I believe that a week of the most shocking news in the international financial sector has not yet passed. Yeah, how thousands of consensual individuals in a Reddit community stabbed a fund manager that sent Wall Street reeling. The financial event increasingly eclipsed the recent electoral melodrama in the world's largest economy that dominated the attention of the media and public opinion.
Although I am not a finance expert, I do try to stay informed about what is happening in my environment, especially in the digital field, which is a window to the world beyond the walls of the room. Every day you hear terms that were previously reserved in the jargon of small groups of specialists that prevent you from understanding what is happening. I have come to think that it is intentional. With the rise of the internet, barriers begin to fall, perhaps this explains the growing censorship actions, but this is an issue, the restriction of freedom of expression, which alone deserves an exclusive post.
In the case of GameStop, a company that markets video games with a global presence, it was in the crosshairs of a prominent fund manager, Melvin Capital, who applied a strategy on the stock market called Short. The first stumbling block for the layman, Short! What is the strategy? Rent the shares to the holder of the shares, paying the interest for the period of the negotiation. Once in their possession, they sell them at the market price, waiting for the share price to collapse to buy them back, earning the difference when returning them to the original holder. For years I heard about vulture funds, now I understand the analogy. These mutual funds live off the spoils of bankrupt companies.
This is where the shoal of small investors from the Reddit forum comes in, someone very astute and intelligent, probably very well informed, whose alias DeepFuckinValut convinced thousands to buy, through broker applications including RobinHood, the shares of GameStop carrying the value to the stratosphere. This is known as a Short Squeeze, performed at the WallStreetBet subreddit address. Now, the vulture fund would have to buy back the shares for a price much higher than the rented price, paying the interest for a higher capitalization. As a consequence, Melvin Capital filed for bankruptcy. So far quite a David-like feat against Goliath, but!
How can an independent group of traders at a broker change the value of stocks on Wall Street when they trade CFDs?
Years ago, a person could only buy shares of a public offering of a company through authorized entities such as stockbrokers and banks, having to pay high commissions for it without impairing the success of the placement.
Now, with the technology available in the hands of the people, very intelligent individuals saw a great business opportunity in offering these services with substantial savings in commissions and with immediacy for those who enter the complicated market of the stock market.
Consequently, brokers (Market maker) entered the market. Who when evaluating the statistics of the behavior of traders, deduced that 95% lose when they trade. A round business, if everything is done at home, casino type through the CDF (Contract for the difference) and the implementation of an index that emulates the real of the stock market, thus they earn the commission as the amount lost by the majority of the traders. In the case of 5% of successful traders, once identified, they buy the shares on the stock market, thus ensuring that they comply with them.
The aforementioned gives a framework to understand the reaction of the interested sector on Wall Street when the next day the users of trading applications, especially RobinHood disabled the action of selling for certain companies in danger of bankruptcy such as AMC and Nokia without forgetting GameStop. A clear intention to manipulate the supply and demand system with the connoted intention of collapsing the shares.
Curiosities that give something to think about
I think I have extended myself too much, many have already spoken about this, but this is where the case becomes interesting. Did you know:
Melvin Capital owned 140% of GameStop shares for an initial value of 2.5 billion dollars. How is it possible? Where was the regulatory body of the stock market?
Ryan Cohen, famous for selling a pet business that made him a billionaire, owns 12.9% of GameStop shares and sits on the board of directors. By the way, he is also the largest individual shareholder in Apple. An interesting curiosity. Consider the possibility that he was an anonymous member of the WallStreetBet forum. Sure, this is just unsubstantiated speculation, but possible. However, if that is the case, the risk of being considered insider trading (buying and selling with secret company information) is too high to expose yourself.
The Citadel company provides HFT (High-Frequency Trading) service to Melvin Capital. If you don't know, HFT is an ultra-high-speed technology for buying and selling shares of the stock market based on Artificial Intelligence and fiber optics.
Citadel owns 40% of the shares of RobinHood. The same broker app that most cyber traders used when buying stocks. Now you understand, how fast it to disable the in-app purchase function.
BlackRock, the largest investment firm on the planet, in December, owned 2.4 billion dollars in GameStop shares. Chance?
Final Thoughts (Lesson Learned)
The world should not be seen from the extremes, black or white. The reality indicates that many shades or gray scales predominate.
I see many curiosities and interrelations in this case, as to believe in the result of the struggle of ordinary individuals against the powerful financiers as if it were a Manichean struggle. A fight for financial claims that shows the mobilization of people to vent their anger at being confined by the pandemic and the subsequent loss of lifestyle when seeing small businesses destroyed.
I see a sordid manipulation and corruption in the system that undermines freedoms and shows the iniquity of people's treatment. Correct me if I'm wrong, Melvin Capital has been bailed out by the government. This reminds me of the real estate crisis of 2008. People lost their homes, while those who caused the crisis received financial aid from the government. Keeping distance and proportions shows the true attitude under the skin.
The international financial elites, based on arguments of lack of transparency and the fight against criminal acts, want to regulate the developing crypto market. The GameStop case exposes to the world how unfair the actors who dominate the global financial scene are.
In this sense, I believe that decentralized finance based on the blockchain, although not the final panacea, will greatly contribute to eradicating unhealthy behaviors for society.
PS: The case has not yet been fully closed, and I would not be surprised by other twists and elements to learn.
Original post was written by the author in leofinace.