January 30th, 2021 at 3:39 PM
This is still largely a developing situation, but it's hard to understate it's significance. A small (ish) group of folks from Reddit successfully brought the 9th largest hedge fund in the world to its knees.
How? Short selling. And they outplayed these folks at their own game.
It's a relatively simple concept really, albeit somewhat dodgy. The short seller "borrows" a stock from someone who is holding it (strange as this may sound, the stock market allows for this). When someone is holding a stock they've borrowed, they can sell it. Literally, they can borrow/rent a stock and sell it, so long as they buy it again when it's time to return that stock to the lender.
This is exactly what Citadel did. They borrowed what became billions of dollars worth of stocks, and they sold them. A lot of them. They sold them while they were $18 a share, while they were contractually obligated to return them eventually to their lenders.
If this sounds like a roundabout way to make money, it is. They were betting on Gamestop's failure. They were counting on predictions that their stock would tank. When it did, they were going to buy back these stocks at a much lower price and then return them to the lender. In doing so, they pocket the difference and have pure profit from Gamestop's demise.
This did not work as planned. A group on Reddit got wind of this. SpookyZalost has a much better explanation than I do, but in short, the folks on Reddit started buying stocks in large numbers via Robinhood. This drove the stock price up rather than down. The stock prices exploded by over 1000% over the span of a week, and they became short in supply and forced Citadel to buy back these stocks at exhorbant prices in order to ensure that they could even get a hold of them at all. They had no choice but to shell out billions of dollars in order to fulfill their contractual obligations.
This sort of dodgy behavior from hedge funds and lenders was the leading factor for the 2008 market crash. It has been 12 years since the great recession, and it is clear that they did not learn their lesson. Citadel had made a risky bet, and is now salty that it did not work in their favor.
But even more shocking were Robinhood's subsequent actions. Stocks were quickly suspended by the popular trading app, preventing anyone from purchasing any more stocks from the company.
This is already suspicious because it's technically market manipulation. It's a private company arbitrarily attempting to inhibit the market from rising, which is illegal and frowned upon strongly by the SEC. But the story doesn't stop there, because Citadel so happens to be a 40% stakeholder in Robinhood. IIRC, this makes Citedel the largest stakeholder. And thus, they have more control over Robinhood than any other player/party in their sphere of influence. So when Robinhood subsequently choked off Gamestop's stock rises to protect Citadel from experiencing further losses, it raised a lot of eyebrows in the industry, and was evidently a very clear indication of collusion to the tune of several billion dollars. And it happened practically in plain sight.
What are your thoughts on this situation?
How? Short selling. And they outplayed these folks at their own game.
It's a relatively simple concept really, albeit somewhat dodgy. The short seller "borrows" a stock from someone who is holding it (strange as this may sound, the stock market allows for this). When someone is holding a stock they've borrowed, they can sell it. Literally, they can borrow/rent a stock and sell it, so long as they buy it again when it's time to return that stock to the lender.
This is exactly what Citadel did. They borrowed what became billions of dollars worth of stocks, and they sold them. A lot of them. They sold them while they were $18 a share, while they were contractually obligated to return them eventually to their lenders.
If this sounds like a roundabout way to make money, it is. They were betting on Gamestop's failure. They were counting on predictions that their stock would tank. When it did, they were going to buy back these stocks at a much lower price and then return them to the lender. In doing so, they pocket the difference and have pure profit from Gamestop's demise.
This did not work as planned. A group on Reddit got wind of this. SpookyZalost has a much better explanation than I do, but in short, the folks on Reddit started buying stocks in large numbers via Robinhood. This drove the stock price up rather than down. The stock prices exploded by over 1000% over the span of a week, and they became short in supply and forced Citadel to buy back these stocks at exhorbant prices in order to ensure that they could even get a hold of them at all. They had no choice but to shell out billions of dollars in order to fulfill their contractual obligations.
This sort of dodgy behavior from hedge funds and lenders was the leading factor for the 2008 market crash. It has been 12 years since the great recession, and it is clear that they did not learn their lesson. Citadel had made a risky bet, and is now salty that it did not work in their favor.
But even more shocking were Robinhood's subsequent actions. Stocks were quickly suspended by the popular trading app, preventing anyone from purchasing any more stocks from the company.
This is already suspicious because it's technically market manipulation. It's a private company arbitrarily attempting to inhibit the market from rising, which is illegal and frowned upon strongly by the SEC. But the story doesn't stop there, because Citadel so happens to be a 40% stakeholder in Robinhood. IIRC, this makes Citedel the largest stakeholder. And thus, they have more control over Robinhood than any other player/party in their sphere of influence. So when Robinhood subsequently choked off Gamestop's stock rises to protect Citadel from experiencing further losses, it raised a lot of eyebrows in the industry, and was evidently a very clear indication of collusion to the tune of several billion dollars. And it happened practically in plain sight.
What are your thoughts on this situation?
