{"id":181026,"date":"2021-01-30T01:16:34","date_gmt":"2021-01-30T01:16:34","guid":{"rendered":"https:\/\/cryptoslate.com\/?p=181026"},"modified":"2021-01-30T01:34:29","modified_gmt":"2021-01-30T01:34:29","slug":"how-robinhood-halting-gamestop-trades-led-to-defi-and-crypto-recognition","status":"publish","type":"post","link":"https:\/\/cryptoslate.com\/how-robinhood-halting-gamestop-trades-led-to-defi-and-crypto-recognition\/","title":{"rendered":"How Robinhood halting GameStop trades led to DeFi and crypto recognition"},"content":{"rendered":"

Robinhood\u2019s shutdown of GameStop stock trading via its platform has led to a massive public uproar. As a beneficiary of this outcry, DeFi and crypto have gained the attention of politicians<\/a>, retail investors, and entrepreneurs<\/a> alike.<\/p>\n

Wall Street faces huge losses over GameStop stock rally<\/b><\/h2>\n

On January 11, GameStop agreed to a deal with Chewy.com\u2019s founder, Ryan Cohen, to add three Chewy.com veterans to its board as part of a plan to embrace eCommerce and had a subsequent 60% increase in stock price.<\/p>\n

Just 10 days later, on January 21, Citron Research and short-seller Andrew Left argued that they expected GameStop to drop in value. Around that time, a group of retail investors on the famous subreddit WallStreetBets noticed that the Grapevine, Texas-based video game retailer was short over 140% on its stock\u2019s float.<\/p>\n

They began to buy call options on the stock and the stock began an unprecedented rally of roughly 1,500%. This led to two major problems for Wall Street.<\/p>\n

1. A short squeeze<\/strong><\/h2>\n

A short position is where an investor has a borrowed a stock and sold it with the hope of its value dropping. Once its value drops, the investor would plan to buy the stock back and return the stock to the original lender, and pocket the difference in the price. A short squeeze occurs when the stock being shorted has its price rise significantly and the short investors try to buy stocks to prevent further losses.<\/p>\n

One major hedge fund, Melvin Capital Management, held a significant short position in GameStop and scrambled to close their position as the price rallied. According to Reuters<\/span><\/a>, sources close to the fund said it lost more than 30% and got a $2.75B lifeline from Ken Griffin\u2019s Citadel and Steven Cohen\u2019s Point72. An Insider article<\/span><\/a> cited exclusive data that showed $19 billion in overall losses by hedge funds and other institutions as of today.<\/p>\n

2. A gamma squeeze<\/strong><\/h2>\n

When the retail investors bought call options, the institutions that sold to them (known as market makers) also buy the stock to hedge their risk. When gamma (the rate of change of the ratio between option price movement and stock price movement) starts to rise, the market maker needs to buy more and more stock to hedge their risk. This occurred in the case of market makers for GameStop call options.<\/p>\n

These two squeezes led to investors with short positions and market makers try to purchase more and more of the GameStop stock which further drove up the prices. This led to the next major turn in this story: the suspension of trading of GameStop stock by some major trading platforms like Robinhood.<\/p>\n

Robinhood stops GameStop stock trading on its platform<\/b><\/h2>\n

There are two major thoughts on why Robinhood halted trading of GameStop and other short squeezed stocks on its platform:<\/p>\n

First, Robinhood faced pressure from institutions and market makers to halt the trades.<\/p>\n

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Citadel is an investor in Melvin Capital, which got run over by Wall Street Bets. Citadel is also Robinhood's biggest customer. ?<\/p>\n

— Tyler Winklevoss (@tyler) January 28, 2021<\/a><\/p><\/blockquote>\n