Melvin Capital Says It Was Short GameStop Since 2014
Hedge-fund manager Gabe Plotkin defends short-selling strategy in House testimony
Melvin Capital Management had been betting against GameStop Corp. GME -7.21% since 2014 and still believes online videogame downloads will overtake the retailer’s business model, the hedge fund’s founder said in an advance copy of his congressional testimony made public Wednesday.
Gabe Plotkin’s Melvin Capital lost more than 50% on its investments in January as losses piled up from its short bets against GameStop and other companies. GameStop had been touted on the Reddit forum WallStreetBets and some other social-media platforms, with its surging stock prices damaging the returns of several high-profile firms including Steven A. Cohen’s Point72 Asset Management and Daniel Sundheim’s D1 Capital Partners.
The action in GameStop was fueled partly by an army of bullish individual traders urging one another on platforms like Reddit to buy shares and options and squeeze Melvin, a particular target of posters. GameStop’s seemingly relentless march upward also created what traders described as a sort of contagion effect. Managers lost confidence in their short positions and covered those bets while also trimming their stakes in other companies to reduce risk in their portfolio.
GameStop’s seemingly relentless march upward also created what traders described as a sort of contagion effect, with managers losing confidence in their short positions and covering those bets. These managers also trimmed their stakes in other companies to reduce risk in their portfolios.
The episode has generated questions about the market’s integrity and set off federal probes into possible market manipulation. Prosecutors have subpoenaed information from brokers such as Robinhood Markets Inc., the popular online brokerage that many individual investors used to trade GameStop and other shares.
The House Financial Services Committee will hold a hearing Thursday to examine what happened with GameStop’s shares. Ken Griffin, of Chicago hedge-fund Citadel LLC and market maker Citadel Securities; Robinhood co-founder Vlad Tenev ; Keith Gill, the once-anonymous trader who goes by the online alias “Roaring Kitty,” and others are expected to testify.
In his prepared testimony, Mr. Gill said that he is an individual investor posting on social media about trading, rather than someone trying to drive up prices of GameStop shares.
“The idea that I used social media to promote GameStop stock to unwitting investors is preposterous,” Mr. Gill wrote. “I was abundantly clear that my channel was for educational purposes only.”
Mr. Gill echoed sentiments shared by many individual investors who have been stuck at home during the coronavirus pandemic, as millions of new traders have jumped into markets to take advantage of their wild swings. He said that hedge funds and other Wall Street firms have “teams of analysts working together” on research, something many individual investors don’t have access to.
“Social media platforms like YouTube, Twitter, and WallStreetBets on Reddit are leveling the playing field,” Mr. Gill said.
Robinhood’s Mr. Tenev used his written testimony to address concerns raised by critics and members of Congress that the stock-trading app encourages excessive risk-taking. Only about 2% of Robinhood’s users are active day traders, meaning they make four or more trades in a period of five business days, Mr. Tenev said in his prepared remarks.
“What we see is generally not consistent with popular memes suggesting that most of our brokerage customers are unsophisticated day traders taking inordinate risks with large sums of money on complex financial products,” Mr. Tenev wrote.
He also used his testimony to explain Robinhood’s decision to curb trading in GameStop and other highflying stocks during the last week of January. A dramatic increase in the amount of money Robinhood had to place on deposit at the clearinghouses that complete customer trades prompted the company to prevent users’ from buying shares in GameStop and other companies, Mr. Tenev said. He denied that the moves came at the request of any hedge funds that were squeezed by a rally in those stocks.
Mr. Tenev wrote that “any allegation that Robinhood acted to help hedge funds or other special interests to the detriment of our customers is absolutely false and market-distorting rhetoric.”
Mr. Griffin, in prepared testimony, said he played no role in Robinhood’s controversial decision to curb trading in GameStop at the height of the stock’s rally. He also plans to defend the role of Citadel Securities in the GameStop episode. Citadel Securities executes many of the orders submitted by small investors using online brokerages like Robinhood and TD Ameritrade.
Like other high-speed trading firms, Citadel Securities pays the brokerages for the right to trade against their customers’ orders, a controversial practice that has drawn fresh scrutiny in the wake of the GameStop frenzy. Such payments are “a key reason why retail investors are able to trade for free or low commissions today,” Mr. Griffin said.
On Jan. 27, at the height of the GameStop rally, and a record day for overall stock-market trading volumes, Citadel Securities executed 7.4 billion shares’ of trades for retail investors, more than the average daily volume of the entire U.S. stock market in 2019, Mr. Griffin said, underscoring the firm’s huge role in the marketplace.
“During the period of frenzied retail equities trading, Citadel Securities was the only major market maker to provide continuous liquidity every minute of every trading day,” he added, referring to glitches that hit several rival high-speed trading firms on Jan. 27.
In his testimony, Mr. Plotkin said a group on Reddit began posting about Melvin’s positions in January using information from regulatory disclosures it had made. He said posts were often “laced with anti-Semitic slurs directed at me and others.” He said he also received profane and racist text messages.
He said Melvin covered its GameStop short “because something unprecedented was happening” and took losses on other positions that were being written about on social media.
More generally, Mr. Plotkin offered a defense of short selling, saying that Melvin’s short positions don’t prevent a company from accomplishing its goals and aren’t an attempt to artificially depress the share price of a company. He also said shorts act as a hedge that limit losses for Melvin’s hundreds of investors when markets drop.
He took issue with reports saying Melvin had been bailed out. Citadel LLC, its partners and Point72 invested $2.75 billion into Melvin as its losses mounted in January and, as part of the deal, took a non-controlling revenue share in the firm for three years.
“Citadel proactively reached out to become a new investor…It was an opportunity for Citadel to ‘buy low’ and earn returns for its investors if and when our fund’s value went up,” the testimony reads.
Thursday’s hearing is the most public appearance by Mr. Plotkin, 42, a former top portfolio manager for Mr. Cohen who has kept a low profile despite Melvin’s strong performance. Off Wall Street, he is best known for owning a minority stake in the NBA basketball team the Charlotte Hornets with Mr. Sundheim.
Melvin and other funds have recovered at least some of their losses in February.
Melvin is up double-digits for the month, said a person familiar with the fund. Point72, which has been an investor in Melvin since its founding, also has made money in February, said people familiar with it.