Hello, and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Halloway and I'm Joe. Wisn't thal Joe? Remember when you said game Stop was a value investment? Crazy, You're you're, you're, you're skewing my words. Not really, I said, and this was the wake of our recent interview with Rod. It started off as a value investment, which is true.
I would not in any sense characterize the recent trading from probably like fifteen to four eight and now back to one seventies seven after hours last time I checked, is a failure investing. I will admit that's not value investing. Okay, I think we're both agreed on that point. But you mentioned the episode we did with Rod. We talked a lot about the business case for game Stop. He was looking at a lot of fundamentals in the business that made him bullish on it as a company. That was
one part of the whole game Stop saga. The other, of course, was what was going on in technicals with both the short squeeze and the gamma squeeze. And I think we need to devote an entire episode to just talking about those, yes, exactly, because the story really has I'm kind of been thinking of it. It It has it has like three parts. The first part is guys like Rod and the Roaring Kitty and some of these other
Michael Burry like make the value case. Then it kind of gets into this short squeeze, redded frenzy, gamma squeeze, call buying and everything that that, and I think that's what we're gonna talk about today, I noticed. And then there is like the third part, which is everything that this taught us about market structure and robin hood and stuff like that. And maybe we'll get into a little bit of that today because I think our guest knows
that stuff well. But we really like what we're gonna do today is going from part one to part two, which is like when it entered the Reddit retail flywheel, what the hell happened? What does that say about the market? Overall? Right? The squeezes are how we got to, you know, an increase of two thousand percent in the space of less than I think it was less than two weeks something crazy like that. All Right, So I'm really happy to say that we have the perfect person to talk about this.
He's a four time all thoughts guest, which might be a record or might match another record. It's Ben Eiffort from QVR Advisors and he has all about options and the big Gamma squeeze. So Ben, welcome on again. Hey guys, I'm so happy to be back. It's always a lot of fun. I'm trying to think where to start, but maybe just to begin, you know, in options land, how crazy has the past week been for you? So it's
certainly been been wild. I mean, as you guys no doubt have seen, there's been enormous amounts of option volume going through in some of these popular retail names, you know, gm E being an obvious one, um you know, on on some days nearing the types of typical volumes you'd see like in SMP Options or in you know, Tesla Options, which is pretty spectacular for a company that. I mean, what was the market cap of gm EU six months ago? You know, it's it's it's been quite wild. But I
think this again that this was particularly crazy week. But I think, as you know, we've been emphasizing, this is really the culmination, you know, or the current state of a trend that's really been building for for quite some time, right, really start late from starting in late with surging volumes across a bunch of different brokerages platforms after the you know, Robin Hood initiated and a bunch of other brokers started
matching you know, zero commission options training. So I remember, I think the last time we talked to you time late last summer, maybe it was like October or something like that, and it was kind of like taking stock of this sort of retail options booms. And there's a number of charts that you have showing the rise of one week call options and the rise of call options in general, and the rise of small orders that indicate that so much of this option activity really has taken
place at the retail level. Just flash forward to today. How much crazier overall is the market. You know, we're recording this February one, February one, versus say, last September,
October whenever the last time we talked. Yeah. Absolutely, So you know, if you think of what those charts looked like of growth of option contract notional traded by small traders, growth of option premium traded, you know, they looked totally parabolic at the time, and now it's just like you zoom out and that parable is just kept going at the same kind of you know, exponential growth rates. So it's been really impressive. I mean, I think there were
was lots of noise over the last few weeks. You saw some of that data of just making new record after new record after new record. Um, you know, seeing just incredible numbers. You know, twenty million, thirty million, forty million calls traded in a week by by this segment of the market, and you know, tens upon tens of billions of dollars of option premium and you know, very
very leverage types of types of trades. So this this trend has continued, you know, at this to grow at these kind of rates, you can speculate about where this growth has to taper off, but it hasn't yet. So let's talk about how that all that retail options activity can actually lead to buying momentum for a stock like game Stop. So one of the things that we saw last week when game Stop was rising was there there were some people out there going, oh, this possibly can't
be this, I can't talk. There were some people out there going, this can't possibly be just retail investors because the stock is moving so much and they don't have a lot of money. But you've spelled out quite clearly in your research and on previous episodes with us just how smaller amounts of retail options buying can actually translate into larger amounts of money flowing into the underlying stock and a lot more leverage. Could you explain exactly how
that works? Sure? Absolutely so. Well, there's a couple of related components to this. So the first is just the synthetic leverage that's embedded in options, and then the second, which will come to in a bit, is the convexity or the gamma and like the dealer hedging dynamics. But so just focusing on the first for a minute, and there's lots of different examples that you can go through.
But you know, backing up a month or two to two calmer times where you know, before Jimmy implied volatility was you know, a small investor could could buy a call option on GM with maybe call it one week to expiration, and it might for example, you know, GM might have been trading at you know, around twenty bucks and they might have been able to buy a call option for you know, a very small fraction of that um you know, maybe a dollar or maybe fifty cents
that was somewhat out of the money that was going to be expiring in a week. That leverage that's embedded the fact that they might get when but when they buy that option, say twenty five or the sensitivity to the underlying stock price, but for only you know, a couple percent, one percent, less than one percent of the
actual cash outlay. That creates a big amount of leverage to the to those kind of trades, right, So a retail investor might get ten to one, one fifty to one leverage effectively by speculating on the direction of the
stock using those those call options. And that's not just you know, a theoretical concept, right, because when that retail investor goes out and buys that call option that has a thirty sensitivity or thirty delta to the underlying stock, he buys it from a market maker, and that market maker sells him that call option and then goes and buys that stock in order to hedge the directionality of
the position. So that's real trades that go out and are executed in the underlying stock, you know, in lieu of in lieu of the what the investor is doing. Now the second component of that, you know, on top of just the huge amount of of notional dollar exposure that that a small amount of premium out lay creates is the fact that when those call options, as particularly are,
are brought to the upside. So let's, you know, again, go with that case of a twenty five or thirty delta call option that only has twenty five or sensitivity to the underlying stock price. Right, stock goes up a dollar, the option should only go up thirty cents. As the stock goes up and up, it gets closer and closer to that strike price, and the strike price the delta, the sensitivity of the option to the underlying stock grows
and grows and grows as the stock goes up. And so that dealer who had initially bought equity to hedge that position is now going to buy more and more and more equity to buy to hedge that position as
the stock rises. Right, And that's this notion of of a gamma squeeze or an acceleration effect where if you know, retail is buying or or anyone is buying very large quantities of short dated upside call options that accelerates the movement of the stock of of a stock to the upside because of this virtuous cycle where dealers are buying stock because the stock is going up. So someone buys, say a hundred call options. The dealer doesn't go out
and buy a hundred shares. They buy some fraction of that initially because of course they don't assume necessarily that the stock is actually going to hit the strike and that they'll be on the hook. But basically as the stock gets closer, as the underlying gets closer to that strike, there then on the hook. You know, the odds that they're going to essentially have to pay out the bed go up and they have to buy more stock to
pay to be headed. Yep, that's exactly right. Think of it as you know once call it once the stock has gone up so much that the probability that it's going to be in the money by the time you reach expiration is really high. At that point a dealer will will be hedged on a full notional. In other words, to your point, an option contract has a one multiplier, So if they own a hundred contracts, that's like owning temp that's like exposure to ten thousand shares. At that point,
the dealer would just be short ten thousand shares. Again, I would sorry, would be long ten thousand shares against the hundred option contracts that they're short but day one if the delta is only twenty five. In other words, the sensitivity of the of the option to that stock price is there's an implied probability of percent, but that
stock is going to end up in the money. The dealer would only be long shares and maybe buying and buying and buying as the stock rallies up to that maximum of ten thous So one of the reasons I find this story so interesting, and I also think it's different to people, you know, pumping up the stock on message boards in the late during the tech bubble, is because of the role of options, and specifically the fact that there were people on Wall Street bets who were
targeting specific options contracts that they thought could have the biggest impact on the underlying stock. And that's, from my perspective, really sophisticated behavior and probably something that we're more used to seeing from, for instance, a hedge fund than a guy, you know, trading out of his basement or something like that. How how surprised were you by that or how much
did that play a role in forcing the squeeze. Absolutely, So you know this, I think a lot of people perhaps underestimated the sophistication of at least, you know, some of the folks within a Redditt Wall Street bets type of community, you know, that are that are leading this type of charge because of how unfamiliar their language sounded, right, because of the the you know, the rocketship emojis and
all of this kind of stuff. But if you go in and read some of the original posts about the potential for example, for a short squeeze in g M e um, you know, some of the long form you know writing there, Um, these are very sophisticated people, right. They understand the dynamics of you know, short interest and
float and how shares have to be covered. They understand the mechanisms you know of option delta hedging by dealers, and they understand you know, the short data options have you know, by far the highest you know gamma and the most convexity have that it makes this acceleration effect largest, you know, and and other little cues, I mean, just
just silly stuff. But for example, that original short squeeze post had a little mentioned of something about you know, I love z Mass and that's that's that's something that only an institutional derivatives trader would say because the you know, the the inside joke and derivatives markets is that they're run by French quants and that's kind of a little ha ha about about you know, coming back to that dig right, So again, that's not that's not somebody who
that's somebody who's been in the markets in an institutional role. I I missed that whole thing. So I guess what you're Another way of saying this is if you're a short seller, like I don't know, Citron Research, you may not want to, like rate wave the red flag in front of that community thinking that they're just going to
fold at the first mentioned that this dog is overvalued. Yeah. Absolutely, I mean I think that you know, one thing, uh, that one one little little discussion that we had must have been six months or eight months ago at this point, and I think it was about Tesla actually at the time, you know, was that you know, there were some folks who are making fun of the of the Tesla lawnss right, and of some of the video videos that you know, some of the enthusiastic fan base of of Tesla was
describing what they thought about the stock and my point what and they were saying, Oh, this is the perfect counterparty, right. That is not That is not how a smart how a trader thinks. Right. The perfect counterparty is someone who is weak hands and can be pushed out, squeezed out, can is leveraged, can be forced out of their position.
The worst counterparty in the world is a big kind of ignorant or or otherwise right, but unleveraged counterparty that doesn't that's not going to be pushed out of their position, and that's really excited about their position. Right. So I think that this is actually really important. You wave a red flag in front of those folks, you get them, get them mad at you. You're the you're the weekends right when you're short of when you're short of stock
because of a stock. You know, we talked about gamma. A short position in the stock is a short gamma position, right, because you have if you short a billion dollars of the stock and it doubles, now your short two billion dollars of it, and your risk has doubled. And then if it doubles again from there you're gonna lose twice as much money as the first time that it doubled. Right, so you have unlimited loss. You're the week, You're the
week the week you know, party at the table. So one thing I've been curious about is when you were watching the flows around jim last week, how much of it was fundamental buying and selling versus the gamma or the short squeeze. Is there a way of measuring that? It's hard to say exactly what fundamental what is fundamental buying and selling in that in that kind of environment, Right, you can certainly model how much of stock volume do you think is dealer hedges on new option position and
dealer hedges on existing option positions? Um, it's certainly material, you know, in the double digit percentages. But so many different things were happening last week, right, I mean, I think it's worth mentioning. First of all, of course, volumes were off the charts. Second UM last week, even though it was the culmination of this you know, of this parabola in GM ME in both in Gimmy and the other you know m C and n b U, I, you actually saw relatively balanced flows from the retail community.
In share transactions in most stocks. So there was probably a lot of new buying from you know, new enthusiastic
you know, members of the of the group. But there was also a lot of selling, uh, you know, probably some combination of profit taking and other things, um, which tells you that a lot of the big explosive price action to the upside um, you know, in combination with when you look at the rapid deleveraging and deep grossing and the headpund community, a lot of that was forced shortcovering and then cascades of of forced shortcovering by by
big institutions. So you know, I think if you were to look at you combine forced short covering and degrossing among hedge funds and forced in some sense or mechanical trading of dealers in the underlying stock, you know, some some very significant percentage of underlying share volume you know, was being driven by those technical factors. You know, we're talking about ways that this particular market is different from
the late nineties, and Tracy mentioned um. You know, of course we've been talking about the call options buying that is very new. You know, it also seems like a new dynamic or an emerging dynamic that might not go away. Is just like the way social media encourages um like buying impacts, Like suddenly everyone is just focused on Jimmy
or everyone's just focused on jimy AMC and Nokia. How new is this not just the explosion of options trading overall, and not just the leverage that comes with options trading, but in so much potentially concentrated in a very short period of time, in just one name or a small handful of names. Yeah, I mean, certainly the extent to which that is true or seems to be true in this environment I think is new or it's really it's
taken it to another level. I mean there there are elements of it, you know, which which go back a long way, is right? I mean you think of how did what were the coordinating factors behind retail investing trends over the last ten or twenty years, And you could point to like, you know, Cramer on CNBC or something like that, right where like what were there the really
cool things and the really cool themes? And Cramer would be up there saying he loved the stock and you'd see, you know, huge retail flows for the time retail flows you know, are obviously much bigger in the over the last couple of months, but you know, so so part
of that element was was always there. But I think, you know, social media has been uniquely powerful in coordinating rapid action across abroad, you know, a large community of people, you know, not just within finance obviously, and in other areas as well, and I think that's going to be
part of the landscape going forward. For sure. There's all manner of you know, it raises all manner of questions from a regulatory perspective that I don't think it I don't think anybody has very clear answers too, and I don't think you know, the regulators have very clear answers to either. Right, This is a it really is a new dynamic for the SEC to look at and understand
how they think about it in the first place. And you know, I've I've I've had conversations with you know, with friends in regulatory seats you know, who look at this type of thing closely, and I don't think it's there's any simple and obvious answers as to you know, where where this is going to go in the near
term from a regulatory perspective. So I mean, on that note, I know you just said there aren't any easy answers, but um, some of the comment area we've seen over the past week has been suggesting that this could pose some sort of threat to the stability of financial markets.
So if we see this type of swarming behavior that's capable of knocking out a hedge funder two and maybe causing problems for brokerages at robin Hood and making us all think about you know, settlement issues and collateral and things we haven't thought about since the financial crisis, really that maybe that's a bad thing that would probably fall under Joe's definition of a bad take. But certainly that
conversation has been out there. How are you thinking about the financial risks or the systemic risks of this new behavior. So so it's a very good question, I mean, and I think that's where that's where it becomes. There's there really are two separate issues, right, One is securities laws and regulation around trying to protect retail investors and so forth, right, and then the other and around manipulation and the other
set of issues around around financial financial stability. And you know, I think that ultimately when you look at for example, what happened in a lot of the retail brokerages, especially the smaller, less well capitalized private brokerages like robin Hood
this week. You know, you saw the whole modern regulatory apparatus and apparatus of collateral and credit management you come into play right where there was this huge surge in dollar volume traded net dollar volume traded by clients of brokerages like robin Hood in these particular stocks that we're moving in a very volatile fashion, and so the you know, systems that we put in place as part of Dodd Frank right where there are central clearing houses that unsettled
trade risk lives at in the charge of credit haircut on you know, on that dollar risk that turned into these huge margin calls you know to robin Hood that they had to meet. Um, it was a scramble because this all holded so quickly. But ultimately, you know, robin Hood went out and raised three billion dollars of new capital plus right in a couple of days, and most other you know, most of the other brokerages have also
been able to reopen trading in these names. And like the purpose of that system right is to put guard rails around around the collateralization of brokerages so that you don't have unexpected failures and to have an insurance pool that's large enough across the brokerage system. Right, and you know, this was a good stress test, right what you know? The the question is how much crazier could it? Could
it be? And could it happened too quickly? Right? But the I think those are the kind of issues regulators are going to be thinking about. I don't think that regulators in of itself, I don't think that they would have great concerns about some particular microcap stocks having you know,
some crazy, some crazy activity. The question is, you know, what if this kind of activity became much much broader, what if it was affecting you know, the creating huge swings and currencies or commodity or you know other things that have major knock on effects on on economic policy. I think those are the kinds of things that regulators
are going to be thinking about. I made a joke a little while ago about you know, about Wall Street bets going after you know, the dollar via you know, via some of the E T E T f s that are around there. I mean, if Wall Street Bets was actually able to move the value of the dollar by thirty pc by trading a bunch of out of the money call options that would probably get um, you know, attractive crackdown in a hurry. But these are those are much bigger, Those are much larger, much deeper, much more
liquid markets. Right, And I think part of what the Reddit community knows and understands again, you know, coming back to the sophistication of the ringleaders of this kind of operation, right, they understand that they can have a hugely outsized effect in thinly traded you know, small caps and microcaps, right, um, and they can potentially have some impact over a longer period of time and in larger asset classes, but but nothing nearly as dramatic because ultimately, you know, global financial
markets in currencies are are measured in the trillions, not in the you know, towns of billions. So presumably, I mean, this current episode will fade into some of these popular yolo squeeze names aren't going to be in the news as much. But I'm still like really interested in what the sort of long term effects on just market pricing
is and I'm curious to start like shorting. So there's been a lot of questions now, like what is the future of short selling, Like the whole thing of someone coming out advertising is short that might be totally dead for a while unless they're ready to you know, leg total fraud. And honestly, I'm not even sure that would do it because that might just be still acute for
the yolo buyers. Could you see, um, you know, in terms of taking a directional negative bet, could there be more with options and puts and sort of like what what do you see is the effect if shorting itself becomes a perceived is just too risky to do right now? Yeah,
I think that's exactly the right questions. So, you know, one of the things that we saw last week, right in very big size um, even in names which there's no reason to think we're directly targeted by you know, Wall Street, Beths, right, was very aggressive shortcovering across names that were small cap or micro cap that had a
reasonable amount of short interest out there. Right because hedge funds and hedge fund risk managers were very proactively assessing the state of the game, of the state of play and their portfolios and where was this risk and where could there be you know, this risk manifesting itself right and proactively covering that risk. Um, I think that you're you're going to see much more hesitation to have certainly any kind of meaningful risk position in an outright short
within you know, low liquidity stocks. Right. I think you had a you know something that that's a bit of an unusual circumstance here, right, which is many of these hedge funds that you read about having lost a lot of money are were very large and had me ning full short positions and pretty small companies right GM me at the time when when these positions would have been initiated,
was you know, a billion dollar company or less. And the liquidity and the float and the volume, it makes it very hard to support, you know, like a three million dollar short position, an aggregate short position across the market of billions of dollars. So I think you're going to see much more reluctance to to engage in that type of activity, right. That You're also going to see I think much more much more demand for optionality on
those kind of names. So if you really believe that this, you know that that there's a company that's a great short, and you have a catalyst and you think that you know makes sense to be in this bet um. You're going to look to structure, structure those trades with puts or put spreads or some type of limited loss um, you know, positions that give you, you know, give you staying power to give you, give you, make you strong hands,
and not weekends. Right. As a result, you're going to see, you know, significant difference is in option pricing in that whole segment of the market, right the upside you know, upside options are just going to be bid because that's your hedge against a short position. The wings and options speak sort of the deep out of the money. Calls and puts you know are going to be much more
symmetrically bid. I would think, whereas you know, you typically think of skew in most equity and the most most stocks as being you know, it's more expensive to buy that that those downside puts than it is to buy those upside calls. Because there's this trend. You know you want to buy insurance, and insurance is expensible. You need insurance on the upside against your against your shorts. Right, So I think that that's going to be a long
lasting impact. So the implication here is that the types of options that have been deployed by a lot of people on Wall Street bets with great effect in the case of Game Stop, those are going to get more expensive and possibly harder to use. I think that's probably right.
I mean we've seen really over the last seven or eight years, especially um before the Wall Street Pets phenomenon, you know, on the retail side, and then also on the institutional side, you know, being common wisdom that you know, buying options is for suckers, right, because you pay this insurance premium, you pay this risk premium. Right, You're supposed
to sell options in order to make money. If you think that the stock you know is overvalued, maybe you don't short and maybe you just sell calls on it, right, And you've seen you have call over writing and put under writing and iron condor selling, and this kind of common wisdom that you're just supposed to sell options. And I think that that really led to, especially after where which saw I think a huge surgeon that that phenomenon, you know, options just being far too too cheap and underpriced.
I think this is going to generate, you know, the one so far have generated very strong pushback against that in a very strong repricing of options to become much more expensive. Um. But you know, because of the value of, for example, being able to put on a short position. And as we were talking about earlier today, you know, if you bought puts on GM a couple of weeks ago, you'd um, you'd be up a lot as opposed to having gotten blown out of the water on your on
your shorts. Right, that's a bit of an odd phenomenon of of just how incredibly volatile the stock has gone.
But forgetting about that for a second worst case scenario, you would have just lost the premium, right and that and that's incredibly valuable in a world where the alternative is that maybe you're actually down ten x on your position, maybe you're down fifty x on your position, cutting off that tail is incredibly important, you know, speaking of short selling, you know, one of the things that the Wall Street bit crowd has really been focused on is like when
is the when are the shorts going to cover? And so they're sort of these crude metrics of how many shorts there are outstanding? How useful are those measures of aggregate shorts and especially when you think of how short can be combined with options trade such that such such that the holder of the short is not necessarily directly negative. Like how useful are those measures? And how can you how well do we really know short interest out there
in any name? You know, it's certainly indicative, but it's complicated, and there's a lot of different factors going on, right, and you alluded to some of these. So one way that you can see a bunch of short interest is because you know, somebody's borrowing a bunch of shares and shorting them, and that certainly has been the case in
these names. Another another reason you can see short interest is if, for example, clients are selling calls, customers are selling calls to a dealer, dealers are buying those calls, and then they're hedging them with short stock. Right, that's a very different phenomenon. Of course, the customers do in that case have some have a similar risk risk thing. Those shares that are short could be hedges of all kinds of different derivatives positions, They could be hedges of
futures positions in in certain kinds of products. Also, you know the understanding, you know the dynamics of rehypoblication and in shorts where you have you know, a daisy chain of shorts where you know, someone borrows borrows of share, it's lent out and then it goes into somebody else's account. Someone borrows that share, um, and so they just looking
at aggregate short interest and that's all. You know. It doesn't tell you a precise picture, right, And it also doesn't tell you who are the shorts in the sense that you know. One thing that we hear about last week, for example, is that, um, there was a very large amount of covering from those initial shorts, the original shorts who were in the newspaper and who lost a whole
bunch of money on this. They were replaced. In many cases, a lot of those shorts were replaced by folks initiating new shorts, folks who hadn't been short before, right, And so um, you know, those are still shorts, and maybe
you can squeeze them. But now you're talking about squeezing somebody who put on their short at three hundred bucks as opposed to somebody who put on their short at you know, thirty bucks, right, And they're in a much stronger position because they haven't lost any money yet, and you know, they might have a pretty deep wallet, and maybe if you blow those guys out, then some other guys who haven't touched it are going to come in and short at six hundred bucks, right, you know the
overall picture. You know, you can have a plan, which is I'm gonna buy a whole lot of this stuff. I'm gonna roll these calls up until the shorts are forced to cover, and I'm gonna sell to them. But you don't really know exactly when that's happening, and actually that short mix may just be rotating as you push the stock higher. So when we're talking about possible changes to the way the market works as a result of this, there's also the whole sort of retail brokerage dynamic, which
you've touched on a couple of times. But one of the big points of drama in the entire game Stop phenomenon was when Robin Hood restricted trading on Jimmy and a few of the other meme stocks. Can you walk us through that decision and whether or not this might end up being a more common occurrence if we continue to get these social media fuel squarms over stocks. You know, I think we first heard on Wednesday night Thursday morning about Robin hood having maxed out its lines of credit,
you know, across several different banks. A bunch of us were discussing kind of the plumbing issues here on Thursday. So just to walk through step by step here, right, the way a brokerage works is when when a brokerage's customers buy and sell stocks, those trades don't settle until two business days later, when the buyers and sellers are
matched up and the cash is exchanged for securities. If a brokerage's customers are buying and selling an equal amount of shares on a given day, then that's really just internal accounting transfers within the brokerage. Right, Hey, I've got you know, these guys bought fifty million shares, these guys sold fifty million shares. We just kind of reshuffle around
everything among the accounts. But if that brokerage, as customers are, are big net buyers of a stock, then that brokerage has a big net unsettled position in buys on that stock facing the clearing house, right, And those trades don't settle for two days, and that's counterparty credit risk, right, And so what the clearing house does under the modern Dodd Frank regulations there's a specific sets of formulas that generate how much collateral does you know, Robin Hood, the
brokerage need to post to the clearing house as a function of the risk of those outstanding unsettled trades that they have, and that's going to be a function of how large those trades are and a function of what's
the risk on that particular security. Uh. And you know what we heard this week, right was DTCC raised its haircuts on the clearing house raised its haircuts on these popular meme stocks that were trading, you know, doubling or cutting a half every day, which is a very reasonable, you know, thing to do given the risk of those securities. And so what happened was robin Hood got a margin call for three plus billion dollars at three thirty in the morning on on on Thursday morning. Right, I'm sorry,
on Wednesday morning, I said, Thursday morning. And that's again, that's the way that the system is set up in order to be resilient to uh, you know, to credit risk and shocks in the in the in the system, right where brokerages have to be adequately capitalized to support the volume of trading that they're doing. And you know, Robin Hood did go out and then and raise a
whole bunch of money. I mean, certainly, one thing that's going to happen now is all of the brokerages are going to be rewriting all of their stress tests for you know, increases in volume and increases in risk. Right, you can argue it would have been hard to see to foresee a spike in volume and risk this big,
this fast, you know happening. You can go back and forth about how extreme your stress tests should be, but you better believe that across the street, everyone's going to be you know, dramatically increasing those kind of thresholds, right, And as a result, you're going to be seeing capital plan and going through. You're going to be seeing you know, fundraising get done and more lines of credit put in place.
So I think that you know, that's certainly well, you know, how capitalized does you know the banking system and the broker system have to be to support this type of you know, this type of activity, And like what we're we're finding out, it kind of seems like I mean, I know a bunch of politicians, Elizabeth Warren and others have criticized it, but it kind of seems like the system worked. Yeah, I mean I would I would agree
with that. I think that people, um, you know, you you have to make some choices ex anti certainly as a business in um, you know, in forecasting. Okay, how much capital do I need and what kinds of access to capital the short term do I need to manage the expected fluctuations in the nature of my business? You know, this was a very very large increase in capital requirements over a very short period of time. And you know, Robin Hood I think did a total disaster on the
pr side. But being able to being able to get out there and raise three billion dollars in a couple of days and you know, get this stuff, you know, back open again. I think it's pretty reasonable. Ultimately, it's hard to say that what the system is designed to avoid, right is cascading failures of brokerages and you know, people
losing tons and tons of money in systemic implications. Um, you know, I don't think the primary objective of the regulations governing the way our brokerage is work and post collateral is you know, is the hot stock of the day always available to trade on demand, you know, at any at any level for any customer. So we touched
on this in a previous episode a little bit. But if we're saying that ultimately the requirements around clearing and collateral and posting collateral in order to protect robin Hood customers is a good thing, how how would robin Hood actually go about changing that narrative because it seems really really tough at this point. I think I think that's the tough things, right when you look at the narrative.
On Thursday, lad was very tight lipped and and you know, went on television and said didn't really say very much. And I think that's understandable in a sense, right, because the concern there is if we if we go out there and we tell the world on Thursday that we just got a three billion dollar margin call and we haven't really figured that out yet, we don't have the money. The concern, right is that causes a run on the brokerage.
Everybody freaks out, everybody pulls all their money. Banks are worried that everybody's going to pull all their money, and they pull their lines of credit and there's some kind
of cascading failure, right. So you can see and that's probably the advice that you know he was getting and you can understand that, um, but I think that when you look at how fast the narrative got away from them, and you look at the anger in you know, the general public that isn't necessarily that hyper focused in their dinner conversation around you know, clearing collateral requirements, right, it created a big backlash and a big, big brand damage
for them. And I don't know, you know, it's not obvious that they're going to be able to get that, you know, to shift that narrative back among really their core client based this notion of democratizing, democratizing trading and democratizing brokerage. I think that's going to be be a big challenge for them. Well, we'll have to have you back when retail options trading triples again from here in three months to see what to see what even weirder
stuff happened in the market. Exactly, we're gonna be we're gonna be doing call options on on the Euro, trying to tank the dollar, and it's going to be working, and we're gonna be like, don't tell Wall Street bets about the Hong Kong dollar peg stuff like that. Yeah, exact, I'm sure I'm sure Kyle is A is really hyper focused on that. Sorry. Sorry, Tracy, I probably shouldn't even
said said that into existing Yeah what are you doing? Okay? Well, um then it's yeah, it's lovely having you on for a fourth time, and we'll get you that all box tote bag in the mail soon. Awesome. I definitely need one, guys. It's always it's always fun. Sorry if I was a little distracted sitting here in the park, So Joe, Yeah, I think that was a really important conversation to have. I know we've spoken about the amazing story, which is some people who made a bullish thesis on Game Stop
and then ended up making a lot of money. But I don't think you can talk about that story without discussing the technical factors like the short squeeze and the
gamma squeeze that went into it. Totally right. I mean, I'll say this that the short squeeze element was at least part of the thesis from the early at least late last year I talked about with Rod, but the Gamasquez, the swarm, the effect that options buying had the sort of flywheel effect where more and more buying led to this upward vortex and price that is its own distinct thing, and no one like talks about the mechanics better than no one talks about it better than betting period absolutely.
But this is also I think I said this, but this is why it's so interesting to have seen people like deep effing Value, as we keep referring to him, people like Deep effic Value who were making the crowded short position part of their fundamental case and then going
after the gamma squeeze through options contracts. That mingling of the sort of fundamentals with the technicals I find really really interesting, and it's one reason why when you see the game stop strategy rolled out to other companies or to other markets, people are looking for places or for companies with sizeable short positions where they could maybe affect a squeeze of some sort. Yeah, and I am like really fascinated by this angle because you've talked about it
message boards. They've probably been around for like a quarter century if not longer, people talk about stocks, but like so I've been every day after the market ends, like um DFV posts his daily gm E YOLO update, like how many millions he's lost? If you look at the comments and they're all if he's still and I'm still and if he's still in they all it's all that. So not only do you have this, you have this sort of like cult of the trade itself where everything
gets amplified furtherest. You have the short squeeze, you have the gamma squeeze because everyone's using options, and then you just have this culture of everyone around the world. I'll talk about this one trade. And so you just really see how hundreds of thousands of individual traders can just incredibly amplify they're buying power in a way that I just don't think we saw in the late nineties or
prior periods of marketing enthusiasm. Yeah, and wait till deep effing value gets on a copy trading platform like e Toro. Like imagine that if people were able to follow his trades with just the click of a button. I think that'd be pretty interesting. Um, shall we leave it there? Yeah, let's see it there? All right. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm
Joe Wisn't Thought. You can follow me on Twitter at the Stalwart Follow our guest on Twitter, Ben Effort. He's so good. He talks about this stuff all day. He learned so much. He's at Ben with Two Ends, Ben P. Eiffort. Follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast Francesco Levi at Francesco Today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening.