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February 3, 2021

Understand more. Argue less.

Good morning. Today’s newsletter will be a little different. Instead of politics, we’re looking at the bipartisan narrative surrounding the Reddit stocks story. We’ll be back to our regularly scheduled programming next week.

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Market Mayhem

Jenna Gibson

For the past week, it’s been hard to escape the Reddit/GameStop/Robinhood saga (a documentary is already close to being confirmed). In short, a Reddit channel called r/Wallstreetbets noticed that major Wall Street hedge funds were betting against GameStop, AMC, and other stocks by “shorting” them (we’ll get into shorting soon). They realized that if enough amateur investors bought lots of those shorted stocks, they could drive up the price, inflicting significant financial damage on the institutional investors with short positions. 

The chance to embarrass Wall Street and earn some easy money was too good to pass up. Last Thursday, GameStop and AMC stocks were up 14,300% and 890%, respectively, compared to the beginning of the year. As a result, stock brokerages decided to halt trading of those and six other stocks that same day. The most notable of those brokerages, Robinhood, bore the brunt of public ire as a result. Twitter exploded with angry users voicing their frustrations. Rep. Alexandria Ocasio-Cortez and Sen. Ted Cruz criticized Robinhood’s actions as well. When those two are united, you know something’s amiss.

Here’s what else you need to know.

The Facts

  • What’s shorting? In essence, shorting is when an investor borrows shares and immediately sells them in the hope to later purchase the same number of shares at a lower price (to give back to the original lender), pocketing the difference.(Financial Times)

  • Okay, give me an example. If you were to short 1 share of Civil at $10/share, you’d be borrowing a share from someone else and selling it for $10. If your bet pans out and the price drops to $5, you could then re-buy the share at $5 to give back to the lender while also pocketing an extra $5 from the original sale. However, there’s no guarantee that the price to get the share back will be lower than what you sold it for.

  • Wait, why did Robinhood halt trading? Without getting too into the weeds, increased trading volume and fluctuating stock prices meant that Robinhood had to find a lot of extra cash. Elon Musk interviewed Vlad Tenev, Robinhood’s CEO, who said that even with an emergency $1B from investors, they had to temporarily shut down trading due to a shortage of capital. (CNBC)

  • Not convinced. However, many amateur investors complained that Robinhood was simply protecting the hedge fund partners (to whom they sell user data) instead of embodying its mission to “democratize investing for everyone”. (CNBC)

  • Coming back down to earth. After peaking at $483 last Thursday (up from $17 at the beginning of the year), GameStop stock ended trading yesterday at $90. AMC closed at $7.82 after topping out at $19.90. (AP, Reuters)


Is It Being Spun?

Katherine Chuang

If you've been reading Civil for a bit, you know what this section usually contains: spin, bias, and partisanship. However, this week, we're pleased to give you a single unified narrative surrounding the our story. 

Unified Narrative

How refreshing, the everyday American has stuck it to Wall Street. Some are celebrating the fact that they earned a lot of money from their couch. Some revel in the power of Reddit and its ability to take a meme’d company’s stock to the moon. Other’s just see this as a hilarious, beautiful mess. Although we may be celebrating for a variety of reasons, it’s refreshing to almost be on the same page.

Supporting Headlines

WallStreetBets Traders Celebrate Losses Inflicted on Melvin Capital

GameStop Stock Plummets But ‘Reddit Rebellion’ Sparking War On Big Money Investors

‘Spill The Beans’: Elon Musk Questions Robinhood CEO On Halting GameStop Trades

Robinhood Screwed Its Users But Is More Popular Than Ever

There's Still Some Bias 

While the majority of news outlets are united on this topic, there's still some diverging opinions. Here are two cases where you can see that divergence.

Hawley: Congress Must 'Get All Of The Facts' On Possible 'Collusion' Between Big Tech, Hedge Funds

Fox News deviates from the unified narrative by highlighting a claim that last week's events weren't an isolated incident, but indicative of a concentrated effort by Big Tech companies to subvert the will of the American people.

The GameStop Fiasco Exposes the Fantasy That Capitalism Can Be Democratic

Jacobin deviates from the unified narrative by claiming that last week's events weren't an isolated incident, but indicative of a fundamentally flawed capitalist system.


What Does It All Mean?

While you just saw how coverage of the Wall Street story is unusually unified, you also saw how each side differs slightly in interpreting the past week's events. Depending on where you get your news, the story might sound something like this….

  • If your news outlets lean Right, you see proof that the game is rigged from the top down. You’re especially worried about the potential influence of Big Tech, and want an investigation into possible market manipulation. You want financial markets truly democratized. We cannot have a free market when we have companies like Robinhood financially de-platforming everyday people for their own commercial interests.
  • If your news outlets lean Left, you see this as the greedy titans of the financial industry finally feeling the pain that the little guy endures every day. The New York Stock Exchange has been Wall Street’s personal casino for far too long, and the people are finally fighting back against those that take advantage of our capitalist market at the expense of the general public.

While some may be satisfied to see massive hedge funds lose money to “ordinary” people, those institutions aren’t as wounded as some think. Yes, short-sellers have lost billions of dollars, but those losses are quickly shrinking as GameStop share prices continue to dip. Since last Wednesday, short-sellers have watched their year-to-date losses fall from $26B to $9B. Not only that, but Wall Street institutions received most of the commission on the 500M GameStop shares traded last week.

As the dust begins to settle, Robinhood’s standing also appears to be relatively intact. Over 177,000 people downloaded the app the day they halted trading (twice the previous week’s average), and Robinhood announced a $3.4B fundraising round on Monday. What’s more, Acting SEC Chair Allison Herren Lee said that while the agency is keeping a close eye on the situation, volatility within a few stocks has yet to pose a fundamental risk to the market at large. However, Robinhood now faces over 30 class-action lawsuits and their CEO is expected to testify before a House committee on February 18.

For many, this past week has illustrated just how much the stock market can be influenced by basic psychology and group think. If enough people buy a company’s shares, the value of that company can skyrocket, regardless of its underlying value. However, the market is already correcting as buying momentum fades.

Even if it isn’t the long-term amateur victory some hoped it would be, bipartisan discussion is welcome. We hope it continues.


What Else We're Following

  • In a pre-trial brief on Tuesday, the House of Representatives laid out their impeachment case against President Trump: "incitement of insurrection against the republic he swore to protect." Trump's legal team argues that the impeachment article is a "violation" of the Constitution. (BBC)

  • After meeting with top Republicans on Monday, Joe Biden said their proposed $618B proposal was insufficient. He plans to move forward with his $1.9T COVID rescue plan, but has said he's "willing to make some modifications." Passing it without bipartisan support won't be easy though. (AP)

  • Jeff Bezos is stepping down as Amazon's CEO, effective in Q3. He will take on the humble role of Amazon Executive Chairman, while the head of Amazon Web Services, Andy Jassy, will become CEO. (BBC)

Finally, some good news

Scientists at MIT have used nanotechnology to create spinach plants that detect explosives. Not impressed yet? Those same leafy greens are equipped to send an email when it detects explosives. Yes, you read that correctly. (Yahoo)

Have a great rest of your week, just don't forget to eat your veggies. We'll see you next Wednesday.

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