If you followed the rise of the forum of the self-styled "misfits" that make life in the Reddit community WallStreetBets, especially at the time they decided to unite to fight against the big capitals of Wall Street, then it is time to explain the outcome of this story, by the way, you will be left with a bitter feeling of "dejavu" with what you have recently experienced in the world of cryptocurrency exchanges.
The GameStop fans were really hanging in there and on the other hand there was David's uncertainty. Retail investors who saw the price go up a bit and made a profit were tempted to pull their money out, after all you had to have faith when the traditional media, the press and even your relatives were telling you to pull your money out before Wall Street did what it always does: win. But there were Gill's diamond hands, holding on and generating faith. When GameStop's price hit $43, a company called Citron Research that posted a tweet ridiculing retail investors on Reddit called, "the five reasons why buyers at these GameStop levels are the suckers in this poker game," the stock again dropped to $20 quickly.
The next day the director of Citroën Research Andrew Left makes a direct in which with somewhat overbearing ways assured that they would not see any shorts, paradoxically this type of situations were what gave food to a forum of trolls like WallStreetBets. Now in addition to Gabe Plotking and Melvin Capital, the forum was flooded with mockery and vicious memes of Andrew Left, which somehow net investors and stood their ground and did not sell. By January 2021 GameStop stock was hovering around $70 and for some like Elon Musk there was no doubt that the short was happening.
Coincidentally, Musk who knew what it was like to fight short investors just as those who had bet against GameStop had done years earlier against his company Tesla, in fact he remembered one name: Melvin Capital, a fund that coincidentally had also been part of the short investor brigade against Tesla. He was surely pictured on a couch grinning from ear to ear when on January 26, 2021 he tweeted "GameStope" sharing the Wall Street link.
That same day GameStop at market close was trading at $147, A day later at $354, the short was real and the big Wall Street funds were losing the battle against retail investors. The extraordinary story triggered by retail investors was able to happen thanks to platforms like Reddit that served to create and organize a community, but also thanks to platforms like Robinhood, a zero-fee broker for retail investors. Robinhood was created with the aim of democratizing investments so that a world like the stock market, which until then had only belonged to the privileged of Wall Street, could also become part of the ordinary citizen, which is why they gave it such a pretentious name, because of course it would bring the ordinary citizen closer to a service in which between 70 and 80% of retail investors lose money.
The key to Robinhood was that people with little money could invest thanks to the fact that it offered commission-free operations and this could be afforded thanks to the fact that it uses a Payment for Order Flow system, a system promoted in the 60s by Bernie Madoff, a figure who is the protagonist of one of the biggest Ponzi scams of all times. To sum it up, this system
system consists of the user placing an order to the broker and instead of executing it, the broker transfers it to a third party in exchange for a commission (a Market Maker).
When a customer bought shares in Robinhood at a specific price the order was sent to a Market Maker, but in between it met with a clearing agency the NSC that took two days to verify that both parties were able to deliver what was agreed, within which time Robinhood had to secure the transaction with a deposit of its own money not the customer's. This guarantee is what is known as "value at risk". This guarantee is what is known as "value at risk".
The value at risk depended on different factors, a single trade would have a low risk but if you multiplied it by millions of trades and added factors such as the volatility of a stock the riskier it became to buy or sell and therefore the higher the deposit Robinhood had to include. The NSC performed these calculations with algorithms and usually came pretty close to the dollars spent on trades, but on January 28 Robinhood's managers woke up to find that the NSC was requiring a deposit of $3.7 billion. This figure was insane for the app named after the legendary character.
To be in context, the previous days which were also being quite volatile because of the GameStop issue, the NSC had demanded $125 million from them and $291 million on the day Elon Musk posted the tweet. Bottom line, Robinhood had to make a deposit they couldn't afford. At first they thought how to raise that $3.7 billion, it was a complete impossibility, what they could do was reduce the value at risk and how did they do that, by putting out a statement:
"We continually monitor the markets and make changes when necessary in light of recent volatility we restrict transactions in certain securities to closing positions only."
Broadly speaking, it was restricting trading in GameStop and 13 other meme stocks that were driving WallStreetBets retail investors including Nokia, AMC and Blackberry but the key here is that they only restricted buying not selling, i.e. people couldn't buy shares but if they wanted to they could sell them and this in a context of a tug of war between retail investors dreaming of reaching $1,000 share price and the big funds betting against it was a decisive thing.
The short got punctured, GameStop which had briefly topped $500 per share plummeted and returned to values near $100. Over the next few months GameStop would continue to ride a roller coaster, but retailers who entered at the top of the chart would no longer get their money back. As of today GameStop trades above $20, in the end it was the complexity of how Retail Brokers operate that shut down this rebellion of misfits supposedly because in the background perhaps in the shadows "things" happened that helped save the necks of the funds that were going short.
January 28, 2021 was a key day in the GameStop case, as we said Robinhood had its back against the wall by not being able to post the NSC guarantee, but more "stuff" happened that day. In addition to Reddit, the WallStreetBets forum had its own Discord server and on that day the following message appeared: "The server has been on the radar of our trust and safety team for some time due to occasional content that violates our community guidelines including hate speech, glorification of violence and dissemination of misinformation. Over the past few months we have issued several warnings to the server administrator. Today we decided to remove the server and its owner from Discord for continuing to allow discriminatory and hateful content after repeated warnings.
As stated by Discord this had nothing to do with Robinhood's stock purchase restrictions, it was just a curious coincidence. As if that wasn't enough, the Reddit forum was also closed to the public for an hour, during which time WallStreetBets users were not only unable to buy GameStop stock but also unable to If all this wasn't enough of a coincidence, just a day before Melvin Capital received a ransom or a cash injection.
The short got punctured, GameStop which had briefly topped $500 per share plummeted and returned to values near $100. Over the next few months GameStop would continue to ride a roller coaster, but retailers who entered at the top of the chart would no longer get their money back. As of today GameStop trades above $20, in the end it was the complexity of how Retail Brokers operate that shut down this rebellion of misfits supposedly because in the background perhaps in the shadows "things" happened that helped save the necks of the funds that were going short.
January 28, 2021 was a key day in the GameStop case, as we said Robinhood had its back against the wall by not being able to post the NSC guarantee, but more "stuff" happened that day. In addition to Reddit, the WallStreetBets forum had its own Discord server and on that day the following message appeared: "The server has been on the radar of our trust and safety team for some time due to occasional content that violates our community guidelines including hate speech, glorification of violence and dissemination of misinformation. Over the past few months we have issued several warnings to the server administrator. Today we decided to remove the server and its owner from Discord for continuing to allow discriminatory and hateful content after repeated warnings.
As stated by Discord this had nothing to do with Robinhood's stock purchase restrictions, it was just a curious coincidence. As if that wasn't enough, the Reddit forum was also closed to the public for an hour, during which time WallStreetBets users were not only unable to buy GameStop stock but also unable to
communicate with each other, they had been cut off from communication and as if all this were not enough of a coincidence just a day before Melvin Capital received a ransom or cash injection.
As Gabe Plotking preferred to say that it would allow him to close his positions in GameStop the coincidence comes from the fact that this rescue was carried out by who at that time was the main Market Maker of Robinhood: Citadel, that is, who generated most of the profits in commissions of Robinhood had bought Melvin Capital just one day before Robinhood restricted the purchase of shares as GameStop was too much coincidence.
From this point on, two conspiracy theories emerged that were not far-fetched. On the one hand it was believed that Citadel had pressured Robinhood to restrict the purchase of shares like GameStop, the other possibility was that Citadel as Robinhood's Market Maker knew its trading volume and knew perfectly well what the NSC was going to ask it for as a deposit, so it believed that Robinhood was not going to be able to meet it, so the latter was going to have to end up restricting trading.
Citadel was always ahead, if it was the biggest Market Maker for anything it was for its high frequency trading, a computerized strategy using algorithms to trade ahead of the market. They wouldn't need to pressure Robinhood to buy Melvin Capital on sale. The truth is that this case was so relevant and had so much echo in the media that the U.S. government organized a congressional hearing on the pandemic that was held by the U.S. government in the U.S. Congress.
that was held by video call because of the pandemic. The CEOs of Citadel, Robinhood, Reddit, Melvin Capital and Gill were summoned and Gill stated that the current price of GameStop proved that his analysis was right. He also stated that the idea that he had used social media to manipulate the market was ridiculous, it was not his posts that caused the billion dollar move in GameStop in April 2021.
Far from retiring he increased his position in GameStop to 200,000 shares, at the time he was given a value of $30 million, it is not known if or when he sold. Gabe Plotting CEO of Melvin Capital tried to make it clear that his company had not been bailed out but that Citadel had merely made an investment. He also tried to defend himself by explaining that when markets were down they had to go short overvalued companies to protect their investors' capital. He did not convince some politicians who, when talking about 140% of stocks being shorted, could only think of market manipulation.
The money Melvin Capital lost was not made public although it is said that during the short they were losing a billion dollars a day. In May 2022 the closure of Melvin Capital was announced, while the CEO of Robinhood defended that restricting purchases of GameStop was the best option, much better than restricting selling if people wanted to get rid of their shares and could not would be a big deal. He likewise apologized, admitting that he could have done better. He was a punching bag for
politicians at that hearing.
Today Robinhood continues to offer its service at zero commissions although the pay per flow order since then has raised some questions it is still legal. As for Citadel's CEO he didn't have to defend himself against anything, the politicians didn't even understand how the financial system that had become increasingly complex worked. When asked if anyone from Citadel had had contact with Robinhood weeks before restricting stock purchases he was taken aback at the implication that they had had contact with Robinhood. Of course they regularly talked to Robinhood because they managed so much of their order flow, it was a stupid question. When asked if he had talked to them about restricting the purchase of GameStop stock it was sufficient for him to say no.
GameStop stores for their part now have a second chance to get in tune with the digital transformation, that's why they are working on an NFT platform based on the ethereum network and whose Beta was launched generating more than $7 billion. In general terms, this experience makes us understand that in a centralized world, using fiat money and with the rules created by the elites, the possibilities of achieving economic benefits for the majority is almost limited, they will simply use their legal and financial power to crush any rebellion. Only in a decentralized world, where the rules are equal for all, is it possible to exercise more democratic wealth. It would be a mistake to think that the world of cryptocurrencies is safe from the tentacles of power, considering that most of the investors of these digital currencies joined this world thinking of the possibility of enriching themselves through speculative methods under centralized means, that is, under the rules of the enemy.
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