Welcome to the World's Greatest Casino
A few weeks back, those of us who like a little flutter on stocks and shares, discovered we were by no measure alone.
Let’s be clear, I’m no Warren Buffett.
I’m putting as much cash on the market as I do on national hunt races at Cheltenham or an evening race on the all-weather in Wolverhampton. I may leave the money on for a day, a week or a month at most, but I’m not planning my retirement here. Wins pay for little extras and luxuries for me and my daughter. Loses are swept under the carpet and never talked about.
I’m a casino-style punter - you only ever hear about the wins!
My method of picking the stocks is nothing unusual. The same system as picking the nags – there are twitter accounts, online blogs and commentators who are tipsters I follow. Racing Post, Daily Mirror, OLBG for the horses, FT, StockPicks, Yahoo and The Street for shares.
What was a surprise was when I found this sub-Reddit community called WallStreetBets.
Here, people were sharing their insights and predictions on who would be the winners and losers in the market that day. There were literally millions of punters like me - or ‘retail investors’ as we are properly called - and they were generating a lot of heat and light about getting into certain stocks through the no fee, no minimum platforms like RobinHood and Charles Schwab, both of which I use.
Intrigued, I had a little punt on the stock being widely discussed.
Luckily, I was a winner – I got in earlyish and was happy to get out at a decent gain of about 300%, However, as the shares moved from $20 and $30 a piece to a high of $435, I clearly could have made unbelievable amounts of money if I had the nerve or patience. But happy with tripling my money, that seems like spilt milk to me.
As it turns out, while I may have made bundles by staying in, millions of those who held on for the long ride lost lots.
While no-one thinks horseracing is without its issues – old stories of painted horses from Ireland, laced sugar cubes and slippery jockeys have been the banter of the Tattersall’s bars for generations - the rules governing who wins and loses are pretty clear – stewards inquiries and photo finishes leave no doubt.
If only the trillions of dollars moving around Wall St every day were as easy to follow as the used twenty-pound notes stuffed in the satchels of the bagmen on their pitches at the nation’s racetracks.
But money is murky. There is now a US Congressional hearing into the events on Wall Street those couple of days in January.
Questions are asked of the Reddit forum members and other punters, the trading platforms acting as bookmakers, the market makers setting the odds, and the giant hedge funds who had already bet billions on the price going down.
Rep. Brad Sherman (D-CA) – made the pithy observation that US Law School professors construct complex scenarios with competing interests, but none could be as intriguing as the Gamestop/Reddit/RobinHood escapade in that last week of January.
For those who haven’t followed the story, it brings into focus how the equity markets are controlled, who is afforded access, what protections do exist and what impact processes like short-selling and influence institutional investors have.
At the outset, the seeming hero of this story is Vlad Tenev.
He is CEO of RobinHood, a firm he set up to make financial systems accessible to all, especially for those with little money, providing the American dream of access to the greatest wealth-making machine in history.
With no account minimums or trade fees, here was a way for punters to make a little spare cash, pay a bill or put money aside for a rainy day.
Robin Hood indeed. “Riding through the Glen, Feared by the Bad, Loved by the Good, Robin Hood!”
But all started to unravel in late January. Tenev reported Robin Hood had 10 times more trading volume than normal and, as a result, had to stop trading some shares to recapitalize as per the rules of the DTCC, SEC and others.
They raised 3.4Billion dollars to shore up their balances, including, of course, money from those with connections to the big finance houses.
But this meant that while highly volatile stocks like GameStop were rising by 1000% in hours, RobinHood investors were locked out from buying in to grab those gains. While RobinHood says its decision was because it was overwhelmed by ‘the volatile market’ some wonder if more sophisticated investors in Hedge Funds who had shorted GameStop’s price to fall were putting pressure on.
After all, RobinHood had suddenly introduced millions of buyers to the market looking for GameStop shares and the price was accordingly rocketing upwards, and now it needed money. So, when RobinHood blocked its members from buying specific shares, including GameStop, but allowed them to sell, it brought the stocks meteoric rise to an end and as holdings were sold the price plummeted again.
Retail investors like me are pretty unsophisticated. We don’t typically set sell price orders, advance orders on sales outside of market hours, and we go to bed and see what the market looks like in the morning.
Many retail investors went to bed with GameStop prices in $300 and $400 prices dreaming of new cars, college loans paid off, and mortgages cancelled but woke up with prices back in the $30 range, millions wiped out in unrealised gains.
So why are people so suspicious of the circumstances?
In cross questioning the principal players, Congressmen and women queued up to imply there was more contact and discussion about GameStop and the Reddit-fueled frenzy than the parties were letting on – a claim vigorously denied by all.
They showed RobinHood does a lot of business with mega-market maker Citadel Securities LLC, who in turn does enormous amounts of business with the traditional investors and hedge funds, many of whom were losing billions in shorted positions.
And why, they asked, did retail investors get locked out on the buy side but were still allowed to keep selling these stocks?
They also asked why, if capitalization was the problem, did RobinHood make no mention of this in its public announcements and communications with worried investors, instead blaming ‘market volatility’?
As one Congressman said, far from ‘robbing the rich to pay the poor’ It appears this time RobinHood played a part in taking billions from an army of small investors to bail out the rich Wall Street traditionalists.
RobinHood CEO Tenev vehemently denied any collusion, any discussions with the big players and that while he acknowledged the mistakes they made, it was because this was the ultimate Black Swan – a once in a generation – moment. Nobody could see it coming.
Except "Roaring Kitty" that is.
That is the Reddit handle of Keith Gill who is suspected of driving much of the clamour for GameStop. He had bought at $5 when traditional analysts were undervaluing the legacy business of selling and renting computer games and overstating the threat of bankruptcy. He kept buying and explained to Reddit readers why he was so confident in his belief they were best placed to pivot to a digital model in the billion-dollar gaming sector. He recently confirmed his $53,000 initial purchases became a $48million win. Nice work Keith.
The Congressional hearings will go on for weeks and there will be more forensic investigations by the SEC and others.
But to the watching public – or those nerds like me following proceedings on C-Span - it does seem an unusual set of circumstances played out. Were they dishonest or illegal? Who knows, it seems unlikely in such a regulated world, but as with so much when billions of dollars are at stake - it is the optics.
Wall Street is traditional. It is male, white, old and rich. They tend to have it their way and aren’t used to being challenged.
Suddenly, millions of ordinary people – including – shock! - females, minorities, the young and relatively poor - had decided Wall Street’s view of this one stock - in a sector the youthful and non-traditional retail investor perhaps knows more about – was worth more than the traditionalists had decided it was and there in lay an opportunity.
There were also a fair number of more militant Reddit commentators who were rejoicing in seeing Hedge Funds and traditional investors lose billions in the process.
Congress and Financial Regulators will come up with a conclusion. It will be interesting to see which side of this debate they come down on.
The traditional and the wealthy like the predictability of being able to determine the manner in which Wall Street operates. Some patsy questions by Republican Congressmen suggested they had allies. They are comfortable with the power remaining in the hands of household name brokerages and systems which make it difficult for newcomers to break in.
On the other side are those who believe the democratisation of the world’s biggest wealth generator is urgently needed, including Congresswoman Maxine Waters who happens to chair the House Financial Services Committee holding the hearings.
Me? I am skeptical of the Wall Street institutions who performed so poorly in the 2008 crash and seem to have come out of that unscathed. I am also wary of the capitalists who celebrate ‘free market economics’ but only when it works in their favour.
I’m a gambler, that means you take your chances and see what happens.
You study the form and put your money where you think the best returns will come from. I love to back favorites not long shots, but your dead-cert horse can always unseat its rider, pull up short with a furlong to go or just display a lack of interest and incentive to stride home like you hoped it would.
The stockmarket is the biggest casino of all. We should all be afforded equal access to it and the money-making opportunities it offers.
Rather than the traditionalists seeing their barriers to entry getting even higher, perhaps the greatest GameStop lesson will be the recognition that much of the way our stocks and shares are managed and traded is divorced from reality - and that Main Street is a shrewder reader of the real world than Wall Street.
Martin Liptrot is a marketing, public affairs and advertising consultant. Living on the sunny Northwest Florida coast, he enjoys Football, Rugby, Cricket, Horse Racing and Formula One. At the time of writing GameStop (NYSE GME) is trading at $40.69 and Roaring Kitty is still buying.