Despite its best efforts to the contrary, Robinhood did end up stealing from the rich and giving to the poor.
Melvin Capital, the $8 billion hedge fund that didn’t find GameStop funny, lost 53% of its portfolio in January ($7 billion) trying to short against the rallying cries of the Reddit Capitalist Union. Gabe Plotkin also faces the embarrassment of having to get bailed out by your old boss.
Speaking of, New York Mets owner and former name-on-the-door of SAC Capital, known most recently for its insider trading fine of $1.8 billion, Steven A. Cohen, put $2.8 billion of capital into Melvin’s fund.
Ken Griffin, owner of the Citadel hedge fund (an investor in Melvin), and Citadel Securities (a massive market maker and buyer-of-order-flow for Robinhood), is seeing capital losses in the former and Washington cries for scrutiny into market structure in regards to the latter.
Robinhood itself — which for goodness sake is *not Wall Street*, but as *Silicon Valley* as it possibly gets — raised $1 billion immediately to protect itself from class action lawsuits, DTCC capital calls, and a now-rapidly-closing IPO window. That means Yuri Milner of DST Global chipping in yet again.
That’s at least 4 people that have had a very bad, no good day.
The Reddit Wallstreetbets army has 8 million members. Robinhood has 13 million users. These are the opposing force. They are, loosely speaking, having a pretty good day.
But there are other billionaires who are having way more fun with this too. World’s richest man Elon Musk is raising the crypto rallying flag, and ex-Facebook billionaire Chamath Palihapitiya is trading along with Reddit for quick profits. Decentralized hedge fund and all. This isn’t how much money you have. This is about a mindset, and a framing of the world. It’s about who you are, and who you are not. And it’s about what you did and did not do.
Do you side with the Internet’s gamer heroes, wearing Nyan cat shirts and crying out sarcastically for “moar Stonks, money printer go brrrr, number go up”! A post-Gawker-4chan swirl of human vectors, coalescing into one giant middle finger to every Karen and Ken? Dopamine splashing out from our pituitary glands into a vortex tornado of well-earned resentment.
Market Structure on Display
GameStop is a mall shop that sold video games. The mall shops that rented videos (Blockbuster) or sold books (Borders) are bankrupt and rightly dead. The Internet, and its children Netflix and Amazon, killed them. And yet, their names are etched into the collective childhood memories of millions. GameStop has no chance against Steam or Epic — both brands that are also deeply loved by nerds all over the world. We say this as self-incrimination. And yet, GameStop is a symbol, a feeling, a reminiscence.
The person building financial models and analyzing this stuff according to economics is “right” to point out bad things about “fundamentals” of the business. Within the game of financial capital markets, the fundamentals are the gears of the economic machines that you evaluate with capital decisions. You buy good fundamentals, says Warren Buffet, and you sell bad ones. Another Warren, Elizabeth Warren, also believes in fundamentals. She believes in them so much she wants government to regulate them into the market to protect consumers from losing a traditional approach to value, and “fair, orderly, and efficient function”.
Fundamentals are what the financial doctors will tell you that you have. Do you think the Internet cares about their diagnosis? No. The Internet cares about being patronized by people in coats. Musk and Chamath are the mushrooms of the Internet. It is in their DNA.
The GameStop trade itself is worth a pause. While some of the original thinking by DeepF*ckingValue that led to his $30+ million capital gain reflected on the GameStop business, the core insight was market structure. The trade was not about GameStop beating its analyst estimates, or any of that boring-play-by-the-rules stuff. It was about a short squeeze. It was about restricting the supply of the stock in such a way as to blow up a levered short bet that Melvin Capital was putting into play.
In other words, we are talking about the metagame, not the grunt Excel spreadsheet game. SAC, Tiger, Point72, Melvin Capital and every other hedge fund worth its salt plays the metagame. That’s the whole point. You get a PhD in financial instruments by doing the work and testing the levers, rather than believing in them blindly. And Wallstreetbets dared to play the metagame as well. Retail investors aren’t supposed to self-organize into a hivemind of levered derivatives strategy driven by spite. And here we are.
To go short, Melvin has to borrow. To borrow, you have to pay an interest rate. To cover your short, you have to buy back the stock. You’re paying an interest rate and have to buy back the stock. Nobody is selling you the stock, because they hate you. Everyone is buying, to troll you specifically. They are levering up with options. And you keep raising your bids until you cover your position.
In the short term, it’s a bit of a mess. Robinhood is getting amazing publicity, and like Facebook, will flourish in growth despite repeated calls to “cancel it”. It will IPO a year late, but with 10 million more pragmatic users who don’t care about Internet culture. Its Fintech competitors, Public and WeBull, will pick up disenchanted users who still want to trade stocks.
Crypto/Fintech bridges like FTX or Synthetix will get some of that spill over as well, by creating trading pairs in Reddit darling stocks with derivatives. Coinbase will win, as more people start to believe in the underlying philosophy of crypto assets. They will win so much that their websites will break under new volume.