My Experience at Citadel & Analysis of the GameStop Short | Reddit WallStreetBets vs Melvin Capital

David vs Goliath Reddit vs Hedge Funds Keith Gill vs Ken Griffin GameStop vs COVID 19 this story has everything, so let's discuss what's going on. I'm John Coogan and today we're discussing the GameStop short squeeze. Last week, when the GameStop story was breaking, I really didn't want to make a video about this because I felt like it had been really thoroughly covered. But now that the dust has settled a bit, I feel like I can add some insight to the political and moral implications of this story. I also have personal experience here since I actually worked at Citadel, the $35 billion hedge fund at the center of this whole story. If you don't know what happened with GameStop last week, pause this video and go catch up. There's plenty of great content out there about it, and I haven't seen anyone really get the basic facts wrong. If you want to learn some finance fundamentals, go watch Khan Academy or or Oswat the Modron. Both are excellent resources and explain things way better than I ever could. And if you're more of a movie person, don't worry because apparently they're going to make a movie about this. Okay, great. So now that you know about Reddit's WallStreetBets, Robinhood, and the hedge funds that were shorting GameStop, let's start with a personal story. Back in college, I interned at Citadel. Here's a picture of me in Ecuador wearing a hat from Citadel securities, the market making firm that now handles about 40% of all stock trades, although they were much smaller back then. Citadel is important in the GameStop story for two reasons. First, Citadel pays Robinhood for the order flow of the retail traders who buy stocks through the Robinhood app. There's a saying in Silicon Valley, if you aren't paying for the product, you are the product. And that's true of Robinhood traders. They don't pay commissions on trades, but in exchange for free trading, their order flow is routed to Citadel and a few other firms so that they can use the information to make trading decisions. The second reason Citadel is important in this story is that they just invested $2 billion into Melvin Capital, one of the hedge funds that's shorting GameStop. So they are on both sides of this issue. They make money from all the retail traders using Robinhood to go long GameStop, but they also make money from the hedge fund that's shorting GameStop. When I worked at Citadel, Robinhood didn't even exist yet. This was back in 2011 and I was studying economics at Northeastern University in Boston. Finance careers are a common choice for econ majors and I thought working at a big hedge fund would be a pretty strong career path. The problem was big hedge funds like Citadel didn't recruit interns from non target schools like Northeastern. Sure, I could have probably sent my resume to some random email address, but that wasn't likely to go anywhere. So I had to figure out another way to get in front of the people over there. I wound up figuring out that Harvard's career fair would be full of top hedge funds and it was basically open to the public if you just dressed the part. So I took the bus down Mass Ave over to Harvard and walked around their finance focused career fair talking to all of the recruiters. I made sure to aggressively steer the conversation away from undergraduate topics so I wouldn't hit any landmines like so what are you studying here at Harvard? I had really done my homework on Citadel and knew the history and general strategy of the firm well, so I was able to impress the recruiter enough to get through the initial screening. A few weeks later, the recruiter that I had hit it off with called me to tell me that they wanted to bring me to Chicago for an in person interview. They flew me out in first class and put me up in a nice hotel. I was super excited and spent the whole flight reading interview prep books like Peter McAnuff's Pet Practitioner's Guide to Investment Banking. I wound up doing really well in the interview and they offered me an internship. I quickly accepted and planned to move to Chicago for the summer, but when I got there, it wasn't exactly everything I dreamed of. I wasn't getting people coffee, but the work was very dull and I could see that there wasn't really a strong career path there for me. All of the best people at the firm were quants and most of them had PhDs in physics or math. Over the summer I learned enough visual Basic to automate most of my daily Excel tasks, but I was still far away from having the skills to really make a difference at Citadel. They wound up offering me a full time position for when I graduated, but I knew I wouldn't be on track to develop new trading strategies and would probably stagnate in a comfortable but unfulfilling middle management position. My hustle had gotten me in the door, but there really was no substitute for the quant skills needed to have a real impact there. And that's a big part of the reason why I went into entrepreneurship, starting my own company would allow me to focus on my interests and learn as much as I wanted. I had fallen in love with programming, but I couldn't just waltz into Facebook or Google and get a job working on their most interesting programming problems. But at my own startup there were no rules about where I could contribute. I've always enjoyed being an autodidact and teaching myself new things, and the fact that entrepreneurship offers an unlimited opportunity and incentive to learn is still my favorite thing about startups. So even though Citadel wasn't the right place for me, I still have a lot of respect for the people that work there and generally don't buy into the idea that all hedge funds are bad. That's not to say that all hedge funds are good, though. Not by any means. Obviously, Bernie Madoff's fund was a terrible Ponzi scheme that robbed people of billions of dollars, and Long Term Capital Management caused a massive disruption to the financial system when they collapsed. But the more general criticism of hedge funds usually falls into two categories. First, hedge fund managers are ultra wealthy, and excessive wealth is a societal problem. And second, hedge funds take short positions, which hurts businesses. Let's address these one at a time. First, the wealth issue. It's absolutely true that hedge funds make lots of money. Ken Griffin, the founder of Citadel, is worth over $20 billion personally, and it's not uncommon for a Citadel employee to make over $1 million a year. Compare that to Keith Gill, the WallStreetBets Redditor who goes by deep f Cking value and posts from the basement of a modest house he rents. It's easy to look at Ken Griffin and Keith Gill and say that they could not be more different, but I actually see a lot of similarities. Gill is at the center of the GameStop story because he made a $50,000 YOLO bet on GameStop and his position is now worth millions. But Ken Griffin didn't start off with billions of dollars. His first trading portfolio was just $100,000, not Keith Gill's, and he turned that into a few million dollars from his dorm room. And I wouldn't be surprised if Keith Gill is able to raise his own fund off of all this positive press. It's not really as crazy as it sounds. His analysis of GameStop was actually quite good, and shortly after he made his position public, Michael Burry came out in support of the trade. You probably know Michael Burry from the Big Short, where Christian Bale portrayed him as the main hedge fund manager who saw the housing crisis coming. And it looks like Keith will wind up making much more money from his GameStop trade than most people, so paying him a 20% management fee is pretty reasonable. So what if Keith Gill winds up raising a fund and growing it into the billions? Does he become a villain? Wealth inequality is a real issue, but it should probably be addressed in a more systematic way than hoping that a few well placed trades on Robinhood will solve the problem. Now let's consider the second short selling. As an entrepreneur, I I can totally understand why so many executives hate short sellers. Shorts put downward pressure on the company's stock and make it harder to raise more money to fund growth. Elon Musk has been extremely vocal about this, and he proved all the Tesla short sellers wrong when the stock exploded last year and cost those shorts billions. Both of the companies that I've founded are still privately held, so I don't really have to worry about short sellers. And maybe that biases my view here, but I think the data is pretty clear on this issue. People often say that short sellers can put good companies out of business by driving the stock into the ground, but there isn't much evidence of this happening in practice. In fact, the biggest example of a short seller forcing a company into bankruptcy is Enron. In 2001, Jim Chanos went short Enron because he suspected that it was a financial fraud. And he was right. In cases like this, it seems like it's a good thing to have someone in the market with a financial incentive to root out fraud. The other good thing about short sellers is that they actually reduce volatility when they make money. Just like a traditional long only investor will buy low and sell high, a short seller tries to sell high and buy low. When done correctly, this actually evens out spikes in the stock price and and decreases volatility. Lower volatility is good for everyone, shareholders, management and employees. Now that's not true for bad short sellers. Bad shorts will sell low and buy high, which increases volatility. But that's true for bad investors who take long positions at the wrong time as well. And these investors don't tend to stay in business for very long. Whenever one of these big stories drops, everyone rushes to give their takes. But I think it's important to take a step back and think about what individual elements of the story really matter here. Let's walk through a thought experiment. The current narrative is that the little guy Redditors were supporting another little guy, Gamestop, who's been crushed by the pandemic against the big evil hedge funds who were shorting the stock. But what if some of those positions were different? What if Reddit was shorting GameStop in a frenzy and the hedge funds were actually holding long positions? Would you feel differently? And what if the target of the short was a different company? What if the hedge funds were shorting a hated company like Big Oil or financial fraud like Enron? Would you still support what's happening? Before you rush to a conclusion, I would urge you to really break apart the story and figure out your position on each element. This isn't meant to be a defense of any particular position, merely a clarification of how the different pieces here add up to the common narrative that that's being repeated everywhere. Because everyone is so emotionally invested in seeing the rich hedge fund guys fail, I think they are missing what's really going on. A lot of attention has been paid to the fact that Melvin Capital has lost more than 50% of their fund's value because of the GameStop short squeeze. But this isn't as bad as it sounds. During my first day onboarding at Citadel, the Chief Investment officer gave us a presentation about the firm's history and highlighted a particularly dark period. During the financial crisis of 2008, Citadel lost more than 50%, just like Melvin Capital, and Citadel bounced back in a big way, posting huge returns in the following years and increasing the fund from 8 billion to 35 billion. But retail investors who bought GameStop near the top could be completely wiped out, and I think we're going to start hearing about these stories in the coming weeks. One of the biggest lessons that I took away from working at Citadel was that it's nearly impossible to compete with them as an individual. The firm is an absolute machine when it comes to analyzing financial markets, and they have a huge advantage over retail investors. The WallStreetBets folks might have made a funny meme go viral here, but I really feel like the hedge funds will have the last laugh. But I want to know what you think. Did any of these points make you think about the GameStop story in a different way? Let me know what you think in the comments below, and if you enjoyed this video, please consider subscribing to the channel. Thanks for watching.