back to indexE19: Robinhood's GameStop decision: Why did it happen and how can it be prevented in the future?
Chapters
0:0 Besties intro
2:11 Chamath breaks down the entire WallStreetBets/GameStop saga
15:38 Jason responds, debating Robinhood's liquidity crisis, Citadel's potential involvement & more
39:18 How can this be prevented in the future? Restructuring capital gains tax, censorship, where Robinhood can go from here
53:2 Major learnings from this week's events, risks of decentralization, do stocks need to be reflexive of the underlying business? GameStop's endgame
75:1 Chamath for Governor of California, Friedberg on leaders vs. managers & the problem with career politicians
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I'm going all in with your beak, with your beak, with your beak. 00:00:18.740 |
We open sourced it to the fans and they've just gone crazy with it. 00:00:25.980 |
Hey everybody, welcome to the All In Podcast. 00:00:29.820 |
It was a slow news week, so we decided we'd give you a special episode. 00:00:33.900 |
We're going to go around the horn with our special picks. 00:00:36.960 |
We're each going to pick three picks, everybody. 00:00:38.740 |
We're going to pick our favorite recipe, our favorite new hobby, and our favorite 00:00:42.940 |
streaming guilty pleasure because there was no news with us today. 00:00:49.820 |
Rain Man, David Sacks with his new track from Young Spielberg. 00:00:56.700 |
Young Spielberg at it again, this time with a 00:00:59.640 |
track focused on the Rain Man himself and the Queen of Kinwad, who everybody says we 00:01:12.180 |
People just felt I was being, I don't know how people could say that anointing him as 00:01:21.360 |
I think these people are not woke and they need to be canceled. 00:01:23.660 |
Jason, here you go again, making a lot of assumptions about people's 00:01:37.980 |
And today I'm having the emotion of excitement and I am ready for the conversation. 00:01:45.120 |
So I think we might as well start with, I don't know if you guys caught this, but there's 00:01:50.780 |
a subreddit called WallStreetBets and what they do on WallStreetBets is they find angles and a thesis. 00:02:00.360 |
The stock they picked for the past couple of months has been GameStop. 00:02:10.740 |
So, um, do you, uh, I had actually a guy on my team put together two really important documents and I'm just going to read them because it's full of so much interesting shit. 00:02:30.440 |
I had a guy go in, uh, one of my team members, one of my colleagues and go and summarize the entire saga from the beginning. 00:02:36.940 |
And then we can talk about the, the corporatist scumbags at Robin hood and other fucking people over. 00:02:46.360 |
Let's uh, let's start with the, uh, no, no, no, shut up. 00:02:54.280 |
Cause you, you just want to defend people because you blindly stumbled into a fucking trade. 00:02:59.740 |
Lo and behold, you actually invested in a company. 00:03:02.580 |
That literally they got on television yesterday and they fucking lied to Americans right to their face. 00:03:08.800 |
This is a company that was insolvent because now let's just put a pin in the following data point, which I believe to be true. 00:03:14.640 |
I know more about this than you do because I live in these markets. 00:03:19.640 |
So I understand what it means to be putting on trades, to being short, to being gamma squeezed, to have longs, to do all of this risk management. 00:03:28.540 |
So I know the intricacies of this stuff and what's happening in your, this company was insolvent. 00:03:33.520 |
They did not have the capital requirements to post the margin that was being asked of them by their partners. 00:03:41.680 |
And so this was a platform level decision to ban and block people from trading securities. 00:03:47.620 |
It costs individuals, hundreds of millions, probably billions, maybe even tens of billions. 00:03:55.520 |
Now, let me give you the timeline before we get into that. 00:04:00.940 |
In June of 2019, a wall street bets user named deep fucking value began buying long dated January 21 calls. 00:04:10.720 |
What that means is in June of 19, this person was betting that the stock would go up by January of 2021. 00:04:17.360 |
He spent $50,000, which by the way, today is worth about $25 million. 00:04:23.140 |
By the way, Shabbat, we should just highlight that there are forums where individuals that are trading stocks. 00:04:28.180 |
Talk to each other and share tips and promote things to one another. 00:04:33.420 |
And by the way, those forums exist, uh, in the professional organized world too, amongst hedge funds. 00:04:38.920 |
You know, I've been invited to idea dinners where we all get together and we talk about the ideas that we have, and we're all expected to do fundamental analysis. 00:04:46.900 |
Uh, but some of those ideas are actually momentum driven ideas. 00:04:50.580 |
And a lot of the biggest dislocations in the market, just as a setup here have been because of momentum driven trading by 00:04:58.360 |
So we've, we've been stuck with this for a while. 00:05:00.460 |
So, so this guy deep fucking value posts this and every month since he's posted a screenshot of his position and he's titled it G M E Yolo update. 00:05:09.880 |
August 22nd of 2019, Michael Burry, who is this guy famous from, uh, the big short, who's the guy that caught the mortgage thing. 00:05:18.580 |
He discloses a 3% position in the company, and he highlights that 90%, nine, zero percent of GameStop's 50% of the 00:05:33.820 |
He urges a buyback and he notes that the company was trading at or near net cash levels. 00:05:40.360 |
So he's making a deep value oriented fundamental thesis as well. 00:05:44.700 |
I think also it's worth saying what GameStop is. 00:05:47.060 |
Cause even my wife asked me what the hell is GameStop last night. 00:05:49.360 |
GameStop is a retail store where people buy video games. 00:05:52.060 |
I used to go to the mall all the time and buy video games there and consoles and headphones and other stuff. 00:05:57.640 |
And so the stock got beat up over the last couple of years as people stopped going to malls and stopped buying stuff in stores. 00:06:02.740 |
And everyone thought the company was going to die. 00:06:04.600 |
And so these guys observed that maybe there's real value in this company and it's making money. 00:06:10.960 |
No one buys DVD ROMs anymore or anything like that. 00:06:13.420 |
So, and, and the chewy founder who is very successful at e-commerce came in to run the company. 00:06:22.720 |
So June 19 was the original post August 22nd. 00:06:27.460 |
Of 19, Michael Burry comes in and says, I'm long. 00:06:30.580 |
Then a year later, August 31st of 2020, Ryan Cohen, who's the founder of chewy takes an almost 10% position in GameStop about two or three weeks later on September 19th of last year, a member of wall street bets writes a post on GameStop. 00:06:47.860 |
And he notes that GameStop has 120% short interest, which I'll get to in a second. 00:06:57.280 |
And he defends the company as a result of a few things. 00:07:00.520 |
He says, number one, there's a new console cycle coming, just as Jason mentioned. 00:07:04.720 |
Number two, consoles are, are not going all digital immediately. 00:07:10.000 |
GameStop loyalty programs have 55 million users. 00:07:14.620 |
Ryan Cohen just bought a steak and the shorts were underwater and would be forced to cover. 00:07:20.040 |
If the stock ran up, he predicted the convergence of all these factors would lead to a big squeeze. 00:07:27.100 |
16th of 2020, Ryan Cohen writes a letter to the GameStop board and he urges the company to conduct a strategic review and share a credible plan to capture market share in the gaming industry. 00:07:40.120 |
He said that they need to evolve into a technology company that delights gamers and delivers exceptional digital experiences. 00:07:46.120 |
I'm just quoting here, not remain a video game retailer that over prioritizes its brick and mortar footprint and stumbles around the online ecosystem. 00:07:57.420 |
Someone in wall street bets highlights that a hedge fund called Melvin capital was going long GameStop puts. 00:08:07.040 |
That they are synthetically shorting the stock by buying the right to sell it at a different price in the future. 00:08:14.760 |
Um, and that they had been long that position for more than four years. 00:08:20.920 |
So all the way going back to 2016, fast forward to now 2021 of this year. 00:08:28.280 |
GameStop strikes an agreement with Ryan Cohen and adds them to the board of directors and gives two of his affiliates, his former COO and CFO of Chewy also two board seats. 00:08:39.620 |
They collectively, you know, bring their experience in e-commerce, online marketing, finance, and strap planning. 00:08:46.360 |
The stock goes up 13% on that day and closes at about 20 bucks a share. 00:08:59.780 |
There's a ton of activity around GameStop in wall street bets and now in discord and in stock twits claiming that Ryan Cohen is going to be the savior. 00:09:10.960 |
And then by January 14th, so three days later, the stock closes at 40 bucks. 00:09:19.780 |
So now comes the setup, the pros versus the Joes from January 12th to today. 00:09:26.540 |
There has basically been a battle by institutional investors on one side, shorting GameStop and retail investors on the other buying the stock and also buying the right to buy the stock or what's called call options. 00:09:40.660 |
And this is what has created this crazy nonsense we've seen. 00:09:45.160 |
So on the institutional side, after, you know, retail drives a stock up, the institutional guys are like, Hey, wait a minute. 00:09:58.600 |
They have too many, you know, cyclical and secular tailwinds. 00:10:02.400 |
And they become so massively short that the infrastructure that's supposed to even count all the shares can't keep up. 00:10:09.960 |
And now they are short more than the actual number of shares that actually exists. 00:10:17.640 |
The Joes retail, they start to aggressively purchase all these cobble options. 00:10:21.900 |
And on January 13th and 14th, this price keeps ticking up. 00:10:26.300 |
Then a bunch of quant funds and momentum hedge funds notice all this activity, and they also participate on the long side. 00:10:35.300 |
And then over the past seven trading days, we have traded over $100 billion of stock in GameStop, which is well in excess of what retail can support. 00:10:47.080 |
A bunch of value oriented, non computerized, non quantitative hedge funds short. 00:10:56.180 |
Initially fundamentally, but then momentum oriented buys. 00:11:03.160 |
And this is what's created this massive short squeeze. 00:11:06.220 |
On January 19th, Citron Research, a research firm that basically tries to, you know, find 00:11:12.940 |
shorts in the market, announces that they were short GameStop and they gave five reasons 00:11:23.600 |
Then over the next two days, GameStop went down. 00:11:32.260 |
And this is what really starts what's called a gamma squeeze. 00:11:35.620 |
Okay, which is what we saw in the first part of this week. 00:11:37.840 |
So January 25th, Ken Griffin, Stevie Cohen, they inject almost $3 billion into Melvin Capital, the firm that was short. 00:11:45.680 |
2 billion from Citadel and 750 from Stevie Cohen. 00:11:48.880 |
Stevie Cohen had a billion in it from before. 00:11:52.900 |
And then now all of a sudden, the squeeze keeps happening. 00:11:55.940 |
And then it starts to spill over to the rest of the market. 00:11:59.660 |
Now all these hedge funds, these original hedge funds, they are getting called by the 00:12:03.620 |
bank saying, "Hey, wait a minute, you've run over your collateral limits. 00:12:11.040 |
So now not only do they have to cover GameStop, they have to cover all their other shorts. 00:12:18.740 |
So now they're selling, you know, Facebook, Netflix, Alibaba. 00:12:25.820 |
That's what's happening in the market in the last couple of days. 00:12:29.600 |
And then the coup de grace is what happened on January 28th of 2021. 00:12:34.820 |
Brokerage firms, and this is where, Jason, we should talk about this, like Robinhood 00:12:38.880 |
and Interactive Brokers, because in fairness, it wasn't just Robinhood, prevented their 00:12:42.920 |
users from buying GameStop and a handful of other stocks. 00:12:46.740 |
They were only able to sell, which resulted in such a one-way pressure, it caused a 44% 00:12:58.760 |
And so what it speaks to is a bunch of questions. 00:13:00.780 |
There are questions as to whether or not this was mandated by the platforms or the regulators. 00:13:06.260 |
Given the fact that it didn't impact all the brokerage accounts, it was a platform-level 00:13:12.960 |
So some organizations like Robinhood banned it. 00:13:19.540 |
And it could be that some of these platforms that banned it is likely because, and this 00:13:25.580 |
I'm going to get to the insolvency question, didn't have enough margin. 00:13:29.540 |
And so they knew that if they opened the doors, there would be a run on the bank and there 00:13:35.580 |
And that's why they basically, I believe, had to stop allowing people to trade. 00:13:41.180 |
And it just shows how fragile the whole system is. 00:13:46.820 |
The last thing I'll say, and then we can talk about this, is how does Robinhood make money, 00:13:50.680 |
which I think is also important to understand this. 00:14:02.060 |
What they do is they watch and monitor your orders. 00:14:06.580 |
They create a data file about that and they give it to these prime brokerage institutions 00:14:14.160 |
like Citadel milliseconds before you do the trade. 00:14:18.300 |
What that allows Citadel to do is if they see a lot of people buying, milliseconds before 00:14:27.460 |
To be clear, Citadel is responsible for 47% of all the payment for order flow volume. 00:14:35.520 |
They paid Robinhood almost $60 million in the third quarter. 00:14:41.180 |
Plus another, I think, $7.5 million for S&P 500 stocks and $31 million for non-S&P 500 00:14:49.220 |
They paid them almost $100 million in the quarter or a $400 million run rate. 00:14:55.220 |
If we had to summarize all of this in a nutshell, that's what we know. 00:14:57.640 |
We know that it started out as people debating the true fundamental value of GameStop and 00:15:06.300 |
it morphed into a momentum trade where a bunch of folks got dogmatic about a short, a bunch 00:15:13.400 |
of folks got dogmatic about being long, and the longs won. 00:15:18.420 |
In the middle, what happened was a bunch of firms basically decided at some point to gate