If you haven’t noticed, the Month of January was all about Gamestop (GME) and the high volatility in the financial markets. so what are the key takeaways for investors..
Number 1. The zero commission trading platforms business model is built on selling its users data (order flows) to its clients the hedge funds.
Number 2. The high volatility in the financial markets is orchestrated. For Example, when WallStreetBets (WSB) drove up share prices of Gamestop (GME), AMC and others, there were winners and losers. However, due to the nature of the business model of trading platforms such as Robinhood, it became apparent very soon that hedge funds such as Citadel and others were not going to allow the free market to be free anymore, as they watched Melvin Capital go down, and had to be rescued with billions of dollars.
They forced Robinhood to put limits on how many shares of Gamestop (GME) and AMC could be bought; at one point they totally removed the ability for its users to buy, and only allowed them to sell, which is pure manipulation. The only reason they would do that is to force the share price of Gamestop (GME) and AMC to go down, thereby allowing short sellers, i.e hedge funds that had heavily shorted Gamestop (GME) and AMC to close their positions and recoup some of their losses, while millions of small investors lost their capital, because they couldn’t buy any shares or a very limited amount (1 or 2), but were only allowed to sell those same shares in an unlimited amount, which is pure manipulation of the laws of the free market.
Number 3. The regulators or SEC allowed hedge funds to manipulate the market in this manner partly because of the fear that a cascade effect of hedge funds going under would be bad for the financial markets and the economy.
Conclusion: In times like these, where hedge funds are allowed to force zero commission trading platforms such as Robinhood to limit the number of shares that can be bought by its users, based on order flow data that they receive from these very same platforms, because not doing so would hurt their bottom line, as we have just seen, WallStreetBets (WSB) just proved to us, to the entire world, that the financial markets are not immune to manipulation. It also proved that if the market, the financial markets were allowed to be free and fair, to function as they are supposed to function, even the little people can be winners.
Now you could be asking, but how is the everyday Joe supposed to hedge against these hedge funds that are allowed to intervene and manipulate the market by stopping people from trading and the regulator does nothing about it. Especially, in times like these, where order flow data, can be used in High Frequency Trading, or HFT algorithms that make millions of transactions per second, based on upward and downward momentum in the market.
One way for the everyday Joe, to hedge, is to diversify their portfolio by picking the right funds, instead of picking individual stocks. secondly, if picking individual stocks, to have long positions in those stocks whose companies have strong fundamentals.
Currently as we speak, no one is immune to financial markets manipulation, even options trading is not immune. In fact it doesn’t matter what bets one makes, in the end, order flow data gives an advantage to whoever is on the other side. Just for illustration, suppose an investor buys a put option or call option on TSLA for a maturity date X. if in fact a hedge fund knows what the bets are in advance, they can pick and choose winners and losers in the market, as they have billions of dollars on hand to invest and can drive a stock price higher or lower if they choose so, if they happen to have an agreement with other hedge funds to do the same on date X.
The good news in all of this, is that, in one month, the entire world just had a crash course in financial markets 101.
Disclaimer: All views expressed in this article are my own and do not constitute an investment advice.