“Not mad knowing that the small retail investors do, in fact, have more power than the institutional investors thought…” remarked Mark Post, Chief Growth Officer with empiriKalpartners, llc ©
On the morning of January 28th, the Robinhood mobile trading app temporarily blocked its customers from buying Game Stop (GME), AMC Entertainment, and 11 other companies. Consequently, the mobile trading app has been hit with at least 33 federal lawsuits across the country. The suits were filed in 10 states, including California, Florida, Illinois, and New York. Most of them seek class-action status and allege violations of securities laws of consumer protection status.
Robinhood attempted to block an unprecedented populist assault on hedge funds. Self-organized anti-Wall Street day traders organized and forced an artificial spike in the struggling “brick and mortar” video game store chain, GameStop. As a result, the stock price rose 1600% in January. The problem with this increase is that hedge funds were betting on GameStop and other lackluster stocks to go down.
According to Forbes.com, hedge fund Melvin Capital was one of GameStop’s largest short sellers. Coincidentally Melvin Capital received a $2 billion cash infusion from another hedge fund, Citadel, as it suffered massive losses when a populist movement led by Reddit traders helped drive up the stock price. Between January 16th and February 16th, the GameStop rose from about $37 to almost $400 and back to under $50.
The incestuous relationship between Citadel and Robinhood is interesting. Citadel, which billionaire Ken Griffin runs, has also come under scrutiny because Griffin also founded Citadel Securities, which operates separately from the hedge fund and buys Robinhood’s order flow.
Individual trading usually works to help institutional investors. Smaller traders telegraph the market for institutions and hedge funds to profit as they monitor market activity and typically take a counter position to smaller individual investors. However, in January of 2021, the smaller investor struck back. Consequently, Melvin Capital suffered massive losses, requiring a $2 billion cash infusion bailout.
The blocking of trades to prevent further losses for hedge funds has led to bipartisan criticism from congress. According to Forbes.com. One member stated, “Private funds engaging in predatory short selling to the detriment of other investors must be stopped.”
The GameStop saga has forced individual investors to find alternative platforms and perform due diligence before migrating their trading activities. One suggestion would be to migrate to trading apps with more stability in the marketplace, independent from clearing firms linked to hedge funds.
If you’ve stuck with me to this point, you’re probably a seasoned investor. On the other hand, you might be the type of person that’s willing to sit through a horrible movie, hoping that it somehow turns the corner and has a strong ending. Here’s the good news. You don’t have to sit through the movie, and you don’t even have to understand all or, for that matter, any of the investment jargon I’ve just dumped on you.
There are full-service investment advisors who are willing to accept accounts for both large and small investors. Savvy, well-informed investment advisors help their clients navigate volatile situations and markets to minimize losses and maximize gains. For instance, at empiriKal partners, llc ©, we advised our clients to ignore the hype and stay clear of the fray of the Game Stop Saga. While some lucky investors made money, there were billions of dollars lost on both sides.
If you want to get in on the many 2021 opportunities, let us help you rather than going it alone. If you already have an investment advisor, congratulations. However, if you’d like to learn more about what investment advisors do for their clients, please feel free to reach out to me at empirKalpartners.com for an individual assessment.
Edward Vela is an Investment Advisor and Estate Planning Specialist at empiriKal partners, llc ©, with 13 years of wealth management experience. He earned a Journalism Certification from the University of Massachusetts, a BA in Political Science, a Financial Planning Certification at UCLA, and an Executive MBA from the UCLA Anderson School of Management. You can contact Edward at 925-300-8805 or email edward@empiriKalpartners.com.
Investing involves risks, and investment decisions should be based on your own goals, time horizon, and risk tolerance. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Past performance does not guarantee future results.
The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and content provided are for general information. This is not a solicitation for the purchase or sale of any security.