The Gamestop Fall Out: What’s Next For Wall Street
Needless to say, this past week has been a crazy one in the finance world. Assuming you haven’t been living under a rock, I’m going to spare you from another long explanation of what going down in the whole reddit vs. Hedge Funds thing, sweeping in stocks like Gamestop (GME), AMC Entertainment (AMC), and Bed Bath and Beyond (BBBY). Things only got worse when brokerages like Robinhood and Webull limited traders, taking some stocks off of their platform as a whole for some time in response to “increased volatility”, and getting a LOT of heat for it.
This upending of the stock market begs one question: What happens next?
Needless to say, the Hedge Funds took a BIG hit thanks to these short squeezes. Since lots of these funds had significant short positions on these stocks, they lost loads of money. According to Business Insider, hedge funds and short sellers lost more than $19 billion. $19 billion! That’s got to hurt their bottom line.
This whole situation has forced hedge funds to rethink their strategies and tactics. Many predict funds will be more weary of their short positions after so many of them have been challenged. Retail investors are testing long standing techniques that Hedge Funds have been using for years. This will definitely shake up the market- funds can no longer come out on top as easily as they used to.
The Wall Street journal notes hedge funds are likely to stop disclosing their put options, which indicates their bearish positions. Funds can use SEC rules to keep these confidential. Additionally, Hedge Funds might trade short positions for options positions that take the role of a short. Only time will tell how this whole debacle will change Hedge fund operations.
Robinhood (and others like them)
Robinhood and other online brokerages add another twist to this situation. For this article, I will be speaking specifically of Robinhood because their trader demographic is mostly aligned with these reddit traders, but some of this applies to similar brokerages.
Robinhood restricted the trading of 13 stocks as a “risk-management decision” to protect itself and it’s investors. It has since eased back on these restrictions, but limitations still apply. Doesn’t seem like “democratizing finance” if you ask me. Needless to say, this action was met with overwhelming outrage from retail investors. (More on this in Government Intervention/Regulation)
Even through this scandal, Robinhood has managed to raise over $3.4 billion from investors over the past few days. Reports say this money will go to meeting deposit and capital requirements, as well as catering to it’s still growing consumer base.
If I could take you back to the past for a moment, remember that before this crazy week a Robinhood IPO was expected later this year. However, according to CNBC, this venture is now on the backburner. The company is reportedly just taking it day to day and facing problems as they come up. I’m interested to see how this hot water Robinhood found themselves in will affect their eventual IPO.
A class action lawsuit (one of many) was filed against Robinhood for taking multiple stocks off of the market (most notably GME), saying the brokerage “deprived retail investors of the ability to invest in the open-market and manipulating the open-market.” It also notes that the restrictions caused retail investors to miss out on potential gains.
However, an arbitration clause in Robinhood’s user agreement might stand in the way of lawsuits. This clause sends any conflicts into a legal process called arbitration, which keeps companies out of courts, and often works out in their favor. A class action suit is supposed to be a way to bring a big case like this to the courts, but history shows it will still be difficult.
Lawmakers across the board have called for action and investigation into these Robinhood restrictions, notably Ted Cruz and Alexandria Ocasio-Cortez. Senator Elizabeth Warren also spoke out, advocating for an SEC investigation. The SEC itself has released a few statements, one of which says “We will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity.”
All this bipartisan support for action against Robinhood and the big guys of wall street makes me confident that these investigations and suits will continue to develop in the future, and even lead to more regulation.
My Final [personal] thoughts
At the end of the day, I’m of course interested in where this whole thing is going to go. Robinhood and other brokerages had no right to restrict or limit trading in any capacity, and I think their reasoning for it was specifically outrageous. Saying that these moves will “protect investors” is a cheap excuse, especially when lots were making money. Retail investors win some and lose some, but when and how that happens is not for ANY brokerage to decide.
As a whole, it is slightly refreshing to see such a big movement from retail investors, especially when they are reminding Hedge Funds that they can be players in the game too. Will all of this be successful? I have no clue. But you better be sure Wall Street is waiting to see what happens next.