chase & Co. wrote in a recent report that “households’ equity allocation has risen to record highs, surpassing its previous high seen at the beginning of 2000 at the peak of the dotcom bubble.”
It’s hard to miss the tell-tale signs of a bubble. Initial public offerings are popping more on the first day of trading than they have since the dot-com days, as evidenced by the recent performance of companies such as Airbnb Inc., DoorDash Inc. and Snowflake Inc. Then there’s the recent raid by speculative day traders on GameStop Corp. and other companies with outsized short interest in their shares.
Not to mention the bankrupt car rental company Hertz Global Holdings Inc. and other low-priced stocks that experienced a buying frenzy a few months ago for no fundamental reason. The Robinhood trading app is turning investing into something akin to a video game. And let’s not forget the digital currencies led by Bitcoin.
If it acts like a bubble, it probably is, which is why, just like 20 years ago, there’s a raging debate about whether it is the Fed’s job to tamp down excessive speculation when it occurs so that a bigger bubble doesn’t burst further down the road, causing severe economic damage. The topic was certainly on then-Fed Chairman Alan Greenspan’s mind when he gave his unforgettable “irrational exuberance” speech in December of 1996.
Of course, it took a while for Greenspan to do anything about it, and the stock market rose for three more years. And the bursting of the dot-com bubble did result in an economic recession and a nasty bear market that saw the Nasdaq 100 Index falling more than 78% between March of 2000 and October of 2002.
The troubling part is that I don’t get the impression that conversations about excess speculation are being had inside the Fed. Chair Jerome Powell dodged the question last week during his post-Federal Open Market Committee press conference, only saying that there’s not a strong link between interest rates and asset prices.
But we can clearly trace the origins of the 2008 financial crisis to monetary policy after the dot-com bubble, when rates were slashed to below 2% and held there for more than three years. We’ve had three large, speculative manias in the last 21 years, and they were all a result of prolonged period of time with negative real rates.
Former Fed Chairman William McChesney Martin once said that it was the Fed’s job to take away the punch bowl just as the party was heating up. Admittedly, he was referring to the economy heating up, not the financial markets, but the divergence between the real economy and financial markets is currently so extreme that it can’t be ignored.
The Fed’s current interventions were meant for times of crisis, and the financial markets are no longer in crisis. They should be gradually withdrawn, starting with the Fed’s purchases of exchange-traded funds and corporate bonds. The Fed must realize that the markets are in the midst of a raging party, and the first beer bottle just got thrown against the wall.
‘The Antisocial Network,’ Book About GameStop, Is Sold to Hachette Unit
Grand Central Publishing made pre-emptive bid for Ben Mezrich’s book about trading frenzy.
Grand Central Publishing has acquired an upcoming book by author Ben Mezrich about the recent trading frenzy involving shares of videogame retailer GameStop Corp. GME 19.20% that pitted small investors against hedge funds.
Ben Sevier, Grand Central’s publisher, said he plans for the book, titled “The Antisocial Network,” to be published this fall.
Grand Central Publishing, a division of Lagardère MMB 0.88% SCA’s Hachette Book Group, declined to say how much it paid for the book. Eric Simonoff, Mr. Mezrich’s agent, said the publisher made a pre-emptive bid for the book, preventing it from going to auction.
At least four book proposals—including Mr. Mezrich’s—are either being circulated to publishers or in the works, according to people familiar with the matter. The interest is a reflection of the widespread fascination created after GameStop shares were bid up well beyond logical measure by investors who followed the stock on social network Reddit and other platforms.
The movie rights to Mr. Mezrich’s proposal, titled “The Antisocial Network,” had previously been acquired by Metro-Goldwyn-Mayer Inc. earlier this week.
Mr. Mezrich is one of the country’s leading nonfiction writers, having authored top-selling titles including “Bringing Down the House” and “The Accidental Billionaires”—a book about Facebook Inc.’s founding, which was later adapted for the big screen as “The Social Network.”
GameStop Frenzy Echoes Sharp Moves Long Seen In Cryptocurrency Markets
Groups who organize online and target a specific asset are a staple of the crypto world.
The flash mob that drove up the price of GameStop Corp. GME 1.77% and other heavily shorted stocks took Wall Street by surprise. In the cryptocurrency market, such behavior is commonplace.
Groups of investors who organize on social media and target a specific asset—often one small and illiquid enough to be easily influenced—are a staple of the crypto world. Although digital currencies have made inroads with professional investors, they are also still subject to pumping schemes that proliferate on social-media platforms like Discord and Telegram.
The prevalence of such ploys, going back nearly a decade to the early days of the crypto industry, suggest that the mania surrounding GameStop on Reddit’s WallStreetBets forum may not be an isolated event in the stock market. A similar, temporary spike also occurred last week in the silver market.
“It’s definitely an awakening of small retail traders that there’s power in numbers, and that’s come from crypto,” said Kain Warwick, the founder of Synthetix, a crypto-focused derivatives platform. “We realized that a long time ago.”
Another similarity between crypto and WallStreetBets: Free tools, like online trading apps and message boards, promote what early bitcoin adapters called the democratization of finance. Bitcoin was created 12 years ago as a decentralized currency that would be free from the interference of bankers and other middlemen.
When the Robinhood app restricted trading of some stocks, investors on WallStreetBets saw it as further evidence of the inequity of the investing world, casting themselves as David and the Wall Street establishment as Goliath. And in the wake of that decision, Coinbase, one of the biggest crypto exchanges, experienced an increase in new customers as those investors looked for new investing platforms.
There was already overlap among crypto and Robinhood traders. About 46% of crypto investors on digital exchanges like Coinbase and Kraken have also made deposits at Robinhood, according to a survey of consumer-spending habits from analytics firm Cardify.ai. Both fans and critics of Robinhood, which allows investors to trade stocks, options and cryptocurrencies, say it promotes “gamification” of the market with the use of push alerts, free stocks and confetti to encourage engagement.
Neeraj Agrawal, the director of communications at Washington, D.C.-based cryptocurrency trade group Coin Center, says there is a significant overlap of gamers and crypto traders—and now, apparently, stock traders.
“It’s the same skill set,” he said. “Day trading is basically sitting in a gamer chair with multiple screens playing a game.”
The velocity of the recent surges in bitcoin and GameStop are also drawing comparisons.
Bitcoin has mounted a spectacular rally since September when it traded around 12,000, one that was turbocharged in December and January. The digital currency crossed $20,000 for the first time on Dec. 16, broke through the $30,000 barrier on Jan. 2 and topped $40,000 just five days later.
After waffling recently, bitcoin gained fresh momentum this week after Tesla Inc. disclosed its purchase of $1.5 billion in bitcoin and said it plans to accept the digital currency as payment for its electric vehicles. Bitcoin set a new intraday record of $48,226 on Tuesday.
Some bulls have said bitcoin could hit $200,000 by the end of year, defying skeptics who say it has yet to prove itself as a large-scale currency.
GameStop’s surge was also turbocharged. Shares started the year at $19. By Jan. 19, they had doubled. Three days later, they had more than tripled—and three days after that, on Jan. 27, they closed at a high of $347.51. Through the run and subsequent fall—the stock closed Tuesday at $50.31—users on WallStreetBets urged one another to “hold the line,” “send GME to the moon” and put pressure on the hedge funds short selling GameStop on the other side of the trade.
The stock’s surge was divorced from fundamentals. GameStop is expected to post its fourth consecutive annual revenue decline as it struggles with years of falling mall traffic and advances in technology that let people download games directly to their consoles instead of buying hard copies.
There has been much debate about whether the behavior of the investors organizing on WallStreetBets should be considered market manipulation. The GameStop frenzy has attracted the attention of the Securities and Exchange Commission, which has said it is on the lookout for such trading.
Treasury Secretary Janet Yellen, meanwhile, has asked for a meeting with officials at the SEC, Federal Reserve, New York Fed and Commodity Futures Trading Commission to discuss the recent stock-market volatility.
Crypto pumping schemes have received much less scrutiny, even as the Commodity Futures Trading Commission has offered rewards to whistleblowers. Traders gather in groups with names like Big Pump Group and Big Pump Time to target a specific currency on a certain exchange at a set time in a bid to drive the price higher for a quick payday.
Such groups became highly organized by 2014 and reached their height in 2017 and 2018. They generated more than $825 million in trading activity in 2018 alone, all of it coming from small, individual traders across hundreds of different groups, according to a Wall Street Journal analysis.
In one more recent example, a group called United Binance Pushes orchestrated a pump-and-dump of a small, obscure cryptocurrency called Bread, with a market value of about $10 million. On Saturday, at 1 p.m. ET—the preselected and advertised time—trading in Bread exploded, very briefly, on the Binance exchange.
In one hour, the volume for Bread—which is so marginal that it only trades in bitcoin and ether—surged to 65,000 bitcoins from 2,000 bitcoins. In price terms, it rose to 0.00000473 bitcoin from 0.00000281, before falling.
“With many new members we hope this was a good pump and learning experience for you,” the group wrote on Discord after it was over.