The stock market revolution in the GameStop case, leadered by thousands of small investors versus large Wall Street funds, which he forced take heavy losses on your short positions, was the subject of a heated debate this Thursday in the US Congress.
The Financial Services Committee Hearing in the House of Representatives featured some of the main protagonists of the complicated drama: the leader of the revolutionaries, the small investor Keith Gill; and Vlad Tenev, the CEO of Robinhood, the commission-free electronic brokerage app. There was also Steve Huffman, the head of Reddit, the social network where the coordinated actions of small investors were discussed.
Gill, under the war name of ‘Deepfuckingvalue’, managed from the basement of his house in Massachusetts to beat funds like Melvin Capital. They had amassed a large volume of short options, as the right to sell higher-value stocks in the future and pocket the difference, of GameStop, a fading video game retail store, is known, and Gill successfully bet against them together on thousands of investors.
“I am not a professional investor. I do not give financial advice for a fee. I like the actions of Gamestop“Gill told legislators, in a tie and with an ironic staging that included a poster with a cat with the slogan” Hold on. ”
Precisely, shouting “Hold on, hold on” and “to the moon”, millions of small investors, led by Gill, raised the price of GameStop shares, which less than a year ago was at 4 dollars, to almost 350 dollars at the end of January. Gill, in the process, became a millionaire and became a hero to small investors.
To cut losses, these big Wall Street traders were forced to hedging short positions by buying shares in bulk, something that triggers an even greater increase in the price, what is known as ‘short squeeze’, a phenomenon for which large investment funds could have lost 20,000 million dollars. In the case of Melvin Capital, he was forced to an emergency injection of 3 billion dollars.
Robin Hood and the big funds
Also appearing at the congressional hearing, Kenneth Griffin, the CEO of the investment fund Citadel, one of the largest on Wall Street, which manages the orders of Robin Hood, who limited himself to defend that his performance was perfectly legal and rejected accusations of market manipulation.
Griffin assured that the GameStop case was “exceptional” and claimed the usefulness of these novel brokerage mechanisms in financial markets. “It has allowed the retail investor to have the lowest running cost you have ever faced“said the Citadel boss. The volume of operations forced Robinhood to limit trading on the most affected securities due to speculation and investors took up arms against the same application that has allowed them to operate on the stock market, to the point of protesting on the street.
Paradoxically, the situation achieved to agree legislators from opposite poleslike Democrat Alexandria Ocasio-Cortez and Republican Ted Cruz, who charged against the restrictions and demanded “freedom” to invest. Suddenly, the e-brokerage application went from the side of small investors to those of large funds.
Before the legislators, Tenev apologized for what happened, something that he described as “unacceptable”, but assured that it was due to “higher regulatory deposit requirements” due to the huge number of operations. “We do not respond to hedge funds (…) Please know that we are doing everything possible to ensure that this does not happen again, “Tenev said at the hearing, although he acknowledged that small investors do not have the same market access as large funds.
However, the Securities and Exchange Commission (SEC) fined Robinhood last year for not explaining that his way of actually making money is by contributing a gigantic volume of buy-sell orders to large funds like Citadel, and that he gets a profit on the price differences generated between the order and the execution.
Actually, GameStop’s share value is $ 44, which means that investors who entered the market at the peak of the “revolution” caused by Gill, at the end of January, have registered notable losses. The episode has revealed the risks (for both profit and loss) of trading for unsophisticated investors, and uneven access to the world’s most advanced financial market.
Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.