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January 28, 2021 | When Predator Becomes Prey

John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What to Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website in 2004, sold it in 2022, and now publishes John Rubino’s Substack newsletter.

Wall Street traders have traditionally played hardball with each other. They’ll take a position and then “talk their book” on CNBC, or short a competitor’s favorite stock while spreading negative rumors about it, or do any number of other ethically-dubious things to profit at the expense of their peers. When they end up on the losing side of such a scheme they don’t like it, but they understand that this is how the game is played.

Then the game changed. The government sent billions of dollars of covid relief checks to video game playing Millennials who had just discovered free stock trading apps like Robinhood. And – no surprise for people who have been organizing cooperative video game raids their entire lives – these newborn daytraders figured out that by targeting heavily-shorted stocks and buying them en masse, they can force hedge fund short sellers into a panicked short squeeze, sending the target stocks through the roof. Et voila, easy money, over and over with no apparent end in sight – all at the expense of the market’s former top predators.

GameStop, a moribund bricks-and-mortar video game retailer (and thus a familiar name for Millennials) was the test case. A few weeks ago, packs of Robinhood traders sent the price from around $10 to over $450. Imagine being short that stock with millions of dollars of other people’s money, and you’ll understand Wall Street’s angst.

GameStop price predator becomes prey

Now consider that these hedge-fund-hunting wolf packs can do this with any thinly traded, heavily shorted stock — and that the government is getting ready to send them another round of stimulus checks – and suddenly the threat looks existential.

This video illustrates the kind of furor that has been stirred up so far:

Now, it would be a huge surprise if Wall Street didn’t come back swinging. And come back it has. Yesterday, Robinhood and several other stock trading platforms shut down trading in the Millennials’ favorite stocks, while hedge funds are still allowed to trade. Those stocks are plunging, trapping panicked Millennials in losing positions.

However, allowing one group of people to trade stocks while banning others seems just a little bit unconstitutional, so opposition from across the political spectrum is lining up. Here are the last few paragraphs of a CNBC article from earlier today:

Rep. Alexandria Ocasio-Cortez weighed in on Twitter, calling Robinhood’s new parameters “unacceptable.”

“We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit,” she tweeted. Republican Senator Ted Cruz tweeted “fully agree” in response to Ocasio-Cortez.

Law firm ChapmanAlbin LLC announced Thursday it is “investigating claims on behalf of Robinhood users that were affected and suffered losses as a result of investing in Gamestop or AMC through the Robinhood brokerage platform.”

This could end up as one of those epic court battles that illustrate the fundamental divide between the ruling class and the rest of us. Can’t wait.

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January 28th, 2021

Posted In: John Rubino Substack

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