GameStop, a struggling brick-and-mortar retailer, made headlines last week after a group of Reddit users rallied together and drove the stock’s price way up—causing short-selling hedge funds to lose $91 billion dollars.
Wall Street was not happy—they made numerous trading halts, bailouts to failing hedge funds, and put restrictions on buying (but not selling) the GameStop stock. Essentially, Wall Street changed the rules of the game—to protect themselves.
Will regulators go after social media platforms to prevent future “market manipulations” from going viral?
Are trading apps like Robinhood right to restrict retail investors while hedge funds face no restrictions?
How do deplatforming and decentralization figure into this?
One thing is certain: this saga could change the world of investment as we know it.
GameStop, a struggling brick-and-mortar retailer, made headlines last week after a group of Reddit users rallied together and drove the stock’s price way up—causing short-selling hedge funds to lose $91 billion dollars.
Wall Street was not happy—they made numerous trading halts, bailouts to failing hedge funds, and put restrictions on buying (but not selling) the GameStop stock. Essentially, Wall Street changed the rules of the game—to protect themselves.
Will regulators go after social media platforms to prevent future “market manipulations” from going viral?
Are trading apps like Robinhood right to restrict retail investors while hedge funds face no restrictions?
How do deplatforming and decentralization figure into this?
One thing is certain: this saga could change the world of investment as we know it.
Henry: Hey everyone. It's Henry Mike and Chris of the decentralists and not surprisingly another hot topic. There has been so much going on in the world of social media and the rest of the world in the last several weeks, of course, we had the storming of the capital and how that was impacted by social media but another crazy thing has happened for the first time and that is how Reddit has been able to impact a stock price of today's blockbuster, known as Game Stock, and then Robin Hood is supposed to come and save the day. But Diddy, I don't know. So, Mike brings us up to speed and I Chris, I know you get a ton of things to say, but Mike starts us off.
Mike: it's literally the 29th of January. We aren't even through the first month, we didn't even make it a week before social media seriously was being used to kill five people and basically almost burned down the centre of democracy in the United States. Then a week and a half week later, we have one of the most egregious, I would say, kind of examples of the limitation of free speech, and the fact that these, that social media isn't free speech by the banning and then platforming of Parler Don't forget that one.
Henry: Yeah, we did that one. It's crazy.
Mike: Did that one, that was last week now, and now it has literally been a storm of information is coming across way more frankly than I remember seeing over the parlor thing. Which was literally, seems like months ago, is this fight that's brewing between Wall Street and all of these hedge fund billionaires and the social and the average people like you and me represented online on social media in this case, Reddit. So, Chris, why don't you bring us up to speed on what is actually going on here?
Chris: Absolutely. Mike, so what everybody needs to know is that this isn't something that I sprung suddenly. This is five years in the making. So, in 2015, I'm going to give you a little bit of background here because I used to be a Game Stock shareholder. Game Stock.
Mike: Game Stop.
Chris: So, game stop. Well, I guess it is game stock now, game stunk. Game stop used to be a very good brick-and-mortar retailer. Not that much different as far as fundamentals from bed, bath, and beyond, and what occurred as they were on an upward trajectory. They issued quarterly dividends all at 5% yields with pegged yields.
Henry: That's not bad
Chris: Oh, excellent. That's why I bought it. But suddenly I started noticing that the price of the stock kept going down and down and down, and I noticed that these hedge fund billionaires would keep going on to new sites like CNBC Bloomberg. So on, so forth talking about how game stop was the blockbuster of video games.
Henry: Well, how long ago was this, Chris?
Chris: This was over a five-year period.
Mike: No way.
Henry: Wow!
Chris: Little research equity folks like Citron research. Would keep saying the same thing and they kept shorting and shorting and shorting over a five-year period to the point where a game stop is now the most shorted stock in Wall Street history. This is not a joke, the shortest.
Mike: You got to be kidding me.
Chris: Over a five-year period, short for five years. Until I'm 2019, this one fellow on Reddit, his name is Deep Bleeping value effort there. Started noticing that it was so leveraged that there were more short floats than there was stock in existence.
Mike: Oh, my goodness.
Chris: It was that one point 40 float. So, what this means to those who are not, so they're not so much into stock. It means that that if the price goes up, instead of down, they would be in a death spiral. Where they would be forced to buy at increasing prices.
Mike: But not even that, even at that, at 1.4 leverage, that means that for every dollar that they've sold short, they not only have to buy that share back that dollar, but they have to buy another 40 cents. They have to dip into a well to make themselves whole.
Chris: You got it. So, last year's game stop sold at a low of a little under $4, $380 cents at the very bottom and this was when everybody on Reddit basically realized, hey, what would happen if we bid up the stock? What would happen to these hedge funds? So, over the course of the year, this was back in December, it reached $20. Then $80 last week, it was at $100 until this week, it hit a high of $400.
Mike: Wow.
Henry: That's incredible.
Chris: To such an extent that major hedge funds such as Melvin capital basically had to go out of business and other short-sellers had to bail them out but the whole thing becomes crazier because guess what? The major platform that people are using to buy these stocks, Robin Hood is owned by a short seller.
Mike: Oh, you got to be kidding me.
Chris: The short seller is called Citadel, and they've been investigated previously buy the sec for insider trading, but the reason why they own Robinhood is because they do something called front trending. Where if you put in an order for a stock within microseconds, they basically get in front of you to buy it before you do in very small increments.
Henry: Is that legal?
Chris: Technically it's legal, although it shouldn't be.
Mike: Oh my God.
Chris: It was basically under the Obama administration. They said it was okay when it shouldn't be. So, as you can imagine, we are now in a tug of war between the hedge funds, the short-selling hedge funds, and social media, because this thing has now gone viral across all social media. So, what has happened, Robin Hood? The firm is kind of in the middle of all this.
Mike: Just a second. So, Robin Hood, correct me if I'm wrong, Chris, Robin hood is this hipster kind of gamified stock-buying app that doesn't charge any fees to buy shares.
Chris: Yeah. Pretty much. So, right when the short squeeze was coming. When all these companies were about to go bankrupt, Robin Hood basically said to everybody who was used to seeing their platform, no you can't buy stock.
Henry: That was yesterday. Wasn't it?
Chris: This was yesterday. You can sell stock. You can't buy it.
Mike: But it wasn't even that. Okay, hey, let's qualify that. It wasn't like Robin hood. To put the brakes on the platform, they basically came out and said these 15 companies, because it wasn't like you said because it wasn't just game stop blackberries. Been getting bid up AMC, the movie theater chain, people like this. So, these guys selectively banned one-half of the transaction on their platform. Is in effect what they do.
Chris: So, every stock that just has a hint of popularity on Reddit is essentially banned from buys. You can only sell and the question is if you're able to sell, who's buying, not me, the retail investor.
Mike: The short sellers allegedly.
Chris: Oh Yeah.
Mike: I mean that's clear, I mean, come on. That is clearly a collusionary if that's a word, a collusionary kind of thing where the hedge fund guy who's bleeding. Beading, trying to cover off his or her position who happens to also own in the average individual investor platform that is being used to basically buy or sell into that wind is using their muscles to block the people who are basically driving them out of business from continuing to drive them out of business.
Henry: What a scam.
Mike: That is a total scam.
Chris: So, the thing is what this shows me is that the whole market is rigged. The hedge funds they're getting a hand up. They're getting a way out. If the retail investor, if this whole thing goes down, if it all collapses, no handout,
Mike: Oh yeah, for sure.
Chris: Who's helping these hedge funds. It's the platforms. It's a very platform being used.
Mike: Well, this is the problem. Right. I mean, I think this is, let's just dig a little bit deeper into the actual mechanics of what's happening here. So, as an average human being and I'm not necessarily even your average human being, I mean, I've gone to business school. But when you think about what the average human being thinks about when they think about investing right and stocks and things like this is the idea is you look at a company or a fund, like an RS, an RSP or something and they basically you essentially, you're supposed to evaluate their kind of fund rentals, right? What their revenue and sales profitability and all that stuff.
And if they're a good company and they pay dividends like game stop, did. You buy your shares, then every quarter, whenever you get, you get your 5%, that's a great win, and off you go and the stock sits there. What that does by you buying stock and supporting that company is they can expand, build new stores, hire people who can now pay for rent, and do. So, it’s fun let's remember this is a real brick and mortar business. This isn't some tech company that has 12 guys or girls. So, what you've got is you've got this infrastructure on wall street. That was, that is built out of these banks and investment banks. So, retail kind of trading platforms, and banks, in investment banks and the idea is they're there to support these companies to raise money and trade shares.
Now, not that long ago, really hedge funds started to appear and this is where the real creeps started to go. Where the sole purpose of a hedge fund is to bet the opposite way is to say, instead of going out, because I remember back in the day, early days back when I was back working with brokers and stuff used to get these analyst reports, Henry, that were the mining guys follow these five companies and we think you should buy these, there was buy, hold and sell. So, you get these hedge fund guys that are all about the sell-side. But they're literally hand in hand with the guys that are on the buy-side because they need to get the shares from the buy-side guys in order to borrow them, to sell them.
You can't sell what you don't have and so one of the things that I think it was that video you sent over Chris where the guy was talking, one of the things we also got to mention in here, one of the subtle things is so these hedge fund guys, part of the reason why this Robin Hood kind of Reddit thing worked was because one of the things they told everybody to do was give explicit instructions to their brokers, that they were not allowed to lend their personal stock to any hedge fund short seller. That was what really got them. Because usually what happens is I'm a hedge fund guy, right? I call, I pick up a phone, I call my buddy over at Morgan Stanley. I say, hey man I want to take a run on these game stop guys.
How many shares have you got in all of your customer's accounts? They say, oh, we got 10 million shares. I say, can I borrow those for 30 days? Sure, no problem. Literally, these two people who both probably have seven houses in the Hamptons, and superyachts and very fascinating tans have made and they both know each other, their hand in hand and they've just decided to basically take a run at game, stop and bury this company for no reason.
Henry: Ethically, it's ridiculous. It's, morally wrong.
Mike: Other than they make a boatload of cash. Henry the hedge funds make the cash driving this stock done, and the guy at Morgan Stanley makes the cash. When his investors, his private investors start calling him and say sell, and he takes a commission on it.
Henry: Exactly.
Mike: It is, disgrace. But the funny thing is now it's being turned into a, hey, these guys should be allowed to talk about this on social media.
Henry: Because people will figure out what we've been doing. So, go ahead, Chris.
Chris: Well, I just want to say, it's pure craziness that a billionaire investor, bill Ackerman, can you go on to CNBC say this company's dying short. That's not considered market manipulation. You know, user Bob Jones, 1135 on Reddit says, I like this stock and that's considered market manipulation.
Henry: I'll buy a hundred shares.
Mike: So, and I want to buy it exactly. I want to buy a hundred shares. Seriously.
Henry: Okay. Guys relate to me and our listeners. We're all about decentralization of social media and of course, all these platforms are built on, of course, the traditional mountain, which is centralized communication. So, tell me, how does a decentralized platform help and maybe not allow this to happen?
Chris: Well, Henry, I just want to say this whole circumstance has made me realize how closely aligned social media apps, like Twitter, are to, investment apps, like Robin hood, because they're both centralized. They both can de-platform you at any time, they both can take years and years of assets in Twitter's case, your messages in Robin Hood's case your stocks and they can basically seize it at any moment and they can do it because they're centralized.
Mike: Exactly.
Henry: They own everything about you.
Chris: Exactly.
Mike: It's not just that, it's the fact that the mere fact. Sorry, Chris, I don't mean to interrupt here, but to me, this thing is at the one hand, an illustration of the importance of the ability for people to congregate on a platform to organize the fact that these people could get together and you could call them very smart guys and girls and show the power of what can happen when a bunch of individuals like Joe Brown, what 5 0 3, 6 Chris get together.
Henry: When they coordinate.
Mike: To buy those a hundred shares because if there's a thousand of you, a million of them, now it's a hundred million shares. But the fallout from this is what is actually a very important illustration of the peril of decent, of centralization and this is what we're seeing. The mere fact that one app, or let's say two apps could be a band or de-platformed in this case, Robin Hood and Reddit and that would guarantee basically fundamentally that this, Hijinx, this genie that's been led out of the bottle would never affect these short sellers ever again. So, these hedge fund managers would never lose any more of their billions. Because there's one throat to choke. That's the problem. If every single one of these Reddit people were driving these short sellers out of business, and there is an admirable because these guys do not. These guys and girls do not generate any value for anyone but themselves.
Henry: Exactly.
Mike: Much like social media. It's the centralization of wealth and power. That's what Wall Street is social media is the centralization of control of data. If every single human being had their own microphone that they could plug into any switchboard they wanted and organize for the purposes of driving short-sellers out of business, or for the purposes of sharing stories about their cats, nobody would be able to stop them.
Henry: Mike, that makes perfect sense. Absolutely perfect sense. Because any centralized sort of organization or structure seems like it can be perverted. For example, the stock market, was invented because people wanted to get involved with and invest in companies that were making a difference, making money, and perhaps doing something that betters, the economy and a country. Then it was not invented for someone to say, I don't think that company has a very good future. I'm going to manipulate it. So, it goes out of business. Sure. Just as social media, the internet the Facebook, the Twitters, I mean, Facebook was invented originally. So, a bunch of people could keep in touch and communicate, but because it's centralized and the power is held by one entity it can be perverted.
Mike: What's the common thing. They both make hundreds of billions of dollars off of the manipulation of the average human individual.
Chris: Now, one thing I want to say is that the world of wall street is not that far removed from the world of Congress, Washington. The world of social, because you can't run a business without relationships. If money's going to change hands, you need people for it to change hands, and what we're seeing in the world of finance right now is exactly what we're seeing in the world of social media Decentralization. We're seeing it with Bitcoin blockchain, Ethereum, and we're beginning to see it with social media as well.
Mike: Well, and with exactly or people are starting to yell for it. It's becoming more and more, the only way to fix all these problems.
Chris: They, should because for as long as things are centralized, what's going to happen is things are governed very opaquely. You don't get to find out how everything works. So, Robinhood decides, oh, we're going to stop trading game stop. All right. Why who led to this decision? Why now? Who got onto the phone with Robin Hood? And said, I want you to make it impossible for you to sell this stock. We don't know who made the decision. Do we.
Mike: Probably Zuckerberg.
Henry: Okay, no. So, I have a question for you guys because I haven't been able to answer it yet. I thought I did, but why are politicians on both sides of the aisle? Republicans, Democrats, Ted Cruz, and what's her name? Alexandria Cortez. They both seem to be outraged about what's happened with Reddit. So, what are their views, and are they the same?
Mike: You want me to take a run at this one.
Henry: For sure.
Mike: I think it's a coincidence of common, goals. If I was to put because here's the thing, right? Nobody, in this story, the Reddit folks on Robin Hood, or the wall street at least, hedge fund guys and girls, neither of them are going to win. Because the truth of the matter is what you got to remember is all these people who are getting exhorted to bid the stock up are putting real money. That Bob 5032 who puts his advice a hundred shares is taking real money and depending on who Bob is in these times of pandemic, Bob may not have any money.
Chris: No, it could be 500 bucks. It could be a thousand, who knows?
Mike: I think what actually be funny if everybody just took their $2,000 checks from us government and used them to buy the game stop.
Chris: That's what is happening with 2 million people.
Mike: That's awesome. That's so awesome. But what I'm saying is that I think on the one side, somebody like AOC, because she's always associated with the fringe left of the Democrats. Is concerned about the effect it's going to have on these real American citizens who are going to lose a lot of money.
Henry: Because they eventually will.
Mike: Because they eventually will and Ted Cruz, Is concerned that all the Wall Street, billionaire buddies that fund him in the Republican party are not going to be able to anymore or are not going to do it unless these guys get sued or banned out of existence.
Henry: Or they've lost money and that's money that could have been contributed.
Mike: To, could have contributed to his campaign.
Chris: What I think is going on is that Americans love an underdog story.
Henry: True.
Chris: You could go through all the sports movies that you like, and there's been hundreds of them. They always do gang busters at the box office and what's going on with Reddit is it's David and Goliath. It's an underdog story. So, no matter your political Stripe, you're going to cheer on that underdog. AOC is going to say, hey, good job sticks it to billionaires and Ted Cruz is going to say, well, anybody should be able to become a billionaire, and that's a common cause and we're even having billionaires, chairman Elon Musk, sent out a tweet that sent the, the value of game stop from $150 to $300. We're seeing mark Cuban come on and say, hey, What's the deal shouldn't people be allowed to in invest how they like. Kevin O'Leary is cheering on the underdog. The only people who are not cheering on the underdog are of the hedge funds.
Mike: That's because nobody likes these guys. Literally nobody does.
Chris: Nobody likes them.
Mike: Because they're literal, eight of them and they're all like 800 trillion billionaires and so nobody likes them, but here's the, this is why I think guys, like on the one hand you would think that this story, this underdog story, Chris is a would be an indication of, well, maybe there's hope for social media yet. But sadly, I think that the section two 30 kind of the push on the one side, the big corporate corporations, social media corporations, bad guys, they're going to get, they're going to get killed with section two 30. If it gets repealed, they're done. It's over and the pressure from the S.E.C and Wall Street and the billionaires is going to put pressure on that side to basically fundamentally change social media and these centralized platforms and muzzle them. In much the same way that repealing section two 30 would, but they're going to be doing it for a selfish purpose, which is to save these hedge fund billionaires, a bunch of money.
Chris: We're already seeing this right now, Mike, discord used to host wall street be chats and they Ban them
Henry: Discord is a decentralized app. How can they ban them?
Chris: Well, it's not decentralized. It's, works a lot like slack. But there, Bann now. Facebook just banned a bunch of stock related. This is crazy groups; we're seeing the guy who kind of started the whole thing get docked by the media. He has this whole identity out there right now and now they're building narratives of about stock manipulation, emanating from Reddit.
Mike: Well, I could tell you this, we've just spent the most of this episode talking about how evil these short sellers are, but I'm going short on social media. I'm going to call it right now. I suggest you all go short on social media and all of these tech companies, because this is literally a watershed moment it's over for these guys. This is when the straw that broke the camel’s back. We must decentralize now, us just for the sake of our sanity and the sake of retirement funds, and our mortgages and our kids going to school and all this stuff, this lunacy and manipulation, whether it's financial or social needs to stop.
Henry: So, you're saying we should all short centralization.
Mike: I would short centralization right now and that that's everything right. So, short it all you might as well while you still can.
Henry: Okay, well then let's do it, Mike, when are we going to be releasing the alpha of many one?
Mike: Growing out to friends and family of us on Monday, and then I think probably about a week, maybe next week for Valentine’s Day, that's a good idea. Maybe for Valentine’s Day.
Henry: Because we love decentralization.
Mike: We do, we love decentralization and we love decentralized.
Chris: I want to say one thing in closing folks. The Winklevoss twins gone to CNBC yesterday, and they said something very profound. They said, this moment is the beginning of the end for centralization.
Henry: Really?
Chris: Yeah.
Mike: Those are the two brothers that were basically kind of hoodwinked out of their share as co-founders of Zuckerberg. They were like his roommates or something like this and Harvard or whatever, weren't they?
Chris: Something like that. So, if this is the death for centralization, he was referring to finance, but I will also say social because it is the death for centralized social as well. I think the next 10 years is going to be the beginning of decentralization.
Mike: Absolutely. It's going to be a brave new world. It's going to be awesome.
Henry: Whole new world.
Mike: It's going to give us all the it's going to win power us all.
Henry: Thank you, gentlemen. I obviously concur, if we're going to change the world, we might as well change it for the better.
Mike: Absolutely. Thank you, Henry.
Henry: Bye Chris
Chris: Take care.
Henry: Bye Mike.