Editor’s note: Post updated with recap of the Twitch stream below. Reddit co-founder Alexis Ohanian replaced Chamath Palihapitiya.
Rep. Alexandria Ocasio-Cortez is heading back to Amazon’s Twitch for a third time. Alongside guests Chamath Palihapitiya, a well-known venture capitalist, and Twitch streamer TheStockGuy, Ocasio-Cortez on Thursday intends to discuss the ongoing developments surrounding this week’s GameStop short-stock scandal.
Her past two Twitch broadcasts have involved long conversations on a variety of topics with an array of guests from the worlds of politics and game streaming, in between rounds of InnerSloth’s murder-mystery game Among Us.
I’ll be hopping on Twitch at 8:30pm tonight to discuss today’s developments with GameStop and retail trading. ???? Might have a guest or two join – we’ll see.
See you there!
— Alexandria Ocasio-Cortez (@AOC) January 28, 2021
And were live! https://t.co/u9zNReAauY
— Alexandria Ocasio-Cortez (@AOC) January 29, 2021
This week has largely been defined by the news surrounding Wall Street Bets (WSB), a community on Reddit (a “subreddit”) that specializes in discussing the stock market. Recently, a member of WSB noticed that the U.S. video game chain GameStop, despite a relative lack of debt, had been getting short-sold for months by hedge funds. Wall Street had been betting on GameStop’s eventual bankruptcy–which seemed like a possibility as recently as late last year, although a strategic partnership with Microsoft might turn that around–and had taken a lot of effort to make sure it would happen, to the point where the hedge funds had borrowed more shares of GameStop stock than were actually available on the market.
The members of WSB took advantage of this, and united to buy up all the shares of GameStop (GME) that they could find, which drove the stock’s price up dramatically. Not only did this make a few lucky Reddit users a lot of cash (and gave everyone else who remembers the Great Recession a nice dose of schadenfreude), but due to how short-selling works, it seems to have driven at least one hedge fund to the verge of bankruptcy. By short-selling GameStop so aggressively, the funds effectively borrowed a lot of money that they can’t pay back. (Reuters reports that some analysts have called the losses to Wall Street hedge funds at $70 billion as of Thursday morning.)
The market was quick to react, with multiple high-profile bankers and investors arguing that something, somewhere, had been done illegally. The /r/WallStreetBets subreddit saw its Discord chat server suspended, and many of its regulars have moved their chat programs to private servers on Telegram. WSB, for its part, has moved on to try to replicate the feat with other short-sold stocks for struggling companies, such as Blackberry, Nokia, and the AMC chain of American movie theaters.
What’s gotten Ocasio-Cortez involved is that today, users of the stock-trading app RobinHood woke up to discover that retail investors were unable to purchase stock, while hedge funds suffered no such limitation. Notably, Robinhood seems to have betrayed its own mission statement in the process, which resulted in a firestorm of attention on social media.
This is unacceptable.
We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.
As a member of the Financial Services Cmte, I’d support a hearing if necessary. https://t.co/4Qyrolgzyt
— Alexandria Ocasio-Cortez (@AOC) January 28, 2021
Multiple members of Congress have united behind bipartisan calls for an investigation into what appears to be blatant, open market manipulation, with hedge funds and other multi-billion-dollar players trying to take their ball and go home before Reddit figures out how to troll them into nonexistence.
Update: While the beginning of the stream was plagued with technical issues, including audio and camera problems, Ocasio-Cortez rallied to carry on a long, far-ranging conversation with three guests, without the context of a video game. Her stream initially peaked at just over 368,000 viewers, before an early crash and a subsequent broadcast break to resolve her computer problems, but stayed at between 200,000 and 240,000 viewers for much of the rest of the night.
While venture capitalist and ex-Facebook executive Chamath Palihapitiya was initially announced as a guest for Ocasio-Cortez’s stream, he wasn’t present in the actual broadcast. Instead, he was replaced with Reddit co-founder Alexis Ohanian. Ohanian joined TheStockGuy, a Florida-based full-time Twitch streamer who broadcasts every weekday about trading and finance, for a panel discussion with Ocasio-Cortez on the social implications behind the WallStreetBets stock buys.
Beforehand, however, Ocasio-Cortez spent roughly half an hour one-on-one with Alexis Goldstein, former Wall Street business analyst and current senior policy analyst at the non-profit organization Americans for Financial Reform. Goldstein was there to explain the fine details behind the WallStreetBets controversy, including the links between the Robinhood app and its owner, a hedge fund called Citadel.
As noted above, the news on Thursday morning was primarily about how Robinhood had made some strange decisions in the morning’s trading, such as banning trades of specific stocks. While other traders had made similar moves, such as Interactive Brokers, they’d taken the comparatively restrained option of changing their margin requirements. Buying certain volatile stocks today required 100% cash margin, rather than being able to pick them up for borrowed money.
Goldstein noted here that Robinhood, which she refers to as “the Facebook of stock trading” for how it’s designed to keep your attention, is a free app. It makes its money by selling its order flow to market investors, primarily a hedge fund called Citadel. Citadel, in turn, is one of the two funds on Wall Street that bailed out the ailing Melvin Capital, which took the brunt of the losses from WallStreetBets’ buying up GameStop stock. (The other fund, Point72, is run by New York businessman and Mets majority owner Steve Cohen, whose prior hedge fund SAC Capitol Investors was shut down for insider trading in 2013.)
By law, Robinhood as a broker app is supposed to give its users what’s called “best execution,” where it’s required to act to find the most advantageous terms for its customers at all times. Goldstein also pointed out that just last month, in December of 2020, Robinhood had agreed to pay $65 million to settle charges from the SEC that it hadn’t satisfied the duty of best execution. That in turn raises the question of whether Citadel, as the primary purchaser of Robinhood’s order flow, was able to use its high-frequency trading algorithms to manipulate the market, when given a few seconds’ warning of batches of incoming small trades via Robinhood.
Goldstein was careful not to make any actual accusations here, but did draw a lot of lines. “I bring this all up to say, ‘Is Robinhood doing the best by its customers?'” she said to Ocasio-Cortez. “I think that’s an important question that regulators should be asking right now.”
It encourages us to ask the question of how we want to design our economy in America, Goldstein said. “Do we want to incentivize people to work on trading instead of climate change?” she asked. “Do we want our Ph.Ds to make more money for the wealthy? Some of our really wonderful brainpower is being spent on how to optimize trading algorithms. If we can cancel student debt, have a wealth tax, if we can regulate these powerful actors, we can reorganize the incentives in our society. That’s sort of the bigger picture.”
The conversation with TheStockGuy and Ohanian, conversely, was more focused on the potential social fallout from the WallStreetBets stock run. The thrust of the conversation was on how in some circles online, the hedge funds’ financial losses have been seen as a sort of vicarious revenge against the financial forces that were responsible for the Great Recession in 2008.
“All of us got screwed in the Recession,” Ocasio-Cortez said. “We never saw a single person who was responsible for 16 million or so foreclosures… we didn’t see anyone go to jail for that. We didn’t see virtually anybody held accountable in any serious way. It almost felt like this week, one of the reasons for this populist rally is that it felt like the first time that anybody was holding these folks accountable.”
As noted by TheStockGuy, the only person who went to prison in the wake of the Great Recession was Bernie Madoff, “because he stole from rich people.” He compared the actions by Wall Street in reaction to the run on GameStop stock to a rigged casino game. “You buy a stock, you’re taking a gamble. I understand that… Imagine if you had a twenty on the blackjack table and the dealer had a nineteen. You’re like ‘I win.’ They said, ‘No, no, wait a second.’ They pull out the deck of cards, shuffle through, find a two, put it down, and say ‘Actually, we have a twenty-one.’ At that point, you say, ‘I understood the risks I was taking, but now we’ve moved in an another direction.'”
The question raised by the panel then became whether this might be considered the start of an uprising of sorts, held by “a bunch of randos on the Internet,” where technology has democratized access to the point where a group of individuals can get together and have an impact on these massive, well-funded, immensely connected institutions.
Ohanian added that, as someone born in 1983, he’s grown up in a period of American history where every institution that previous generations were able to rely upon had crumbled, starting with the second Iraq War, then leading into the Great Recession. As a result, millennials have grown accustomed to questioning those institutions, which has resulted in an environment where millions of people feel disenfranchised, creating an environment that Ocasio-Cortez calls “kindling for volatility.”
Hedge funds and their practice of short-selling, according to Ohanian, is a “b——t way to make money”; Melvin and other affected traders were able to short more shares of GameStop stock than actually existed, and were eventually caught out on it by individual retail investors. “No one’s gonna wake up in a week and be like ‘Let’s go back to the way it was,'” Ohanian said. “The collective public won’t forget this.”
[Errata, 1/29/2021: Alexis Goldstein was a business analyst on Wall Street, never a trader. Thanks to Miss Goldstein for the correction.]
