Wallstreetbets Robinhood & Hedgefunds
A rough transcription of Chamath Palihapitiya’s breakdown of what transpired in the stock market in January of 2021 pulled from All In Podcast.
Chamath believes that Robinhood was insolvent that they did not have the capital requirements to post the margin that was being asked of them by their partners. That this was a platform level decision to ban and block people from trading securities and that it cost individuals hundreds of millions.
June 19, 2019
Wallstreetbets subreddit user named deepf*ckingvalue began buying long-dated January 21 calls what that means is that in June of 2019 this person was betting that the stock would go up by January of 2021 he spent 50k which is worth 25mil dollars as of 29th Jan 2021.
August 22, 2019
Michael Burry is famous for The Big Short. He discloses a 3% stake in the company and he highlights that 90% of GameStop 57,000 stores are cash flow positive. He urges a buyback and he knows that the company was trading at or near net cash levels so he is making a deep value fundamental thesis.
August 31, 2020
Ryan Curry Founder of Chewy takes a 10% position in GameStop.
Sept 19, 2020
Wallstreetbets member notes GameStop has a 120% short interest. He defends the company.
- There is a new console cycle coming.
- Consoles are not going all digital immediately.
- Their loyalty program has 55mil users.
- They have a strong balance street.
- Ryan Cohan just bought a stake
- The shorts were underwater and would be forced to cover if the stock would go up.
He predicted that the convergence of all these forces would lead to a big squeeze.
November 16, 2020
Ryan Cohen writes a letter to the GameStop board and urges the company to conduct a strategic review and share a credible plan to capture market share in the gaming industry. He said that they need to evolve into a digital company. Not remain a video game retailer that overprioritiezes brick and morter retail and stumbles around the online ecosystem.
November 2020
Wallstreetbets member highlights that Melvin capital was going long GameStop Puts. What that means is that they are synthetically shorting the stalk by buying the right to sell it at a different price in the future. That they had been long that position for more than 4 years all the way back to 2016.
Jan 2021
GameStop strikes an agreement with Ryan Cohen and adds him to board of directors and two of his affiliates former CEO and COO of Chewy awarding two board seats. The stock goes up 13% on that day. One day later 12th and 13th of Jan 2021 a ton of activity around GameStop in Wallstreetbets, Discord and StockTwits. That Ryan Cohen will be the savior. Three days later the stock closes at $40 up 125%.
Now comes the setup the pros vs the joes from Jan 12th to 30th there has been a battle. On one side, institutional investors shorting GameStop and retail investors buying the stock and buying the right to buy the stock whats called call options. This has create the crazy rise of stocks.
After retail drives up the stock. The Pro’s say “screw these guys” they become so massively short that the infrastructure that is supposed to count all the shares can not keep up and now they are short more than the actual shares that actually exist, so now they are 120% short. The Joes “Retail” start to aggressively purchase all of these callable options on the 14th and the price keeps ticking up.
Then quant and hedge funds notice all the activity and they also participate on the long side and after the past 7 trading days we have traded over 100 billion dollars of stock in GameStop well in excess of what retail can support.
Realise, a bunch of value oriented non-computerized non-quant hedge funds short, retail notices the dislocation initially fundamentally but then momentum oriented buys. Other hedgefunds also buy and this is whats created this massive short squeeze.
Jan 25, 2021
Ken Griffen, Steve Cohen they inject 2.75 billion in Melvin Capital 2 billion from Citidel and 750 from Steve Cohen — Steve already had 1 billion in it from before and the squeeze keeps happening. Then it starts to spill over to the rest of the market. Now all these original hedgefunds get calls from the banks which say that. you need to post more collateral you’ve run over your collateral limits you need to post more money to your bank accounts. Now not only do they have to cover GameStop they have to cover all their other shorts so those go crazy and so they have to sell their longs FB, Netflix, Allibab so those go down. That accordion is whats been happening in the market in the last couple of days.
Jan 28, 2021
The cop de grace to this is that brokerage firms like Robinhood and interactive brokers prevented their users from buying GameStop and a hand full of other stocks. They were only able to sell which resulted in such a one way pressure it caused a 40% sell off — that has since been reversed.
Given that it didn’t effect all brokerage accounts means that it was platform level decision meaning that some organizations banned it and some did not.
So we have the question of insolvency, they didn’t have enough margin. If they opened the doors there would be a run on the bank and that's why Chamath believes they had to stop allowing people to trade.
