ASH BENNINGTON: Welcome to Real Vision. It's Tuesday, February 2nd, 2021, 2pm in New York. This is the Real Vision Daily Briefing. I'm Ash Bennington joined shortly by Tony Greer. Today, Tony, we're flying live without an intro. Welcome, Tony.
TONY GREER: Sounds perfect for us, Ash. Let's go.
ASH BENNINGTON: Tony, I only have two questions for you the entire show. Number one, what the hell is happening? Number two, how are you positioning yourself?
TONY GREER: Oh, good questions, man. What the hell is happening? I'm asking you that myself. We have to talk about GameStop, and we have to talk about Robinhood, and we have to talk about Citadel, and this story a little bit. Because, to me, what I'm seeing is I'm seeing the younger generation fry itself in meme wars, trying to every market, every market connotation, every move, every narrative and storyline has to get memed out to its most basic, understandable level. Unfortunately, you leave a lot of facts out when you start meming the crap out of every story on earth, and sometimes, it just doesn't work. I feel like that's what we're watching. We're watching the Icarus print of the market meme burn itself to shreds right now.
The GameStop story. All the WallStreetBets guys, they'll find a vulnerable security but it's not a new story, because Michael Burry and some of the ninjas of retail have spoken about this. They talked about that there's upside potential in the name. Nothing new under the sun here, they start buying it and getting it on the run, and obviously, there's going to be derivative bets on the downside placed on GameStop. Because that's been a winning trade for years now.
You're going to have to allow these guys to find that value play in the market where the brick and mortar shop is overvalued and going out of business, and so they ride the short down and they've made a lot of money on it. Got it. Melvin Capital now gets pushed into the mix with its large GME short, Melvin Capital has to stop out of the position, at Robinhood, because of what's going on, they're going through the same machinations that every exchange in the world has gone through when they've got volatile securities on their pads that are changing their cash flows second by second.
Now, Robinhood goes out and lies to everybody in the streets, say, we're fine, we're fine. We're not blowing up. We're not blowing up. We don't need capital, which is exactly what everybody does when they need capital. They go to their investors and they say we need capital. In this attempt to take on the suits, what's going to happen is Robinhood is going to get a cash infusion at a lower level and the suits that put money into that are going to make a fortune as long as Robinhood can survive. We've got Melvin Capital is out of GameStop. Who cares? Mr. Steve Cohen put in an additional investment to pad that loss for his investors in Melvin.
ASH BENNINGTON: And also Mr. Ken Griffin.
TONY GREER: Ken Griffin is involved because another fact that we know ahead of time is that he's getting to see all the Robinhood flow before it hits the street.
ASH BENNINGTON: Yeah. By the way for people, this is Citadel and Point72.
TONY GREER: Well, Citadel, let's talk about-- they're separate here, they're two separate players in this story, Ash, because Citadel gets to see all the Robinhood flow before it hits the street. Steve Cohen's shop Point72 does not. That was a separate story.
ASH BENNINGTON: Yeah, two separate stories, cash infusion from Citadel and Point72, but for payment for order flow, it is just Citadel.
TONY GREER: That's exactly right. That's exactly right, and the right way to look at it. What's going on now at Robinhood is they're going through all of the financial survival steps that you have to go through when you've got margin calls coming. There are prime brokerage or the DTCC that was in this case, saying you're going to need to lay out this much cash for these positions you have on their books.
ASH BENNINGTON: By the way, Tony, for people who don't understand this, who haven't been experienced in this, this is about net capital requirements in the relationships with clearinghouses, which is such a critical part of this story. If you're a retail investor, you may not have had exposure to that part of the story. Why is that so absolutely important?
TONY GREER: Forget about if you're a retail investor, if you didn't work at a big shop and had the understanding of how this back office machinations work in terms of payments going back and forth from your firm to the exchange, you might not have any idea how this goes on.
ASH BENNINGTON: 100%. This is such an important point. If you don't know about clearing and settlement, you probably wouldn't know about it if you didn't work at a big bank. This is so crucial and inherent in this is the solvency of the firm, number one, and also the capacity of broker dealers to make money on things like margin lending. This is so critical to Wall Street. If you're just sitting at home entering trades on your retail brokerage account, it's something that you probably just don't know about, because you've never experienced.
TONY GREER: That's right, and you've never thought about the second level machinations of in a squeeze like this, where there's obviously going to be a large retail presence buying YOLO calls, out of the money, etc., etc., but there's going to be a driver in there that has some professional capacity. I think that it's been proven that there's been more volume in GameStop than could possibly just be retailers. Now, you've got a case potentially, where you've got institutional investors that are in there that are long the stock and pulling their stock from stock loan so that it can't be borrowed. They're creating another squeeze in the name that they're long so that they could potentially sell it.
If you didn't know about all the machinations that go on behind a short squeeze and margin requirements, etc., etc., you suddenly have got a great opportunity to call out the suits and the establishment and that's a very marketable call right now. The timing is just opportunistically perfect to point up at the big institution, like Point72 and Citadel and call them out, which is what Mr. Portnoy, the Barstool president, did. Now, I understand his frustration that Robinhood shut down trading, and let's not go into the details. Robinhood restricted trading in GameStop and several other names.
ASH BENNINGTON: Restricted trading to one share for a minute there.
TONY GREER: Right. Restricted trading and you can't you get long it. Your only allowable transaction is to liquidate a long position. It very much looks like they're padding it in favor of the shorts who need to buy it who were Steve Cohen's shop. What it really is behind the scenes is Robinhood saying we're not taking any more risk in these stocks right now until we cover our margin, and until we get the capital infusion that we need to continue to run our business, we can't let somebody come in and blow themselves up on a levered call option anymore.
ASH BENNINGTON: By the way, to give you a sense of the leverage trading for the audience, I got a buddy of mine, former banker, who was talking to me last night, he's up about 4500 bucks on a trade where he's selling calls on GameStop. He had to post $100,000 in cash before he was able to buy one contract to do it. That's the kind of risk exposure that Robinhood and other brokers are trying to insulate themselves for. Just understand that because of the volatility, there's a huge amount of implied risk in this trade. They are-- they, the broker dealers-- are getting collateral calls from their clearinghouses.
TONY GREER: Exactly. This is what happens when you've got all these levered bets that are imploding, the short-levered bets are imploding on the upside, while the guys that are long in the calls are making all the money. There's two stories to the story to me, and there's actually even another angle of it too. Because it's just socially and culturally, it's fascinating to me to see Dave Portnoy get his backup about this. It's perfectly opportunistic for him to call out Citadel.
We know there's a connection between Citadel and Robinhood, but then to get into this tiff with Steve Cohen, who-- you can say what you want about Steve Cohen. That's not what we're here to discuss. We're here to discuss the specific instance with Melvin Capital and how Steve reacted with Dave Portnoy. Steve was trying to be aboveboard and share with Dave, if he wants to make an additional investment in one of his existing funds while it's blowing up to prevent the loss from getting any further, he's allowed to do that. He's allowed to do that.
Dave Portnoy was invited to take a phone call from Steve Cohen, and probably Steve could have given him an education on how this works. Portnoy's too big for the phone call, doesn't take it. He says backroom deals happen on phone calls, so he wants it all out in the open. Now, he's not going to get an education on what's going on with the markets and calls out Steve Cohen to the point that the Barstool army starts coming or possibly the WallStreetBets army starts coming after Steve Cohen on Twitter. Now, to me, that's totally outrageous that Steve Cohen now has to feel these threats on Twitter when he's really trying to educate the person that is improperly throwing stones at him.
ASH BENNINGTON: Tony, just to jump in here, and just to give a little bit of context talking about education. I'm not an expert in payment for order flow, but a little bit of preliminary research that I've done that says when you buy order flow, when a fund like Citadel buys order flow from a retail broker like Robinhood, effectively they buy two things. They buy access to the order flow, and they buy optionality. What does that mean?
It means that they have the option, the funders buying it, the Citadels of the world have the option of either internalizing the trade so that they can internalize it based on their own order book, or the second thing that they can do is they can route it directly to the exchange floor. The idea that big hedge funds are in this impossible bind when there's volatility in the stock, it's not really quite the case, because they can just go, okay, we're not touching it. It goes out, we're not going to internalize it, we don't have to take on the risk, let's just route that order flow to the exchange or to the ATS.
TONY GREER: That's right, or right across the screens of our high frequency traders that allowed them to profit on it once more before it actually gets executed.
ASH BENNINGTON: But they have the option, they have the option, that's simple.
TONY GREER: They have the option, they have the option, but that's a pretty good option to get. That's why they see the order flow, because if they can have somebody taking them out of a position that they may be want to be taken out of, they can execute it against their book. If they want to route it to the floor, they can go ahead and execute it outright on the floor like that.
ASH BENNINGTON: Yeah. By the way, if you're an expert in this, come and join us on Real Vision Daily Briefing, let us know. If you've been involved in these sorts of transactions and you want to come out, we'll black out your face. The hedge fund guys with a hoodie if you want to speak freely, but it's just a fascinating topic and one that so few people who are on the retail side really understand. I don't understand it that clearly myself. It's not a transparent process.
TONY GREER: No, it's very difficult. What it looks like, Ash, is it looks like we're already in the middle of the seventh inning stretch of the WallStreetBets short rates. A whole bunch of them made a whole bunch of money in GameStop but the reality is that the weakest of those traders that waved into GameStop long last are the ones that probably got caught holding the bag too and lost a whole bunch of their own money.
That's where I sit here on the sidelines seething at watching Portnoy go back and forth with Cohen and Cohen is trying to set the record pretty straight here, and Portnoy doesn't want to hear it. He's going over his head, he's going to talk to Colson, and he's raging about the injustice and that he's going on Chris Cuomo, who knows less about markets than anybody. Now, I'm just trying to understand-- what makes me upset is that he's fed a bad story to the public. The public has run with it. They came after Steve Cohen, who had to then leave Twitter, and now, the problem with social media is there's no look back on that.
Jack Dorsey doesn't have to say, hey, is it a big deal that we just got the owner of the Mets and a hedge fund manager booted off of our platform due to threats? No. That's everyday business in the world of social media and Twitter, they just move on. The world doesn't get to have Steve Cohen on Twitter. Dave Portnoy gets to let his army think that he's taking on the establishment and might change something. About what? About margin requirements? About firms doing everything they can to survive financially in periods of high volatility? There's nothing new under the sun going on here, man.
I hate to tell everybody the form at which it attacks the market is very different, and very nihilistic and very unprofessional, but that's fine. I don't care as long as I know the rules, I can play by them but there's just a real, real injustice there, that it's fine that the short got squeezed but in the world of maiming the story out and trying to simplify it, the street really lost the plot. The street completely lost the plot, aside from the people that really know what went on. That's why the GameStop thing to me is a sad collateral story to how social situations are interacting with the market, if we can call it that.
ASH BENNINGTON: Well, that's exactly right. People have asked me what happened? You cover markets, what happened? The really simple answer right now is that we don't actually know definitively what happened. You and I have a bit of an understanding about the way these things work in the back office. We've got some context here, but we don't know because we haven't seen data. We're just talking about the stories in terms of plausibility.
Look, have hedge funds in the past, let's be honest, have hedge funds in the past done things to manipulate prices of securities unfairly? Absolutely. That's just a fact. Do we know that they've done it in this case? Absolutely not. We haven't seen evidence for it. If there's evidence that comes out, we'll look at it but as of right now, the answer is we understand the basic context of the story, we get a pretty good sense of probabilities, it definitely seems like net capital requirements and the relationships with clearing firms played a huge part in this, but we don't actually know yet.
That's a really uncomfortable thing to say. Nobody wants to say, hey, I don't really know exactly what happened. When you don't know, when you don't have the information, when you don't have the data, you know what takes over? Emotion.
TONY GREER: Yeah, that's a good point. We saw and have seen a lot of it. The GameStop guys to segue a little bit, rounded themselves up and they went after American Airlines. They went after silver, and I'm inspired by their spirit but it's like going to try to create a short squeeze in an airline that has been depressed for 10 years and trying to create a squeeze off of the lows in a holding that every mutual fund has been choking on for 10 months, I'm sorry, man, but you just going to wake up sellers.
The same thing is happening with silver. They've got this folklore story that there is this huge shortage of silver, there may be a huge silver naked short out there, they believe the price is being depressed. They're forgetting the fact that there are commodity merchants that have been in this market trying to figure out what's going on with silver and net short for years. Now, they're trying to take silver on a run to the upside, they took it from 25 to 30. It came back all the way right to where it started from already.
I think that they're getting an education the hard way, Ash, and I guess it's just upsetting to me because it doesn't have to happen that way. Maybe that's the way it's going on now. It's fine, but I feel like there's a lot of money being incinerated and I feel like there's a lot of hot air being wasted on this story that's not taking it in the right direction.
ASH BENNINGTON: That is exactly the right point, Tony. I'm so glad you said that. Because you and I spend most of our lives working on democratizing financial information. It's the thing we're most passionate about. We're definitely not here to defend hedge funds. That's the last thing we're doing. In fact, quite the opposite.
The whole reason that we do what we do is because we love it when the little guy can understand what's happening in the market, when they have the opportunity to make good decisions and to make money. I think these-- whether the story, the narrative is always right, I think it's terrific with these kids, younger people on GameStop, young guys and gals in their 20s getting interested in markets, getting interested in finance, best thing in the world, big picture. Man, kudos to them, hats off, I think it's great. The challenge is some of the narratives are a little bit more complicated, or, in some cases, a lot more complicated than they seem on the surface.
Exactly as you said, these people who are going through this cycle, if you're 22 right now, and you've just lost five grand which could be a huge amount of money if you're 22 years old, on a silver play that you maybe didn't 100% understand, I can guarantee you that that guy or gal when they come up two or three years later, when they're talking to someone who's 19 or 20 are going to say, let me tell you something, I know what I'm talking about. I've lost money. That's the way that you learn.
TONY GREER: That's exactly right. Maybe I'm just sore, because guys in our generation learned it a little bit differently. I've got my battle scars from the markets all over me, and that's fine. It just seems like I got those in an orderly fashion. These guys are running their head into a wood chipper, and it doesn't seem like it makes sense.
ASH BENNINGTON: Either way, that's the lesson that they're going to learn. You and I got yelled at by crusty old guys on the street,