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Friday, January 29, 2021 6:26:15 PM
Opinion: Time to reduce risk in the broader stock market amid the nonsense around Robinhood, Reddit and GameStop
"GameStop’s Reddit army changes the game for good"
How do we know the Reddit people are not big hedge fund longs.
Published: Jan. 29, 2021 at 1:54 p.m. ET
By Cody Willard
Recent action makes stocks appear to be random number generators.
And that can affect you even if you’re not playing meme stocks.
(Photo by Keystone/Hulton Archive/Getty Images)
Wall Street is a tough place.
If it were featured in a movie: It has gangsters, such as Tier 1 investment banks with divisions that never have down trading days because they trade in front of, and with, other investors.
It has swindlers, who will promise and say anything in their fancy presentations and on their websites about how the companies they recommend you invest in will someday do great things, while the people in charge are selling as much stock to as many fools as they can.
Wall Street is stacked to make sure the big boys always win, and if they don’t, they get bailed out.
So what’s new?
Are you annoyed that Robinhood, whose entire business model is built on selling your stock order flow information to a giant hedge fund, isn’t on your side since the company shut down your ability to risk your money in the stock market on certain stocks in a way that could destroy its business model?
Is this supposed to be surprising?
To be sure, other brokerage firms, such as TD Ameritrade and Interactive Brokers (disclosure: I do business with both), have also been shutting down individual and institutional clients’ ability to open new positions in stocks that have been trading chaotically on exchanges, whose main job includes making sure stocks trade in an orderly fashion.
Not play money
The brokerage firms have real money at risk when you trade stocks, which are then tied into the exchanges. The exchanges themselves don’t have nearly as much, if any, capital at risk when you trade stocks.
Brokerage firms’ trading risk is real, and in case you don’t remember, a giant collapse in asset values can destroy century-old firms such as Bear Stearns and Lehman Brothers.
In fact, you might recall that investment banks actually lost a bunch of money when they allowed customers to trade oil futures that went to negative value last April. Remember that .. https://www.marketwatch.com/story/oil-prices-could-go-negative-again-so-be-prepared-cftc-warns-futures-industry-2020-05-13 ?
Interactive Brokers IBKR, -3.46% lost $104 million in that debacle, and the firm can’t take chance of losing a billion dollars when the markets aren’t making any sense.
If there’s anyone to blame now, it’s probably the exchanges for not being able to clear these trades in an orderly manner.
Blame game
Finding someone to blame isn’t as important as this theme: If the exchanges, brokerages and Wall Street at large don’t get this disorderly, frightening, bubblicious and easily manipulated action in order, it’s going to hurt the economy as money flows inefficiently to the wrong places.
I suggest steering way clear of the Reddit battleground stocks that are gyrating. GameStop Corp. GME, 60.66%, AMC Entertainment Holdings Inc. AMC, 57.49% and even Nokia Corp. NOK, -1.31% don’t seem to be viable investments or trades right now.
To be sure, longtime readers and TV viewers of mine from my days on CNBC and Fox Business know that I have long been a vocal Wall Street critic. I even stopped by Occupy Wall Street back in the day.
Wrong battle
I encourage people to be vocal about the problems with Wall Street and how the system is always getting more complicated to keep propping up the already inefficient status quo. But I’m not sure fighting the system by day-trading wild stock movements is an effective way to fight the system. It’s probably going to cost millions of people billions of dollars in losses at some point. Are we even sure it’s not some other giant hedge funds that are in control at Reddit’s WallStreetBets?
This action hurts the economy, as it becomes the reason for the inefficient allocation of capital. Seasoned, reasoned investors are starting to consider moving much more cash to the sidelines to remove some of the newly elevated risks that come from a stock market that doesn’t trade orderly.
When stock prices for companies that are worth tens of billions of dollars look like random number generators on a minute-to-minute and day-to-day basis, it becomes impossible to use any risk/reward analysis!
So I continue to look for great long-term Revolution investments at fair values every day. But I won’t gamble on random numbers. Be cautious and defensive for now.
Cody Willard is a columnist for MarketWatch and editor of the Revolution Investing newsletter. Willard or his investment firm may own, or plan to own, securities mentioned in this column.
Read Next
Here are the biggest short squeezes in the stock market, including GameStop and AMC
Dozens of heavily shorted stocks have rocketed 50% or more during 2021.
https://www.marketwatch.com/story/here-are-the-biggest-short-squeezes-in-the-stock-market-including-gamestop-and-amc-11611842270?mod=mw_more_headlines
More On MarketWatch
* Barron's: ‘Big Short’ Investor Who Once Touted GameStop Calls Rally ‘Unnatural, Insane, and Dangerous’
https://www.marketwatch.com/articles/big-short-investor-who-once-touted-gamestop-calls-rally-unnatural-insane-and-dangerous-51611707398?mod=mw_more_headlines
* Texas fifth-grader cashes in the GameStop shares his mom gave him for Kwanzaa — for almost $3,200
https://www.marketwatch.com/story/texas-fifth-grader-cashes-in-the-gamestop-shares-his-mom-gave-him-for-kwanzaa-for-almost-3200-2021-01-28?mod=mw_more_headlines
* Barron's: Another GameStop? Here Are the Next 10 Most Shorted Small-Caps.
https://www.marketwatch.com/articles/another-gamestop-here-are-the-next-10-most-shorted-small-caps-51611688092?mod=mw_more_headlines
* Mark Cuban, Dave Portnoy, AOC and others react to Robinhood restricting trades on GameStop and AMC
https://www.marketwatch.com/story/mark-cuban-dave-portnoy-aoc-and-others-react-to-robinhood-restricting-trades-on-gamestop-and-amc-11611855658?mod=mw_more_headlines
About the Author
Cody Willard
Cody Willard is a columnist for MarketWatch and editor of the "Revolution Investing" newsletter.
https://www.cnet.com/personal-finance/robinhood-what-to-know-about-the-app-at-the-center-of-the-gamestop-drama/
"GameStop’s Reddit army changes the game for good"
How do we know the Reddit people are not big hedge fund longs.
Published: Jan. 29, 2021 at 1:54 p.m. ET
By Cody Willard
Recent action makes stocks appear to be random number generators.
And that can affect you even if you’re not playing meme stocks.
(Photo by Keystone/Hulton Archive/Getty Images)
Wall Street is a tough place.
If it were featured in a movie: It has gangsters, such as Tier 1 investment banks with divisions that never have down trading days because they trade in front of, and with, other investors.
It has swindlers, who will promise and say anything in their fancy presentations and on their websites about how the companies they recommend you invest in will someday do great things, while the people in charge are selling as much stock to as many fools as they can.
Wall Street is stacked to make sure the big boys always win, and if they don’t, they get bailed out.
So what’s new?
Are you annoyed that Robinhood, whose entire business model is built on selling your stock order flow information to a giant hedge fund, isn’t on your side since the company shut down your ability to risk your money in the stock market on certain stocks in a way that could destroy its business model?
Is this supposed to be surprising?
To be sure, other brokerage firms, such as TD Ameritrade and Interactive Brokers (disclosure: I do business with both), have also been shutting down individual and institutional clients’ ability to open new positions in stocks that have been trading chaotically on exchanges, whose main job includes making sure stocks trade in an orderly fashion.
Not play money
The brokerage firms have real money at risk when you trade stocks, which are then tied into the exchanges. The exchanges themselves don’t have nearly as much, if any, capital at risk when you trade stocks.
Brokerage firms’ trading risk is real, and in case you don’t remember, a giant collapse in asset values can destroy century-old firms such as Bear Stearns and Lehman Brothers.
In fact, you might recall that investment banks actually lost a bunch of money when they allowed customers to trade oil futures that went to negative value last April. Remember that .. https://www.marketwatch.com/story/oil-prices-could-go-negative-again-so-be-prepared-cftc-warns-futures-industry-2020-05-13 ?
Interactive Brokers IBKR, -3.46% lost $104 million in that debacle, and the firm can’t take chance of losing a billion dollars when the markets aren’t making any sense.
If there’s anyone to blame now, it’s probably the exchanges for not being able to clear these trades in an orderly manner.
Blame game
Finding someone to blame isn’t as important as this theme: If the exchanges, brokerages and Wall Street at large don’t get this disorderly, frightening, bubblicious and easily manipulated action in order, it’s going to hurt the economy as money flows inefficiently to the wrong places.
I suggest steering way clear of the Reddit battleground stocks that are gyrating. GameStop Corp. GME, 60.66%, AMC Entertainment Holdings Inc. AMC, 57.49% and even Nokia Corp. NOK, -1.31% don’t seem to be viable investments or trades right now.
To be sure, longtime readers and TV viewers of mine from my days on CNBC and Fox Business know that I have long been a vocal Wall Street critic. I even stopped by Occupy Wall Street back in the day.
Wrong battle
I encourage people to be vocal about the problems with Wall Street and how the system is always getting more complicated to keep propping up the already inefficient status quo. But I’m not sure fighting the system by day-trading wild stock movements is an effective way to fight the system. It’s probably going to cost millions of people billions of dollars in losses at some point. Are we even sure it’s not some other giant hedge funds that are in control at Reddit’s WallStreetBets?
This action hurts the economy, as it becomes the reason for the inefficient allocation of capital. Seasoned, reasoned investors are starting to consider moving much more cash to the sidelines to remove some of the newly elevated risks that come from a stock market that doesn’t trade orderly.
When stock prices for companies that are worth tens of billions of dollars look like random number generators on a minute-to-minute and day-to-day basis, it becomes impossible to use any risk/reward analysis!
So I continue to look for great long-term Revolution investments at fair values every day. But I won’t gamble on random numbers. Be cautious and defensive for now.
Cody Willard is a columnist for MarketWatch and editor of the Revolution Investing newsletter. Willard or his investment firm may own, or plan to own, securities mentioned in this column.
Read Next
Here are the biggest short squeezes in the stock market, including GameStop and AMC
Dozens of heavily shorted stocks have rocketed 50% or more during 2021.
https://www.marketwatch.com/story/here-are-the-biggest-short-squeezes-in-the-stock-market-including-gamestop-and-amc-11611842270?mod=mw_more_headlines
More On MarketWatch
* Barron's: ‘Big Short’ Investor Who Once Touted GameStop Calls Rally ‘Unnatural, Insane, and Dangerous’
https://www.marketwatch.com/articles/big-short-investor-who-once-touted-gamestop-calls-rally-unnatural-insane-and-dangerous-51611707398?mod=mw_more_headlines
* Texas fifth-grader cashes in the GameStop shares his mom gave him for Kwanzaa — for almost $3,200
https://www.marketwatch.com/story/texas-fifth-grader-cashes-in-the-gamestop-shares-his-mom-gave-him-for-kwanzaa-for-almost-3200-2021-01-28?mod=mw_more_headlines
* Barron's: Another GameStop? Here Are the Next 10 Most Shorted Small-Caps.
https://www.marketwatch.com/articles/another-gamestop-here-are-the-next-10-most-shorted-small-caps-51611688092?mod=mw_more_headlines
* Mark Cuban, Dave Portnoy, AOC and others react to Robinhood restricting trades on GameStop and AMC
https://www.marketwatch.com/story/mark-cuban-dave-portnoy-aoc-and-others-react-to-robinhood-restricting-trades-on-gamestop-and-amc-11611855658?mod=mw_more_headlines
About the Author
Cody Willard
Cody Willard is a columnist for MarketWatch and editor of the "Revolution Investing" newsletter.
https://www.cnet.com/personal-finance/robinhood-what-to-know-about-the-app-at-the-center-of-the-gamestop-drama/
It was Plato who said, “He, O men, is the wisest, who like Socrates, knows that his wisdom is in truth worth nothing”
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