Retail trading was said be a risk to markets during the GameStop saga, but the Archegos blow up has Reddit users pointing fingers back at Wall Street

  • Archegos Capital Management triggered $20 billion of selling on Friday after it failed to meet margin calls.
  • The leveraged blow-up has Reddit traders questioning who the real systemic risk to the markets.
  • Reddit’s r/wallstreetbets and the retail-trading boom more broadly were said to be a danger to the markets amid the GameStop saga.
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Retail traders on Reddit’s r/wallstreetbets forum took a lot of heat during the recent GameStop saga for coordinating on the forum to pump the price of their favorite stocks, but after hedge fund Archegos’ historic blow up at the end of last week on the back of leveraged stock bets, many on the platform are pointing fingers back at Wall Street.

Back in January, traders on Reddit’s r/wallstreetbets began targeting stocks with high short interest rates in hopes of driving a short squeeze and netting quick profits. The beleaguered video game retailer GameStop rapidly became the group’s favorite target.

After GameStop’s share price soared, the Reddit forum and its retail trading members were eyed for potential market manipulation by US regulators. The Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) both began reviewing traders’ actions on forums like Reddit to see if illicit activity took place. 

EU regulators, meanwhile, said the Redditors’ actions “could constitute market manipulation” and that they would monitor the situation as well.

Massachusetts Democratic Representative Stephen Lynch even argued Reddit-fueled trading could lead to “systemic risk” in the markets in an interview with CNBC on February 1. 

Now that the leveraged bets of the hedge fund Archegos have led to a massive blow up, sending a handful of stocks crashing and causing reverberations throughout the markets, Reddit traders are questioning the way they were treated by regulators and the media in comparison to hedge funds.

The forum is asking, who’s the real systemic risk after all? Especially when it’s so often hedge funds and institutions that cause market mayhem.

A post from u/thaneak96, which garnered over 14,000 upvotes in under five hours, made the Redditors’ case:

“Can we just appreciate for a moment that a large multi-family private office leveraged themselves to the t–s, defaulted on a margin call, and it causing a market-wide sell-off to the tune of tens of billions of dollars, and yet I’m the irresponsible retail idiot who’s risky trading is dangerous,” the user said.

Archegos Capital is run by Bill Hwang, a protege of the famous Tiger Management. Archegos’ inability to meet margin calls from Nomura, Goldman Sachs, and Credit Suisse forced the banks into block sales of $20 billion of stock held by the firm.

The sales created a sell-off in many big names from Baidu to Discovery on Friday.

Many Redditors and market commentators are wondering why these banks would allow Archegos to leverage its bets to such an extent given the history of Bill Hwang, and if real market manipulators are getting the same treatment as retail traders did during the GameStop saga.

Hwang pleaded guilty to wire fraud in 2012 after his firm, Tiger Asia, traded on non-public information, reaping $16 million of illicit profits in 2008 and 2009, per Bloomberg.

Goldman Sachs had Hwang on its blacklist after he was charged, but according to Bloomberg, “at some point in the past two-and-a-half years, the firm changed its mind about Hwang.”

That change of heart allowed Hwang to leverage his bets on equities.  While it’s hard to say the Archegos turmoil has created a systemic risk to the markets as of yet, it very well could moving forward.

As Queen’s College President and Allianz chief economic advisor Mohamed El-Erian said in a Linkedin post:

“The Archegos drama involves a classic mix of massive leverage, concentrated positions, derivative overlays, forced deleveraging, and distressed sales. The pain has been felt so far only in a handful of stocks. What happens next depends on remaining sales and related contagion channels.”

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