It’s amazing how fast it takes a meme to hit terminal velocity these days. Witness Bernie going from folding chair to most photoshopped human ever:
But the real meme across FintTwit these days isn’t Bernie. It’s Bernie’s army (of investors) YOLO’ing very real money to drastic effect on the markets. Just like that, there’s a new acronym we all need to know: r/wsb. That’s the shorthand for the reddit (technically a subreddit) page wallstreetbets which is like a live look into a degenerate gamblers mind while they’re on a roll at the craps table in Vegas. And that’s not being mean – the community members actually call themselves that. Here’s Brent Donnelly guest posting on the Epsilon Theory blog explaining:
If you go into r/wallstreetbets (WSB for short), you will find a community of funny, rude, self-deprecating and reckless speculators riffing on various market-related activities. The focus tends to be one or two stocks and the primary investment thesis is almost always to YOLO as many calls as possible in the thing that is about to [rocket higher].
There is a lot of despicable and sophomoric language but mixed in there are some good ideas and some well-informed speculators…In WSB lingo, strong hands are called “diamond hands” and weak hands are called “paper hands”. Profits are called “tendies” as in chicken tenders, as in the ultimate luxury food. One sample post I just scrolled to reads as follows: “TSLA – Best $100K I’ve ever spent. When do I hop off the tendie coaster???” and then shows a screenshot of an absurd gain on super low delta calls in a Robinhood account.
If your head is spinning with millennial terminology right now, here’s a quick refresher:
A meme = a funny image or video that becomes quick culture via its rapid spread around the internet. A correctly used meme is worth a million fictional social media coins. Use a meme to hilariously say all the things you’ve been trying to say but can’t quite get out. Or to add humor to a dig that you don’t want the other person to take too seriously. All of the above work.
FinTwit = Financial + Twitter = FinTwit, a microcosm of finance-based Twitter people such as those listed below.
Reddit = A massive collection of forums where people can share news and content or comment on other people’s posts. And the best part is that the “likes and dislikes” actually make a difference in their “karma scores.”
YOLO = You Only Live Once, ala the infamous Drake song if you’re into that.
So, who cares? We said in our ‘Retail Traders Rejoice’ post back in September that there has never been a better time to be a retail trader, and they are noticing. Millennials are buying options. They are buying A LOT of options, and mostly all on the upside via Calls. Here’s Sentiment Trader showing the stats – with NET call option buying about 10 million contracts more than the rough 2009 to 2017.
And here’s the knowledge of QVR’s Benn Eifert (@bennpeifert) in flow chart form showing how a small option premium outlay can result in a lot of extra stock being bought:
So what does that simplistic example look like in real live trading with one of the hedge fund world’s most heavily shorted stocks? It represents as that rarest of chart patterns – the vertical line straight up, as seen with Gamestop ($GME) stock, which has gone from an all time low of around $3 to a high above $170 (as of the time writing this…now over $200).
So, if all the r/wsb folks are making money. Who’s losing? Would you believe one of the best performing hedge funds of late – short selling specialist Melvin Capital, who per various reports has been known for big +20% to +40% years before this wrong bet. Past performance not necessarily indicative of future results. How bad of a bet was it? Bad enough that Melvin needed a lifeline from two hedge fund titans – Citadel’s Ken Griffin and Point 72’s Stevie Cohen. Here’s market maker/flow expert Cem Karsan digging into the Citadel/Point 72 “investment” into Melvin Capital.
4/x that they likely benefited from both sides here as well, as the favorable terms. In particular, we all know Stevie’s penchant for taking advantage of ‘informational asymmetry’ &, seeing as he likely spearheaded the effort given his relationship w/ Gabe Plotkin, I think it’s
— Cem Karsan 🥐 (@jam_croissant) January 26, 2021
The internet is abuzz thinking these small retail traders could take down big billion dollar firms who seemingly have all the advantages, and while we can all see evil hedge funds coordinating to drive a stock down as a likely illegal thing – it isn’t quite so clear to many that the opposite is true. Is it fair to team up and push a stock’s price against hedge funds. Does the SEC have a duty to protect all market participants? Or just individuals?
SEC needs to drop a bomb on this. Imagine if the scenario were inverted, & short sellers were to use an online forum to advertise & attract participants into an option-driven attack that sunk a stock by 90%.
“It shall be unlawful for any person, directly or indirectly…” pic.twitter.com/Hxd893ZkjQ
— Jesse Livermore (@Jesse_Livermore) January 25, 2021
This speaks to the leveling of the playing field, if not in actual scale, at least in the ability to access and place “bets” and desire to make one’s financial mark. A nice thread (on Bitcoin, but still prescient here) by Demetri Kofinas seemed to capture the feeling of the next generations desire to level this playing field:
Millennials and Zoomers feel totally and completely betrayed by their parents’ generation whose lives and peak income generating years coincided with the greatest period of financial excess in American history. And whose 401K’s and retirement accounts are being goosed by a Federal Reserve that is utterly determined to prevent even a modest decline in the value of assets they’ve spent a lifetime accumulating by offloading the costs of their interventions onto the next generation.
This short-sighted betrayal has turned the most vital segment of society into a voting block of speculators who have absolutely no trust in government and who seek to exit a system that depends on their very participation in order to function. It’s no coincidence therefore that Millennials treat the stock market like a casino and see cryptocurrencies as their ticket to financial freedom.
So that’s it? Well, no so fast according to Dave Nadig – who throws everything we just covered above out the window in the piece we wish we had written. To him, this isn’t about gamma and delta hedging and all the rest. It’s about the speed of information in today’s connected digital world and what happens when gamified apps and algorithms triangulate on a single stock:
…social media — which includes the curation algorithms of TikTok, Reddit, Robinhood, Amazon, Netflix, etc. — is designed to…keep you engaged on the platform you happened to launch from your phone. Nearly by definition, this leads you down a funnel into which it is very difficult to return. Once your TikTok feed is full of stock tips, it’s nearly impossible to get rid of them. Once you start following /r/WallStreetBets, you’re going to get the most sensational, clickbait posts bubbled to the top of your window: Go deep, Go narrow, Stay engaged. And do it in a market designed to take those few seconds of attention and execute on them.
…What’s new is that an entire generation of investors [has] a set of services on their phone designed to funnel them into the most extreme, most dopamine-driving financial ideas.
…it would be a mistake to dismiss this as the craze of the moment…it’s a herd created by algorithm…This may not be a world you have any interest in exploring. But it’s this shift in how information moves and is processed that is changing markets, and to deny it’s existence — and it’s seemingly inevitable rise to a kind of information delivery primacy — is folly.
Well said Mr Nadig! For movie fans – it’s the Social Dilemma meets the Wolf of Wall Street, and in that vane – we’ll be popping our popcorn and pulling up a chair to watch this epic battle unfold. With some comic relief as only the internet can deliver:
— Melvin Capital Investor Relations (@CovidMrktWatch) January 26, 2021
& Make sure to subscribe to our podcast The Derivative where we’ll be discussing all this and more with two FinTwit finfluencers Cem Karsan (@jam_croissant) and Kris Sidial (@Ksidiii). Subscribe to YouTube or your favorite podcasting service for notifications when it’s live.