I suppose the beginning of the end came this morning when Brokers like Robinhood announced they would restrict trading in the stock and options of GameStop and other stocks that have been going bonkers.
This is from CNBC:
Amid the flurry of speculative activity in GameStop, brokers took steps to restrict the trading in GameStop stock and options and other related securities. In some cases, investors would only we able to sell their positions and not open new ones.
Free-stock trading pioneer Robinhood and Interactive Brokers both made efforts to curb the wild trading activity in heavily shorted names like GameStop, AMC Entertainment, Koss and more on Thursday.
I’m sure this was some combination of these platforms losing money or the regulators stepping in to slow things down. These moves have entered silly territory and the regulators and brokerages themselves don’t want to be liable.
You can be angry at these changes but don’t be surprised.
This isn’t the first time something like this has happened and it won’t be the last. Brokers have changed their rules on the fly for short-selling in the past so it shouldn’t come as a shock that they’re now doing it on options and crazy long bets.
The problem for places like Robinhood is they have advertised themselves as a platform built to “democratize investing for all!”
Its possible people will be outraged by this and move on like we do with so many other topics these days.
But maybe not.
There were people who owned these shares that were restricted from trading them today who likely lost a lot of money.
Whether this was Robinhood’s decision or the regulators, it’s certainly not fair, regardless of the craziness in the price action of late.
I don’t know if this means lawsuits or people leaving for another trading platform but I don’t think we’ve heard the end of this story.
The same applies to the entire movement behind investing in meme stocks.
Sure, the market will adapt. Highly volatile stocks will likely see higher option prices to combat the type of short squeeze we’ve seen in GameStop shares. And I’m guessing the hedge funds will wise up when trying to short stocks with such high short interest to avoid getting taken to the woodshed like this in the future.
The hedge funds will also be following this stuff more closely and probably try to front-run some of these trades. The big money will surely adapt even if they are caught flat-footed at times.
GameStop could also be a one-off.
Following the greatest trade ever by John Paulson, who shorted the housing market for billions of dollars in gains after the real estate market crashed, a number of hedge funds made it their goal to introduce big short-like trades into their repertoire.
The problem is this was a once-in-a-lifetime trade for Paulson and it’s called once-in-a-lifetime for a reason. They don’t come around very often.
GameStop could be a perfect storm situation.
You had a heavily shorted stock that got a few pieces of good news that eventually became a runaway freight train. You had the pandemic keeping people home and driving them to speculate in their boredom. Maybe some of the shine comes off when more people are back in the office.
However I don’t think the rise of individual traders on social platforms is going away any time soon.
The combination of social media and zero commission trades has created a movement that will be difficult to stop now that it’s in motion. If anything, this whole ordeal will only invigorate others to try the same.
In fact, I think it’s going to be very obvious looking back in a number of years that the advent of social networks increased the number of micro-bubbles in the markets. Even if it dies down for a while this stuff is not going away.
Faster markets are here to stay now that the barriers to entry have been demolished by the interconnectedness of the web, young people who grew up on the Internet, and free access to the markets.
I’m not saying everything is going to end well for all of these traders but day-traders are getting smarter.
Many people in the investment community do not want to admit this but it’s true in many cases. These people knew what they were doing and took advantage of a structural inefficiency in the markets. I’m impressed with how they were able to pull this off, especially when they were up against multi-billion dollar hedge funds that should have known better.
We’re probably not going to see another situation like GameStop every month but this type of coordinated investing done by a group of individuals is likely here for the long haul.
I don’t know where that’s going to take us but I am fascinated to see what happens next.
We talked more about this situation in a live video yesterday: