Reddit day traders wanted to beat Wall Street to prove the system is rigged. Instead, they did it by losing.

A group of demonstrators are gathered by the New York Stock Exchange
A group of demonstrators are gathered by the New York Stock Exchange

  • Reddit day traders tried to beat Wall Street at its own game to prove that the system is rigged.
  • Instead, brokerages locked them out and their holdings tanked, while some hedge funds still won big.
  • Experts said Wall Street’s reaction showed just how stacked the deck is against small investors.
  • Visit the Business section of Insider for more stories.

Keith Gill, the day trader and member of Reddit group WallStreetBets who is widely credited with igniting the recent GameStop trading frenzy, claimed in late January that he had turned his $54,000 investment into a $48 million dollar fortune.

Days later, it had been sliced by more than half to $22 million, and regulators had set their sights on Gill, investigating him over potential disclosure violations.

Many retail investors fared far worse. One Robinhood user lost $70,000 in savings and contemplated committing suicide. Another, Alexander Kearns, did.

GameStop’s stock, which had peaked at more than $480, had dropped to around $52 as of Friday.

Before the rollercoaster went off the rails, however, one hedge fund walked away with a $700 million profit, brokerage app Robinhood raised billions in new financing after being forced to restrict its users from buying stocks, and trading giant Citadel likely made a hefty sum from the increased market volatility.

While the dust has far from settled, and some Wall Street firms did lose big, a David versus Goliath victory now hardly seems like the most likely outcome. 

It had made for a compelling narrative, too: an army of retail investors – without deep pockets, sophisticated trading algorithms, proprietary market data, or other tools of the trade – banding together to beat powerful, corrupt financial institutions at their own game.

Ultimately though, Wall Street and other big-money investors still appear to have ended up on top, and experts, at least those outside the industry, say it’s that outcome that further proves how the system is rigged.

Insider spoke with three experts on financial markets – none of whom work at traditional financial services firms. They said there’s a lot of work to be done to make the markets work for small investors again, and, just as importantly, to restore the public’s faith that the markets can do just that.

“Geared to favor the big”

“The whole business is basically a power dynamic… it’s geared to favor the big over the small,” Garphil Julien, a research associate with the anti-monopoly think tank Open Markets Institute, told Insider. “Those with enormous amounts of capital, enormous amounts of money, will use their power to basically get what they want, and when they get what they want, someone else is going to lose,” he said.

He’s not alone in that assessment.

According to a recent CNBC poll, a record-breaking 57% of Americans view the stock market as a reflection only of how corporations and the wealthy are doing, not the rest of the country. That’s true among financial elites and Republicans as well, both historic defenders of the free markets.

“Is the market really fair for individual investors? Is it really competitive? What we’re seeing is that it’s not,” Julien said.

As former Wall Street analyst Alexis Goldstein recently put it in an op-ed for The New York Times: “Wall Street’s edge over retail traders remains, as always, structural,” and even if a bunch of Redditors band together, “the house still wins.” But, she argued, “rather than gambling on the dubious promise of more Americans gaining access to the casino, it’s time to rewrite the rules to ensure that the house doesn’t always win.”

Julien said that means adding more consumer protections, as well as cracking down on the monopolization of various segments of the financial services industry. For example, he pointed to brokerage apps, like the Morgan Stanley-owned E*TRADE and TD Ameritrade, which is owned by Charles Schwab.

Making money by “making money”

Another problem underlying the GameStop saga is that too many Wall Street firms have gotten into businesses that are inherently designed to extract as much money as possible from the financial system for their own gain, rather than helping allocate it toward uses that would help the economy overall.

Amid last month’s trading frenzy, the markets ultimately proved fairly resilient, but that doesn’t mean they’re working in ways that protect smaller investors who have more to lose.

“There will be a temptation to say… the market isn’t broken, everything’s fine,” Barbara Roper, director of investor protection at the Consumer Federation of America, told Insider. “While it’s true that the market isn’t broken – yet – I don’t think it follows that everything is fine.”

Roper said it’s good to focus on improving transparency and accountability around practices that may involve conflicts of interest, such as payment for order flow, over which Robinhood and Citadel are both facing scrutiny, but that the issue is also far more fundamental and widespread.

Read more: Robinhood makes hundreds of millions from selling customer orders. That business model is about to come into focus.

“The financial services industry itself has sort of divorced itself from the more boring and less profitable job of helping to steer capital toward its best uses in support of the productive economy, and has for some time now, made most of its money making money,” Roper said.

“Financial firms make all of their money off of securitizing everything under the sun,” she said. “They found a way that it’s really profitable, and so they’re pursuing the profits even though the niche is overfilled.”

But that problem “was at the heart of the last financial crisis, and we didn’t solve it there,” Roper said, referring to the 2008 financial crisis.

Since then, there have been multiple near-crises and the problems have only gotten worse.

Robinhood itself has been criticized – and fined $65 million by the Securities and Exchange Commission – over high-frequency trading, a controversial practice that uses powerful software to execute large trades in fractions of a second, allowing firms to make money off momentary changes in the price of stocks. Wall Street banks are even evading regulations around derivatives trading – the same risky behavior that precipitated the 2008 crisis – according to financial blog Wall Street On Parade.

Roper said she doesn’t see dangerous Wall Street business models being addressed anytime soon, either.

“If we didn’t do it when Wall Street literally brought the global economy to the brink of collapse, I don’t think we’re going to do it now because some people on Reddit put on a short squeeze and caused some chaos in the markets for a few weeks,” she said. “I guess I’m as cynical as the people on WallStreetBets.”

“Broader public outrage”

Part of Americans’ frustration with the current financial system is that it has become so complex that only Wall Street insiders really seem to know how everything works, something the industry uses to its advantage to dodge blame in situations like GameStop.

“It’s another episode similar to those past ones of the public feeling like there are multiple things wrong here – not really know what is exactly wrong, but just feeling like something is not working,” Graham Steele, senior fellow at the American Economic Liberties Project, told Insider.

“It’s just a general popular sense that a system wherein this kind of scenario can come to pass, just fundamentally doesn’t work for the public and it is ‘rigged,’ or something else, but they know something is wrong.”

Steele also said widening inequality, pandemic response failures, and polarization around the election amplified the GameStop fury: “It feels like you’re layering a new financial episode on top of other, broader public outrage.”

That’s also apparent in the voices from across the political spectrum that have criticized Wall Street in recent weeks: progressive Democrats like Rep. Alexandria Ocasio-Cortez and Sen. Elizabeth Warren; far-right Republicans like Sen. Ted Cruz; and tech investors like Elon Musk and Mark Cuban.

But that’s where their agreement ends, with Democrats typically favoring government intervention, and Republicans typically pushing for more transparency and then letting the markets figure out the rest.

“In terms of the Silicon Valley folks,” Steele said, they’re “painting themselves as kind of populists, but a lot of them have their own sort of financial interests at stake here. A lot of their solutions are like, don’t use that app, use the app that I invested in.”

“I just don’t see Elizabeth Warren going out there pumping someone else’s trading app because a venture capitalist has said, ‘that’s the right thing to do,'” he added.

Elon Musk, for example, has spent the past few weeks hyping up cryptocurrencies like Dogecoin.

Ultimately, all three experts agreed that making the markets more equitable and aligned with the health of the broader economy will require reforms stretching far beyond the financial services industry.

“Fixing that system requires a whole host of policy solutions that run the gamut from financial regulation to tax policy to how we structure the retirement system to how we deliver healthcare to people,” Steele said.

Read more: The SEC is monitoring the GameStop trading frenzy. Here’s why lawyers and former regulators say clamping down on the market will be tough.

Read the original article on Business Insider

GameStop and other meme stocks rebound after sharp sell-off as Reddit traders ‘hold the line’

GameStop
  • GameStop, AMC, and other retail-trader favorites rebounded on Wednesday as the Reddit-fueled rally regained steam.
  • The rally comes a day after a cohort of highly volatile stocks plummeted as investors secured profits and minimized losses.
  • The day-trader crowd now stands at a crossroads: repeat recent weeks’ wild rallies or cash out.
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GameStop, AMC Entertainment, and other Reddit darlings rebounded on Wednesday as retail investors banded together to “hold the line.” The phrase has become a popular rallying cry on the Wall Street Bets subreddit amongst day traders hoping to preserve recent gains.

The rally comes after the group of highly shorted stocks plunged on Tuesday as investors looked to secure gains or minimize losses, including a 60% single-day drop for GameStop.

The investors are now at a crossroads. They can either try again at bidding the names higher or run for the exit.

Trading on Wednesday suggests the coordination that powered last week’s climb is wavering. GameStop rose as much as 26% in early trading, while AMC gained as much as 14%. BlackBerry climbed 4% at intraday highs, while Nokia and Bed Bath & Beyond posted similarly modest gains. 

Read more: Buy these 26 heavily shorted stocks as retail traders trigger wild rallies in Wall Street’s least liked names, Wells Fargo says

More seasoned investors warned repeatedly that, while some day traders could mint small fortunes through the Reddit-fueled surge, many who entered the trade late stand to lose big. The parabolic nature of the stocks’ rally also lends itself to a similarly steep crash as profit-taking spurs others to sell out of concern that they’ll be the last ones holding their shares.

It’s possible the retail investors were encouraged by the easing of trading restrictions by Robinhood and other broker dealers. Several trading platforms temporarily blocked investors from buying shares of GameStop, AMC, and other highly volatile stocks last week, citing attempts to protect clients from unprecedented market risk.

Those policies have since been somewhat reversed, allowing the army of day traders to continue buying at least some shares this week.

To be sure, GameStop and most of the other so-called meme stocks still trade well above where they sat at the start of the year. Some companies even used the phenomenon to their advantage. AMC paid down debts and sold stock at extraordinary highs to extend its cash runway. Just weeks after warning the company could go bankrupt, it leveraged the retail-trader frenzy to stay afloat.

“The sun is shining on AMC,” CEO Adam Aron said in a January 25 statement, adding any talk of imminent bankruptcy is “completely off the table.”

GameStop closed at $90 on Tuesday, up 367% year-to-date.

AMC closed at $7.82, up 262% year-to-date.

Read more: The GameStop mania driven by Reddit traders isn’t simple market trolling. It’s a populist movement threatening to disrupt the financial system to a degree Occupy Wall Street only dreamed of.

Read the original article on Business Insider

Robinhood users are furious that it intervened in GameStop trading. This map reveals where they are.

GettyImages 1230845061 NEW YORK, USA - JANUARY 28: A group of demonstrators are gathered by the New York Stock Exchange building (NYSE) to protest Robinhood and bring their voices to Wall Street trades amid GameStop stock chaos in New York City, United States on January 28, 2021. (Photo by Tayfun Coskun/Anadolu Agency via Getty Images)
Protesters demonstrated at the New York Stock Exchange on Thursday to protest Robinhood and establishment Wall Street firms amid the GameStop stock chaos.

  • Robinhood users are furious after it blocked them from trading GameStop and other red-hot stocks.
  • In more than 120,000 tweets in just two days, users called for a boycott of the app.
  • This map, compiled by cryptocurrency news site Bitreporter, reveals where they are.
  • Visit Business Insider’s homepage for more stories.

Robinhood sparked the outrage of its users this week after it throttled their ability to buy shares of GameStop and other red-hot stocks amid a market frenzy.

Bitreporter, an online cryptocurrency and financial news website, mapped out that anger using geotagged Twitter data, and unearthed more than 120,000 tweets over the past two days from users venting about the situation via hashtags like #boycottrobinhood, #deleterobinhood, and #cancelrobinhood.

The map revealed some interesting trends about who’s behind this week’s wild stock market activity – here’s which states’ Twitter users were the angriest about Robinhood.

boycott robinhood
Twitter users voiced outrage over Robinhood in more than 120,000 tweets in just 48 hours.

New York, as well as other large states and those near the financial heart of America, such as Pennsylvania, were unsurprisingly, well-represented – but so were less-populated states like West Virginia, Utah, South Carolina, Hawai’i, and Wyoming.

“Another piece of the puzzle is the somewhat populist undertones of all this,” Bitreporter spokesperson Ryan Taylor told Insider. “The little guy taking on the ‘man’ type idea.”

“This is a popular theme in states like Florida, West Virginia, and South Carolina, especially in recent years. And when these people feel that they are being taken advantage of, or cheated, they are going to make it known they aren’t happy,” he said.

States where gambling is big, like Nevada and New Jersey, also saw a lot of activity.

“While Nevada is the top gambling state, it could be argued that New Jersey is the top ‘online’ betting state,” Taylor said, “so it’s no surprise that you see these states jumping on an app like Robinhood and engaging in what some would say is ‘gambling.'”

Taylor said the only surprise was that “there didn’t seem to be a lot of Robinhood outrage in California,” adding that, while it’s difficult to get exact location information Twitter users, “you would assume California has the greatest amount of Robinhood users.”

Read more: The Reddit traders driving up the price of GameStop are not what you think they are

Earlier this month, a Reddit-based online community of investors called r/WallStreetBets ignited a “short squeeze,” a buying spree that targeted GameStop, AMC Theaters, Nokia, and a handful of other stocks, sending their prices skyrocketing.

In the process, they also triggered massive losses for Wall Street short sellers who had bet those stocks would tank, and fueled a surge in market volatility this week as other investors rushed to get in on the action.

Read more: How hedge funds are tracking Reddit posts to protect their portfolios after the Wall Street Bets crowd helped tank Melvin Capital’s short positions

On Thursday, Robinhood, which allows anyone to buy and sell stocks without fees, briefly blocked users from buying GameStop and other stocks targeted by the short squeeze. On Friday, the company capped users at one share of GameStop and restricted trading for 22 other shares.

The move drew swift criticism from Robinhood’s users – as well as business leaders and some Democratic politicians – who claimed Robinhood was unfairly blocking retail investors from buying stocks that were still on their way up even as hedge funds and other Wall Street firms could still trade freely.

Robinhood CEO Vlad Tenev defended the move, saying the company had to comply with regulations that became more stringent due to the market volatility.

But Robinhood users didn’t buy it, and voiced their anger by tanking the app’s reviews, filing lawsuits, and venting on social media.

Read the original article on Business Insider

Robinhood is reportedly borrowing at least ‘several hundred million dollars’ from banks amid GameStop trading frenzy

robinhood gamification trading app 4x3
  • Robinhood is drawing on credit lines from its lenders, Bloomberg reported Thursday.
  • The trading app is tapping into “at least several hundred million dollars,” according to Bloomberg.
  • Robinhood is popular among the retail investors behind this week’s market frenzy involving GameStop.
  • Visit Business Insider’s homepage for more stories.

Robinhood is drawing down lines of credit to the tune of “at least several hundred million dollars,” Bloomberg reported Thursday.

The quick decision to seek additional funds from its lenders, which include JPMorgan Chase and Goldman Sachs, suggest that this week’s trading frenzy has put a strain on the company, according to Bloomberg’s Matthew Monks and Michelle Davis. 

Robinhood did not respond to a request for comment on this story.

The trading app is popular among the online community r/WallStreetBets, a group of mostly retail investors who sparked massive market swings by targeting short sellers’ positions in companies including GameStop, AMC Theaters, and Nokia.

Read more: How hedge funds are tracking Reddit posts to protect their portfolios after the Wall Street Bets crowd helped tank Melvin Capital’s short positions

The high volatility prompted Robinhood and other brokerage firms to temporarily halt trading of those shares.

In an email to users, Robinhood attributed the company’s decision to restrict trading to having to comply with financial requirements including SEC net capital obligations and clearinghouse deposits, that it said protected investors and the stock market. 

Read more: Robinhood user launches class-action suit against the trading app hours after it blocked purchases of GameStop

But the move sparked outrage from customers, the broader retail investor community, several progressive lawmakers including Reps. Alexandria Ocasio-Cortez and Ro Khanna, regulators, and even Elon Musk, a popular figure among r/WallStreetBets members.

Democrats in Congress have said they will hold at least two hearings about Wall Street’s practices following the GameStop short-squeeze.

Read more: One chart shows how 3 GameStop shareholders gained nearly $4 billion in a week

Robinhood has tapped its credit lines during periods of market volatility in the past. In March 2020, it maxed out its credit lines during wild market swings in the early stages of the COVID-19 pandemic. 

Read the original article on Business Insider

SEC chief Jay Clayton says he is nervously eyeing retail-driven euphoria in the stock market

FILE PHOTO: Jay Clayton, Chairman of the U.S. Securities and Exchange Commission, speaks at the Economic Club of New York luncheon in New York City, New York, U.S.,September 9, 2019. REUTERS/Shannon Stapleton
FILE PHOTO: Jay Clayton, Chairman of the U.S. Securities and Exchange Commission, speaks at the Economic Club of New York luncheon in New York City

  • Chairman of the Securities and Exchange Commission Jay Clayton told CNBC on Thursday he’s concerned about stock market euphoria stemming from retail investors. 
  •  “When stocks run away… we do get concerned because it is a situation where professional investors understand this, I do worry that retail investors do not understand that trees don’t grow to the sky,” Clayton added. 
  • His concerns come as all three major indexes hovered around record highs on Friday.
  • Visit the Business Insider homepage for more stories.

Chairman of the Securities and Exchange Commission Jay Clayton told CNBC on Thursday he’s concerned about stock market euphoria that’s stemming from retail investors.

“We are in a situation where with mobile communications, access, and the like, there is a new paradigm. There are more retail investors participating in the market than ever before,” Clayton said.

“One thing we don’t regulate directly…is euphoria and we’re seeing some euphoria here,” he added. 

His concerns echo those of Goldman Sachs CEO David Solomon, who said earlier this week he’s also worried about retail investors driving the market to dizzying new heights. Both pointed to the hot IPO market. Airbnb, for example, leaped 115% on its first day of trading. On Friday, all three major indices hit all-time highs.

Read more:3 ETF executives break down the various ways to invest early in the global 5G boom as it grows to unlock $13.2 trillion in value by 2035

“When stocks run away… we do get concerned because it is a situation where professional investors understand this. I do worry that retail investors do not understand that trees don’t grow to the sky,” Clayton added.

His interview comes as the SEC charged Robinhood with misleading customers on the revenue from trades resulting in a $65 million settlement, as well as a complaint from the Massachusetts securities regulator stating that the trading app encouraged inexperienced investors to execute frequent trades.  

 

Read the original article on Business Insider

Goldman Sachs CEO says he’s concerned about stock-market euphoria stemming from retail investors

David M. Solomon, President and Co-Chief Operating Officer of Goldman Sachs, speaks during the Milken Institute Global Conference in Beverly Hills
David Solomon, CEO of Goldman Sachs, speaks during the Milken Institute Global Conference in 2017.

  • David Solomon told CNBC on Tuesday he’s concerned about euphoric activity in the stock market being driven by retail investors buying IPOs.
  • “I do think we’re at a moment in time where there’s a lot of euphoria. I personally am concerned about that. I don’t think in the long run that’s healthy,” the Goldman Sachs CEO said.
  • The euphoria was especially visible in the IPO market last week: Airbnb leapt 115% in its first day of trading, while DoorDash soared 86% following its debut. 
  • “There’s a lot of retail participation in a bunch of these IPOs,” Solomon added. “I think that’s something to watch, something to be cautious about.”
  • Visit the Business Insider homepage for more stories.

David Solomon told CNBC on Tuesday he’s concerned about euphoric activity in the stock market that is being driven by retail investors buying IPOs.

” I do think we’re at a moment in time where there’s a lot of euphoria. I personally am concerned about that. I don’t think in the long run that’s healthy. I think it will rebalance over time as it always does,” the Goldman Sachs CEO said.

Euphoria was especially visible in the IPO market last week with two high-profile IPOs. Airbnb surged 115% during its public debut, while DoorDash soared 86% as it began trading. Those offerings defied many observers’ expectations, and Solomon isn’t alone in his concerns that the market is getting too hot. The Goldman chief executive sees retail activity spiking due to technology that’s made investing and trading more accessible.

“There’s a lot of retail participation in a bunch of these IPOs,” Solomon added. “I think that’s something to watch, something to be cautious about. I think a bunch of these are great businesses, but obviously, the market at the moment is pricing in, you know, perfect execution and enormous growth for a very long period of time. And my guess is there’ll be a rebalancing of that over time for sure.”

Read more: A JPMorgan income fund manager shares 12 high-dividend stocks set to gain from a broad cyclical recovery – and unpacks the strategy he uses to beat 93% of his peers

The banking icon also said that the current stock market is appropriately looking forward and acknowledging that the pandemic will at one point be beyond us.

“There’s certainly been a meaningful recovery in the economy but there’s still a ways to go. I think we’ve replaced about 75% of the economic output that we lost when we shut down the economy in March and April and so I do think we see the light at the end of the tunnel.” 

Solomon added that the Fed’s policy actions in the beginning of the pandemic were necessary and staved off a situation that could have been much worse, but they’re not without consequences. Now, people are far out on the risk curve and that’s inflating asset prices, as seen in recent IPOs, Solomon said. 

“Cheap money has an impact,” said the CEO. 

Read the original article on Business Insider