Citadel’s $1 Billion Silver Bet: A Trap for Wallstreetbets?

In war, a threat increase usually invites a fifth column. With their stock gameplay now in the open, can WallStreetBets Redditors resist misleading signaling and dilution of their focus? After all, numerous indicators point to short-squeezing silver as an ill-conceived idea.

2021’s Bad Start for Hedge Funds

Everything about WallStreetBets (WSB) seems to cause intense social mobilization and record-breaking. Just a week ago the subreddit had about 2.8 million followers. Now it has around 7.8 million, a 178% increase, signifying rapidly growing populist revolt amid the unprecedented upward transfer of wealth.

As things stand, they may just halt the ongoing evisceration of the middle and lower class. Prior to GameStop’s short squeeze – a restoration of the Occupy Wall Street spirit – hedge funds were raking profits without any public fuss about it:

• 2019 – hedge funds gained $178 billion
• 2020 – hedge funds gained $127 billion – a 28.6% downturn, which is still remarkable considering the lockdown-induced economic devastation.

However, given the WSB’s current impact, 2021 should end with record low profits for hedge fund managers. According to Ortex data, WSB greeted hedge funds into the new year with a loss of $70 billion, ending with $19 billion losses on last Friday – at which point GME was holding at about $345. When GameStop stock jumped by 135% on Wednesday, Wall Street short-sellers lost $10.2 billion.

A reminder, with all of these hedge funds – Melvin Capital, Citadel, Point72, Citron Capital – betting against GameStop thanks to the initial signaling by Andrew Left, they were expecting the stock’s price to drop. With WSB entering the fray, the opposite happened, which is why they had to cover their short-selling positions by purchasing back GME stock at a massive loss.

An Unwise Shift Toward Silver?

With such an impressive record of financial disruption, achieving what Occupy Wall Street couldn’t have even dreamed about, WSB’s mere announcement of its intentions causes deep market ripples. By shifting their focus on silver, its futures rose by 13% on Monday, reaching an 8-year high.

However, diverting WSB’s amassed populist power from GME to silver may not be such a good idea. By some accounts, the successful short-squeezing of GME already had unique enough elements as it is, making it less likely to be repeatable to even other stocks. With silver’s market cap at around $1.4 trillion, short-squeezing it may benefit hedge funds in the end.

After all, the Reddit army is only one of many powerful market players in the game. Recall that BlackRock (NYSE: BLK), the world’s largest asset manager, held 9.2 million GME shares (~13% stake) at the end of 2020. As of yet, BlackRock has not signaled they will sell the stocks.

Citadel Increases Silver Investments to Over $1 Billion

When it comes to silver, according to Bloomberg, Citadel Advisors LLC had around 6 million iShares Silver Trust on September 30, accounting for a 0.93% stake, equaling around $480,669. Now the hedge fund owns about $816,990 in SLV, and has stake in 17 other silver stocks including the Pan American Silver Corp and First Majestic Silver Corp.

Here are one of the more notable ones:

As you can see, overall, Citadel has increased its silver holdings. Ii-vi Incorporated, a semiconductor manufacturer, have shrunk their position as the rise in silver price makes it more expensive to do business. Notwithstanding the recent rise in the price of silver, Citadel has been steadily increasing its silver holdings, surpassing the $1 billion mark. In other words, if WSB does to silver as it did to GME stock, Citadel stands to recoup its $2.75 loss when it had to bail out Melvin Capital.

Furthermore, it doesn’t seem to be the case that Wall Street placed bets on silver to go down. Additionally, BlackRock, with its $7.81 trillion worth of assets, had its iShares Silver Trust (SLV) up by 9.48% in pre-market trading.

Further, 24% of SLV’s shares are owned by institutions, suggesting there are many big players involved in this game.

Robinhood Raises $3.4 Billion and Eases Restrictions

With its reputation as a democratizing trading app severely damaged, the disgraced Robinhood has managed to achieve a record of its own – raising $3.4 billion since last Thursday.

“We’ve raised $3.4 billion to invest in record customer growth. With this funding, we’ll build and enhance our products that give more people access to the financial system.”

By having more cash to back up its trades for the clearinghouse, Robinhood wound down its previous record – restricting up to 50 stocks last week. Now, the restriction falls onto eight stocks. Among them, the star of the show – GameStop (GME) – has been restricted to 20 positions on shares and options contracts.

Fallout from GameStop’s Short Squeeze

In the meantime, Citadel had to rescue Melvin Capital, which lost about 53% in January after the GME short-squeeze onslaught. As for the resulting social media crackdown, after Facebook and Discord joined to ban WSB groups, it seemed Reddit would follow suit.

Fortunately, WSB skyrocketing popularity crossed the political party and cultural lines, so further bans have ceased for the time being. With that said, Google backed Robinhood by deleting 100,000 negative reviews on its Play Store. Google justified this action by curtailing “coordinated or inorganic reviews“, as if Robinhood engaging in mass stock restrictions and selling people’s shares without consent wouldn’t have caused an organic backlash.

Lastly, before the dust has even settled, Netflix is finalizing a GameStop-based movie project. It appears that the Oscar-winning writer Mark Boal, of The Hurt Locker and Zero Dark Thirty, is likely to land the deal. One of the protagonists will be 25-year-old actor Noah Centineo. It should be interesting to see what kind of framing will take place considering the depth of which the GameStop saga cuts into – in terms of both the economic and social issues of our time.

Institutional Response Yet to Unfold

In the immediate aftermath of the media frenzy covering the GameStop trade war, prominent politicians voiced their support for Redditors. However, given the nature of politics, it is difficult to determine what is populist signaling and what is genuine support. Former presidential candidate and current Senate member of Committee on Banking, Housing, & Urban Affairs, Sen. Elizabeth Warren, had been seemingly onboard the populist rebellion against Wall Street in her initial statement:

“For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,”

This statement implies that she is aware that hedge funds use many means, including mediatic channels, to manipulate the stock market beyond the fundamentals. However, in her most recent letter to U.S. Securities and Exchange Commission (SEC), she extended her concerns to include WSB’s conduct:

“To what extent did online message boards, such those on Reddit, or broader social media amplification impact the fluctuation of GameStop’s prices? Did any of these practices violate existing securities laws?”

Like Janet Yellen, the current Treasury Secretary who received $800,000 in speaking fees from Citadel hedge fund, Elizabeth Warren too built her career on courting big money. It is a common practice among politicians, regardless of party affiliation, to swing with the populist mood. It remains to be seen how genuine this swing holds out.

With Robinhood becoming untrustworthy, what alternative stock trading apps are you currently using? Let us know in the comments below.

Disclosure: Tim Fries has no positions in any of the stocks mentioned, and has no plans to initiate any positions within the 72 hours following the publishing of this article. This article expresses the opinions of Tim Fries. Tokenist Media LLC has no position in any of the stocks mentioned, and does not plan to initiate any positions within 72 hours of the publishing of this article. Please consult our website policy for more information.