The dispute between the swarm of small investors and hedge funds is far from over. The latter are said to have lost billions in the meantime.
The US broker Robinhood, which has come under heavy criticism for its usage restrictions, says it only wants to regulate the trading of eight instead of the previous 50 shares. Users are still only allowed to buy a certain number of securities from and options on companies such as Gamestop, Blackberry, AMC Entertainment or Nokia, as the company announced on its website on Sunday evening. In some cases, only a single share may be acquired. Robinhood justified its decision with “persistent market volatility” and reserved further changes.
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The online broker, which is particularly popular with younger investors, surprisingly suspended trading in certain stocks for several hours on Thursday . As a result, the prices of affected companies crashed dramatically. Companies such as Starbucks, Trivago or Moderna were also affected, which, in contrast to Robinhood’s presentation, were not subject to any particular exchange rate fluctuations.
Brokers such as the smartphone apps Trade Republic or Trading212 were also in trouble in Germany because they forbade their users from accessing the free market. At times, only the sale of certain securities was permitted, but not the purchase of new shares.
The swarm against the short sellers
Gamestop and AMC shares have been particularly popular with users of the Reddit platform in recent weeks. In doing so, they opposed so-called shortsellers (in German short sellers ) such as Citron Research and Melvin Capital, who had bet massively on falling prices of the companies in question. As a result, stock prices shot up and some hedge funds suffered extremely heavy losses.
Because of the trading restrictions imposed by brokers like Robinhood, small investors see themselves slowed down on their profit path. They suspect that the trading platforms have the backs of the hedge funds. Robinhood and Co. deny this, but the outrage is not only great among the investor community, but also in politics. Investigations have already been announced in the USA, including by the Securities and Exchange Commission, which, according to its announcement, wants to protect small investors and ensure “fair, orderly and efficient markets”.
Hedge funds with losses of $ 20 billion
By last Friday, the hedge funds are said to have made losses of 19.75 billion US dollars over the year alone with Gamestop short sale bets, reports the Handelsblatt , citing analyst Ihor Dusaniwsky from financial data provider S3 Partners. The hedge fund Melvin Capital alone is said to have lost around 53 percent of its capital, Reuters writes in turn , citing insiders: At the beginning of the year, the fund’s assets were still at 12.5 billion US dollars. Last week, Melvin was able to secure fresh capital for 2.7 billion US dollars.
However, none of that means an end to the bet against Gamestop: According to Handelsblatt, the proportion of short positions on Gamestop shares is still 113 percent of the portfolio, and many new shortsellers have moved up.
In a short sale bet, the investor borrows the shares, throws them on the market in the hope of falling prices, buys them back at the ideally cheaper price and then returns the shares as agreed. The difference between the sale and resale price minus fees is the profit. And if another hedge fund also makes such a bet on the shares sold in the short sale attempt, then the inventory of short positions could be higher than that of the shares, writes the Handelsblatt. Meanwhile, Reddit is debating whether such creations of more stocks than actually exist are not a sign of fraud in high finance.
Risk to the financial system?
In the course of the stock market quake caused by small investors, many analysts are already worried about the stability of the financial world. According to Jochen Stanzl from the trading house CMC Markets, “the topic could ultimately become a serious threat to the entire financial system” because a bias in hedge funds could lead to drastic upheavals. “Since everything is closely intertwined in the modern financial markets, too many cogs jumping out can lead to the overall system no longer working properly,” Stanzl fears.
The investment strategist Chris-Oliver Schickentanz from Commerzbank sees regulators and politicians on the course – with the aim of “preventing manipulative market intervention by hedge funds and a herd of small investors alike.”
Next goal: silver market
As the BBC reports , the swarm of small investors now seems to have discovered the market for the precious metal silver. Since the discussions on Reddit broke out in the middle of last week, the price has risen by around 10 percent. Silver is a highly manipulated market, and many banks have built short positions here, according to a much-commented post by the Reddit community r / wallstreetbets . Other voices from the community criticized this, arguing, for example, that a swarm investment in the silver market would help the hated hedge funds.
The shares of smaller mine operators and silver coins are also very popular right now, according to the BBC. However, it is also a much larger market that is much more difficult to move than the individual stocks in the short sale bets of hedge funds, according to analysts.
This post is the first published on citytelegraph.com