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Taking down Wall Street

Good Monday afternoon. A lot of requests to cover GameStop and the Robinhood lawsuit this week, so we turned this issue into a 4-phase explanation of how Redditors took on Wall Street:
  • GameStop’s flailing business
  • A man named ‘Roaring Kitty’
  • Robinhood steps in
  • r/ClassActionSuit
We’ll be back with our normal programming next week.
P.S. let us know if you like this and want more long-form content!

GameStop Is Doomed
The story begins with GameStop, a games retailer founded one year before Blockbuster (RIP) in 1984. GameStop has been steadily pushed to the edge of irrelevance in recent years, with people realizing buying video games online makes for an infinitely better experience than going to a mind-numbingly dull strip mall for a physical copy.
When a company starts sliding into oblivion, Wall Street vultures smell blood and start to circle. So, over the last few years, hedge funds like Melvin Capital have been betting big on GameStop’s dwindling business using a strategy called ‘short-selling’.
Short-selling: a practice where you borrow shares for a fee, sell them for a high price, buy them back at a lower price, then return the shares. You get to keep the profit, meaning the lower the price of the stock is, the more money you can rake in.
Here’s the catch. You lose money if the stock price rises, and your losses are potentially endless if the stock price keeps rising.
Experienced hedge funds, though, were pretty confident GameStop would (true to its name) stop being a viable business. In the sleek world of e-commerce, there was no way a clumsy brick-and-mortar chain could mount a comeback. Right?
‘Roaring Kitty’, Well, Roars
In mid-2019, a man known as ‘DeepF*ck*ngValue’ on Reddit - or ‘Roaring Kitty’ on YouTube - posted a picture on r/WallStreetBets of his $53k investment in GameStop.
Reddit users largely ignored and/or made fun of him for putting his faith in Blockbuster’s dying cousin, but Roaring Kitty – real name Keith Gill, a 34-year-old ex-financial educator from Massachusetts - continued to post consistently.
He uploaded daily livestreams onto YouTube, spending upwards of four hours a day tracking stocks from the basement of his home in a baseball cap and T-shirt, more often than not with a cigar dangling from his fingertips. Gill slowly cultivated a mass following, fueled mainly by perplexed admiration he was still holding onto his GameStop shares.
In videos posted throughout Sep. 2020, and in parallel posts on Reddit, Gill bets GameStop stock will go up for a multitude of reasons. Among them:
  • Wall Street was undermining how much GameStop would profit from the upcoming cycle of new console releases.
  • GameStop loyalty programs have 55 million users.
  • Game consoles currently aren’t – and won’t immediately be – fully digital.
  • Ryan Cohen, billionaire co-founder of Chewy, bought a 10% stake in GameStop in Aug. 2020.
Then, Jan. 2021 happened. Ryan Cohen was appointed a director of GameStop, pushing the stock up 13%. Small-time investors flooded Reddit to (a) crown Cohen as the saviour of GameStop; (b) admit Roaring Kitty was right to bet against Wall Street.
This activity quickly escalated, with individuals – who trade stock on the Robinhood app – egging each other on to buy GameStop shares from the comfort of their couches.
This was partly for profit, partly to mess with the hedge funds who hoped to cash out from a GameStop downfall, partly because Elon Musk fueled the frenzy by tweeting out the link to r/WallStreetBets to his 44.5 million followers.
Regardless of motive, the result was clear. GameStop stocks were up 2500% at one point this week, throwing hedge funds for a loop. Melvin Capital, who was once so confident in short selling GameStop, lost over $3bn on its shorts this month and had to be bailed out.
And it’s not just GameStop anymore. The mania swirling around r/WallStreetBets has pumped up other beaten-down stocks like Blackberry, Nokia, Tootsie Roll and AMC, the flailing cinema chain.
  • This headline sums it up nicely: “Nokia not aware of any reason for share surge.”
Robinhood Pulls the Plug
The GameStop saga wouldn’t have been possible without the democratization of finance through trading apps like Robinhood. The app lets you buy and sell stocks for free, creating an army of amateur investors who can influence the stock market through the screen of their iPhones.
Although Robinhood doesn’t make money directly from you, it does make money off of you:
  • It monitors your orders and sells that data to firms so they can get in on trades milliseconds before you.
This works well when markets are stable, but is a pretty risky business model when Wall Street is a puppet whose strings are tugged by someone called Roaring Kitty. According to billionaire investor Chamath, this week’s market volatility pushed Robinhood to the brink of insolvency.
This was halfheartedly confirmed by Robinhood CEO Vlad Tenev, who explained the volatility coupled with mass trading meant Robinhood needed to deposit 10x as much money as it normally does for collateral. Money Robinhood didn’t exactly have.
So, on Jan. 28, it restricted users from buying ‘beaten up’ stocks like GameStop and Blackberry – users were only allowed to sell them. Meaning the hedge funds who were betting against GameStop still got to trade, but the Reddit warriors battling them were ejected from the game entirely.
The online world erupted with anger, with people – including the Avenger Squad of allies: AOC, Mark Cuban and Elon Musk – accusing Robinhood of freezing out the small guy and ignoring its mission statement to “democratize finance for all.”
The Grand Finale
Image: Jack Butcher
Image: Jack Butcher
Wherever there’s public outrage, a lawsuit is never far behind. Although Robinhood has since relaxed restrictions on tradingthousands of individual investors are now joining a class-action suit against Robinhood.
The suit alleges the app “deprived customers of the ability to use their service” so it could “manipulate the market for the benefit” of the fat cats on Wall Street. 
This is a David and Goliath story at its core, with small-scale Reddit day traders in one corner and cash-heavy Wall Street suits in the other.
But this lawsuit won’t help Redditors ‘stick it to the man.’
For one, Robinhood’s lawyers aren’t stupid. They drafted the T&C’s to make clear the company isn’t obligated to let you do whatever you want. It can block, cancel, restrict transactions – even delete customer accounts – on a whim with zero repercussions.
Also, every person that has signed up to use Robinhood has agreed, whether they know it or not, to an arbitration clause that says: “all parties are giving up the right to sue each other in court.”
So, probably not a successful case.
The point of the case, though, isn’t to win. It’s to publicize an uneven playing field.
For the last year, investors have been inflating companies like Tesla, Shopify and Snap to prices that don’t make sense when you look at the actual earnings prospects of these companies, per the New Yorker. When professionals play – and win - this game, it’s okay. But when individuals band together and start winning, institutions throw their toys out of the pram.
We’re living in a society where social media has decentralized markets, politics, and everything in between. Individuals who swarm together now wield more power than ever before, and lawmakers are at a loss at how, or if, they should regulate this.
The NYT said it best: No one knows how this ends.”
  • WeWork might be getting SPAC’d.
  • Farmers win a Dutch court case over Shell Nigeria oil spills.
  • Elon Musk’s SpaceX violated its launch license in explosive Starship test, triggering an FAA probe.
  • Rudy Guiliani is sued by Dominion Voting Systems over false election claims.
  • AstraZeneca may have to renegotiate vaccine contracts to avoid breaches caused by supply chain chaos.
  • Uber’s acquisition of UK tech company Autocab is being investigated.
  • Kanye West is being sued for $30 million over allegations he failed to pay 1000 performers at his Sunday Service shows.
  • Dinah Rose, renowned human rights lawyer from Oxford, is under fire for taking a controversial case in the Cayman Islands.
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