The Gamestop story – and Robinhood’s decision to suspending trading on the stock – appears like a riddle with as many meanings are people covering it. The ABC’s David Taylor described it as the little guy taking on the big end of town. Retail investors are angry with stagnant wages and absurd inequality – after all, that’s why they voted for Donald Trump and stormed the White House (so the story goes…) – and they’re ready to make a buck for themselves. The big end of town won’t stand for this, and that’s why trading in Gamestop shares was shut down by the popular brokerage platform, Robinhood.
There’s something to this. Robinhood’s major customer is Citadel, a hedge fund to whom it sells real-time data on its customers’ trades. Citadel in turn was drawn into bailing out Melvin Capital, which reportedly lost between 15 – 30% shorting Gamestop.
Of course, it isn’t that cut and dried. Brokerages need to keep cash on hand to ensure they are able to cover trades if anyone is unable to come up with the cash on settlement date, particularly if the stock changes prices dramatically in the 2-3 days between order and settlement. Keep in mind that after being priced at USD$5 five months ago, Gamestop was priced at $347 on Wednesday, $193 on Thursday and $325 on Friday.
So Robinhood is exposed to market volatility. This in turn is enhanced by margin lending, which is offered in the “Robinhood Gold” service, apparently for well-to-do Robin Hoods. As a result, the collateral requirement for brokerages went from $26bn on Wednesday to $33.5bn on Thursday. So there is a clear case, backed by the likes of Bloomberg, that Robinhood did the right thing.
So it was striking to see congressional representatives across party lines piling on in condemnation of Robinhood and their hedge-fund stakeholders, when they could have easily sided with Wall Street.
The critiques came from both an Arizona Republican and Brooklyn’s Alexandria Ocasio-Cortez. Weighing in on the same side was wingnut Ted Cruz (R-Tex.) and Maxine Walters (D-Calif.). Both sides ended up feeling like this:
Yet the most telling statement came from Elizabeth Warren.
With stocks soaring while millions are out of work and struggling to pay bills, it’s not news that the stock market doesn’t reflect our actual economy. For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price. It’s long past time for the SEC and other financial regulators to wake up and do their jobs – and with a new administration and Democrats running Congress, I intend to make sure they do.
It looks like the Democrats are ruing the missed opportunities of 2009 and are ready to make amends. With the sacred cow of the American economy now situated somewhere in the Silicon Valley, Wall Street may be about to get its wings clipped.
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Feature image courtesy of @austindistel via Unsplash.