The bell for the opening of the New York Stock Exchange rings at 9:30 am.
Many will be watching events unfold this morning on a number of stocks being short squeezed.
I expect Hollywood will make a movie about millions of small investors taking on Wall Street millionaires and hedge funds that bet heavily against those retail investors.
The story of shorted stocks, and hedge funds finding themselves facing financial ruin due to millions of people realizing that when joined together, can fight back against the wealthy who manipulate stocks and the stock market.
This is the second half of the post I put up on Saturday, but this ongoing battle between retail and institutional investors hasn’t ended yet.
The Wolves of Wall Street are feeling the pain of losing some of their wealth to an army of retail investors with the power of the internet, and a combined war chest of potentially a Trillion dollars at their disposal.
The Reddit community, WallStreetBets, went on a hunt for some Wolves of Wall Street.
The Wolves aren’t getting any sympathy from the public. Many of which are retail investors who are still angry over their losses in 2008, when investment firms were responsible for the housing crash and economy that followed. It was taxpayer money that bailed out the firms.
Some of these retail investors today were children in 2008, when the resulting crash to the economy caused their parents to lose jobs. Their parents and grandparents 401K retirement accounts, many of which were heavily invested in the garbage bundled mortgages that caused the collapse, suddenly became almost worthless.
The Reddit community, WallStreetBets (WSB), seems to have attracted present and past generations of retail investors into a powerful force whose combined assets are capable of killing a Wolf who tries to make money by shorting a stock too greedily.
It was the Wolves who exposed their soft underbelly by leveraging themselves so deeply in Put Options (betting a stock will decline in price) on some stocks that, if the price of the stock rose, they would begin losing money to investors buying the stock en masse.
It was a few WSB members that found the Wolves weakness. The word quickly spread among the 600,000 members about the Wolves at risk and the simple fact that if the stock price increased on a certain stock, it could mean the financial death of a Wolf. If not dead, certainly wounded.
The WSB community was first drawn to GameStop (GME). Shorted to 140% of available stock for trading (the SEC needs to put somebody in prison after finding out how that was done), prices going up could cost a Wolf billions of dollars in losses.
Word spread to financial chat rooms frequented by retail investors.
One Wolf, Melvin Capital, had poured billions of dollars into covering their short positions, as WallStreetBets membership swelled into the millions, and money began buying GME stock. The buying power of the millions is more than hedge funds have at their disposal.
On Thursday, with some saying only minutes before Melvin Capital would be dead and the entire stock market would close, as the price of GME reached $483 and would jump over $1000 per share, the trading platform, Robinhood, halted trading of GME.
Other stocks, such as AMC Entertainment Holding (AMC), Bed Bath and Beyond (BBBY), along with about a half dozen others in which short sellers were being “squeezed” by retail investors also had trading availability halted
Within minutes, every trading platform, with only a few exceptions, ceased trading of stocks involved in a short squeeze. When they did resume, they announced new restrictions on trades, options, and margin requirements.
A couple of trading platforms actually de-listed the most heavily squeezed stocks, making them unavailable to customers.
My own brokerage house that holds my primary portfolio, TD Ameritrade, has now placed restrictions on 19 stocks, a few of which aren’t subjects of real short squeeze, but social media pump and dump groups are saying they are.
Robinhood, the preferred trading platform of the WSB community, announced that they wouldn’t accept “Buy” orders from retail investors, but “Sell” orders were free to continue. Hedge Funds were the only ones allowed to buy the stocks being squeezed.
If you don’t understand what that announcement meant, it meant that the stock price could only go down. The Hedge Funds were given the power to determine what they would offer to buy a stock. There was no upward pressure on the stock price.
Prices on shorted stocks tumbled about 25% from their highs on Thursday. The attempt to stop the short squeeze had some success, but it didn’t achieve the goal of seeing the “diamond hands” investors (those who buy and hold even in a drawback of price) retreat from the battlefield.
Wall Street Wolves were showing their teeth and changed the rules of the stock trading game.
Never has a stock, on what is supposed to be free trade equities market, been restricted to only selling, or only buying. When trading has been stopped, it has always been on all trades. All transactions stop, until trading is resumed.
For an analogy of what happened on Thursday, imagine playing Blackjack at a local casino.
You are dealt a 6 and a 4, for a total of 10.
The dealer shows a 7.
“Hit me,” you say.
“Sorry, the casino just implemented a new rule. I can’t give you another card,” says the dealer.
“What can I do?”
“You can stand with your 10, or surrender your cards now.”
“Do you have to stand on your cards, if you have a total of 9?”
“No Sir. I’m allowed to draw cards until I beat your 10.”
On social media, Robinhood was accused of caving to influential hedge funds such as Citadel. Citadel Hedge Fund however, said the hedge fund is not involved with Robinhood. It’s a technically correct statement, but not totally accurate when you see the connection to Robinhood.
Ken Griffin’s Citadel Hedge Fund is a separate business from his Citadel Securities, which is a market maker that processes trades for Robinhood and other platforms. His hedge fund is reportedly also heavily leveraged in short positions of certain stocks being squeezed.
It was later disclosed Citadel Hedge Fund provided about $3 Billion to Melvin Capital, so it could close out their short positions on Thursday, and survive. For providing them the relief, Citadel Hedge Fund will now collect a cut of Melvin Capital’s future revenue.
Citadel Securities is Robinhood’s biggest market maker, and the firm reportedly provides much of Robinhood’s revenue by buying trading data.
Robinhood said their decision to restrict trading was made to protect the investor and meet SEC requirements of paperwork. It said it wasn’t done at the request of Citadel, and Robinhood wasn’t under financial distress in settling accounts, though it was disclosed on Friday it was provided $1 Billion in additional credit to draw upon.
The halting of buying, but not selling, allowed short positions time to try and close out their contracts and stop the bleed. While selling did take place, it wasn’t enough to allow all the shorts to escape. It seems the there is still over 100% of available GME stock still shorted.
Retail investors squeezing the shorts seemed intent on holding their shares, making them unavailable in the quantity all shorts needed to cut their losses and avoid more bleeding. Many retail investors, angry at the blatant violation that occurred on Thursday, vowed to buy even more shares of GME and increase their position in the stock.
By Thursday afternoon multiple lawsuits had been filed against Robinhood, including one by Naperville lawyer Richard Gatz, regarding the trade restrictions.
Robinhood also lost WSB members and the revenue their trades generated, as the community felt betrayed that a company originally created and touted “free trading in a free market,” appeared to support the hedge fund market makers they once opposed.
I also closed my small account I had with Robinhood, and have removed their banner from my site. I used a promotional link from a friend, transferred my money to a new brokerage, getting 2 free stocks from them when I opened my new account, and 2 more will be given when my deposit clears. The new banner is on this page, and the link will give you free stocks, as well.
There is already talk of congressional hearings and investigations by the U.S. Securities and Exchange Commission, to see if there was collusion between Citadel and Robinhood. The SEC is anticipated to investigate the disproportionate number of shares being shorted in GME, to what should be available for trade.
Known as, counterfeit, or “ghost” shares, brokerage houses have been issuing shares they don’t actually have for decades. It isn’t as if paper trades hands. If they lose, they pay. If they win, they get paid. Either way, they collect fees and interest for a put or call option involving the non-existent shares.
After seeing its value plunge from its high, GameStop shares recovered much of their value Friday to close at $325 a share. The other stocks being squeezed, that had their trading halted and restricted, also climbed back up.
“The squeeze isn’t squozed,” WallStreetBets members wrote on Friday. The hunt for the Wolves had resumed. We’ll find out for sure this morning.
One thing I’m fairly confident of, is the SEC imposing a new rule regarding shorting stocks. I expect that there will be percentage limits placed on the available float of stock that can be shorted on a company. I’d guess no more than 20%.
The days of a stock being squeezed because of over-shorting should come to an end. If not for ethical reasons, then for the reason that retail investors have discovered that, they too, can influence the stock market when they unite. The Wolves will have to find another way to screw the small investor.
What you’re hearing about now will be part of Wall Street history. The only thing delaying the movie, is nobody knows how, or when, it will end.
What I am sure of is, when it ends, there will be casualties – on both sides. Some will be wealthy, some will be less wealthy, and some will have lost more than they could afford to lose.
Notice: Any and all discussion of a stock(s) should not be considered financial advice and is for entertainment purposes only. I often lose my car keys and forget where I park my car. I am not a financial advisor.
Full disclosure: I have a long position in AMC Entertainment Holdings (AMC).
UPDATE: I closed my position in AMC this morning, With my sales of AMC ranging from $17.04 through $14.30.
Disclaimer: On January 4, 2016, the owner of WestEastonPA.com began serving on the West Easton Council following an election. Postings and all content found on this website are the opinions of Matthew A. Dees and may not necessarily represent the opinion of the governing body for The Borough of West Easton.
