What the Hell Happened on Wall Street?

Many of you I'm sure may have had your fill of GameStop, with it trending all over Twitter, most due to the news that Robinhood would no longer allow it to be bought as detailed here on Flappr. People from all walks of life and all sides of the political aisle weighed in, dismayed at these actions, even mystified how the company that was democratizing the stock market could suddenly put a stop to trading on certain securities that had seen some incredible up moves, led by the WallstreetBets reddit board.

The David versus Goliath metaphor has been thrown around a lot in this situation as it seemed that the retail traders had brought short sellers of GameStop ($GME) to its knees, culminating in hedge fund Melvin Capital requiring a $2.75B of capital to be pumped into the firm by Ken Griffin's Citadel and Steven Cohen's Point 72 Capital. I had figured, well they made a good buy, probably for a tax advantage with likely a very large write-down due to its blown up short GameStop. However, this is Wall Street so there is always another angle.

This action seemed to fly in the very face of everything that Robinhood has marketed to its users. Robinhood has disrupted the discount brokerage industry with the launch of zero commission fees, which allows traders to move in and out of securities without regard to the size or to cost. This has allowed regular people to get into the markets with even small sums. It hasn't hurt Robinhood either who now most recently has a valuation of north of $11B in its most recent funding round.

So how can Robinhood be worth so much when it doesn't charge its customers anything? Well, that's the rub. The retail traders who have embraced this platform aren't the real customers; they are the users. Robinhood's actual customers are market makers and trading companies who pay Robinhood for the privilege of executing securities trades, purchasing what they call "order flow". Why would they do this? Well, these trading venues have trading desks as well and with access to this information of what retail traders are buying before it is even executed, these trading houses are able to "front run" what retail is doing and doing other data analytics before others can. The users of Robinhood are the product, like we are for much of Big Tech right now. That is the Faustian bargain we make; we don't have to pay for the services, but we turn over our data for free.

Now who do you think is one of Robinhood's biggest customers? Yup, it's Citadel. The very same Citadel that just invested heavily into Melvin Capital who's massive GameStop short position was crippling it. Now wouldn't it be awesome for Citadel if somehow that short position was able to reverse itself? If only Citadel had some leverage over those retail investors who were crippling Melvin.

It is very interesting that Robinhood essentially made it impossible to buy GameStop only days after its major customer Citadel had acquired a short position in it. Seemed to work out very fortuitously for Mr. Ken Griffin & Co.

Tonight, Vlad from Robinhood has graciously allowed retail traders to access and trade their entire portfolio of securities, but only after GameStop cratered 44%. Seems like being short GameStop was a good idea after all, especially if you control the system. This whole sordid story has not been missed by many, with Davey Day Trader himself Dave Portnoy going toe to toe with Stevie Cohen of Point 72 himself on Twitter:

Emotions are high right now, with many retail traders very frustrated with some suffering probably catastrophic losses because of these trade restrictions. Maybe it was always too good to be true and that there would eventually be a cost to trading with no commissions or limits. Or maybe the curtain was finally pulled back on how the sausage is made on Wall Street.

Either way, Billionaire and New York Mets owner, Stevie Cohen DGAF: