The rumors of the meme stocks’ deaths have been greatly exaggerated. Financial markets have not gotten this much attention from every corner of the media landscape since last year’s slaughterhouse on 11 Wall Street. GameStop’s meteoric ascent, hedge funds crying on CNBC, and a bunch of meme-makers on Reddit have invigorated the David v. Goliath battle and the classic Robin Hood fable. It was a story that had been quietly in the making since October but exploded over the last week. But will this fairy tale of mom-and-pop investors taking down the titans of finance continue, or have the villains won?
Following the massive rally in Wall Street Bets-endorsed stocks – GameStop, AMC, BlackBerry, and several others – the major trading platforms intervened and restricted trading. This resulted in a double-digit tank for many of these tickers. But after some fierce backlash worldwide, these outlets reopened trading, although there have been reports that some investors were only allowed to buy one share of specific stocks.
Did Wall Street win the war on Wall Street Bets? Hardly. Here are how these stocks finished the January 29 trading session:
- AMC: +53.65% to $4.63.
- Express: +27.66% to $6.00.
- GameStop: +67.87% $325.00.
- Koss Corporation: +52.53% to $64.00.
BlackBerry was the sole loser, falling nearly 4% to just above $14 a share. All eyes will be on the February 1 opening bell.
Protecting You from Yourself
Vlad Tenev, CEO of the online broker Robinhood, confirmed that the website restricted trade in about 13 volatile stocks to protect the business and its customers. Traders could only sell, not buy, these heavily shorted stocks.
Since several other entities did the same thing, there have been plenty of theories that this was a coordinated effort by Wall Street to protect hedge funds. But, according to Tenev, the “difficult decision” was made by the firm and not a hedge fund or market maker.
“We absolutely did not do this at the direction of any market maker or hedge fund … the reason we did it is because Robinhood as a brokerage firm, we have lots of financial requirements,” Tenev told CNBC. “In order to protect the firm and protect our customers, we had to limit buying in these stocks.”
The surge in these stocks has impacted Robinhood, resulting in the company tapping approximately $500 million of its credit lines with banks, including JPMorgan Chase and Goldman Sachs. The company also raised $1 billion overnight from investors to pad its balance sheet. Does this mean there is a liquidity crisis at Robinhood? Tenev confirmed that this was a proactive measure.
That said, there is an ethics debate here: Is this the role of these platforms? Should companies protect investors from themselves? Although plenty of people are making a killing off of these stocks, there are just as many folks losing cash. These are adults, and they know what they are getting themselves into by buying GameStop shares at the top. This paternalistic behavior is not what investors signed up for when they downloaded the mobile app.
Elizabeth Warren Demands a Cop on the Beat
Politicians on both sides of the aisle have come to the defense of the forum-turned-decentralized hedge fund, slamming Wall Street’s reaction to the armchair traders who made these billionaires look like fools. But one senator and former presidential candidate seems to be taking the side of regulations.
Senator Elizabeth Warren (D-MA) wrote a letter to acting Securities and Exchange Commission (SEC) Chair Allison Herren Lee, revealing how “deeply concerned” she is about these “casino-like swings in the value” of these memeified stocks. Sen. Warren believes the latest chaos could impact public confidence in the market. The member of the Senate Banking Committee penned:
“The manipulation of share prices may exacerbate inequality and the impacts of the ongoing pandemic-related economic collapse. While investors work to outmaneuver each other in search of short-term profits, working families continue to suffer, underscoring the growing disconnect between the stock market and the real economy.”
The SEC will have until February 5 to address her letter. The federal regulatory body recently released a statement confirming that it is “closely monitoring the extreme price volatility of certain stocks.” Senators and representatives have promised to hold hearings on the matter.
A Silver Squeeze?
Is silver the next bullish target for the Reddit bros? Ever since a post on WSB, titled: THE BIGGEST SHORT SQUEEZE IN THE WORLD $SLV Silver 25$ to 1000$, went viral, the white metal has garnered fresh attention. Is it to the moon for silver prices, or is it all hype from anonymous posters?
For one thing, March silver futures surged $1.123, or 4.33%, to $27.045 on January 29, adding to its weekly gain of 6%. Many silver-related stocks and ETFs enjoyed massive gains, including the three primary targets of the Reddit forum:
- iShares Silver Trust (SLV): +1.09% to $24.99.
- First Majestic Silver Corp. (AG): +7.47% to $18.12.
- Sprott Physical Silver Trust (PSLV): +3.46% to $9.58.
A quick look at the trading volumes suggests that the post did its job.
But what about the technicals? The data suggest that silver prices should be trading higher, considering that demand has exceeded supply by about 4%, or 100 million ounces, over the last year. Plus, investors have inflation fears from the trillions of fiscal and monetary stimulus since the market meltdown in March 2020. Not to mention that silver is also an industrial metal with a diverse array of functions.
Critics will aver that financial institutions are suppressing metal prices, alluding to the cases and investigations against some of the world’s biggest banks. Spoofing, anyone? This is a practice of submitting buy or sell orders with no intention to execute the transaction. Spoofing aims to move market prices that benefit the investor’s pre-existing positions in the market. The tactic was banned as a part of the Dodd-Frank financial reform law.
Whatever the case, silver markets could be as fascinating as the GameStop saga in February.
Short Squeeze Mania Running Wild?
While it has been a fun ride to watch billionaires lose their shirts and weeping on camera about how this is an attack on the affluent, there could be consequences in the broader financial markets. And this may have been evident during the January 29 session when the leading benchmark indexes recorded massive losses. Investors might become hesitant to become bulls due to the volatility and speculative nature. Hedge funds could start shuffling their portfolios to cover their shorts, sending other stocks spiraling downward. If enough people lose money from GameStop trading, the government could intervene and impose damaging regulations. Perhaps this a bridge to cross when the market gets there. Until then, to the moon?
Read more from Andrew Moran.