Tag Archives: Robinhood

Hedge Fund Torched By AMC

On glamorous Madison Avenue in midtown Manhattan, as most people were heading home for the day, the top executives of a powerful hedge fund filed into a conference room. The fate of this multibillion dollar institution could be at stake.

This is Mudrick Capital Mangement, L.P. With offices in New York City and London, it manages approximately $3.8 billion. Or did, until a struggling theater operator’s stock started to climb, seemingly out of nowhere:

Inside Mudrick, executives were growing apprehensive as the AMC rally gained steam. The firm’s risk committee met on the evening of June 1 after the stock closed at $32 and decided to exit all debt and derivative positions the following day.

It was a day too late.

AMC’s stock price blew past $40 in a matter of hours June 2, hitting an intraday high of $72.62. Call option prices soared amid a frenzy of trading that Mudrick Capital contributed to and, by the end of the week, the winning trade had turned into a bust, costing the fund hundreds of millions of dollars in losses.

Mudrick lost about 10% of its value, or around $400 million, in just a few days. These losses came not from short sales but from selling call options, or a right to purchase the stock at a specific price. The options Mudrick sold gave the buyer the right to buy AMC at $40 a share. At the time, it seemed inconceivable the stock could ever go that high.

Inconceivable except to retail traders on Reddit, among other forums. They pushed the stock to all-time highs, badly bruising Mudrick.

Mudrick sold these options to hedge the risk they took in lending AMC money. I think it would’ve been a lot smarter to buy credit default swaps, which are like insurance. If the company in question goes bankrupt, the seller of the swap has to pay you. But, buying the swaps costs money up front, whereas selling the calls produced income right away. Mudrick seems to prefer the quick buck to long-term risk management.

I find the sight of powerful hedge funds being torched by average Joes quite amusing. If other funds don’t want to join them, I’d suggest treating all meme stocks with extreme caution.

More on AMC:

Photo: “Police Stationed outside AMC Theater showing Joker film 4573” by Brechtbug is licensed under CC BY-NC-ND 2.0

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The New Black Wall Street: Young Black Investors are Piling Into Stocks

A new survey finds that young black Americans now invest in stocks at the same rate as whites:

In a year like no other, however, there is also evidence of growing engagement in the stock market by younger Black Americans, with 63 percent under the age of 40 now participating in the stock market, equal to their white counterparts. The closing of this gap among younger investors is being driven by new investors: three times as many Black investors as white investors (15% vs. 5%) report having invested in the market for the first time in 2020.

Stocks are a major vehicle for wealth creation, and black Americans have long been less involved in the stock market than whites:

A majority (61%) of non-Hispanic white households own some stock, compared with 31% of non-Hispanic black and 28% of Hispanic households. Median investments vary here as well: Among whites the median is about $51,000. By comparison, the median for black families is $12,000, and for Hispanic families it is just under $11,000.

Behind this growth is a huge increase in the use of stock trading apps like Robinhood and Webull. Downloads in the last year are up 157% and 371% respectively. For all their faults in enabling speculation, these apps also seem to be opening up opportunity. The minimum investment in Vanguard’s S&P 500 index fund is $3,000, for example. This is far out of reach for many young people, particularly minorities. Meanwhile, Robinhood allows users to buy fractions of a share of stock for as little as $1. Webull has no minimum at all.

I’m happy to see more people get an opportunity to be a part of this amazing capitalist wealth creation system of ours. More people benefiting from our system helps preserve it. And more people getting rich makes me smile.

Have a great weekend everyone!

Dig into these posts for more on markets:

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This Is How Vlad Tenev Built Robinhood

“You can break down Robinhood into a series of small steps, the first one being start Robinhood, and every subsequent one being some variant of don’t stop and keep going, right, and you end up where we are today. “

In his mid-20’s, Vladimir Tenev lived in New York City. His apartment was tiny and spare. All his time went into his high frequency trading startup. Then mom came to visit.

When she saw his shabby surroundings, she began to cry. She told him she had a friend who worked at Macy’s. Maybe, she could get him a job there.

It must’ve taken great fortitude for Tenev to push ahead with his own business, despite few signs of success and the anguish it caused his family. But push ahead he did. Today, the company he built, Robinhood, has over 13 million users and plans to IPO soon at a valuation of around $40 billion. Tenev’s net worth exceeds $1 billion.

Tenev came to the United States as a child from Bulgaria and attended the elite Thomas Jefferson High School for Science and Technology, which US News ranks the best public high school in the entire country. What would’ve become of Tenev if he had stayed in Bulgaria? He might have had a very normal life. But giving this smart kid a superb education and access to a great entrepreneurial ecosystem turned him into a billionaire executive.

Tenev didn’t stop learning when he finished school. He taught himself to write iOS apps by watching free Stanford courses online while commuting on the Caltrain. It really shows you what a person can accomplish learning on one’s own for nothing now that knowledge is much more freely available.

Robinhood faced numerous obstacles along the way, but Tenev and co-founder Baiju Bhatt blasted through them. It took two full years of constant work to build their product. Venture capitalists were highly skeptical of their business. How could they make money without charging commissions? How could they beat giant competitors like Etrade and Charles Schwab? And could a couple of math guys make a beautiful consumer product?

But they kept pitching, and ultimately raised $250,000 from Google Ventures. Tenev couldn’t even get a job interview at Google 4 years prior. What if he had let that discourage him from ever approaching Google for an investment?

Just days before a meeting to approve a critical license Robinhood needed to operate, they were still $500,000 short of the required capital. Only the birth of an executive’s baby saved them by providing an excuse to postpone. By the new date, Tenev had raised the money.

A key lesson for startups: Robinhood didn’t worry about monetization until it achieved a large user base. It was confident that, like Instagram, winning enough users would give them all the opportunities for revenue they’d need. And they couldn’t put the cart before the horse.

What sticks out to me most about the Robinhood story is Tenev’s perseverance. At first, his business looked laughable. Later, it gained a bit of traction but faced seemingly insurmountable obstacles in fundraising.

But he just keep pushing, day after day. Now, 11 years after he started his first company, he sits at the helm of one of the hottest startups in the world.

For more on startups, check out these posts:

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Photo: “File:TechCrunch Disrupt NY 2016 – Day 2 (26902081436) (2).jpg” by TechCrunch is licensed under CC BY 2.0

Is Robinhood Screwing You On Your Trades?

An interesting detail surfaced in this week’s Congressional hearing on GameStop shares and Robinhood, the platform where they’re often frenetically traded:

In his statement, Themis Trading Partner Sal Arnuk went right for that last issue, calling attention to the fact that payment for order flow (PFOF) causes a disconnect between a broker and his customer — especially in the case of Robinhood.

“They recently changed their PFOF method from one giving them a set payment per share to one giving them a percentage of the spread instead,” he said. “Think about this: A Robinhood trader wants the spread in the stocks he/she is trading to be as narrow as possible. The HFT [high frequency trading] market maker buying those orders benefit most when that spread is as wide as possible. And now Robinhood benefits most when the spread is as wide as possible as well! This is an amazing misalignment of interests.”

Arnuk took a dim view of Robinhood’s motivations:

“This tells you Robinhood knows full well the value of its herded and gamified product base; they knew to educate their users just enough to incentivize trading and maximize their own revenue as a result of it.”

Let’s back up a bit. A spread is the difference between the price you can buy a share at and the price you can sell it at. Let’s say you can buy GameStop at $190 a share and sell it at $189 a share. The company that executes the trade gets that dollar for their trouble.

You want that spread as low as possible so you can make more money. If Robinhood is paid a percentage of the spread, their incentive is to get that spread as high as possible. Nice for them, not so nice for you.

I don’t think Robinhood has publicized this change, and it seems sneaky and not in the best interest of investors. I’d like to see them come out and explain why this is good for investors. But I’m not sure they can do that.

For more on GameStop, check out these posts:

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Photo: Robinhood Co-CEO Vladimir Tenev “TechCrunch Disrupt NY 2016 – Day 2” by TechCrunch is licensed under CC BY 2.0

New Stimulus Checks Could Set GameStop Off Like Never Before

With the House about to approve another $1.9 trillion in stimulus, the final hurdle before the legislation is signed by President Biden, I found myself wondering what this means for shares in GameStop and other meme stocks.

Those stocks took off big time in January, as personal income increased 10% month over month. Most Americans received a $600 stimulus check in December of 2020. A couple weeks later, shares in GameStop, AMC and others took off.

That stimulus is dwarfed by the new one, which will mean $1,400 checks for most Americans along with expanded unemployment, child tax credits, and other benefits. If a $600 check set meme stocks on a tear, what will $1,400 do?

Indeed, the expectation of stimulus payments may already be boosting GameStop shares, and may continue to do so in the future:

Market strategists have said tens of billions of dollars of U.S. President Joe Biden’s coronavirus relief package could indirectly find their way into shares, possibly boosting “meme stocks” that are heavily promoted by retail traders in online social media forums such as Reddit’s popular WallStreetBets.

My view of this company is that it’s lacking in fundamental value and should be avoided. However, it definitely wouldn’t surprise me if the stimulus gave the shares a short-term pop. The question is, how long will it last? You don’t want to be left without a chair when the music stops.

For more on GameStop and other meme stocks, check out these posts:

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Photo: “Money!” by ToGa Wanderings is licensed under CC BY 2.0

GameStop May Go Broke Before It Can Reinvent Itself

GameStop shares are surging again today, even as the company is losing hundreds of millions of dollars a year.

The stock is reacting to Chewy founder Ryan Cohen beginning a push to transform GameStop into an e-commerce business. But it still has 5,000 stores that were losing a fortune even before COVID. And they won’t be easy to get rid of.

Commercial leases typically last for several years, unlike residential ones. But what exact terms is GameStop bound by? This morning, I made it my mission to find out.

The most recent info I could find was from their 2018 annual report:

Store leases typically provide for a lease term of one to five years, plus renewal options

That means this store-centric business model that is losing a fortune is locked in for years. Whatever Mr. Cohen does, it won’t take effect for quite some time, and the company could be out of cash by the time it happens.

GameStop lost $300 million in the first 9 months of 2020 and had only $600 million in cash left. They could be out of money 18 months hence at that rate, or about 1 year from now. That’s long before these money-losing leases expire and free them to pursue a better business model.

Their best course of action is to take advantage of their high-flying stock and issue a lot more shares. That war chest should be used to wind down all physical stores and completely focus on their e-commerce business, which is actually growing very quickly.

Such a plan would dilute existing shareholders significantly though, so for current GameStop shareholders, it’s hard to see a happy ending to this story.

For more on GameStop, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

GameStop Is Surging, But Are They Willing To Make Hard Changes?

GameStop Corp. shares are surging today and are currently up over 30%:

Chewy co-founder and GameStop board member Ryan Cohen is taking a bigger role, which is driving today’s gains:

GameStop Corp. shares extended their rally after the company tapped Chewy.com founder Ryan Cohen to guide its transition to an e-commerce business.

Cohen, a director at the video-game retailer, will chair a new board committee tasked with the transformation, the company said in a statement Monday, confirming an earlier report by Bloomberg News.

But GameStop is still losing hundreds of millions of dollars a year, continuing a trend that predates COVID. It has 5,000 stores that are dinosaurs in an e-commerce driven world. Formation of a committee is nice and all, but this doesn’t mean any real change right now. And certainly not enough to make a money losing, moribund company worth 30% more than it was yesterday.

Even if they decided to close all their stores tomorrow, they’d still be on the hook for years’ worth of rent. A typical commercial lease lasts 3-5 years, locking in this cash-incinerating business model for quite some time.

For more on GameStop, check out these posts:

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Photo: “GameStop” by JeepersMedia is licensed under CC BY 2.0

Payment for Order Flow Really Does Help Investors, Research Indicates

Citadel CEO Ken Griffin claims that even though they pay Robinhood to execute their trades, investors are getting a better deal than they would in public stock markets:

Citadel CEO Ken Griffin said Thursday that the system has been “very important to the democratization of finance. It has allowed the American retail investor to have the lowest execution cost they’ve ever had.”

Sounds hard to believe, right? I’m naturally skeptical they’re giving those small investors a worse price and keeping the difference. However, one of the few recent studies to analyze payment for order flow (PFOF) finds the opposite:

Focusing solely on execution prices, we find that the cost of liquidity on exchanges utilizing the PFOF model is 80 bps higher than on exchanges utilizing maker-taker pricing. Nevertheless, when taker fees are incorporated into the analysis, the cost of liquidity on the PFOF exchanges is 74 bps lower.

More here.

In other words, the prices the PFOF model gave investors were a bit worse, but when you consider the commissions they would’ve paid otherwise, they came out ahead. This study was limited to options, not stocks, but many Robinhood users trade options as well.

On the other hand, Citadel has been fined before for offering worse prices than public markets. Until we see a comprehensive data set on Citadel-completed trades versus comparable ones on public markets, this will remain a difficult question to answer. I know of no such data currently available to the public.

If Robinhood or Citadel came out with something like that, I think it would go a long way toward allaying the concerns of investors and regulators.

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Photo: Citadel CEO Ken Griffin. “Ken Griffin with computers” by insider_monkey is licensed under CC BY-ND 2.0

GameStop Tanked, So Wallstreetbets Is Moving to Pot Stocks. They’re Headed for Trouble.

Vice President Kamala Harris introduced a bill to decriminalize marijuana as a senator.

GameStop was the darling of the merry band of traders on Reddit’s Wallstreetbets. Then this happened:

Ouch. Now the community is looking for its next play. I nosed around the message board a little today to see what that might be.

Wallstreetbets users are increasingly enthusiastic about marijuana stocks, in particular two companies called Sundial Growers, Inc and Tilray, Inc. Though both took a hit today, they are up significantly in the last month as the online buzz builds.

Reddit seems to have two main theories on why these stocks will continue to rise: a short squeeze and/or decriminalization of marijuana at the federal level in the United States. (If you’re not familiar with short squeezes, check out this post for a quick explanation.)

But their position here looks much weaker than with their last love, GameStop.

GameStop was much riper for a short squeeze than Sundial or Tilray. As of Dec 31, 2020, 71 million GameStop shares had been sold short. This is more than all the shares in GameStop that exist (70 million)! This can happen because the same share can be borrowed and sold short many times.

Meanwhile, Sundial and Tilray are nowhere near as heavily shorted. Sundial has 5% of shares sold short, and Tilray is at 19%. Compared to over 100% for GameStop, the likelihood of a short squeeze looks much, much lower.

Maybe marijuana gets decriminalized in the US. But maybe not. In any case, the Reddit traders aren’t likely to have any special information on that (nor do I). Everyone buying and selling Tilray and Sundial know about that possibility already. So it’s hard for the Reddit traders to get an edge.

Even if marijuana is legalized in the US tomorrow, Tilray and Sundial may not make a dime on it. Why? Both companies are based in Canada! To say that marijuana may be legal in America is one thing…to say we’re going to let it come across the border rather than favor our own domestic producers is quite another. Remember that we’re in a jobs crisis, so the good move for politicians is to (at least appear) to support jobs in the US.

So these are two possible rational cases to buy into these money losing companies. But what I notice over and over on Wallstreetbets is the lack of any justification at all, with people simply repeating the names of stocks over and over. Maybe Wallstreetbets doesn’t need much of a theory…they just need to get their fellow traders involved. (Or maybe it’s increasingly populated by bots.)

Thing is though, without any real rational basis for holding the stock, that same group of traders will have to get out eventually. What’s supporting the stock then?

Wallstreetbets would be better served buying broad index funds and waiting for corporate America’s money machine to work its predictable magic. But that’s just not as fun, is it?

I find this roving band of Reddit traders a very interesting phenomenon in markets. But I won’t be joining them any time soon.

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Photo: “Kamala Harris” by Gage Skidmore is licensed under CC BY-SA 2.0

DraftKings and Robinhood Are Both Growing Like Crazy. Here’s Why.

As Tom Brady bagged his seventh Super Bowl, I got to thinking about an interesting trend I was seeing. I was hearing more ads for DraftKings every day. At the same time, Robinhood is exploding in popularity and its army of small traders is moving markets. Were these two related?

DraftKings, an online sports betting app, is exploding in popularity. It’s revenue doubled in the last year, and its stock is on a tear:

The stock-trading app Robinhood is also growing at an incredible rate. It doubled its payment for order flow revenue, its main revenue source, in just a few months in 2020 as the lockdowns hit.

Robinhood gamifies investing in a way that can mimic online gambling, and much of the trading on the platform, including in stocks like Gamestop and AMC, seems to be speculative.

I think both trends come from a big increase in personal income due to stimulus and extra unemployment payments. Put that extra money into the hands of someone who is bored and has fewer other ways to spend, and you see big increases in gambling…err, “investing”.

With another large stimulus planned, I expect to see more of this in the future. I also wonder where else this extra cash will show up.

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Photo: “File:Tom Brady 2017.JPG” by Jeffrey Beall is licensed under CC BY 4.0