02.02.2020 – Special Report. Super-Gau for small investors: Apparently under pressure from large investment houses, online brokers are making it more difficult to trade GameStop and other speculative stocks. Retail investors panicked as they were stuck in stocks that were depreciating. It smells of nasty tricks. It is quite possible that the previously short Wall Street elite is digging its own grave. Or it could be that small investors are failing to support the market. The war rages on, the outcome for the stock market is still completely unclear.
The GameStop Revolt
Historic times on Wall Street: A battle is raging in the financial industry between large hedge funds and millions of retail traders who organise themselves via Reddit, Twitter and other more specialised online platforms. The matter has now mutated into a vendetta of determined retail investors against hedge funds. GameStop, in particular, was where it really went down. Here, an investor named Keith Gill, who had gone long since 2019, stood out; he is known on YouTube as Roaring Kitty and on the Reddit group WallStreetBets as DeepF*&^%Value. He led the wild ride of online gamblers on the stock wave with his followers.
And so Gamestop shares shot up from $2.40 at the top to $418.50 within a year. Funds that had mostly acted as short-sellers against the flash mob of recreational investors had taken heavy losses. Melvin Capital Management, for example, has since had to beg for about $3 billion in support and close its short position in GameStop. Specifically, Point72 Asset Management and industry giant Citadel have come to the rescue of the distressed Melvin fund after its “mother of all short squeezes” blew up. What a triumph for the revolutionaries!
The Empire Strikes Back
But then came the counter-attack: the retail revolt led to the temporary suspension of trading in some gambler stocks last week. Presumably under pressure from the money giants on the US stock exchange. In particular, Dave Portnoy, founder of the sports and lifestyle blog Barstool with millions of followers, accused Point72 Asset Management on Twitter that the fund had obtained the restrictions on trading. On Thursday, the trading restrictions had been eased again somewhat amid public outcry. On Friday, Gamestop’s shares had closed 68 per cent higher. Those of the cinema chain AMC, which was also heavily sought after by traders, rose by 54 per cent.
Robinhood restricts number of shares
But the war is not over yet: on Saturday, Robinhood – one of the largest US trading platforms for retail gamblers – announced that 36 companies allow the ownership of only one share, including GameStop and AMC. At 14 other companies, only five shares may be held, ZeroHedge reported. The financial blog also pointed to a strange coincidence in timing: shortly before, the broker had had to take out a $1 billion emergency loan. Was that when the lenders demanded intervention against the cheeky retail rebels? At least that’s what it looks like. Then, on Sunday, a partial turnaround: GME is still allowed to trade one share, AMC ten shares, and the restrictions were lifted on 42 other shares. A perfect mess, uncertainty is poison for the stock market.
The assessment of the situation: If an army of gamblers agrees on trades on forums, then on the one hand this is a competitive advantage over professional investors, who are not allowed to collude according to the law. On the other hand, the merger into a gigantic pack of wild hunters is precisely the consequence of social media. Now, at least, it looks as if the fund elite has unfairly outwitted the GameStop rebels.
Nasty tricks from the cartel
But in doing so, the lords of money may have scored a fierce own goal. The anger of investors at Robinhood is now so great that, according to dpa, far more than 20,000 of them have joined a class action lawsuit via a special app. Texas Attorney General Ken Paxton said on Friday he had requested information from Robinhood and other online brokers to find out whether everything was above board in the restrictions on trading in shares of Game Stop and some other companies. He said there appeared to be collusion by hedge funds with trading platforms and web servers to fend off threats to their market dominance. The stench of corruption is in the air… New York Attorney General Letitia James now also wants to investigate.
The US Securities and Exchange Commission (SEC) has also confirmed that it is investigating the GameStop case. It will protect small investors if the facts indicate manipulative trading activities. Investors who have been bruised should report to the SEC. According to the financial broadcaster CNBC, 4000 complaints had already been received on Friday afternoon. We suspect that Robinhood cannot be saved from insolvency for much longer after the betrayal of its clientele.
Attack on retail investors
The episode can otherwise have nasty consequences for the entire stock market. For if retail investors are excluded from trading or stuck in falling prices, it could mean that they eventually withdraw from an unfair market altogether. We had already explained in this space that many retail investors are using the stimulus cheques in the US to gamble. If retail investors bail out, other stocks will also lack buying support, especially in a correction.
Parade of the “modern investor
Moreover, a whole important cohort of investors could stay away from the market in the long run. On the financial blog “Value Walk”, the asset management company Mintos, which specialises in alternative investments, paid homage to the “modern investor”. This is a millenial who is very tech-savvy and learns quickly. The modern investor trades via app from the internet and is also available for exotic alternatives such as art, wine or loans. According to a survey by Accenture, 90 percent of asset managers see that these Millenials know more about investment options today than they did five years ago. Blackstone also judged that the new investor is more engaged with alternatives. We think: Bitcoin is one of them. And above all, Millennials have bet on high-tech stocks. If hedge funds on Wall Street have pulled off some really nasty tricks, and if they get away with it, there are likely to be bearish consequences.
Hate and rage
And star investor Ray Dalio, one of the richest men in the world and founder of the hedge fund Bridgewater Associates, warned that GameStop was only the visible effect of a much larger problem. He told Bloomberg that the chaos was “another sign of the growing intolerance among those with opposing views”. He continued: “What concerns me more is the general anger — and almost hate — and the view of bringing people down that now is pervasive in almost all aspects of the country. (…) That general desire to hurt one another.” As already mentioned several times in this place: It is boiling. After the dozens of indications of election fraud, in the face of the ruling intolerant opinion cartel and because of the ongoing purge by the party called Democrats, because of the lockdown and the opening of the borders, it is boiling underneath the published opinion. As an investor, you should therefore always keep an eye on the “American Revolution” issue. Especially since the big investment houses donated heavily to the Democrats for the presidential election.
It should be noted that it sometimes makes sense not to trade an asset directly, but via a derivative – such as a CFD. We stay on the ball – and wish you successful trades and investments!
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