Time and again, however, the construct has proven unable to handle the rampant speculation it encourages.įor the past year, Robinhood has crashed at the apex of market activity and a new problem emerged Thursday. Giant market making firms like Citadel Securities and Virtu Financial have been more than happy to pay for the flow of orders coming from Robinhood, earning record revenues executing the trades in 2020. While Robinhood purports to democratize investing, behind the scenes it makes money feeding customer orders to Wall Street’s savviest traders ( see story). It’s all thanks to online brokerage Robinhood, which introduced millions of young traders to these dangerous derivative financial products and adeptly built a platform that encourages video game-like speculation. Daily option premiums traded in the video game retailer surged to nearly $10 billion, more than the entire S&P 500 Index. Junky GameStop, not Apple or Microsoft, was by far the most traded company in America at times last week. Single stock call option trading has hit new records. On many metrics, they’re higher than they were at the peak of the dot-com bubble,” says Kevin Smith, chief investment officer of $200 million in assets Crescat Capital.įueling soaring valuations is perhaps the biggest speculative frenzy witnessed in a century, thanks to frictionless and zero-cost stock and options trading by Robinhood. “Tech stocks today are historically overvalued. These funds may have mistakenly taken a piping hot stock market as a sign of genius, pressing their trade too far. Large funds swept up in the losses include Cohen’s Point72 and highly-regarded funds like D1 Capital, Holocene Capital, Viking Global and Ken Griffin’s Citadel. “People are telling me that the pain is anywhere from down 10% on the low end, which is Steve Cohen, to down 30% on the high-end,” says hedge fund insider Anthony Scaramucci of Skybridge. Last week, Melvin required a $2.75 billion infusion from Cohen’s Point72 Asset Management and Citadel, owned by billionaire Ken Griffin, due to its losses. It could have done the trades over-the-counter, remaining discreet, or closed them. One of Melvin’s mistakes was disclosing a put position against GameStop (a bet shares would fall) on its public filings, which gave the Redditors a target to rally around. Cohen of Point72, was the biggest victim, dropping 53% in January according to the Wall Street Journal, in part due to its GameStop short. The complacency was exploited by the Reddit army, to devastating effect.Ī hedge fund named Melvin Capital, backed by Billionaire Steven A. Moreover, the Federal Reserve has been flooding the market with liquidity and a second round of stimulus checks hit bank accounts at the end of the year, a risk hedge funds should have sidestepped. GameStop entered 2021 as one of the most shorted stocks in the world, though positive changes were afoot inside the company as online sales surged and customers lined up outside its stores to buy new PlayStation consoles. “When I looked at these shorts, I thought who the heck would be short movie theaters, bricks and mortar retailers and airlines when we’re just beginning to clear bottlenecks in vaccine distribution,” says Barry Knapp, managing partner of Ironsides Macroeconomics. But they entered the new year complacent. Long-short equity hedge funds generated big gains in 2020 as they bet on the digital companies that thrived during the Coronavirus pandemic, and hedged their rising portfolios by crowding into bets against troubled retailers like GameStop. “And it’s a sorry tale, that something like this can happen and it’s obviously something that will have a bad ending for people who are in a position to afford it least.” “What’s been happening really is a reflection of the quality of analysis, the quality of work, the quality of input that is coming to Wall Street,” says billionaire investing legend Michael Steinhardt. The pain started with the hedge funds that lost big, but as risk bubbles over, it will have reverberations in the broader market ( see story). For many onlookers, the humiliation of Wall Street is icing on the cake.ĭespite the wry cheers, GameStop’s surge is surfacing a market fraught with leverage, unprecedented speculation and superficial analysis at almost every corner, exposing enormous risks. There are some big winners from GameStop, young investors who’ve already taken massive profits that can be used to pay off student debt, or build savings. The episode of millennial and zoomer-aged Reddit traders taking on Wall Street’s wealthiest and winning has turned into the David versus Goliath tale of the age of inequality.
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