“GameStonk”, Robinhood, and hedge funds: how the internet exploded Wall Street

By: Leah Alsept



GameStop’s frenzy has fizzled — but Congress will look under the ashes with their next hearing

DIS, MCD, AMC, GME—these acronyms mean nothing to some people. And to others, they mean everything.

Spelled out, these acronyms (also called stock symbols) are shortened names of the companies Disney, McDonald’s, AMC Entertainment, and GameStop. Market participants, media releases, and company earnings reports use stock symbols to “make the most use of available space while communicating important financial information,” according to Zacks Investment Research.

Jan. 26: Tesla founder and richest man in the world, Elon Musk, tweets out “Gamestonk!!” with a link to subreddit r/wallstreetbets. The tweet now has 253 thousand likes and 38 thousand retweets.

A freezing January was ended after the Musk’s tweet sparked GameStop’s stock. GME stock closed at $76.79 just the day before. After the electric car tycoon’s tweet, GameStop’s stock rose to $147.98.

Social media can do a lot to influence world events. President Trump was banned from Twitter after the Jan. 6 insurrection on the Capitol. His recent impeachment trial was based on that he made tweets seemingly in support of the violence at the Capitol that day, citing in the articles of impeachment that “President Trump repeatedly issued false statements asserting that the Presidential election results were the product of widespread fraud and should not be accepted by the American people or certified by State or Federal officials.”

Dr. Gregory Arburn hasn’t seen one single person control the market as much as Musk did in the past month. He believes social media contributes to Musk’s influence.

“They think he’s just like the best thing since sliced bread and doorknobs. Because he says those things on Twitter. One, that he uses social media to communicate. One, that he uses social media to put out opinions of his,” Arburn said.

“But who it was before him, I guess,” he added. “I don’t know.”

Arburn is an Assistant Professor of Economics and Finance at the University of Findlay. He started teaching at the university in 2000 and has seen many financial ups and downs in the nation throughout his tenure. The Robinhood and GameStop frenzy was unexpected for him.

“I mean this whole thing, just kind of all of a sudden it’s like somebody cracked open this six-foot-tall egg, and we looked inside and we realized that Robinhood was kind of fake and we’re like, ‘Huh, I didn’t know that,’” he said.

In 2018, Robinhood launched its own clearing system to “bypass” the middle man in stocks and trading. Clearing systems, according to Paeimentor, are “procedures whereby financial institutions present and exchange data and/or documents relating to funds or securities transfers to other financial institutions at a single location (clearing house).”

Robinhood sends over half of it’s orders (buying or selling stocks) to the finance firm Citadel Securities Exchange and makes a large amount of revenue from them—12 million dollars from Oct. 2020 to Dec. 2020. The Washington Post found that Robinhood charges large investment firms money to access information about what stocks users are buying and selling.

But Dr. Arburn realized how easy it was for people to get caught up in the newness of the Robinhood app.

It’s easier to get into Robinhood and get an account set up because Robinhood doesn’t have to be as stringent or regulatory profile as if they were going through the New York Stock Exchange and NASDAQ,” he said. “Plus on the phone, kids will do anything on their phone.”

Hedge funds, like Citadel (an offshoot of the main branch Citadel Securities Exchange) and Melvin Capital, are also embroiled in the pot because of their relationship to Robinhood. Citadel was a hedge fund that bought trader information from Robinhood, according to The Washington Post.

Robinhood still didn’t have enough money to continue funding stocks trading for their investors on the app.

“When GameStop all of a sudden goes from $10 to a hundred dollars to $200 to $300. The Securities Exchange Commission is forcing the online brokerages to have higher margin requirements on those particular stocks. And that’s what got Robinhood in trouble,” he said. “The hedge fund that they were going through got the increase in the margin requirement. Robinhood went to the market into the capital market, borrowed a lot of money four or five days in a row. They borrowed money from the hedge funds that they were running their book through.”

“The reason that they cut down the number of shares you could buy was because Robinhood could handle risk,” Arburn said.

And shutting the stocks on GameStop was enough to make hundreds of thousands of people angry. Including Arburn’s students.

“I’ve had students tell me in class multiple times, ‘I hate Robinhood. I’m not doing another trade on Robinhood. I am moving, where should I move to? What trading platform?’ So I help them figure out how to make that decision,” Arburn said.

He gives his students financial advice: “I’ll tell them that I have a TD Ameritrade account. I have multiple TD Ameritrade accounts. That’s university of Findlay investments club as TD Ameritrade. I said that my son has Fidelity. And I said, to be honest with you, if I was to do it all over again, I’d either go to Interactive Brokers or Fidelity.”

But not so much as they will rely entirely on their professor to help them with investing. “I said you’re all going to graduate and you’re going to get jobs at someplace. And when you get hired, you’re going to be sent to human resources. And you’re going to have to decide where you want to put your retirement money,” he said. “They won’t make the decision for you. You are going to have to do it.”

Although GameStop’s stock has fallen below its peak price, the financial situation between Robinhood and its hedge funds will continue to be scrutinized by Congress. Axios reports that Robinhood, Melvin Capital, and Citadel’s CEO will testify. Reddit will be represented by its own CEO, Steve Huffman, and Keith Gill, a user that made millions of dollars from GME stock at the height of the frenzy, better known by his online profiles as “Roaring Kitty” or “DeepF—ingValue.” The trial will be held on Feb. 18 and will begin at 12 PM E.T., according to the press release from the U.S. House Committee on Financial Services.

“There will be congressional investigations and they’re going to ask the question, ‘Do we need to regulate this?’ And the SEC is going to have to answer the question when those congressman and senator ask that question,” Arburn said.

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