Are Retail Trader communities really trumping Hedge Funds?

I’ve always seen a lot of finance professionals mocking young casual traders on Robinhood, often for the right reasons.

Going by the recent events- probably not anymore!

A bunch of degenerate gamblers on the r/WallStreetBets subreddit took down a multi-billion dollar hedge fund!

Situation:

Gamestop ($GME)= A dying business circling the bin. Who goes to a store, to buy games? Definitely not in Covid, when malls are dead.

So, some hedge funds started shorting the stock, betting it would go down. Particularly- Melvin Capital Management (a multi-billion $ hedge fund)… had been acquiring a big-short position in Gamestop. Precisely- they had a $55M+ short against GME (because of it being a ‘Listed Put Options’- some clever Redditors discovered this short position).

Only this time around- Redditors saw the overloaded short position and started buying $GME, as a “short-squeeze” against Melvin. Refusing to sell, demanding higher & higher prices…when the ‘borrowed shares’ were due!

At this point- Gamestop and its business model was irrelevant. It was just about who could outlast the other’s position. Here’s a catch though — these Redditors were primarily Robinhood users… and according to a trending pseudonymous Twitter handle @toxic- “Citadel pays Robinhood for order-flow, getting to see RH’s orders a few milliseconds before they’re filled. Citadel may choose to front-run some of these trades!”

Meanwhile, the war-cry on r/WallStreetBets:

We can remain retarded for longer than they can stay solvent!

So a resolute community of RH traders coordinating on Reddit probably gave a good front-running (publically) opportunity to some other Hedge-Funds who made things even more difficult for Melvin. According to the previously mentioned Twitter user, ‘@toxic’- “the volume of shares exchanged suggest HFT guys were all over this, up until $GME went to $150”.

While the r/WallStreetBet has its motto-

lots of little guys screwing big wall street

… seems like it was actually Citadel’s HFT robots screwing everyone while paying Robinhood a kickback.

Fast forward- Melvin lost $2 Billion+ in ~2 weeks, and just had to get bailed out by Citadel (Surprise! Surprise!) & Point72, covering Melvin’s losses from the shorts!

So is it really that the Retail Investors are undergoing community-driven empowerment? Or are they still pawns that are amplified by Hedge Fund’s HFT algos getting early order-flows from the likes of Robinhood?

To many- this might look like a one-off event or maybe a coincidence that low-value stocks like $BB or $KOSS are being heavily shorted (giving another short-squeeze opportunity by having retail RH traders buy them). But you’d be ignorant not to see the growing solidarity, connectivity, and coordination (in communities), of retail-traders, at a previously unfathomable scale!

While $GME can be one case where Retail traders are systematically being front-run by Hedge Funds… there’s a reason why famous investors like Chamath can pull off humongous SPACS with relative ease, riding heavily on their own social-media persona and followers. A single tweet from Elon Musk can skyrocket the stock price of a mistaken ‘Signal’ or an intentional ‘Etsy’.

Content USED to be King. Now it’s Community, that’s King.

These recent events might just be the tip of the iceberg and it’ll be interesting to see how companies like Stocktwits grow into platforms facilitating even crazier market movements driven by ‘aligned’ retail investors.. and how they’ll avoid the wrath of SEC.

Practically speaking- SEC can go after specific firms like Goldman Sachs/Citadel or someone like Mark Cuban, Elon, etc., but not after 10 Million retail investors/traders!

And for fiercely community driven ecosystems like crypto- it can do NOTHING :)

I can’t see how the seemingly unfair decision of stopping $GME trades on Robinhood, doesn’t fast-track the envisioned “decentralized-future”.

#Gamestop #ShortSqueeze #Reddit #RobinhoodTraders #Traders

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