In 2021 I thought I’d try sending out a newsletter on relevant Fintech topics as soon as there are enough insights instead of the monthly schedule.
If there was one subject with too much information and too little context recently, it’s the trading action on GameStop.
But are there any meaningful lessons to be learned? Absolutely! And I don’t mean how to make a quick fortune by squeezing hedge funds. The story signals some rapid and profound changes in the investment world.
If you managed to miss the GameStop saga, well done! Here are a few key points:
Day traders, particularly active on the ‘WallStreetBets” subReddit shook markets by targeting hedge funds’ short positions on GameStop, AMC and other stocks.
As a result, in January 2021 the GameStop stock rocketed from $17 to over $300, sometimes swinging by over 100% in a day.
One hedge fund, Melvin Capital, accumulated losses and was bailed out by fellow hedgies Citadel and Point72; which made it look even more like a battle of retail vs hedge funds.
Melvin Capital eventually announced that it was capitulating on its shorts, having lost 53% in the process.
Robinhood, the app that became synonymous with day trading (and a Citadel partner), announced a ban on buying the GameStop stock, causing an outcry.
All of the above happened in the last 10 days of January. The story is not finished yet but that’s a lot to take in already. What can we make of it?
The context: The Holy Grail of Social + Fintech
The ‘Holy Grail of Social + Fintech’ is an episode of the A16Z podcast originally released in March 2020 and republished in December, before most of us had heard of GameStop or WallStreetBests. It describes the context which made the events possible: gamification of investing, collective intelligence, investing in public, all the seeds are there.
The intersection of social and finance—as well as shifting attitudes around what we share about money online—have given way to an ambitious new wave of financial products.While revealing one’s financial information was once considered taboo, now people are more apt than ever to openly discuss money online, particularly Gen Z and millennials. That’s evident on both ends of the spectrum, whether people are bemoaning their crushing levels of student debt on Twitter and Instagram or bragging about their latest stock trades on WallStreetBets.
Short Squeeze: How does it work? And hows does it feel?
Here’s a fun take on what happened to Melvin Capital based on an episode of Billions.
What happened with Robinhood?
No matter your stance, this clip of the CEO getting grilled by CNN’s Cuomo is one to watch.
The most in-depth and easy to digest analysis on the matter came from a Twitter thread:
TL;DR The plumbing of capital markets are normally very efficient, but they are also complex and stop working under extreme conditions. Robinhood did not punish its own clients to protect its hedge fund buddies, but its practices still look shady.
Long term forces at play
The GameStop saga reminded me of an article unrelated to finance and fintech that seemed to apply perfectly: Understanding New Power (Harvard Business Review, December 2014).
The author agreed:
George Aliferis CAIA @FintechOramaI'm reading about "New Power" while thinking about $GME I wonder what the authors @jeremyheimans and @henrytimms would make of this... Here are some personal notes 👇🏼 (PS: thanks @ry_paddy for sharing this) https://t.co/oegcZjncTI
Old power, works like a currency. It is held by few and is zero-sum. Once gained, it is jealously guarded, and the powerful have a substantial store of it to spend. It is closed, inaccessible, and leader-driven.
New power operates differently, like a current. It is made by many. It is open, participatory, and peer-driven. Like water or electricity, it’s most forceful when it surges. The goal with new power is not to hoard it but to channel it.
Here’s another take inspired by Billions detailing how the New Power (represented by WallStreetBets) applies to GameStop trading.
The GameStop craze is likely to fade away soon, hopefully in a positive way for the retail store and its 53,000 employees.
But the concepts that surfaced with it: ‘Social + Fintech’ and ‘New Power’ will remain and are likely to become reoccurring themes in investing and fintech.