The Rise of The Retail Investor

We created this newsletter as a resource for you, the retail investor, to gain real insight into the market, and to get access to new investing ideas that will help you get better returns. It was created for retail investors, by retail investors, because we believe that everyone should have the opportunity to make their money work for them – in fact we see it as a human right that shouldn’t just be reserved for the wealthiest 1%.

That is why what happened yesterday after the GameStop short squeeze is so monumental – it highlights the power of you, the retail investor. And proves that there is strength in numbers.

Let’s break it down.

What happened:

In a move never before seen on Wall Street, a group of Joe Average investors banded together in a David vs Goliath clash against institutional investors. GameStop (GME-NYSE), a brick and mortar retailer that sells video games, became the subject of market manipulation.

The story began with Melvin Capital, an American hedge fund with USD $7 billion in assets under management. Melvin Capital had taken a bet against GameStop shares by going short. For those unfamiliar with the term, shorting a stock means opening a position by borrowing shares that you don’t own, and then selling them to another investor. Shorting, or selling short, is a bearish stock position. In other words, you might short a stock if you feel strongly that it is overvalued, and its share price will decline in the future.

In the case of GameStop – and here’s where things start to get a little crazy – Melvin Capital was actually net short 140% of the Company. What this means is that the number of shares that were short, was greater than the total number of shares that exist within the entire Company.

If you’re wondering how this is even possible, you’re not alone – so are many others. How can the regulators allow this kind of market manipulation?

Going back to GameStop, here is where things got interesting. With regulators nowhere to be seen, Joe Average took matters into their own hands.

Many retail investors spend time sharing new investing ideas and talking stocks in online communities such as StockTwits, Discord and Reddit. In one sub thread of a Reddit investing forum, called r/WallStreetBets, the shorting of GameStop shares by these hedge funds stirred up aggravation amongst retail investors, who viewed it as market manipulation by hedge funds. They reacted by aggressively posting on the company and encouraging other users to buy and hold GameStop, and to tell their brokers not to sell their shares to any of the short sellers.

Banding together, this army of retail investors colluded in an attempt to break the bank. Amazingly, this group of individuals successfully managed to beat Wall Street hedgies at their own game. Their concept was to simply counteract the short, by going long. And going long in troves, as a collective group. In the process, they drove the stock price up and up.

As earlier noted, a short position is based on borrowed stock, which eventually has to be repurchased and returned to the borrower. In other words, the short sellers have to buy stock to replace what they’ve borrowed. Obviously the goal is to buy stock at a price lower than what they’ve borrowed at, and keep the difference – i.e. make a profit – but sometimes speculative bets can go awry. In this case, for the hedge funds and other institutions that had shorted the stock, the short on GameStop went terribly wrong.

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The Big Short Squeeze

With retail investors colluding in the sub-Reddit and other online threads and pushing the stock higher, a short squeeze developed. A short squeeze occurs when a stock suddenly jumps sharply higher, catching traders who had bet its price would fall off guard and causing them to buy the stock in order to prevent even greater losses. The extra buying activity creates more upward pressure on the stock, pushing the price even higher. The retail investors created a short squeeze, and Melvin Capital’s losses quickly mounted into billions of dollars.

Melvin Capital wasn’t the only hedge fund that went down in flames – multiple other firms were caught up in the short squeeze, including Citron Research, Maplelane Capital LLC, and $20B fund D1 Capital Partners, which suffered a 20% loss, the largest reported so far.

What happened next sent shock waves through the entire financial community and is likely to have repercussions for a long time to come – it could possibly even reshape the financial landscape as we know it. Multiple retail trading platforms including Robinhood and TD Ameritrade responded by restricting trades of GameStop, disabling retail investors from trading the stock. Similarly, Discord and Reddit removed the threads that started it all, so that users could no longer access or post on the threads.

Retail investors were, quite rightly, outraged. Essentially, Wall Street whined because they got beat at their own game, and cried “Market manipulation!” to Big Tech, who bowed to the pressure and punished retail investors as a result.

So, let us get this straight: Wall Street is accusing retail investors of market manipulation? The hypocrisy is laughable.

We are now seeing legal action being taken as a result – on Thursday, the same day that trading of GameStop was restricted by Robinhood, a class action lawsuit was filed in the Southern District of New York, alleging that Robinhood “purposefully, willfully, and knowingly removed the stock ‘GME’ from its trading platform in the midst of an unprecedented stock rise, thereby deprived [sic] retail investors of the ability to invest in the open market and manipulating the open market.”

The plaintiff argues that “Upon information and belief, Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial institutions who were not Robinhood’s customers.”

As we write this, on January 28th, we predict that this will be the first of many lawsuits to come.

But more importantly, the GameStop market manipulation situation highlights has brought a few things into focus for us, as retail investors.

  1. As a retail investor, you are far more powerful than you realize. Banded together, retail investors are more powerful than the institutions and regulators want us to realize.
  2. Wall Street has been manipulating the market since its inception, and if you’re only just realizing it now, welcome to our world. The best defense is a good offense, and the strongest offense is arming yourself with knowledge.
  3. The regulators often aren’t acting in our best interests, but rather in the interests of the 1%. A short position should arguably be a violation of the rules. How many other companies are net short? A company like GameStop being 140% short – how is that even possible for the retail investor to compete with?
  4. Regulators, law-makers, fund managers and politicians are already calling for limits to be placed on trading through online platforms such as Robinhood in order to suppress retail investors – which is just plain wrong.
  5. This incident is going to cause even greater mistrust of the financial institutions and regulators that exist today. We wouldn’t be surprised if Bitcoin rallies again, given how it is a decentralized, finite currency that is favored by retail investors, and how its supply and price cannot be manipulated by regulators and market makers the way stocks and fiat currencies can be.

Feel free to share this article with your friends and fellow retail investors. We will be following up with more on this story as events continue to develop. Stay tuned.

Until then, wishing you many happy returns,

Dear Retail Editorial Team

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