Reddit vs. Wall Street: Who's Really Winning and Losing in the 'Crusade'

Reddit vs. Wall Street: Who's Really Winning and Losing in the 'Crusade'

The GameStop case and the so-called 'meme stocks' have shocked the investment world. "We will see it in the history books", tells us an expert. But behind a supposed crusade there are many grays and, especially, the debate about the function of applications like RobinHood.

It has been the great technological-financial story of recent days. And most likely it will continue to be. That of GameStop, a company for the physical sale of video games in low hours, whose shares were boosted by a coordinated action from the Reddit WallStreetBets sub-forum to, incidentally, put in trouble funds that had bet that the shares would continue to depreciate.

The result has been a Molotov cocktail with many mixed readings. Since a group of ‘common’ users have defeated the Wall Street sharks, through the supposed rupture and paradigm shift of the entire investment market, to the conspiracies to stop the also supposed crusade.

But, a few days after the maelstrom happened. What has really happened and what has it left behind? “All the readings that have been done have their part of reason. In a way there has been something of David versus Goliath, but sticking with just that would be very simplistic. This is something that will be studied in the investment history books, but the supposed genuine phenomenon of Reddit has been joined by many other interests ”, comments Paco Lodeiro, analyst and director of the Investment Academy.

Not just a David versus Goliath. There have also been intermediaries

Understanding what really happened requires “knowing the background of how the market behaves and part of its operation. It is more complex than it seems at first glance ”, says Lodeiro.
GameStop, whose physical sales business was irretrievably declining, had been valued at just $3 a year ago. With a bearish profile, several funds had bet that their shares would continue to depreciate, known as going short.

These funds, simply explained, bet that stocks will fall. “It consists of borrowing shares with the intention of returning them at a lower price and making money. But to return them you have to buy them at the market ”, explains Lodeiro. And there Reddit appeared.

Through online brokers, and especially RobinHood, thousands of small investors came to buy GameStop producing what is known as a Short Squeeze, that is, a skyrocketing price. Just what happened. “When there are a lot of bearish positions and there are not enough shares, it becomes impossible to buy back to return the shares. Bearish funds are forced to buy quickly to avoid further losses, which added to the push from Reddit purchases sent the price skyrocketing. Whoever started the thread, the forero who has won the most, made an analysis of the situation that proved to be someone with very deep knowledge, ”says Lodeiro.

The result. GameStop saw its shares rise above $ 350 after being just a few hours behind at 17 due to everything formed on the WallStreetBets subreddit, from which several new millionaires have emerged.

RobinHood and Citadel, benefited intermediaries

As a result, bear funds Melvin Capital and Citron Research, who held positions against GameStop, have had to call for bailouts. “They have been without a doubt one of the biggest losers. Melvin has been very touched, "says Lodeiro.

But what about the winners beyond the posts that entered at the right time on Reddit? Among them is Citadel Securities, the intermediary between the purchase orders issued by the redditors at RobinHood and the market, and the RobinHood app itself, which has obtained 3.4 billion in investment so that it could continue operating, in the last week alone.

"Applications for buying and selling free shares like RobinHood should cause us mistrust," says Lodeiro. Under the slogan of democratizing investment, they hide a mechanism by which, when receiving purchase or sale orders, they use as an intermediary what is known as a market maker, in this case Citadel among others, who use this data to improve their valuation models. In short, "at RobinHood the customer is Citadel and the product is the small investor."

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