The question of who profited from the stock bonanza is important to regulators,who are investigating whether the market was manipulated for profit. Legal experts believe financial regulators will likely be combing through social media posts to determine whether sophisticated investors used online anonymity to stoke demand for stocks.
The category of individual traders known as retail investors has ballooned with the rise of commission-free online trading apps including Robinhood. There’s no doubt these traders showed up in record numbers to help drive up GameStop and other stocks last month,creating a temporary liquidity crisis for Robinhood,which had to raise $US3.4 billion to help cover the cost of guaranteeing all of its customer deposits.
Aside from Senvest,the New York hedge fund that manages $US2.4 billion in assets,Wall Street firms have kept mum about any GameStop gains. Most investors,with the exception of top corporate executives and shareholders who own at least 5 per cent of a company,aren’t required to disclose their trading activity.
But industry experts say the soaring stock price was almost certainly given a boost by the hidden hand of larger investors.
Last year,prominent hedge funds including Point72,D.E. Shaw,Two Sigma and Capital Fund Management were all found to be quietly siphoning trading data from a popular app called Robintrack,which collected information on which stocks users of Robinhood bought and sold. Casey Primozic,the programmer who created the now-defunct app,tweeted his finding in May of last year that he had traced large volumes of traffic back to servers that appeared to belong to those firms.
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Spokespeople for Point72,Two Sigma and Capital Fund Management all declined to comment on that incident or whether they participated in trading of GameStop. D.E. Shaw did not respond to a request for comment.
GameStop has only 47 million shares available to trade in the stock market. And yet,on its rollercoaster ride from a share price of $US17 to $US483 in the span of three weeks,investors bought and sold those shares hundreds of millions of times. Over three of the stock’s most volatile trading days,GameStop shares changed hands 554 million times - more than 11 times the number of total shares available.
This pattern suggests there is more to the story than retail investors buying shares and holding them through the stock surge,said Shapiro,the Georgetown policy fellow.
“The same shares are being bought and sold four or five or six times a day,” Shapiro said,a pattern he believes points to the involvement of hedge funds with large amounts of capital to bet on highly volatile stocks. “Hedge funds make money off of volatility and price change. If prices are going to change very rapidly that gives you a lot of opportunity to make profit.”
Another possibility regulators are examining is whether employees of large Wall Street firms were actively using the Reddit forum to boost their portfolios. Though posters are anonymous,r/WallStreetBets has long been populated by users who grasped complex trading concepts,shared screenshots of their Bloomberg terminals and discussed six-figure bets on single stocks,said Jaime Rogozinski,who founded the forum in 2012.
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The sophistication of some forum members was evident,Rogozinski says,during an incident in late 2019 when they discovered a glitch in the Robinhood app. Redditors shared a “free money cheat code” which they said let them borrow an infinite amount of money to perform trades. One user named MoonYachts claimed to have placed a $US1 million bet with only $US4,000 of his own cash before Robinhood fixed the bug.
“It’s evident that these guys knew exactly what they were doing,” said Rogozinski,who said he stopped moderating the subreddit he founded last year.
Andrew Hong,an analyst for a financial software company in Toronto who bought stock options in GameStop last August,said he thinks investors on Reddit actually have a lot in common with the Wall Street investors they claim to despise:At the end of the day,they’re all trying to make money.
“There are some really smart people on[WallStreetBets],but for the most part all this is just poor habitual gambling addicts versus rich habitual gambling addicts,” Hong said. “No one is a good guy here.”
The Washington Post
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