The Breakdown - GameStop, Robinhood and the Failure of Un-Free Markets

Episode Date: January 30, 2021

In this edition of the Breakdown’s weekly recap, NLW looks at: Robinhood’s ham-fisted explanations for why it shut down buying for GME and other stocks Why the root cause seems to have been insolvency How politicians are gearing up for political inquiries around the trading shutdowns  How WSB is reacting to the shutdown attempts -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, January 30th, and that means it's time for the weekly recap. And this week, as you would imagine, it's all about Robin Hood, Wall Street Betts, GameStop, and the failure of unfree markets. Where we left off on Thursday was that Robin Hood had shut down trading on the set of equities that were associated with the Wall Street Betts community.

More specifically, they had shut down the ability to buy those assets. You could still sell things like GameStop. Quick review now of this recent Wall Street Bet strategy, there are two sides of the play. First, find some over-leverage short-seller, focused on an underpriced stock and then buy the ever-loving crap out of that asset. Second, hold. Do not sell to the short sellers as they desperately try to cover their shorts as the price of the asset rises. Going back to Robin Hood then, they didn't just halt trading entirely. That would have been one thing. Still a pretty serious thing, but different than what actually

happened. What they did was that they only allowed selling of these assets, the whole point of which was this community was trying to keep holding. It was nearly impossible for anyone watching, frankly, quite reasonably, to see this as something other than an attempt to tank the market for these specific assets. Unsurprisingly, then, people asked what was the logic behind this, or more specifically, who was behind it. Justin Khan, the founder of Twitch, sent out a very incendiary tweet that said, Just got a tip that Citadel reloaded their shorts before they told Robin Hood to stop trading GME. If this is true, Ken Griffin and the Robin Hood founder should be in jail. This is class warfare. This morning, he followed up that tweet with this. I was sent to cease

and desist and have decided to take my last tweet down. But Wall Street Betts users should ask for the following in the hearings. All communications between Citadel Securities and Robin Hood during this period, disclosure of any short positions of Citadel's hedge funds in the securities which Robin Hood and other brokerages who are paid by Citadel Securities, and any communication in Citadel securities or hedge funds involving GME, BB, or NOK. Please write to AOC or Ted Cruz to lead this investigation to ensure the public can see all evidence around the GME ban. Pretty serious to see a cease and desist around a tweet,

but what Justin is referring to here when he talks about hearings is that AOC called for hearings on exactly this issue. Ted Cruz retweeted her. we talked about that a couple days ago. AOC, for her part, followed it up with a Twitch stream on Thursday night that had more than 250,000 people watching her discuss this. At the same time that AOC was streaming, Robin Hood did go on the PR defensive, sort of, and very poorly, sending CEO Vlad Tenive to the financial cable news. Vlad's mealy-mouthed corporate speak explanations will leave you completely unconvinced, as is witnessed by Dave Portnoy, who also went on TV

after Vlad and said that he felt like he needed to take a cold shower after watching him. Here's an explanation of the non-sinister side, the incompetence instead of maliciousness side, that I found much more coherent. It's from Where's Your Ed at, which is a substack by Ed Zittron. In short, when you buy a stock on Robin Hood, they actually have to pay for it. They need to use their lines of credit to buy the stock and it takes two days to settle. Basically, Robin Hood ran out of money to actually buy these stocks at the rate its users wanted, and they were left with the decision to either stop people buying it so that they didn't run out of money or let people keep buying it and run out of money. Brokers are legally required to have a certain amount of money

on hand at any given time, varying on the actual activity they have on their platform, and Robin Hood legally didn't have enough money. Now, I ain't no communications guru, but this is a moment where Robin Hood clearly knew they were up Shits Creek and could have educated the market. Of course, I imagine they may not have wanted to say this publicly because it would have made them look bad, but I'd say they look far worse shutting off trading with a vague explanation. So they could have said, quote, the way that brokerages work and staying in compliance with the SEC guidance is extremely complex. But to simplify it, you have to keep a certain amount of money on hand at all times to comply. This is how all brokerages, not just Robin Hood operate. With the

massive spiking orders, we were put in a position where we had to increase our access to capital to make sure we could actually run things legally and fulfill the orders from our customers. We couldn't, so we had to halt trading. We are so sorry. We did all we could to avoid it. John Gruber picked up this thread on his daring fireball blog. He wrote a post called Robin Hood needed emergency $1 billion cash injection yet remains underfunded. He references an article from the New York Times that reported that Robin Hood drew on a line of credit from six banks amounting to between $500 million and $600 million to meet higher margin or lending requirements. This is from the New York Times article. Robin Hood contacted several of its investors, including the venture capital firm,

Sequoia Capital, and Ribbock Capital, who came together on Thursday night to offer the emergency funding. And here's Gruber's interpretation. Basically, Robin Hood blew it by not being honest about this. They should have just come clean and explained that they were short of cash to cover all the action on these stocks. But because they were embarrassed to appear insolvent, they destroyed their ethical reputation instead. And now it's come out that they were in over their heads financially anyway. Even today, Robin Hood is not even close to allowing users to trade GameStop freely. It's a complete clown show. Now, even if you accept that this version of the story versus some malign citadel on the phone telling them that they had to stop version of the story is true,

You can say that this was a colossal screw-up by Robin Hood that had the net effect of benefiting the big players over the small investors that their whole mission is purported to help. There's also still the question of why the hell they didn't turn off trading altogether, from that same Where's your edat piece? The truth is that even letting people trade it again today didn't stop people losing money. By switching it to sell only, you're sending a direct signal to the market. You're saying the stock is done for, we're not going to let people buy it, so why keep it? In some ways, I honestly think that adding it back in a day later is more harmful.

If it could come back so quickly, why did you remove it in the first place other than to cut its rally? This sentiment was echoed by Ro Kana, who retweeted Chris Cuomo's interview with Vlad Tenive and said, Chris Cuomo did a good job but need follow-ups. One, why restrict only buying but not selling? Two, why restrict buyers who want to buy in cash with no margins? Three, if preventing liquidity issues, why restrict these few stocks as opposed to exploring other finance options. Did Robin Hood have money lent or used to cover short sellers? If so, admit that you

made a bet that put you in liquidity danger and made a decision to hurt your buyers to prevent consequences of your inability to cover your loss. If not, what deposits were you afraid of losing? You say it was a preventative decision and you didn't have a liquidity issue, but did you fear having liquidity issues in the future? If so, did you explore every other option for raising funds given the size of your company and thousands of stock trades before restricting buying? You keep using legalese. You say, quote, we didn't do it at the direction of a market mover hedge fund market participant. What does this mean? Did you or anyone on your team have a conversation with anyone at Citadel about this? Did Citadel or any other outside investor pressure you? Finally, if you were

unable to fill buy orders for GameStop because you didn't have the cash to buy shares as the price went up with the short squeeze, then say that. It's problematic to buyers if you didn't have reserves or credit to meet the trades when you lost. Many investors want to be a part of the next bull run. Others seek their dream home, finally launch that startup or fund their education. Try Nexos instant crypto credit lines and borrow against any major cryptocurrency with no minimum or maximum withdrawal amounts, no fees whatsoever, no credit checks, and flexible repayment. Not to mention the APR starts at just 5.9%. Stay on top of your investment game with nexo.io. And remember, it's your crypto, your credit, your choice. Get started at nexo.io. Now, it just came out that the Texas

Attorney General has issued a CID, a civil investigation demand to Robin Hood, to Discord, who de-platformed Wall Street Betts recently, and Citadel. So this story is going to continue. Should also be noted that apparently a ton of Robin Hood employees were not happy at all about this. It made it into the news, it made it to Wall Street Betts, and even friends that I know who used to work there said that their former colleagues reported to them that it was absolutely nightmarish. Let's turn to Wall Street Betts' side and what's been happening there. Dave Portnoy has continued to be a champion for the community. He tweeted earlier, the thing that drives myself and so many people nuts is this belief that when this is over, guys like Ken Griffin from Citadel, Gabe Plotkin from Melvin, Steve Cohen,

and Vlad will be at some secret country club laughing at all of us, and deep down, we know we're right. There remains an epic battle around GameStop. GameStop short interest remains at $11.2 billion. It still has a 112% short ratio. In the last 24 hours, the price has ranged from 123 to 494. Currently, it's at around 325. Robin Hood has turned back on buying, but it's very limited, down to one share from five shares when it opened. Others like AMC are also going down. You can currently buy 10 shares of AMC on Robin Hood down from 115 at the open. Now, if you look to the forum itself, their main advice vice is well-trodden territory for Bitcoiners, Hoddle. In a post called Why This Weekend is so crucial, Hold Until You Die says, I know it's Friday and some of you short-term monkey brains are thinking

about bailing on your brothers. Your paper hands are beginning to cramp up. I get it, but we cannot sell. There are still massive amounts of shorts on GME, still well over 113% of total shares floated. Some old shorts have gotten out, but many new shorts have taken their place in the last couple of days, hoping that GME will die out. Here's the key part. They are literally praying for us to sell our shares and end this entire thing today. They are hoping that they can make their money back at our expense, because every single day that they hold their short position is costing them billions of dollars collectively. Billions a day. All we need to do is hold. That's it. We will cost them so much money today next Monday, Tuesday, Wednesday, Thursday, and on and on.

Soon enough, they won't be able to pay the cost of their shorts or it just won't be worth the cost anymore and they will eventually have to bail. That is going to be the squeeze. Once the costs keep adding up, they will start to bail, and the rest will follow. We must stay strong. Don't forget what they have done to us. It's a game of chicken and whoever blinks first loses. Now alongside this, they are pissed at Jim Kramer, who basically went on his show and said that you've won, take the home run. And of course, I'm also seeing a lot of posts that are basically them returning to this David versus Goliath. One post says, I'm holding for the little guy who could only muster $50 on this and it being a big risk for them. I'm holding for the parents who got fucked by these assholes in 08.

I'm holding because it's money I'm not scared to lose. I'm holding for the bag holder at 370. I'm holding for the working class. I really like this stock and this is not financial advice. Another post referenced that same parent thing. It was called This Is For You Dad. I remember when the housing collapsed sent a torpedo through my family. My father's concrete company collapsed almost overnight. My father lost his home. My uncle lost his home. I remember my brother helping my father count pocket change on our kitchen table. That was all the money we had left in the world. While this was happening in my home, I saw hedge funders literally drinking champagne as they look down on the Occupy Wall Street protesters. I will never forget that. My father never recovered

from that blow. He fell deeper and deeper into alcoholism and exists now as a shell of his former self, waiting for death. This is all the money I have, and I'd rather lose it all than give them what they need to destroy me. Taking money from me won't hurt me because I don't value it at all. I'll burn it all down just to spite them. This is for you, dad. This conversation just continues to get bigger. John Stewart literally joined Twitter to talk about this. He said in his first tweet, this is bullshit. The Redditors aren't cheating. They're joining a party Wall Street Insiders have been enjoying for years. Don't shut them down. Maybe sue them for copyright infringement instead. We've learned nothing from 2008. The SEC also made a statement. And while there's a bunch

of standard things that you might expect, the line that I took notice of was this. The commission will closely review actions taken by regulated entities that made disadvantaged investors or otherwise unduly inhibit their ability to trade certain securities. So it sounds like they're kind of on the AOC side of these questions. Elizabeth Warren is making it an issue clearly setting up a fight against the SEC. It's sort of hard to tell whether she's accusing WSB of market manipulation or billionaires of market manipulation or everyone of market manipulation, but it's clear that she's going to make this an issue. Finally, Representative Patrick McHenry, who you may remember from the Libra hearings when he spoke eloquently about Satoshi's innovation and Bitcoin, went on Squawkbox and

had this to say. What I'm seeing here is this larger case, which is average average equity investors are cut off from the access that insiders like C-Sweep members of companies and hedge funds and private equity naturally get. And that accredited investor standard has bifurcated our markets into a highly prosperous lot and then the rest. And so let's fix that problem so you can actually have these capital flows go to the useful and best place. Effectively, McHenry is arguing that we live in a world where certain rules, such as accredited investor rules, formally divide the market between those who have the resources to play and those who don't. And that, for him, is the core problem. What we have experienced over the last few days is a tidal wave of confirmation that these are

anything but free markets. The next stage of this debate is going to happen in the halls of Congress and the Senate and will have a major deterministic impact on how regular people participate in markets going forward. Will we see this as an opportunity to try to level the playing field? Or will we instead try to protect people from themselves, patronizingly and paternalistically. Based on the language, I'm using, you probably have a pretty good idea which side I'm on. Now, if there's anything encouraging here, at least so far, it's that these battle lines haven't been strictly partisan. Maybe the very populous nature of this thing, appealing to both sides of the aisle at the moment, will keep it away from being yet another political football. We can certainly hope. For now, guys, I hope you're

having a great weekend. I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.