Robinhood is Down and Reddit is a Terrible Place for New Investors

Yesterday was crazy. Multiple brokerages halted trading of GME, AMC, NOK and other heavily short squeezed stocks. Robinhood was the most egregious offender; it disallowed its customers to buy these stocks, but allowed them to sell. Halting buys put downward pressure on the price and allowed hedge funds with access to Robinhood’s order book to pick up shares in anticipation of a pop when customers were allowed to buy again.

It’s bad however you think about it.

The reason brokerages are giving for halting trading is they ran out of collateral. Specifically, in the case of Webull, the Depository Trust & Clearing Corp instructed its clearing firm, Apex that collateral requirements had increased by 100%. WeBull was forced to halt trading on certain stocks until they could meet collateral requirements. Schwab halted trading on some stocks too for the same reason.

Robinhood used to use Apex to clear its trades until 2018, but then switched to clearing its own trades in 2019. It appears as though they tapped banks for $1bn to cover increasing collateral requirements due to increased volatility. But they only stopped buying, not selling.

Robinhood derives 80% of its revenue by providing hedge funds access to its order book to execute client trades. These banks and funds pay hundreds of millions to execute trades placed by individuals and they basically front run these trades, making a small profit themselves. The loser is the investor. You think you’re making a commission free trade, but you’re not. You’re buying at above market prices and sending a few pennies to Robinhood and whatever bank or fund executed your trade. Schwab derives about 3% of its revenue from this practice for reference. Reminds me of a quote from Blow: “Hey, am I wearing lipstick…”

Their decision to halt buying, however, needs to be investigated. I have no idea how that doesn’t only benefit hedge funds and banks and hurts their customers. I guess we know who their real customers are. I’m going to buy some DogeCoin, hold it for a week. Then close my account and move my fun money to some other brokerage.

Is the SEC Investigating r/WallStreetBets?

No. In fact, while I think this subreddit is ‘interesting’, it has a few contradictions. The community has created a sort of language of their own, which is not very inclusive. I think the term ‘Gay Bear’ is one of the most egregious (the subreddit does not encourage anyone who thinks the market or a stock might go down). There are many, many others.

The biggest issue with the offensive language is that it is not inclusive. Normally I wouldn’t think this is a big deal because it is a subredit; subreddits are specifically not inclusive and cater to a niche group of anonymous people. If you don’t like what you see in a subreddit, stay away from it. That’s like most of the internet. However, r/WallStreetBets is now consistently on the top of the front page of Reddit. It is responsible for sparking the rallying cry of individual investors to take a stand against hedge funds who for since the dawn of their existence have quietly manipulated the markets in their favor by moving large chunks of capital around all while trying to convince the rest of the world they are on the other side of the trade.

And it’s working. There is speculation that Melvin Capital received $3bn from Citadel and Point72 to shore up its finances in the wake of closing out their short position on GME. r/WallStreetBets now has 2 million subscribers and every day users rally around buying GME to continue and force a short squeeze.

The narrative a few days ago was simple; buy the stock, don’t sell, and these hedge funds will be forced to buy a tremendous amount of stock to cover. Hold your positions, and make a fortune. I don’t pay for any services that allow me to see daily short interest, but my guess is that after Melvin Capital and Citron Research closed their positions the short interest is way down. However, people are still buying the stock. Remember the top shareholders of GME are institutional funds, including hedge funds run by a few really rich people, like Michael Burry and Ryan Cohen. I’m in no way saying they are bad guys, but they don’t need a donation from poor Millennials and I’m honestly not sure why so many Millennials want to give them money.

Brief aside: I know the F word is so taboo right now. Even uttering it on the internet can make you a target for trolls. That’s right, Fundamentals is actually a dirty word. However, they are still a thing and it will still determine long-term value. Every euphoria ends and every fad changes. History doesn’t repeat, but it rhymes. Some people will be on top of every next hype-cycle, but in order for it to be a hype cycle, that means a lot of late entrants will be transferring wealth to a few early entrants. So if you don’t know what to buy and don’t want to risk giving handouts to rich gamblers, buy something with strong fundamentals.

So, lastly, r/WallStreetBets is actually spreading disinformation. Well, here’s how I’m interpreting this video from the founder and previous moderator of the subreddit

“It’s been a constant thing for them for the past few years…there’s just a running joke, whenever things got kinda hot a little bit, they get a lot of attention, they set it private, it sends all sorts of speculation that the SEC is investigating them”

So, to be clear, this isn’t terrible behavior. Jaime Rogozinski goes on to say, “it’s complete bs” because no one would actually think setting a subreddit to private would actually protect them from the SEC. However, if you are just browsing Reddit, you may still think the SEC is investigating them. What follows is outrage that the system is working against the little guy. This is also fine, because, well, it is, but just not in this particular instance.

However, now that 2mm people are pushing specific stocks, the subreddit is branding buying GME with saying fuck you to the man and Wall Street. It’s really not the case. Buying GME makes a few early entrants, hedge funds and institutional funds super rich since they own the majority of the shares. Also, does the executive team of GME really deserver to get rich? The company failed over and over to move into the digital space and greatly mismanaged its cash.

GameStop literally asked it’s employees to dance on TikTok for an extra shift during Black Friday for a whopping $9.25 / hour (source). Do you really want to pump this stock now and reward GameStop’s management team?

So by inciting rage in uninformed investors by saying the SEC is investigating the little guy, r/WallStreetBets is effectively using disinformation to pump a no-good stock. I support more individuals buying stock, but don’t think that just because you have a RobinHood account and are buying GME or AMC that you are part of the solution. All people should open accounts, buy strong fundamental stocks that make a positive impact in this world and hold them for a long time. That’s how you build wealth. There’s literally no trick. You don’t need money managers, you don’t need to do extensive research. Low fee index and mutual funds run by ethical companies is just fine. If you know a little about a few stocks, go ahead and buy those. It’s literally all quite simple. I can’t believe more people know what a short squeeze is than they understand what P/E multiple is.

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