Robinhood and Gamestop Shake Up Last Week: What's Coming This Week?

The past week, a financial matter emerged that has dislodged - at least somewhat - all the chatter about the incoming Administration in Washington. Now we've got other chatter related to Robinhood, Gamestop, short-selling, short squeeze, etc. As with the political mumble, this financial drama is open to interpretation. Don't worry, I'll spare you mine.

First of all, I don't have any brilliant or deep knowledge, understanding, or insights to share. I'm mulling things over - whether on the political or financial front - and just sorting things out. More so, I'm not sure what I read or hear is necessarily true. Here's an example related to Gamestop and Robinhood:

What we know is that the stock of Gamestop was heavily sold short by big hedge funds, among others. For whatever their reasons, a "community" of people who subscribe to Reddit decided to oppose the actions taken by those hedge funds by aggressively buying Gamestop, driving the price up. Many of these folks, if not all, trade using the brokerage firm Robinhood. In driving the price up, the hedge funds began bleeding money, since their bet was that the stock would drop.

That's all true.

During this past week, the stock shot up in a rare form. As it did, one hedge fund had to be loaned money by two other hedge funds to avoid being destroyed. Then Robinhood banned buying Gamestop, while allowing selling of the stock. Again, they didn't halt trading in the stock. They prevented people from buying it while allowing selling. (Is that legal? I have no idea, but it seems like that ought not to be the case.) This naturally resulted in the stock priced declining - although not enough to prevent losses to short-sellers.

That's all clearly true. But other aspects of this drama get dicey, a lot less clear. Let's take the belief that somehow the brokerage firm Robinhood "represents" the small investor, for their benefit. (The name was chosen to promote this idea.) We don't have time to detail how this belief came about, and what this brokerage firm does to attract small investors. Until recently, I accepted the Robinhood story because I never really paid much attention to all the publicity they've garnered from the financial media. Now, however, it seems this is more myth than reality.

It was reported that the firm has a large hedge fund investor and that their revenue is driven more by hedge fund traders rather than those "little guy" investors. So much for the "Robinhood" (take from the rich, give to the poor) thing.

But wait there's another point that's got me scratching my head. Robinhood's CEO reportedly claimed that the decision to forbid buying Gamestop while allowing its selling had nothing to do with protecting the interests of hedge funds. Rather, it had to do with a liquidity crunch at the firm Robinhood uses to "clear" its trades. The clearing firm forced his hand. 

As for the accuracy or veracity of these two points, I'm not sure. What went on in the markets can be verified because the markets in question are public and you can observe what's going on, at least to the extent necessary to know what Robinhood did re Gamestop's stock trading. But who their investors and customer are, and whether the clearing firm insisted on the buy restrictions, that needs verification I can't provide.

(I'm careful here because I do try not to respond in knee-jerk fashion to what I read and hear, unless I have some way to verify accuracy either by direct knowledge of facts, or, when appropriate, the use of logic.)

Whatever the truth here, we're coming up on a new week of trading. We might want to keep one eye on how things unfold:

- Is there a problem with Robinhood's clearing firm?

- How about other clearing firms?

- Is Robinhood in dire financial straits? (Some have made this claim.)

- Will any of this effect the broad markets, causing some sort or more general crisis?

My own take - as of today, Sunday, is I've no special reason to think we'll have a general crisis. But I don't know enough of the facts to be certain either way. So vigilant I shall be.

One final thing we do know: This sort of wild action typically crops up when a Bubble is getting set to burst. It doesn't mean a quick burst (crash) or one that will take place in days or weeks. But it likely means something wicked will soon come our way.

In the meantime, enjoy your Sunday. Even better, keep holy the Lord's Day, as God commands us to do.