WallStreetBets & Robinhood: The Problem with Kids These Days

The most glaring outcome of the GameStop/Robinhood/WallStreetBets/Hedge Funds brouhaha is the proof in stark relief of the utterly non-existent adherence to SEC regulations by brokerages, clearinghouses, hedge funds, and regulators as it pertains to naked short selling.

With the short interest in shares of GameStop Corp. (NYSE:GME) reported at 136 percent of the tradable float at the height of the action on Wednesday, that fact alone is worthy of a wholesale SEC and DOJ raid on the records offices of these illustrious market participants. That implies that 25% of the short interest was in violation of securities laws and was visible in plain sight, yet regulators do nothing to stop it. Naked short selling of shares is not in and of itself illegal. 

An investor who wants to short a stock must first borrow it from a firm whose clients hold the stock in a long position. A brokerage firm can borrow it from a broker-dealer duly registered as such where the shares are held in trust and reported by the Depository Trust Corporation (DTC) record.

But brokerage firms whose clients hold shares routinely lend out their entire inventory of any given stock several times over. Because it generates borrowing fees. And whereas there are specific conditions in “Regulation SHO” that constitute permissible naked short positions, 136% of a stock’s float is glaring evidence of abuse and/or non-compliance of those rules.

Regulation SHO: The SEC’s Rules that Permit Naked Short Selling

You can see just how corrupt and complicit regulators are in protecting the interests of billion-dollar hedge funds (Incoming Treasury Secretary Janet Yellen was paid over $800,000 in speaking fees by Stephen Cohen – among the most wealthy and notorious of unprosecuted insider traders) over the interests of the investing public.

The collective tsunami of the WallStreetBets crowd and their subsequent $70 billion+ drubbing of the hedge fund set is likely the first – and last – shot across the bows of The Establishment, as brokerages and clearing houses close ranks and brazenly rob the upstarts of their power by limiting trading in the equities they’ve chosen to jack up.

You can expect to see a wave of reforms and rules that will be described as “necessary to preserve orderly markets and integrity”, and those rules will limit the future potential effect of the mob of WallStreetBets traders.

With the puffed-up pigeon posturing comments of the young turks jabbing their little fingers into the eyes of the monster and boasting shamelessly of their new stature, they are about to get schooled in the most glaring manner imaginable.

What they fail to comprehend, and indeed, underestimate the extent of, is the simple reality that the SEC and the CFTC and congress and the senate and the Treasury Department and the US Federal Reserve are all part of an old boys network who have no qualms about the daylight hypocrisy of shutting down the Robinhoods while aiding and abetting the hedge funds.

Also, many statements are being published on WallStreetBets that could be said to constitute investment advice under the Securities Acts, and so shortly we will see a parade of guilty parties who must be made an example from among the members of WallStreetBets.

These guys tell us they are buying and holding GME because they “just love the stock” while at the same time metaphorically calling for the demise of hedge funds and their owners with memes replete with mock violent deaths.

Prior to the battle lines being drawn, there was no reason to love Gamestop as an investment. The company’s sales have slid continuously year after year as gamers eschew physical stores to acquire video game consoles and software in favour of online shopping and downloads.

It’s a remarkable paradox that both Gamestop and AMC Entertainment Holdings Inc (NYSE:AMC) (another WallStreetBets darling) have used their unexpected stratospheric share prices to raise colossal money and thereby gain a new lease on life.

You watch: All the tantrums and class actions and chest-pounding in the weeks ahead will be met with a wall of indifference and bureaucracy that will consign the events last week to the footnotes of history.

They have caused the giant to stumble, but that is only going to make him angry.

Yes, he’s as corrupt and criminal as Al Capone, but the only survivable choice is to observe the outcomes, learn the lesson, and then get on with life.

There will be no revolution in the marketplace. You don’t walk into the Mob’s casino and change the rules of the tables. The desert is full of the shallow graves of those who have tried.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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