> These points doubtless make me appear to be a complacent shill for the financial industry, talking down to the rubes. For the record, I’m still angry about the way workers were ripped off in Britain more than three decades ago, and about the way the little guy ended up bearing the brunt for the financial implosions of 2000 and 2008. But it looks horribly to me as though the same thing is going to happen again — and I don’t think the answer to today’s many ills is to empower poor people to bankrupt themselves with margin accounts and derivatives.
Who is this hurting, exactly? The author is making it sound like messing up the short stock is somehow hurting "the little guy" in the long run, and I wouldn't see that happening unless:
a) Gamestop is somehow in a bunch of mutual funds tied to employee pensions/401k's
b) The "little guy" refers to the Reddit traders that are making a killing right now, with the expectation that eventually the stock price will crash again.
As best I can figure, most of the /r/ guys are doing this as a form of trolling and aren't expecting to get rich off it or pour their live-savings into it. And again, as best I can figure, the only people this "hurts" are the ones who were originally shorting the stock. So if this comes down to guys on Reddit pissing in Wall Street's cornflakes, it's hard for me to feel sympathetic for Wall Street.
> These points doubtless make me appear to be a complacent shill for the financial industry, talking down to the rubes
For context, in 2008 John Authers was a (very senior) Financial Times reporter on Wall Street. He became aware that there were queues of financial workers outside retail branches of banks in South Manhattan. These people had cash in various US banks, more than the insured deposit limit, and were withdrawing it and/or shifting it between accounts to protect themselves against the bankruptcy of major banks. They has a better idea than the newspaper-reading public of what was about to go down.
John decided that this wasn't worthy of being covered in the FT. He did however queue up himself to move his own money so it was protected.
You can judge for yourself whether that makes him likely to be a complacent shill for the financial industry, talking down to the rubes.
"Was this the right call? I think so. All our competitors also shunned any photos of Manhattan bank branches. The right to free speech does not give us right to shout fire in a crowded cinema; there was the risk of a fire, and we might have lit the spark by shouting about it."
Enraging. You're allowed to shout fire in a crowded theater if there is, you know, a fire. Tapping all the people in the box seats on the shoulder to give them a heads up about the fire so they can get to the exit before everyone stampedes for it is sociopathic, not social-minded.
I guess it's to his credit that he admitted to this, in the same sense that I'd credit a murderer confessing his crime and bringing the police to the body.
While I mostly agree, it is a touch more subtle than this metaphor.
Shouting fire in a crowded theatre doesn't typically cause the fire to get worse.
A major newspaper breaking news of an impending bank run, does have the likelihood of actually being the thing that triggers the bank run, or maybe making it much worse.
Just because I love torturing an analogy until I can get it to confess all its sins...
It's most like a theater having a squad of firefighters on hand, who most people ignore, as the theater has told them that the usher will let them know if a fire gets out of hand. One day the usher sees all the firefighters freaking out and quietly running for the exit, and his response is to flee for the exit himself and leave everyone remaining to fend for themselves.
I do get the moral complexities here, but the takeaway for us plebs in the audience is to not trust the usher to look out for our lives.
It's more like no one actually saw fire, but the back half of the theater snuck out and ran away because there were rumors of a fire. Authers saw this happening and had a chance to tell the people in the front of the theater that the whole back half had thought there was a fire and ran away, but he decided to just slink out the back and leave the front half to get burned.
I'd be ashamed to call myself a journalist if that was how I behaved.
What if the act of telling people in the front half caused a stampede, which trampled five people to death, knocked a candle over, and burned the whole theatre down?
The thing about bank runs is that if everyone, everywhere thinks there's a bank run happening, this will actually cause the financial system to collapse. It's a self-fulfilling prophecy.
But if most people don't think a bank run is happening, then the system can weather a few bad banks popping.
There was an actual shortage, though, because people's needs changed. Nobody wanted to go to the grocery twice a week when most of the variables of the pandemic were unknowns. Nobody needed commercial toilet paper, but everyone started needing residential toilet paper. Some supply chains for staples were disrupted. (Meatpackers in NYC all getting COVID...)
Many supply chains are still disrupted, relative to changes in demand, just try buying a GPU right now.
> The "little guy" refers to the Reddit traders that are making a killing right now, with the expectation that eventually the stock price will crash again.
The reddit traders are only making a killing if they're selling these inflated positions. At some point somebody will be left holding the bag, odds are it will be a bunch of people from wallstreetbets and other retail investors that are late to the party. There's no chance game stop is worth the its current price.
> At some point somebody will be left holding the bag, odds are it will be a bunch of people from wallstreetbets and other retail investors that are late to the party.
So basically like almost every other trade? Every buyer needs a seller and vice versa.
If you're active in the market, why do you think you're right on any particular trade and the person on the other end is wrong?†
* If you're buying, why is the other person selling? What does he know that you don't?
* If you're selling, why is the other person buying? What does he know that you don't?
The 'safe bet' is to go with index funds (US: S&P 500, Russell 3000) and simply get market returns for the equity portion of your portfolio.
† They could be selling for "correct" reasons: to rebalance their portfolio, to generate income (e.g., in retirement), etc. They may not think there's anything material to the company in the trade, they may simply need cash.
You can expect whatever you want. What actually happens is something else.
On any given trade you can end up with something worth more or less than what you started with. Even if you sell and cash out, you may end up "losing" because things went on to perform better than you expected and the person/entity on the other end of the trade knew something you didn't.
The expectation is that investment is done to derive ownership of something with actual value.
This is a public pump and dump scheme masquerading as a righteous uprising.
Nobody said the market owed anyone anything. Save the sophism. Idiots are getting bilked, those are the answer to your question, and they still exist even if you want to re-define around them.
I'm not convinced this is any less moral than e.g. George Soros famously exploiting Britain's central bank[0], HFT firms building their own microwave towers to do arbitrage and totally-not-front-running a fraction of a second faster[1], or basically anything other strategy that's lauded as brilliant when a rich man does it.
Flash Boys sold front running as something bad for regular people, but you can only front run someone like Goldman Sachs. A retail trader just makes one trade at a time, he isn’t trading in multiple blocks and has nothing to front run. All HFT does for you is fulfill your trade in less than a day and get some market making fees.
I haven't read Flash Boys but if it describes HFT as front running then it's just incorrect.
"Front running" doesn't just mean "getting there quicker than someone else". It is a specific conflict of interest problem where the same people or firm are acting in more than one capacity - agent and principal or agent for different parties - at the same time (eg I see large customer order coming in then trade for myself/my firm before I trade for the client, potentially moving the market for them which would hurt them if our trades are both in the same direction).
Then you don't understand this, or any of the things you listed. George Soros noticed a mismatch of fundamental value. He pushed the price towards its fundamental value. These traders are pushing the price away from fundamental value, and they are doing so at the expense of other, later retail traders.
Money is a made up thing. From another comment I made:
> Why is a Audi "worth" $60K but a VW "worth" $30K? A Porsche "worth" over $100K? Why is a Patek Philippe or A. Lange & Söhne Tourbillon watch worth $100K? Why should I pay $300 for one All-Clad pan when for the same price I can get a 10-piece set at Costco?
[…]
> And to go back to my first paragraph: a Porsche is not "worth" $100K to me—because I'm not willing to pay for it, or even for an Audi. But it may be "worth" it to someone else because they are willing to pay for it.
It's a convenient fiction that allows for a complicated society to run relatively smoothly, but it's a fiction nonetheless when you get down to it (IMHO).
Yes, I am aware of Velben goods (as well as Giffen goods): if you go into my comment history you'll see I actually mentioned them just in the last week.
> You didn't break economics with your "why are luxury goods so expensive even though they're not better" argument, unfortunately.
I do not see (a) where my claims imply breaking any economics principles, and (b) did not claim they're not better. As someone with an engineering degree I was taught all about trade-offs in design. Different situations may call for a need for different characteristics of a design: one person's situation may call for VW (simple commuting) while another's a Porsche (dealing with a mid-life crisis).
My point was that different items, which have different prices, have different value to different people. So to say what something is "worth" can be completely arbitrary, independent of price. Similarly, various people can find the same item "worth" differently, depending on what they value, so each is will to pay a different price: this is what auctions are all about after all.
In the case of GME: the people who actually care about the retail company may value it one way, and thus are willing to pay a particular price for each stock; while the people who care about fulfilling their (shorting) option contracts may have a different value and are wilting to pay a different price. What each stock is "worth" is different to each of them.
Sure, and all of that cashes out in an equilibrium, called marginal pricing. There's no breakdown in the notion of value here. Nothing incoherent about it.
I don't think the point of mentioning Veblen goods was defining a namespace. The point is that this is such well-covered ground in economic theory that there's actually a name for it. The Wikipedia link is presumably a pointer to where you can start reading more answers about these questions (e.g. conspicuous consumption for social status).
I think he's saying it's not manipulation, but simply a bet. If I buy GameStop at $100 believing I can sell it for $120 tomorrow, I am buying that stock honestly believing in its current value so I'm not sure you can call it manipulation any more than another investor hoping to cash in on an expectation that a stock will appreciate.
How do you decide whether or not something is manipulation? Everybody invests in stocks expecting them to go up - at what point is it nefarious?
It becomes manipulation when its coordinated. A massive investment forum is blatantly talking about inducing a short squeeze as a collective. This has been advertised non-stop on WSB as some kind of populist uprising for months. All the rhetoric about the little guy sticking it to "the man" is necessary for attracting new buyers and keeping the squeeze alive.
In reality, many institutions are also long GME and capitalizing on the squeeze as well.
Does this mean investment firms are inherently manipulative, since they coordinate investments for their investors? They're doing the same thing - investing in bulk, hoping to catch the rising tide. When big investment firms and famous traders make announcements it affects the stock price too, you know.
I'm not trying to be obtuse. I just don't see how you can make an objective distinction.
I'd argue you could say everyone investing in TSLA is coordinating a pump-and-dump scheme as that stock is insanely overpriced as well.
Yes I also think firms and famous traders manipulate the market. Yes hedge funds can also be manipulative.
There is a clear difference in TSLA. People were not coordinated. They have been investing because they believe the company will grow and the stock will appreciate long term.
GME is a bunch of people on reddit saying "guys if we all collectively buy, we can induce a short squeeze and artificially pump the stock price for a short period of time. Pour all your money in and diamond hand so we can get rich together." Then as it hits the mainstream, the smart people will cash out, and the dumb people will stay on the train and lose a ton of money.
I don't think any sane person could possibly believe TSLA stock isn't overvalued, and yet people continue to invest and the stock continues to climb. There are multiple forums where people discuss nothing but Tesla, including some focused solely on the stock. Many financial wizards have talked specifically about TSLA and how it is a bad investment, such as David Einhorn, and many of the stockholders have been happy to rally to higher prices because Elon Musk tweets he wants to see a higher number.
It seems like both stocks are targets of manipulation to me.
You're just being stubborn. TSLA investors are not relying on a short squeeze. You keep conveniently ignoring the short squeeze. The people who got into GME early are relying on marketing this David v Goliath falsehood so that they can jump off early and make a ton of money in a very short period.
I suggest you read up on shorting and pump-dumps. TSLA investors believe the company is changing the world and has enormous growth opportunity.
Short squeezes happen organically all the time. Its not that short squeeze = manipulation, its that WSB induced a short squeeze as a coordinated effort.
A forum with 2 million members advertised and coordinated a massive purchase of shares. Gamestop's market cap was less than $900m at the time. Gamestop was shorted at %140 of its float. There were daily posts describing how the forum has enough collective capital to hold a significant portion of the company.
None of that happened with Tesla. There isn't a community of millions all planning to buy Telsa at the same time for a 2 week period. Its not being championed as a noble cause for retail investors.
How are you okay with this happening? The people who actually get hurt are gullible uneducated poor people that were promised a way to get rich quick and stick it to the global elite. Do you feel no sympathy for the victims of this scheme or any other MLM/ponzi "greater fool" bullshit?
No. He's not rallying people to buy TSLA and surge the price short term. He tweets other stupid things like claiming to take the company private at $420 and that the stock price is too high.
Did you even read that article? That is exactly what I was referencing.
He was fined for misleading investors not for coordinating a distributed group effort. Musk absolutely wanted to take Telsa private but was unable to and made an early announcement.
At some point the music will stop and everyone hodling GME is going to lose their collective shirt. Everyone knows it. You can say "it's simply a bet", and you're right except for the simple part.
I don't see anything in the parent comment that would imply that they were "okay with market manipulation" and "if value isn't real there should be no rules".
He's saying there's no such thing as fundamental value, and as a result, collectively pumping a stock to induce a short squeeze is no different that spotting an undervalued company.
Anyone with half a brain should be able to recognize that GME moving from a 900m market cap to a 30b market cap in a few weeks is completely nonsensical.
I mean, he literally just said that money is a construct, and maybe implied that fundamental value is too, which is sort of a reductive argument, but going from that to "market manipulation" and "there should be no real rules" is a strawman argument.
Why does a stock, or anything, have a fundamental value? You can't eat a share of gamestop, you can't build a house with it, you can't even sell games with it because it represents an abstract stake in the company's future profits, but doesn't actually pay out based on the company's performance except when we agree it should. What does "fundamental value" have to do with anything involved in the stock market?
I'm not sure if you're actually expecting an answer here or just raging, but one reason that Gamestop (and many other stocks) have a fundamental value is because they pay out a dividend to the holder.
For example, if the dividend that was paid out per share of GME on, for example, March 15th, 2019 was $0.38, and you owned 1000 shares (and ~4k investment), then you received a payment of $380. In many companies, these dividend amounts and schedules are extremely predictable.
You can then use that money to buy food, or build a house, if you wanted.
The fundamental value of many stocks is tied to the dividend that it will pay you for owning it. Obviously "growth" stocks (stocks that as designed to increase in value, rather than pay a dividend, because funds are used to buy-back stock instead, thus raising the price) is valued differently, but there is still a fundamental value based on the financial situation of the underlying company.
If that were true, we'd be able to value stocks simply by summing the expected dividend over the next 20 years. This makes no sense for GME, but, it also makes no sense for MSFT, whose value has more than doubled in price since three years ago with no increase in dividends. It doesn't make sense for TLSA, which doesn't even have dividends and doesn't do buybacks (and even has outstanding ATMs!). It doesn't make sense for GOOG, it doesn't make sense for AMD, it doesn't make sense for NVDA.
Let's assume that you're right, and that nearly every tech stock, automotive stock, and stock for any company the average person has heard of, or is in an index, is drastically overvalued. Is there any event that would cause the value to "correct"? Some shift causing people to sell their TLSA and buy F, whose value is "more correct"? And if not: what makes the value based on this more correct than the value you can access through trades?
A stock's fundamental value is based on current Shareholders Equity (SE) + future earnings potential. Dividends and share buybacks are just a way to return Shareholders Equity to the shareholder.
In Dec 2018, MSFT had 92B of SE with a market cap of 1.2T. In Dec 2020, MSFT had 130B of SE with a market cap of 1.7T. They earned money which added to their SE, and they returned some SE to shareholders via dividends and share buybacks over those 2 years.
If in Dec 2020 MSFT sold all of its assets, settled all of its liabilities, and closed its doors, it would theoretically be able to pay 130B in dividends to shareholders. The share price would drop by 92% (1 - 130B/1.7T).
So 92% of its share price is based on its future earning potential. This number goes up or down as the market expectations for their future earnings potential goes up or down.
Dividends reduce SE, which is typically why the share price drops by the amount of the dividend on the ex-dividend date. Share buybacks reduce SE and reduce the number of shares outstanding, which increases each Shareholder's equity stake.
GMEs share price is out-of-whack because some market participants are making decisions based off what they believe the fundamental value to be, and other market participants are ignoring the fundamentals and buying at any price.
> GMEs share price is out-of-whack because some market participants are making decisions based off what they believe the fundamental value to be, and other market participants are ignoring the fundamentals and buying at any price.
GME's share price may be out-of-whack to those interested in the retail business.
But to the people who have (shorting) options contracts to fulfill then the share price may be reasonable, as the alternative to these people is to renege on a contract, which could bring all sorts of unappealing consequences. GME having a price of even $1000/share may be "cheap" to these people.
The same item can be valued differently by various individuals, each for their own particular reasons. This is what auctions are all about.
It absolutely does, it is just hard to notice because it is small enough and distributed over time thus making it hard to see in a market cap graph especially when most of the value in the market cap is dominated by expected future earnings.
If apple were to do a 1 time 150 billion dollar dividend, you would almost certainly see their market cap drop by a similar amount the day after. However apples market cap is 2.39 trillion so that is still only 6.27% of their market cap and could get drowned out by normal daily swings. Highly doubt it though and I would expect to see a corresponding runup to the event to claim the dividend and a corresponding drop after.
The world is an extremely complex place, and valuing things is extremely hard. There are way to many factors that contribute. The "correct" value will vary based on both factors in the world, as well as individual-specific factors[0].
The next-best alternative is one of them. We are currently in an economic situation where money is literally being printed by the trillions, there has not been a offsetting set of funds going back to the government (thus increasing the money supply), and interest rates are 0 (and stated to stay there for the forseeable future). There is lots of money, that has to go to something, which raises the price of everything (or devalues the dollar, depending on how you look at it).
You ask 'Is there any event that would cause the value to "correct"?'. As a definitely-not-economist, I would guess any event that modifies either of the aspects I mentioned above. Reducing the money supply (perhaps taxing capital gains more reasonably), or increasing interest rates.
[0] I want to point out here that each individual entity buying something will have a different "correct price" for them, based on individual factors, especially at scale. One of these is individual risk, and how the risk associated with a given stock correlates with other risk in your life. If you live in an oil town, investing in a correlated asset should require a better potential payoff, and thus a better entry point, than someone who has no other oil exposure (if the industry collapses, do you really want to lose both your job and your investments?)
PS:
> It doesn't make sense for TLSA
I never said, and would never make the argument, that TSLA is "correctly" valued. But I'm also not insane so am not going to try to short it.
This is a dumb argument. By your logic, pump and dump schemes should be allowed because there is no such thing as actual value so the victims aren't actually affected. Right...
A group of people are coordinating a short squeeze. They are selling a get rich quick scheme and marketing it as anti-establishment. People who are late to the party and fall for the anti-establishment rhetoric will be the ones who lose their shirts.
You seem to be equating "is moral" with "moves prices towards the fundamental value of the underlying asset", which is an interesting position to take.
That being said, if you're worried about pushing prices away from fundamental value, how about negative crude prices?
> You seem to be equating "is moral" with "moves prices towards the fundamental value of the underlying asset", which is an interesting position to take
I didn't say anything about morality. This is a purely functional argument. When something is sold for its fundamental value, nobody loses. That's why its good for society for things to transact at their intrinsic value.
> That being said, if you're worried about pushing prices away from fundamental value, how about negative crude prices?
It was crude futures that were negative. Crude oil has storage costs. Those costs rarely overwhelm the value of the asset, but in particular circumstances they can. That is what happened when crude futures went negative. It seems illogical, but if you actually understand it, it all makes sense and fits neatly inside an intrinsic value narrative.
The original claim was that squeezing an ill-advised short wasn't less moral than deliberately collapsing a currency and taking $1bn of funds from a government, or engaging in sketchy HFT practices. You said "then you don't understand this, or any of the things listed", implying that you believe that squeezing the short WAS less moral.
> Crude oil has storage costs. Those costs rarely overwhelm the value of the asset, but in particular circumstances they can.
"Storage costs" is a convenient and inoffensive way to say "the few remaining buyers with enough spare capacity smelled blood in the water and were able to price gouge".
> The original claim was that squeezing an ill-advised short wasn't less moral than deliberately collapsing a currency and taking $1bn of funds from a government, or engaging in sketchy HFT practices. You said "then you don't understand this, or any of the things listed", implying that you believe that squeezing the short WAS less moral.
Sure. But you don't need morality to make the point. I will make that point though: things trading at their intrinsic value is more moral than not doing so, because it means nobody loses.
> "Storage costs" is a convenient and inoffensive way to say "the few remaining buyers with enough spare capacity smelled blood in the water and were able to price gouge".
Err. No. It means the storage capacity was completely gone, and people were scrambling to find new storage capacity. It doesn't seem like you're very familiar with how these things work.
IMHO nothing you said contradicts with anything I said.
People are free to buy or not-buy any stock, and to sell or not-sell any stock that they already hold. Everyone trading is an adult and is free to do it (notwithstanding things like insider trading, etc).
There is nothing illegal in the activities that I've seen: just people/institutions trading and holding stocks in an open market.
Some of those people are/will be making money through these actions and some are/will be losing money. As Nick Maggiulli recently posted (on a somewhat unrelated topic):
> If it wasn’t obvious before, it bears repeating now—some people are going to beat you at investing. Some of them will be dumber than you. Some will be less knowledgable. Some will even be completely wrong about the future. But they will beat you just the same. There is no great arbiter of justice in the investment world. There is no cosmic force that ensures that only the knowledgable make money. If there were, then I would be a far richer man today.
As someone who rides a motorcycle, I think it's stupid not to wear helmet, gloves, etc., and yet in Michigan it's legal to ride without a helmet. IMHO it's dumb, but many people do it and ¯\_(ツ)_/¯
Currently some people think GME is worth US$347.51 per share and are willing to pay for it. ¯\_(ツ)_/¯
It's their money and they can do whatever they want with it. I invest in index and bond funds (80/20), but if someone wants to YOLO on this: not my circus, not my monkeys.
> There is nothing illegal in the activities that I've seen: just people/institutions trading and holding stocks in an open market.
Not to contradict you, but just a reminder that short selling is based on something significantly different than "trading and holding stocks". The ability to promise to buy/sell stocks in the future at a given price has become so accepted as an ordinary feature of stock trading that we generally cease to notice how revolutionary of a concept it actually is. It's hard to see any rationale for prohibiting such arrangements - they are entirely consensual, and appear to have no additional impact on things that instantaneous buy/sell orders wouldn't also have.
But this is an illusion. The ability to go short/long on a stock is completely different from the ability to buy/sell it, despite it being based on all the same mechanisms. It's a truly radical concept that has slipped under our radar because it could be described without any new concepts or terms.
Sorry, I did not mean to imply anything about temporality (i.e. that short selling was "new" in terms of starting significantly after stock trading).
My point was almost consonant with yours - it's almost as old as stock trading, but nobody realized how fundamentally different the concept is. They didn't realize it in 1609, and they certainly don't recognize it now.
Most naive conceptions of how stock markets work would never allow for these sorts of contracts. The fact that they've (nearly) always been a part of actual stock markets just points to the same sort of gaps between the actual operation of the financial services industry and how most people think things ought to be that the current GME gyrations are (according to some) also pointing at.
Short selling is not revolutionary at all. Options and short selling are perfectly normal market instruments that have far ranging utility, including both hedging securities and insurance on tangible goods (e.g. a pork farmer buying puts on pork to ensure he can sell his product at a specific price).
Neither is it "radical" in any type of market. It just means selling something you don't actually have yet (something you're "short"). Think of a middleman who sources classic cars. He contractually agrees to sell a 1991 Ferrari for $60k. He doesn't yet own the vehicle, but knows he can source them for $50k. Unfortunately for him, a recently popular meme has gassed the price of Ferraris, and he now has to pay $70k for the car. He's still obligated to sell at $60k, so he begrudgingly takes delivery and loses $10k, having "sold short" the car. Is he revolutionary or radical?
Forward contracts and futures contracts have a number of important differences. Most notably, futures contracts involve assets that already exist, but will be traded in the future. Forward contracts involve assets that do not (typically) exist at the time of the contract, and will not be traded if they do not exist at the contract's specified date.
They also serve quite different purposes for a society/economy.
Whilst there are difference, I'm not sure it's really true that the underlying always exists for futures. The main difference between the two is that futures are standardised contracts traded on an exchange and typically subject to daily margining/price settlement which has some impact on the behaviour of their price over time.
Futures are useful to a broader group of people precisely because they don't need to involve physical settlement. Many people use commodity futures to hedge exposures to the price of assets which are not the underlying in the future but where there is a relatively predictable relationship between the two prices. Others use them to speculate on prices despite having no ability to deliver or take delivery of the underlying. Some contracts are even purely cash-settled.
(Edit: made clear that it was the point that futures always involve an underlying which already exists I disagreed with.)
> There is nothing illegal in the activities that I've seen: just people/institutions trading and holding stocks in an open market.
This is a bit of an oversimplification. Market manipulation for instance is forbidden my most regulators, and defined by the SEC as "transactions which create an artificial price or maintain an artificial price for a tradable security".
It would not seem irrational that people willingly gathering on internet to buy GME with the explicit objective of crashing hedge funds are considered market manipulators.
What kind of incompetent fools are these "professionals" that their risk departments didn't flag this? And if it was flagged: who allowed the over ride and allowed it to go through?
The fact that the rest of the market (Reddit/WSB or anyone) caught these funds with their pants down simply shows that The Market® works: a short squeeze is simply a reaction to too much demand and not enough supply.
It didn't start as a pump and dump. It started last year with a guy who invested progressively more because he felt it was undervalued based on fundamentals.
Whether or not Elon's tweet brought in a bunch of people who want it to be a pump and dump is another story.
Are you saying bubbles never form and the market value equals the underlying value of every asset? No speculators? Please.
And these guys aren’t even taking money from those late to the party, so much as from the short sellers (vultures) who were happy to see the company go into the ground.
Elon Musk hates short sellers with a passion. They try to sabotage a business.
When trading is halted on a stock that is in freefall, I can understand that. But here they are halting a stock that is rising based on short squeezing! Honestly 148% naked shorting by private hedge funds should be illegal, and you’re gonna tell me that the government should side with the short sellers against a crowd of everyday people who are INVESTING INTO A COMPANY THEY LIKE?
How exactly is wall street the little guy? They snap their fingers and get trillion dollar bailouts instantly. Regular people barely get a $1200 check. And now even speculative SHORT POSITIONS are supposed to be protected??
This sounds like how a casino finds out that a game has a loophole and then tells people they can’t actually keep their winnings. And the fourth wall is broken. Apparently hedge funds can short any stock and if regular people notice and beat them back, then it’s the speculative hedge fund that’s trying to kill the company, that should just go ahead eh. How dare regular folks threaten the tried and true methods of speculation?
It's possible they think so, but if they think it'll have money in it, after it lost money six of the last seven quarters, I'm not sure what they're smoking.
You could have said the same about $TSLA or $AMZN at some point in their history. If stocks were rational, TSLA shorts would have made money last year instead of losing billoins.
Neither Tesla nor Amazon went +10,000% in the space of a week.
There's a long term bull case for Gamestop at the $5/share levels of August. There's a bull case for Gamestop at the $17/share levels of early January. I might not believe them personally, but someone can make that case without being insane.
There's no bull case for Gamestop at $468.50 a share this moment as I type. There is no way that Gamestop goes from slightly negative EPS to $23/share earnings (a P/E of 20). And that's what it would take to put money in the bag.
> There's no bull case for Gamestop at $468.50 a share this moment as I type.
Yes there is. The bull case is for those people who have options contracts that they need to fulfill.
If they do not fulfill those contracts there will be consequences: perhaps reputation loss, perhaps law suits, perhaps SEC investigations (with fines and/or jail time).
For those people, GME at even at $1000/share may be "cheap" compared to the consequences they face.
Yeah, we know these are real people who exist. But there's a finite number of them, and we're talking about what happens after they've all either paid up or gone broke and everyone else is stuck with the shares of Gamestop they paid $450 for.
IMHO it's a bull case as long as option contracts still need to be filled.
Every company (and stock) works under changing circumstances: regulatory changes, competition, technological innovation, economic/financial circumstances (economic prosperity, rate environment), etc.
Just because a bull case may not exist for GME-as-ownership-unit, does not necessarily mean a bull case does not exist for GME-as-contract-closure-instrument. If you want to focus on GME-as-ownership-unit, as a share in a retail business, that's perfectly valid. But that's not the only perspective.
Right now there's a bull case for GME(-as-contract-closure-instrument): that may not be the case in the future. But that's no different than any other commodity (IMHO).
While the ever accelerating shift to digital purchases will definitely gut what used to be Gamestop's core business, it's entirely possible that Gamestop could successfully pivot to a new business model that makes them profitable again. Not probable, mind you, but definitely possible.
That's actually a good point, at the same time, in the bigger picture, it's market chaos and nobody wants it.
Basically, mobs are fighting against hedge funds using random companies as battle grounds - the markets are there to support those companies, not destroy them.
So what we are seeing is kind of an inflection point that the system wants to tamp down.
It's actually pretty distressing to see how many intelligent people think they are doing some kind of good here, like burning down a few stores to force the owners to leverage some kind of fire insurance policy to destroy the 'evil insurers'.
But behind the algorithm there is a human trader with motivations and market knowledge who is commanding it; the fact that the buyer is, in some technical sense, an algorithm doesn't seem very relevant to me.
It's not that they're literally irrelevant as in have no effects; they're just irrelevant in the thinking of who you're trading with - no matter how complex the algorithm it's still buying or selling on behalf of a person or company.
> buying or selling on behalf of a person or company
Again, that's what you'd think and it's technically true that you can know who is running what system, but the systems are too complex to say they are really working on behalf of anything except the rules of min/maxing.
How do you explain bidding the price of a textbook up to millions of dollars is "working on behalf" of anyone?
Arbitraging the bid-ask spread is tied to both halves: motivation - desire to make a profit, market knowledge - knowing when there are arbitrage opportunities (asks smaller than bids).
Sure there are some closely managed algorithms but I think you underestimate how many algorithmic traders are ML shops that don't do anything other than "whatever makes the number biggest at the end of the day"
It's a short squeeze. The guys left holding the bag are people that are covering their short positions in the company. The average retail investor is not shorting stocks.. There will probably also be some people that try to jump on the trend too late but that isn't who is being hurt right now.
The second that the shorts have covered the price isn't going to drop to $90, it's going to drop back to $20 and most of the WSBers who were holding out for $2000 will lose their shirts. The shorts are going to lose, no doubt. But once they've lost, the stock price is probably $20. A lot of WSBers are going to be holding stock at that point, and possibly on margin. And that stock is going to be a crappy retail stock. At which point it'll be a slow drift as they cut their losses and move onto the next meme stock.
The stock price today is irrelevant if you're not going to sell, and that's what WSB Thto be saying. The price is going to drop much faster than it rose.
You're forgetting the stock is 125% over shorted. There literally isn't enough stock for shorts to cover their current positions. That's why there is potential for infinite, (huge) gains as long as everyone holds.
That's like saying that the money supply is $5.2T but the U.S. national debt is $28T, so all the money in the world couldn't pay off the U.S's debt. Technically true, but completely missing the point of how currency circulates.
In reality, when a short covers they buy back the stock and pay back the broker or market maker they borrowed it from. Then the broker or market maker sells it again. Then the short can buy back the same share, over and over again, as long as they can find someone to sell it to them. That "as long as they can find someone to sell it to them" is what's going on here - if everybody HODLs, the stock doesn't circulate, and the shorts have to pay increasing amounts to incentivize other weak hands to sell. But total short interest > 100% doesn't mean anything other than that there are a lot of shorts whose need to cover might blunt some price declines. Unless those particular shorts are right up against their margin limits, they can just hold the short position open until WSB loses interest.
That assumes the longs are unified. The WSB community are heavily promoting Friday as the day their grand scheme comes to fruition. How many of these novice first-time investors will defect when Friday comes around and the shorters opt to wait them out? How many need to defect before panic sets in?
Shall be an interesting week.
Edit: looks like it's already falling apart, the price is down 30% on post-market trading! Expect things to get real once the market opens up.
Any trader knows that after-hours price action does not necessarily translate or carry over into RTH. It is much easier for price to be manipulated in thin after-hours trading.
That's why there are people rallying amongst themselves to hold. A significant number of shares are with people who simply does not care if they lose it all. They want the hedge funds who are shorting to bleed mostly from the interests.
80% annualized is tiny on a daily basis - it's like 0.25%. They can afford to wait until next week when WSB has moved on to AMC and BB. Sustaining these high prices requires a continuous influx of new money; once the folks who believe GME is going to $1000 have already bought, what's left are the folks who believe it's worth $10.
this is probably the exact mentality that got the funds in this position. they have more patience than you think when it comes to making money (which is the end goal), and the other pumping is getting rooted out as shills or distractions.
The company could issue new stock (to get a lifeline of cash from inflated price)
I know someone who tried to convince VW management to do that during the Porche/VW squeeze. They didn't but I see no reason why another management team wouldn't act differently.
This would be the most hilarious resolution to the madness. However, the cynic in me sees management spending their time selling their entire portfolio to buy back when it hits $20 again.
Bankruptcy makes it a bit different, I guess, but Gamestop executives can't possibly make a good faith argument that +1000% price in the middle of a short squeeze is a correct valuation of their stock. The SEC has a lot of discretion here (both by law and in practice), and they're just not going to let a company bilk its investors like that.
"bilking investors?" Gamestop is a mature company in a mature industry w/ 20 years of annual reports, earnings releases, investor calls, SEC filings, etc. There's far more information upon which to make a decision about Gamestop than virtually any IPO, or tons of low-float, low-volume stocks out there. Could easily say you know way more about Gamestop future prospects than Uber, Airbnb, Beyond Meat, plenty more.
* The U.S. Securities and Exchange Commission (SEC) had previously conducted multiple investigations into his business practices but had not uncovered the massive fraud.*
What I've been wondering is, why do people think the 125% over-shorted has to expire all at the same time and imminently?
While there isn't 125% available to buy in one go, there is trading happening, HedgeFund2 can be buying and returning their loaned shares this week, HedgeFund3 can be buying and returning theirs next week, HedgeFund4 the week after, and at no point does any group need to buy 125% of available shares all in one go; where does the time limit that causes the squeeze come from?
People are confusing the options trading that's going on as part of this with the shorting. Options do have expiration dates, but shorts just charge interest. The thing is if you own a stock and it goes down, worst case is you lose 100% of your money. If you short a stock and it doubles, you've lost 100% but there's no barrier here, the loss could keep going up to 200% or more. If you can't pay it back, the broker is on the hook for this money and therefore they have the power to actually force you to close the short position. You don't control the timing on that. It's the kind of situation where people start jumping out of windows on Wall St.
It's not that there is an expiration date, but instead that there is a collateral requirement for holding short positions in addition to the interest. As the shorted stock increases in value, the borrower must post additional collateral or close out their position. If the collateral requirements exceed the fund's capital then they'll be forced to close.
Further, all hedge funds have internal risk limits, which include limits of their exposure to a single equity. Should the collateral requirements exceed this limit, then their internal risk compliance team will ensure that the short position be at least partially closed to keep them within their limits.
I don't think there's an exogenous time limit. If the price goes up enough, your broker starts worrying that you won't be able to buy the stock in future. They then might force you to buy now, which pushes the price up further. Hence the squeeze. (Source: learning about this for about a week, completely ignorant, correct me if I'm wrong.)
They don't necessarily force you to buy it back now, but they ask you to deposit more money to cover your "on-paper" losses. The broker usually has some discretion in when to do this, but there are also regulations for how far they can let it go.
The shorts collectively have losses on paper of $35bn+, which is a lot of money even for well-capitalized Wall Street funds.
If you short, you are borrowing a stock from Alice, and selling it to Bob, hoping to buy it back later from Bob at a lower price. But, you can then borrow again from Bob and sell to Charles. Ad infinitum.
The broker who is actually holding your stock can lend them out and you can indeed end up buying your own stocks more than once. You can explicitly request the broker to not do it and, in this kind of situation where 125% of the stock is shorted and some *need* to buy it... well :)
Have a read from Matt Levine's "Infinite Game" from yesterday:
> Falcone owned some bonds of a company called MAAX Holdings Inc. “After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge.” So he bought all the MAAX bonds. Then he bought more: Short sellers would borrow MAAX bonds (presumably from him), and then sell them to him, so that he ended up with “22 million more bonds than MAAX had ever issued.” Then he stopped lending them out, forcing the short sellers to buy bonds to cover their shorts. But there were no bonds to be bought, since he owned them all (and more).
> Falcone stated that the Wall Street firm should just keep bidding for the bonds. Falcone acknowledged that the Wall Street firm would suffer some losses doing so, but told the senior officer and the others that sometimes you are just on the wrong side of a trade.
There is 1 company, that company has 1 stock. Alice is the shorter and expects the stock to drop.
* How shorting works normally:
Alice thinks the price will lower this week. On Monday, Alice borrows a stock from Bob. She sells that stock immediately on Monday. On Friday at the end of that week, she buys a stock again and hands it back to Bob, plus a small fee for his troubles. If the stock price went down during the week, you can see that Alice made a profit.
* What happened for Gamestop:
Melvin thinks the price will lower this year. Melvin borrows a stock from Rudy. Melvin sells that stock, and unbeknown to him he sells it back to Rudy. Melvin borrows another stock from Rudy which unbeknown to him he sells again to Rudy. While there exists only 1 stock, Rudy now has 3 stocks of which he borrowed 2 to Melvin. Melvin owes Rudy 200% of all available stock, which he needs to hand back at the end of the year.
* What is the short squeeze Rudy/Reddit is currently doing on Melvin Capital?
Well, in reality, Melvin Capital has 1.5 stocks borrowed for every stock in existence (I'm not sure how much of the total stock was actually liquid, so I'm not sure how many rounds Melvin needs to go through to cover all their shorts).
Today it is the end of the year. Melvin needs to hand Rudy back the stock. However, the only person he could buy it from, is Rudy himself. Now Rudy is free to set an arbitrary price for his stock AND meanwhile buy up all other available stock at ridiculous prices. The only stock Melvin can buy, is from Rudy, or from other people at at least Rudy's price point. And Melvin needs to buy that stock to then hand it back to Rudy, after which Rudy can sell it yet again at an even higher price point for Melvin to hand it back again. Rudy makes a lot of profit, by squeezing out Melvin after making the market illiquid and overpriced. Effectively, the game is such that the entire capital of Melvin is now for Rudy. Melvin must buy something from Rudy, no matter how high Rudy sets his price.
An alternative is for Melvin to borrow another stock from Rudy, handing it back to cover for the last borrow. However, this way Melvin is only digging himself into an even deeper hole stacking up fees (the fee Melvin pays for Rudy's troubles is currently at a 130% interest rate).
* What is on the line?
Melvin Capital is 3 billion. The question is how much Reddit is Rudy, how much stock Reddit managed to control. If Reddit manages the squeeze, the squeezers will basically share among each other 3 billion. If Reddit does not manage, a lot of people will hold a lot of Gamestop stock at probably way lower prices than they bought.
Melvin Capital appears to have received a capital injection of 3 billion from Citadel today, doubling the stakes in an all or nothing with Reddit. So wallstreetbets is now standing to either gain 6 billion or losing a lot of money. Which sounds big to us, but is probably just another Wednesday for wallstreetbets...
So, from what I understand (I did not do the maths myself), despite Gamestop being the most traded stock right now, not enough has moved in the premarket for Melvin Capital to actually close their position when they claimed they did. It seems a very dubious claim.
Buy a dataset, get it from your broker or use a bloomberg terminal. The info available to most retail traders in their stock app of choice (and certainly true for RH) is pretty abysmal
I suspect that RH drastically limiting the information available to their users is all designed to limit analysis and make people feel more confident that they fully understand everything they are doing. People trade more when they feel more confident.
they most likely sold the position from melvin capital to another entity to hold the risk. that way melvin capital can say "oh yeah we caved in haha reddit wins" to try and calm the market, but I would wager that some private citadel fund is now about to be forced to fellate the reddit call pump
Other shorts may well have moved in. Shorting at 3$ was optimistic. Shorting at $300 is less so.
Some people are saying that Melvin Capital lied. That seems unlikely: my guess is that you'd go to jail for a long time if you lied about your purchases to manipulate the market on such a grand scale.
I don't know that much about it. Martha Stewart went to a minimum security prison for female inmates, and honestly, she's exactly the type of criminal that belongs in minimum security. The judge recommended they send her to her first choice prison (in Danbury) but for some reason they couldn't and they sent her to a prison she didn't want. I'm not really seeing favoritism here. She was investigated for insider trading, but those charges got dismissed and she was ultimately just convicted for lying.
An unrealized gain (ie, "everyone holding") isn't actually money though.
The sensible people will take their (massive) profits, and those who believe the "as long as everyone holds" rhetoric will be left with losses, probably on margin.
Yes and if it gaps down their broker won't be able to sell fast enough to cover the margin loan. The broker can then usually come after the person's other assets (ie traders can lose more than the cash they transferred to the account in the first place).
How does that even work, though? If I've bought a stock for $200, how could I end up owing more than what I already paid? I feel like I don't understand what situation you're describing.
You buy the stock for $200 but of the $200, $100 is money that you've borrowed. Because the stock is now at $350 your assets cover the margin easily. but if the suddenly becomes liquid and gaps down to $2, you owe $100 and only have $2 dollars in assets with which to cover your margin loan. You get a margin call and the bank force sells your stock then takes your car, your house, etc to cover the $98 you still owe.
If part of the 200 paid for your long position in the share was paid for with a margin loan, then you may only have put 40 of equity in the account with the remaining 160 paid for with a loan. You're exposed to a maximum loss of 200.
It's also very hard to exit a falling position. It was hard to exit a rising position this morning -- the stock was on trading hold multiple times. By the time you notice it's falling, it's too late to sell
So, I was on the wrong direction of this trade, having bought puts on Monday and Tuesday.
The stock rocketed up today and the puts rose about 20% as well (which is crazy and counter-intuitive). So, I was entirely wrong and made money anyway. Once I realized I couldn't account for what was happening, was totally wrong on the direction, and being offered a token gain to get out, I got out.
Someone was bidding up $50 puts expiring in 3.5 weeks and buying contracts today, while the shares were in the mid-300s. That's insane implied volatility.
> Someone was bidding up $50 puts expiring in 3.5 weeks and buying contracts today, while the shares were in the mid-300s. That's insane implied volatility.
Because the higher you are, the closer you are to a crash. Peaks take time to build, but crashes can happen overnight (or premarket).
The put is just another instrument that trades. What will under normal circumstances keep a put close to the "correct" price? Well, if the price goes too high, people will start writing puts, driving the price down.
If you write a put, you're long the stock. To hedge yourself, you'll need to short it. To the extent that that is difficult right now, nobody will be willing to write puts. (Strictly speaking, the put is so out of the money right now, that one would not have to short much today. But as soon as the stock price falls and approaches the strike, the writer of the put would need to start shorting. "Hey, anyone got some shares I could borrow?")
On the other hand, if you want to take a negative view on the company, buying a put is sensible thing to do. That'll drive the price of the puts up.
That's just a cheap way to bet on the trade being played out by then: buy some deeply out of the money puts with a relatively low premium today (the further out of the money, the lower the premium... so you can afford to buy more) with the expectation that they'll be deeply in the money in a few weeks. Works a treat... as long as you're not wrong on direction, magnitude or timing.
If it gaps down stop loss orders won't execute at the stop loss order price (because there is no buyer at that price). Therefore previous paper profits are not locked in with certainty with stop loss orders. You need prices to swoop down in an orderly way with sufficient liquidity for stop losses to work in the way I think many imagine they do.
It would go to the first buyer under the limit. So for example if you had a stop loss at $200 and the stock went from $201 to $2, it would sell for $2.
tldr; When your stop-loss is hit, it executes at the best price available at the time, which (as far as I know) has no guarantees.
I think a good example of this is the Ethereum flash-crash on Coinbase in.... 2017? Something happened (IIRC someone submitted a very large market-sell, maybe by accident), but it completely wiped out half of the order book.
This triggered all of the stop-losses that people had submitted. But... almost the entire order book was gone. So they sold very low. Which triggered more stop-losses. Which sold lower, and so on.
In the end stop-losses ended up largely selling to one super-lucky-account-that-I'm-sure-set-this-up-as-a-joke-and-forgot-about-it who had a limit buy in for 10c/ETH.
IIRC the price was ~350 when this started. When people were able to start buying again, the price jumped up again (obviously).
But this lucky person was able to buy ~5k ETH at 10c, because all the stop-losses triggered.
Stop loss is really the wrong term mathematically. In truth, a "stop loss" is really better thought of as a "max price". If you set it up to sell when the prices drops to $320, you are guaranteed that it will sell at a price below $320, not that it will sell at $320.
In truth, you are not even guaranteed to be able to find a buyer.
> If you set it up to sell when the prices drops to $320, you are guaranteed that it will sell at a price below $320, not that it will sell at $320.
IIRC, that’s closer than the naive interpretation (“you will sell at exactly $320 if the price drops to or below that level”), but it's still not quite right. Unless I'm mistaken, a stop-loss @ $320 is actually “if the price is at or below $320, submit a market sell order”. In theory, it could execute above $320, though at or below is vastly more likely. And, as you note, you aren't guaranteed it will execute at all.
To be precise: As soon as a trade <= 320 is printed, the stop loss turns into a market sell order. It could sell over 320, it could sell under 320 (though much more likely the latter).
with a stop limit, you'll simply be left holding the stock if it drops below your limit. depending on what you expect the market to do, this could actually leave you in a worse position (ex, if the value keeps dropping). I'm sure you know this, but, understanding your exit from a speculative position is just as important as your entry.
I sold a GME call option with a strike price of $320 and expiration in July today for $200. A pump and dump by novices is easy money if you know how to play it. Everyone knows this is going to crash, the question is when?
Why do you call it a pump and dump by novices when it seems to be the opposite that was being done by shorters, they just got caught and now they have to pay, seems like the novices just beat them at their own game. [0]
Most people on WSB understand the game here is a short squeeze. They all expect the stock to return to $5-50 when the squeeze is done. That means that the ones who currently own GME or it's call options plan to sell those in short order when whatever target price is achieved.
Hence my calling it a pump and dump... They are pumping the stock up with highly positive videos like the one you posted and comments on WSB to get the price higher faster so they can sell and make a max profit. But for this to happen, they are going to need a buyer who buys at the very top.
Who is that buyer going to be? No savvy investor will go near buying a pump and dump with a ten foot pole. Sadly, it will be the newbies on WSB and the newbies watching this Rossmann video who buy at the top and lose everything as it plummets down.
You might say, "Well I am not going to be that newbie"... But only a very few will sell at the top... Maybe 1-5%. A few more will make solid returns. But all that profit for those guys on top will come from gullible retail investors. That is why MSM is calling BS.
But that buyer must be the shorter right? That's shorting, the shorter must return his borrowed stocks. So the people with the stock have a guaranteed buyer in the near future. That so dangerous about shorting, the losses are unbound. I'm just a noob correct me if I'm wrong.
The buyer could be anyone. But if the stock is so overpriced that no one will buy it except people forced to by margin calls, then what you are describing is a short squeeze... short squeezes are illegal.
Shit. You wrote a naked call on GME today? That’s insane. Even if you think you know what your doing. This is the steam roller. And you’re the guy picking up the penny in front of it.
But, the premiums can be pretty juicy.
Looking at the 29Jan 320 Call options, if you were good, and called today’s top. Then you could’ve wrote the call at 145. Then held it for 90 mins, when it bottomed out at 89. Netting you a cool $56 per contract.
If you wrote 1 contract on this play, then 56 x 1 x 100 = $5600.
So, $5600 of net profit in 90 minutes. If you’re lucky. It’s best to have a large war chest to play this strategy.
But, if you’re unlucky, then a short squeeze can even happen during normal trading hours, and it would probably wipe you out.
You can call the wrong top, and the spreads are so wide, that the loss is heavier to exit the position.
And if you ran this strategy yesterday, at a lower price point, and held it overnight, then you would’ve been wiped out this morning, when the stock spiked in overnight off-market trading. So it’s best to keep this strategy to a daytrade.
I don’t recommend this strategy to anyone. The odds of you consistently calling the top, correctly, all the time, is very low.
And the crazy phenomenon going on right now, is that the retail traders, are somewhat collectively operating like a hive mind. Whether they can really succeed to achieve their objective of hitting $1000/share, remains to be seen. But, I’m not going to challenge this one, at this time.
You are probably right. It would suck if the stock went to $1,000 and the buyer of my call option exercised at that point. That would be a loss of $68,000.
On the other hand, if I am right that this is about the peak, then I get $20,000.
I could either close my position, or I could potentially buy the same call option strike with a shorter expiration for cheaper... Most likely the run up on GME will be over by then. If not, I could just buy another call option with a further strike on top of it.
Perhaps my strategy should be selling call options dated for 79 days from now with a strike of 320 for $190... Then buy call options for when I think this thing will end... Say 9 days out with the same strike for $152. If things go crazy high, then I can use my buy call option to cover the sell call option. If it doesn't, then my profit is $192-152 = $40.
My theory is the stock has run insanely high, and even Elon Musk has made comments that are priced in. At this point, WSB users may have all their money they want in this play invested... Who else comes in to sustain the current price or drive it higher? What if GME execs decide to sell some shares to raise funds? Or if the SEC asks them to to stop the short squeeze? The stock almost reached the WSB pie in the sky goal of $1000... How many people are going to make sure they aren't the last fool in the stock holding the bag?
But if I am really wrong, and the stock went to $5000 on a short squeeze, that would hurt. $5000-320= 4,680 x 100= $468,000.
I probably should buy a shorter run buy side call option to cover my risk. $20,000 with high probability outcome vs $468,000 with a low probability outcome...
Who exactly sells call options anyways? Someone has to be selling these naked in order to provide the volume that is out there, right? Probably people doing it behind an LLC shield so they can't take unlimited losses and will leave their broker ("too big to fail") holding the bag?
Wise choice. That looked like a scary spike, when it shot up to 452. You might’ve gotten margin called, or worse, just have your position liquidated, and you eat the loss.
But, that was today’s scary high. Then, it fell to the depths of 126, just 90 minutes later. Crazy.
You got balls, yes the IVOL is insane and that's a nice premium, but if for some reason you have a repeat of today, you're out $20K plus. This thing will crater, yeah, but shorting it is insane and option volatility is ridiculous right now.
I agree with you... There is a (small) risk the stock goes to $1,000 or $5,000. My portfolio won't face any margin calls even with those numbers though... And eventually the price will come back down.
I think it was Ben Graham who said the markets can remain irrational longer than you can remain solvent.
Eventually it will come down, yes. But you're the option seller, so you can be assigned anytime. I assume this is a naked call you sold (not covered). So you might be forced to buy shares at a really high price and deliver at $320. The big risk with selling options is early assignment.
The option seller needs to buy the stock to deliver the shares when the option expires, so if the price continues rising their losses are unbounded (by contrast, their gains are bounded by how much they originally sold the option for).
Correct me if wrong, but my understanding with Robinhood is that you Sell to Close (by default anyway), which just goes back into the market. No further obligation?
You can buy or sell an option to open a position. If you want to buy it, you Buy to Open and Sell to Close.
If you sell an option, you Sell to Open. If you want to buy it back (at a profit/loss and you're not assigned), you Buy to Close which goes back into the market and closes your position. If you are assigned (i.e. the buyer of your option exercises his right to buy 100 shares at the strike price), you have no option other than to buy those shares at market price if you don't have any and deliver it to the option buyer.
There was a post on WSB yesterday evening imploring readers to exercise their calls instead of selling them, specifically to screw with options sellers.
I know nothing about the parent, but because most such claims are false, it should mean nothing to rest of us. And I think the parent shouldn't make it, as they are inflaming and encouraging a situation that will hurt a lot of people.
We know well that random people on the Internet aren't reliable. For those who respond, why are you taking it at face value?
Individuals selling call options into any stock is risky. Doing it into one of the most volatile stocks of the past few decades is insane. Bragging about it being "easy money" is just sheer lunacy.
You got lucky - you have nothing to brag about. Your actions are 100x worse than anything i've seen in WSB.
--- My friend Andrew Left of Citron Capital, who was up 155% last year, was publicly short GameStop, so I called him last night to ask for his thoughts. He had plenty – and gave me permission to share them:
The market has come to its lowest form. This is even crazier than Tilray (TLRY) [see below] and Tesla (TSLA). The Reddit crowd apparently said, "Let's find a company that's completely dead – and because everyone knows that, there's a big short interest – and engineer a short squeeze."
There's not a five-year-old in the country who can kick my ass… but 1,000 of them probably could. That's what happened here.
Even so, my losses have been minimal – and I'm making it back by selling ridiculously priced calls. For example, when the stock was at $75 today, I was getting paid $18 for $90 strike calls and $14 for at-the-money calls that expire on Friday! If you're a professional player, you adjust to the market to make money off it.
---
If he did what he said, he definitely lost. Might have had a stop-loss.
I mentioned that quote from someone that thought in the same lines as the OP, had more money and was a professional in the area, and still lost his shirt - twice.
you may be overestimating the responsibility of the people involved
I remember reading about people mortgaging their house to get into bitcoin, etc.
I don't know how the coming days will play out, but I'm quite confident when this is all over we'll be treated to stories in the NYT about how someone lost their life savings, alongside calls for regulation.
I used to hang out in that subreddit before I deleted my account.
Most of them are
a) lurking
b) goofing around with maybe a few hundred dollars (I was in that category)
c) people from hedge funds
There was a tiny minority that did stupid things like buy $20k of options on credit cards but there's a minority of stupid people like that everywhere.
Things may have changed since you last used reddit but now I regularly see people playing with $1000s of dollars joking about buying weekly options and trading on leverage that they don't have and then not understanding the implications of that when things come crashing down.
The subreddit has ~65,000 weekly active users (ignoring this week), and the screenshots of "big" positions aren't that common, and often from the same accounts.
It's a bit disingenuous for people to make it seem like there's thousands of people putting their life savings and retirements into stocks - and even so, I would guess that many of the people who do claim to use "life savings" actually mean "the 10k I had in my bank savings account" because they're only 23.
So mathematically, this is a pyramid scheme for the redditors. The people that buy at the inflated price fund the people who bought before them. The hope being that hedge funds will buy at the inflated price.
I also had a horrible thought, what if someone came in and bought short positions at inflated prices with his lunchbox money instead? Then that person is trying to wait out the redditors.
They paid the price when the stock increased in price being forced to buy shares at higher price to cover.
Stock is going to normalize and go back down. Retail investors bought the stock at $50+, they are posting screenshots to WSB. When people start liquidating their position, you need a buyer on the other end of the transaction. And you’ll end up with a collapse in the price as there are way more sellers than buyers. Someone is going to be holding the bag and it’s going to be anyone who purchased above $50. It’s going to be similar scenario of a failed merger and merger arbitrage guys trying unravel their positions.
That's the idea, but there will also be a bunch of retail traders who get caught up in the frenzy and end up losing too much when the bubble pops.
Maybe it's their own fault for being greedy, but they do still exist. It won't only be hedge funds left holding the bag.
Also, there is a worry about multiple hedge funds going bankrupt and causing a cascading effect when they are forced to close out other positions which would hurt average people. I'm not blaming WSB for this, the hedge funds got caught being greedy and deserve everything they're getting, but we do need to try to prevent their failures from affecting the market as a whole.
> Also, there is a worry about multiple hedge funds going bankrupt
Like you, I struggle to feel sorry for them - surely a responsible hedge fund shouldn't be shorting a single stock with sums of money they can't afford to lose? If they really are behaving like that, they must think they can't lose...
Isn't this complicated a bit by the way shorts work? Like when you buy $n of stock, it is impossible to lose more than $n. But with shorting you could lose unpredictable amounts if shit hits the fan. I agree it's not a good look for a hedge fund to have put themselves in this position, but I think it was more about believing they couldn't lose so extraordinarily badly, not that they couldn't lose at all.
I know this has been discussed elsewhere, and it's kind of against the narrative, but my understanding is that typically if you're shorting like this, you would hedge your potential losses by buying calls. Ie, if you short at $20/share, and want to limit to 100% losses (excluding premium), you could buy calls at $40. If the price skyrocketed past here, you have the calls.
There is obviously much more complex math to optimize this.
I'm not entirely sure that I believe the story that a large fund like this didn't have some sort of protections in place (even if the WSB community couldn't find them).
It's also possible that they did have protection in place, but instead of using it to exit their position earlier chose to sell the protection for a quick gain (thinking that the price was going to drop again after the first jump).
To me, that just says they shouldn't be betting money against potentially unlimited losses, especially without the kind of fallbacks that @nrmitchi describes.
Unfortunately I think preventing it in the future will end up being something that prevents retail investors from impacting the market rather than reigning in Wall Street.
For the people with the stock now to make real money they'll have to sell eventually either to the people who've shorted or to a normal investor right? Then after the short position closes the stock price will fall at least some because the demand will fall. Unless the only person buying stocks near the end is the shorter and everyone unloads their shares to them someone's buying above the price $GME will fall to.
Many of those shorts are exiting their positions, or already have, and taken their losses. They're the ones who can afford their losses.
Perhaps there are some funds still holding out their end of the short war, but by the time this is all over... like over over... it will be retail traders selling inflated positions to other retail traders.
The short interest is still extremely high and likely a number of firms are already liquidating their positions to pay off GME. The squeeze should be on Friday when every option expires in the money.
Wouldn't new ones be shorts against the inflated prices?
It could easily be other retail investors shorting the reddit pump and dump.
I suppose as long as no one innocent is hurt, it doesn't really matter if some redditors and hedge funds are cleaned out. But it seems more and more likely that the only thing that will have been done here in the end is to enrich the market makers.
I think it's disingenuous to compare those two numbers. The mass majority of that trading is alogos trading within short time spans, not entities entering or exiting long positions. This includes all the market makers that have to hedge options under the insane stock volatility by exiting and enter both short and long positions as the stock moves. It further includes every flavor of HFT that can potentially syphon some value from high volatility combined with momentum.
This volume doesn't tell us anything about the actual change in stock held by various entities nor how easily 70MM shares could be obtained from entities.
> It's a short squeeze. The guys left holding the bag are people that are covering their short positions in the company. The average retail investor is not shorting stocks.
If the hedge fund blows up, the brokerages that loaned them the stocks to short are left holding the bag, and if that blows up SIPC/brokerage insurance, many retail investors or taxpayers may be left holding the bag.
That's not the point. This is a purely technical play, fundamental valuation methods have been thrown out the window a long time ago. Game stop is maybe worth 5-40$, but these reddit WSBers think the stock will keep rising due to the short squeeze, beyond 1000$ even. Just grab some popcorn and watch the show.
you don't seem to understand what's going on. gamestop itself is just stuck in the middle of a battle created because of financial investment tools. It doesn't really matter which company it is, it just matters that the company is shorted at >100% of total issued shares.
if the gamestop is still shorted at 130-150% of total issued shares (finra report coming soon) that means the shorters are going to be paying interest and getting margin called as GME prices goes up. the fees for borrowing GME to short have been 30-60%. That is absolutely insane, if you can even find shares to short, which I haven't seen any for the past day.
Revenue != profit. That $6.5 billion in revenue cost them just over $6.5 billion, so net they lost a little bit of money in 2020. The three years prior, net profit was between 0.3 cents/share and 0.5 cents/share. Additionally, revenue decreased from about $8.5 billion last year. So if the past four years are representative of future prospects, the value of GME's business is $0. But the assets - liabilities (book value) is about $5/sh.
Yes, but revenue peaked in 2017 and has been essentially declining since. They've been losing money since 2018, and their business is in terminal decline due to digital sales. They have about 300 million in net assets depending on what you count.
The value of a business with the same revenue as Gamestop, but with a normal profit margin and a stable or growing market is a very different beast. The only way Gamestop has any value is either to keep cutting the unprofitable stores until they just disappear as a company, like Sears did, or leverage the brand to pivot to digital. This is fairly difficult since the consoles are all locked to the console manufacturer's store, and Steam is already dominant on the PC.
It's probably a little undervalued at $5 a share if you strongly believe that Ryan Cohen and his buddies from Chewy can turn the company around into a digital first company, then project big future revenue growth. Whether it actually works or just ends up like Yahoo is yet to be seen.
Its worth what people will pay for it. This time last year that was ~$4 per share. The company is looses money to firms like AMZ. And then WallStreet bets came in and pumped it up. It's been really fun to watch.
Bitcoin is a bit different though. Gamestop shares can't be traded freely / directly p2p. You can't self custody your Gamestop shares. Gamestop can issue new shares, majorly diluting the supply, etc.
I heard this comment at 12k and now I'm hearing it at 35k, I think it's worth being honest that nobody knows the future and if we did know where the top is, we'd short it (which you can with DeFi now from my understanding).
Can someone explain how we're supposed to believe WSB can move the market that much? I mean, it's up against hedge funds etc with literal billions and we're supposed to believe a bunch of people on Robinhood can go against those higher power and cause them some inconvenience?
The volume for GME today was like 89,734,235 vs an average of 24M . How does "retail" traders can keep the stock up 100% from the previous day for the second or third day running?
And the stock went up 100% from close during after hours yesterday, and that is not retail traders.
This is, I think, at the heart of the problem, and vastly unreported by mainstream media. In short I encourage you to look up the “nasdaq whale” trade from this past summer 2020, of soft bank fame. Butchering the premise, algorithms (algos) front run Robinhood options. This is how Robinhood makes money, selling this access to investment firms. These algos cause a compounding effect with those Robinhood trades. When combined with the compounding effect of a “melt up” in a short squeeze (described elsewhere in this thread), the effects are enormous. I believe WSB redditors stumbled upon this unintentionally, but the market effects are demonstrated at scale with the Nasdaq Whale trade (and the Essex boys crude oil crash before it). Whether you believe this is “right” perhaps should be informed by whether you believe a market where the majority (>50%) of trades are executed by computer algorithms reacting to preceding market moves most likely executed by computer algorithms. If ever more algorithms compound each other ad infinitum, can’t the market be manipulated by an ever smaller number of market participants, their motivations however perverse?
No one is buying this stock because they want this junk company, it's all manipulation. They have an army of buyers and use some calculated techniques with options to gain leverage. They're not all college students in for $100. I know of people who have borrowed 6-digit sums to get in on this bet.
Potentially there are also pros on the WSB side of this game but I think they would potentially face legal risks that the individuals don't have to worry about.
> At some point somebody will be left holding the bag, odds are it will be a bunch of people from wallstreetbets
A large part of the culture at WSB is to self-mock as "retards", "autists" and so on; fuckups and losses are celebrated alongside gains. Someone who loses thousands on a bad bet on this will be as celebrated (and mocked) as someone making thousands.
The daily volume is higher than the total number of shares for the company. Lots of people are locking in their gains. Of course someone else is taking their place at an even higher cost basis.
In the end I have a feeling it’ll be something like: the first 1% to invest will make a fortune, the first 10% to invest (who are selling now and maybe tomorrow) will be able to pay off student loans, credit card debt or maybe buy a car, but then the other 90% will either lose small or lose big.
I’d guess that in the future if you run into someone who traded GME this week, you’re more likely to meet a loser than a winner.
"At some point somebody will be left holding the bag"
Which while the short interest is greater than the float is the guy with the excess short interest.
They are patsy in the market at present. You can always offload onto them because their loans come due. You don't have a loan so can wait as long as required.
This seems to be a little bit different than other financial crashes where the "little guys" lost out -- in previous situations, most went in trusting that they wouldn't be gambling their savings away because of some financial trust. Now, however, most people are purchasing GME not because they've looked at the underlying value of GameStop and realized it's value, but because they're guessing the price will go up, but deep down know that someone will be left buying high and selling really low.
Not sure exactly what to call it, but it seems to be a difference in consent to gamble $$, if that makes sense.
> The reddit traders are only making a killing if they're selling these inflated positions. At some point somebody will be left holding the bag, odds are it will be a bunch of people from wallstreetbets and other retail investors that are late to the party.
This isn't your typical pump and dump. The plan is to bleed Melvin of every last cent, and transfer it to WSB. Melvin is forced to buy, no matter the price.
While some individual redditors might lose money, as a group they'll make a huge profit.
Just another point here. The original (aka prior to Jan 15ths ish) reddit traders had a fair market value of $80-$150 on this stock.
Looking at the current options prices, if / when this is all over GME will probably land within that range.
Yes, there is a lot of crazy new money going in here at super high prices, but all of the regular WSB users going in on this stock weren't planning on bag-holding, etc. It was a value play.
The short sellers are the ones holding the bag. Granted the last wave of fools to join the party won’t do so well either, but this is a wealth transfer from institutional to retail investors.
Maybe GameStop could leverage its position and “acquire” something with actual value, something private looking to go public. Afterwards the result would be worth more than GME did when this started?
Why would anyone accept Gamestop stock as compensation for anything right now? Especially when they almost-definitely wouldn't be able to turn around and sell it right away.
Because they want to be listed in the exchange without going the traditional way. That is the concept floated for Dell using VMWare in the linked article.
Some say bubble, others say “frothy.” [0] If you think its valuation will reduce, are you shorting it?
Getting acqui-listed thru GameStop would probably be less expensive than paying some phoney like the former speaker of the house [1] and you get a bunch of retail locations to boot. The existing management of GameStop cashes out a year later as they step aside a la Apple-Next.
*This post is random Internet BS and does not represent financial advice. If you or anyone you know feels a need to “buy” an equity, stock or other advanced financial product please consult with a board certified psychologist.
This would be justice though. If you were in it from the beginning as a true believer you probably got tons of money. If you’re just chaser and bandwagoner coming in at the end you will be punished for your greed along with the short sellers.
Because at the beginning there is no evidence the plan will work, and you could very well just be blowing a bunch of money. It’s like the people who mined Bitcoin very early and stashed them in their hard drives.
Once the stock picks up steam though, it attracts people who purely just want to make a fast buck, and less true believers.
Oh, anyone now could very well be blowing a bunch of money too, of course.
But you think making a gamble that seems like less of a sure thing is less greedy than if you think it's a sure thing? The more of a sure thing you think it is the greedier you are? That's not really clear to me.
But maybe it's really about the "true believer" thing. You think people in later were only there to make money, but those in earlier were "true believers" in something other than making money? What? They also planned to make money though?
I think the author is arguing here that the solution to combating institutional gambling via trading is not to allow retail investors to also gamble.
Should someone who has no idea what they're doing be able to leverage themselves up 100X to buy a call/sell option by pressing a few buttons in Robinhood because they read about YOLO stock on Wallstreetbets?
As someone who has lost a lot of money by following the Reddit sentiment on an investment, I think the author's point here is fair.
This is not to say I wasn't an idiot. I was. But at a hard time in my life I needed more money so I gambled big and lost big. I worry other people will fall into the same trap.
It ruffles my feathers when I read that we should "combat institutional gambling via trading and not allow retail investors to gamble." Who died and made the author a moral decision-maker?
Is the problem that gambling is a 'sin' or is the problem that we're TRULY worried about people losing all their money and we want to protect them from themselves?
Do you want to put them in prison when they bet money on fantasy football or a poor person spends their paychecks on lottery tickets?
How far do you want to take this? FYI: states are moving to legalize gambling.
Irresponsible gambling costs the government money because we have safety nets. This applies to both institutions and individuals. The government needs to bail out banks and provide social welfare.
It's not a moral issue to me. Gambling through leveraged stocks should to be taxed more heavily to offset its cost. Something like the rate on lottery tickets.
That's a clear straw man argument, that there exists a sequence of events between people buying stocks on margin, going bankrupt, and living off of government assistance. And this occurrence is so commonplace as to warrant a proposed punitive tax on margin trade profit? What evidence do you have that this actually happens? I think you ARE making a moral argument, namely around 'risk taking' being something that society should punish and discourage via taxation. You left the second part, the societal cost (which may be real, who knows, you only offered a hypothetical government assistance scenario) completely in the realm of speculative fancy.
Not to mention, if you really truly wanted to morally punish and discourage gambling, I seriously doubt a tax on profit would make a dent in it! Have you ever met a real gambler?
> Gambling through leveraged stocks should to be taxed more heavily to offset its cost. Something like the rate on lottery tickets.
I agree with your initial point, but I don't believe this would actually help. People who are gambling typically don't look at the expected outcome and make "rational" decisions. Therefore, taking action that just modifes the expected outcome is unlikely to have any impact on the behaviour. People will still assume/hope that they will win, and if they win just a bit less, then so be it.
>As best I can figure, most of the /r/ guys are doing this as a form of trolling and aren't expecting to get rich off it or pour their live-savings into it.
I saw a lot of those "pour their life-savings" into it postings. A lot of "yacht or food stamps" type sentiments being shared.
On the flip side, if you watch the comments go by in the megathread, quite a few people are just buying 1 stock (often times just a fraction of a stock).
The fact that there are many people who are only gambling a small amount doesn't mean there aren't great amounts of people who are putting themselves in financial peril. It just means you have to look harder for them.
Being without a relationship was Galloway's take. This poster's take is that he's find going to zero because him and many others would rather stick it to the man, even if it means the stocks go to zero eventually.
Not really. The people who are moving this money are largely not the people with a few hundred bucks to their names. The entire lot of those types don't even move the needle.
As if a few hundreds worth of GME stock would matter to a billion dollar hedge fund.
You can also go to 4chan where you can find selfproclaimed nazis who thinks they are fighting the jews on wall street.
It is all very idiotic.
As someone noticed elsewhere here on hn; regardless if it is a pump and dump manipulation or a short squeeze, GME will eventually come down. Maybe not in a week but surely in a year.
> As if a few hundreds worth of GME stock would matter to a billion dollar hedge fund.
In aggregate I’m sure the hedge funds will be happy to take that money. The thing to be concerned about is the sentiment of that Reddit poster. It’s not wrong and IMO it’s the reason you see such politicization in the West now.
The thing people are failing to understand is that throwing away your money or electing an incompetent leader isn’t “sticking it to the man”. It’s simply giving them more money or a broken system where it’s easier for the dishonest to thrive.
"Making a killing"... I got my first experience in trading with Crypto currencies, it always surprises me what stock traders call "crazy". Just an observation, I know the downsides of crypto etc, etc, it's just... another world.
> Reddit traders that are making a killing right now
How can you know that ? Some of them are making a killing, but how can you be sure it is the majority of them ?
It is easy to say that some hedge founds made bad bet, but I strongly think that some other hedge founds were winners. These people are professionals at making money from such events !
It looks like the short sellers made a mistake though. Short interest for Gamestop was 140% 12/31. Institutions did that.
It's just too much for institutions to get so arrogant and greedy that they think that's worth a return but on the other hand talk down to small retail investors.
Shorts are often (usually) a legit way to reduce risk - if the stock falls, you’re not losing everything. But that’s less entertaining to report about, so you rarely read about this in the non-technical news.
Yes but those aren't naked shorts. You don't get short interest in 140% of the total shares available from people hedging their holdings. That did happen with GME and it's what the r/WSB people picked up on.
> You can't just reduce risk without also reducing gains.
You can (assuming you haven’t exhausted all available independent investment opportunities with equivalent risk/reward profile) reduce risk without reducing expected gains.
Doing so (assuming you were investing suboptimally for your the prior risk level and expected returns) involves reducing in the part of the distribution above the mean offsetting the increase in the part below the mean.
Buying a 10% interest in each of 10 lottery tickets (ignoring practical risks associated with deals to split winnings) doesn't reduce your gains compared to buying one lottery ticket, it just reduces your risk.
The goal is to make enough money for pensioners to live off.
If the goal was to reduce risk then pensions would be better off being held in cash. But pension funds dont have enough cash to meet needs so they have to grow.
Pension pots actually often do follow a path of minimising risk, with the percentage held in cash and government bonds increasing as pensionable age nears.
I am far from the most knowledgeable HNer on this topic, but my understanding is that pension funds are more conservative than most, but that they do get involved in riskier asset classes as well. They probably allocate a portion of their assets to hedge funds or VCs because otherwise they miss out on lots of upside. Of course, there can be downside as well...
holding a hedged portfolio (with shorts) is less risky than a long only portfolio in the vast majority of cases.
Moreover some asset that is risky on it's own can decrease the risk of the entire portfolio. From a quantitative perspective, specific risk from an asset is largely irrelevant (and doesnt carry a risk premium), because it can be diversified away to 0
I have a pension from my tech job. Almost all professional full-time jobs offer pensions. It might be in the form of a 401k in the US, but a 401k is just another kind of pension.
I don't know why people get confused about this! It's a fund to give you income in retirement. That's a pension! You can have both defined-benefit and defined-contribution pensions. Not all pensions are defined-benefit: 401(k) is a defined-contribution pension.
Wikipedia say it's a pension:
> a 401(k) plan is an employer-sponsored defined-contribution pension
The US Code also says it's a pension - 401 is 'Qualified pension, profit-sharing, and stock bonus plans' and 401(k) is covered under the 'qualified pension' clause ('qualified' meaning the same as 'defined contribution' in this case.)
If it looks like a pension and quacks like a pension and is called a pension in law and is called a pension in non-technical resources like Wikipedia then... it's a pension!
I didn’t say it quacks the same as defined-benefits. I said it quacked the same as a pension. Why do you think ‘pension’ inherently means defined-benefits? It doesn’t. That’s just one kind of pension.
Or maybe for clarity consider the word "pensioner"
Is it still a "pension" when contributions are made your whole life and it crashes to 0 and you never make a withdraw?
Most people call defined contribution plans "retirement savings" plans and defined benefit "pensions". While conceptually at a high level they are the same thing, the difference is in who bears the risk when the plan is underfunded. In the first the risk is entirely born by the individual which frequently doesn't have any choice in the investment companies much less the investments. The latter the risk is squarely on the shoulders of a larger organization, be that a company or as the last resort the government. Aka the risk is socialized/insured.
You're using the legal term to be pedantic. However, it makes nearly 0 sense in this case because with 401(k)s, you can usually only invest in the funds allowed by the plan, not individual stocks.
What makes you think the definition of pension is "protected by the PGBC"? The PGBC's website itself specifies:
> PBGC is a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits *in private-sector defined-benefit plans*
Which means by implication that there are pensions in non-defined-benefit plans (ie defined-contribution, like 401ks). Also note that this quote indicates the PGBC doesn't protect public-sector pension plans, which means your logic leads to the ludicrous conclusion that public-sector pensions are somehow not pensions.
This level of confidence combined with this level of ignorance is not a good look.
Yes they only cover defined-benefit pensions. They say that they cover ‘pension benefits in private-sector defined-benefit plans’. A 401(k) is a defined-contribution pension so it’s out of their scope.
But so what they don’t cover it? Why does that make it less of a pension? Government pensions also aren’t covered by it. Are they not pensions as well?
The retail investor only wins if they realize their profits. If they don't, those profits are shifted to a third actor (or never removed from their tormentor's pocket).
There's two way this can play out in the end from my understanding.
1. The Hedge funds loses their bets, and some retail investors make ton of money of it. This will happen if when the retail investors "cash out", all the money is coming from the shorters being forced to buy it back at the inflated prices.
2. The shorters will be done liquidating their loss, and now more "little guys" will buy the now inflated stock from the earlier retail investors at an inflated price wanting to "get in" on the action. This will result is something more akin to a pyramid scheme and get rich quick scheme.
Edit: Well there's a 3rd way, though seems less likely to me, which is that the new surge in stock price allows GameStop leverage to somehow become a massively profitable company that actually meets and surpassed the now "apparently" inflated stock price. In which case, all of the "little guys" will win and only the shorters will lose. I guess this is the best case scenario.
WSB is mostly buying options - not stocks directly and cashing out now (or at some top that could be in the future).
The people on WSB that sold their call options and made a killing are selling those options to other people on WSB who (likely) will lose everything. And the ones with diamond hands who haven't sold yet will (likely) lose everything.
So - this is like penny stock sellers in the 90s. Some little guys made a killing. Lots of little guys lost most of their savings.
It's not like all the little guys are going to win and Melvin Capital is the one paying the bill. It's like Melvin Capital went bankrupt, and some little guys on Reddit fooled a bunch of other Redditors into giving them a bunch of money.
WSB and other investors pocketed the 5 billion from those people. And I assume some diamond hands on WSB will end up losing everything.
It's easy to understand why everyone is HODL in WSB, since that's the position you want others to hold whether you want to sell or hold. Won't surprise me if half already exited.
I think the narrative around this trade is a bit simplistic, and a lot of people in it are likely to wind up disappointed by the details it ignores.
For instance, with potential losses this big, counter-party risk is huge. Even if everything works as the trade intends, and the losers have to chase after an ever smaller pool of increasingly expensive GME shares, it may make more economic sense for some of those losers to declare bankruptcy instead.
> it may make more economic sense for some of those losers to declare bankruptcy instead.
This is a thing that goes against the narrative here, where the narrative is "Melvin has $13B, we can take it all!". Even if you assume that is true, and you can somehow push this already $25B cap company high enough, there isn't enough money in that $13B to allow all shares of GME to sell at the current price.
If the entire premise here is "Melvin is screwed, we have him by the balls, and he has $13B", then it seems that the max would be... $13B. Past that, you're no longer "taking from Melvin"; you're taking from the people who don't get out before you do.
There is no bankrupcy judge in the world that will say "Okay Melvin, sorry, but you owe WSB a thousand trillion dollars".
> As best I can figure, most of the /r/ guys are doing this as a form of trolling and aren't expecting to get rich off it or pour their live-savings into it.
There are certainly a lot of people talking about "sell your house, put it all into Gamestop". I hope the majority of people reading it recognize it as a joke, but I'm sure some people are heavily overinvested in gamestop right now, to the extent that losses will hurt.
The people hurting are the ones who get addicted to gambling with stocks and options. One person becoming a millionaire doesn't make up for another losing their life savings.
>b) The "little guy" refers to the Reddit traders that are making a killing right now, with the expectation that eventually the stock price will crash again.
The stock price is completely disconnected from the value of the company. Either this is a bubble that will eventually pop and every small player still holding it will be badly hurt or the bubble doesn't pop, it continually exposes an inherit flaw in our financial system, and who knows what type of drastic and wide-reaching ramifications there could be from that including marketwide collapses.
I'm not going to disagree with you on the semantics of that, but this simply is in a totally different league. There is almost always plausible deniability that the stock value and company value are related. Meanwhile Gamestop is up over 1600% in a couple weeks with no fundamental changes to the company. There is no argument that can be made for anything else beyond the stock price being manipulated by a coordinated effort.
Great explanation. IMO the GameStop phenomenon is the result of the combination of democratization of trading through software (Robinhood no fee trading, doing it on your cellphone) + social media enabled mass scale online community building (around some previously fringe niche). Any area that is subject to this kind of combination of change could face similar situation where the old institutions guarding the area would face increasing challenge from grass root efforts ("retards/autistics" as in wsb's lingo).
I don’t think it’s about that at all. If you follow the subreddit at all, you’d see that WSB investors have been losing immense amounts for a long time now.
I think the primary thing that baffles the more traditional investing establishment is how irrational WSB investors actually are.
I think there have always been potential "investors" that never really lost money because they were never investors in the first place. Lots of Robinhood, r/wsb users/members are 1st time traders because Robinhood significantly lower the barrier to entry for investing, and they don't feel as alone and scary once found an online community similar to themselves.
I didn't watch all the videos, but so far as I write this post, it does not appear that shorts have covered, or started covering (at least as of this morning). It seems like the price hike is due to big buyers and gamma squeezes. There's been systematic short attacks in an attempt to drive the stock down, but they keep getting neutralized by big buyers. It's been a wild ride.
What is stopping Melvin Capital from lying about closing their position in order to deflate the stock price so they can actually close out their short position when they are due this coming Friday?
Yeah that is basically it. If you are safe why report on it? You don't gain anything. If you are in danger then a little lie doesn't hurt because even a tiny chance of success could mean billions of dollars for you.
If you follow this in more detail you will see they have already misled the public on their positions several times. But when the choice is between your fund’s bankruptcy and an SEC fine, people do crazy things.
I lost my respect for Rossman after he uploaded a video cursing out short sellers after $AGRX sunk after getting approved. Bio stocks almost always sink after PDUFAs, but he was just raging after what he thought was market manipulation.
I was disapointed in some of his videos about Coronavirus and Cuomo's executive orders. But then I remembered that he is neither a stock trader nor an epidemiologist. His channel is fundamentally an opinion show. Its a good opinion show, but still an opinion show. When he starts giving opinions on things far outside his wheelhouse he becomes a more-rational-than-average lay person.
I think he is mostly just genuine about his opinion on things and explaining why he holds those opinions. Per peer post on his intellect. Which I agree is generally a rational wat to approach things and I respect him for it.
I call them 'professional morons'--high-profile who have a lot of status and money and clout in various tech and investment fields despite being sorta dim and banal
Rossmann is hardly rich. His whole brand is fighting Apple for right-to-repair legislation as well as a bunch of pro small business stuff. What exactly is wrong with this opinion on the oppressive covid lockdowns?
This is gold, it's things like this situation and then such people explaining it that teaches me more about the market than any other dry material I have ever found before.
Okay a serious question: at what point does it make sense for these hedge fund guys to just purchase reddit and shut it down?
To be clear: I don't think that would work, but I think we're at the point where stuff like that is going to be tried. These guys are losing BILLIONS of dollars. Billions. Can they spend $1B to prevent the loss of $2B? (Is reddit worth more than $1B?)
Other stuff I won't be surprised if we see:
* Massive astroturf campaigns (the WSB mods are claiming that this is already happening.
* DDOS attacks on reddit
* Attacks against the mods of WSB
* "Institutional" attacks like SEC involvement
It's just sortof crazy to think what it looks like when there is this much money on the line. Everything goes out the window.
Hedge funds and other investors have rules in place to limit what they can invest in which would probably rule out a purchase of Reddit.
Secondly, the Reddit crowd would move else where.
Thirdly, working in investments myself, hedge fund types dont even think like this. It is hard to explain how far off the mark you are...I know financial services can look like a black box....but what is happening is much more boring than you might think. All the drama is happening on Reddit...the SEC is worried about retail investors creating a bubble and losing money....hedge funds and traders just want to make money.....they may take a loss here and move on quickly to the next thing. Doing crazy sheeeeet like you suggested would have them potentially lose all of their investors money or be blacklisted....
> Okay a serious question: at what point does it make sense for these hedge fund guys to just purchase reddit and shut it down?
It would be irrelevant even if they could. The problem is/was not Reddit/WSB, but rather the positions that the hedge funds put themselves in.
Where are/were the PhDs in risk analysis at these places? How do you get into a position of shorts being >120% of the total float?
Take Willian Gibson's 'Law':
* The future is already here—it's just not evenly distributed.
And take the Efficient Market Hypothesis (EMH):
* The price of a security reflects all the available information about it.
And when you combine them you have the principle that the information is out there (too many short contracts), but it wasn't evenly distributed—yet.† Until someone noticed it, and it started to spread, and that caused people to change their positions in GME.
Shutting down Reddit, or any other random forum, isn't going to stop someone from noticing the shorts.
This is no different than what happened in The Big Short: some folks noticed discrepancies (e.g., mortgage delinquencies) and acted first, and as that information spread the market "corrected" its price. It's just that it ended up causing the Great Recession.
The spread of information isn't instantaneous either: at the very least it is limited by the speed of light. After that, it's limited by either (a) human attention spans, and/or (b) the machine learning systems that humans programmed in automated systems.
† Edit: I propose this phenomenon, if not labelled already, be called "Gibson's Market Corollary".
--
Now the price of GME is kind of meta though, in that it doesn't reflect on what's know about GameStop, but rather someone 'related' to GameStop.
It's probably not a good idea to buy reddit when you're losing your shirt just in hopes of turning it around in the short term. The momentum is already there for the short.
Instead hedge funds will learn from this example and get smarter about using and manipulating social media. I wouldn't be surprised if they start leading secret PR campaigns to start trends like this on reddit--screw their competitors and make a lot of money.
Why try to swim upstream when it's so much easier to make money swimming with the current?
And why buy social media when you can just manipulate it anonymously?
It would probably take $5-$10 billion to purchase Reddit outright today. Its last funding round a couple of years ago valued it at $3 billion, and it has grown a lot since.
It would be much cheaper just to pay some kids to make nice looking but ultimately loss making bets on there. If WSB looks like a place where people go to lose money then it's popularity will drop.
> I don't think that would work, but I think we're at the point where stuff like that is going to be tried
Agreed it won't work. A lot of the discussion has already moved from Reddit to discord, and then to another discord channel after the first, and it will move again too if it needs to.
I don't have any skin in the game, but it's fascinating to observe.
the cat is out of the bag. you can suppress maybe one or two of these squeezes but fundamentally this changes what they are going to try in the future (ie they need to rewrite their playbooks)
If reddit were a public company today, it would have a market cap of over $100B. Public valuations don't follow logic anymore, it's just supply and demand.
Discord and telegram are big, but there's no way they're as big as WSB. I can just go to reddit.com/r/wallstreetbets and watch the show, I don't even know how to begin finding the same thing on discord.
And to put into focus how many people are involved here: the GME discussion threads go to tens of thousands of replies within MINUTES of being posted.
r/wallstreetbets has an official Discord, I think that's probably what parent is referencing. It's linked in their sidebar with a giant Discord logo, not hard to find
A hedge-fund believes that the milk consumption will go to zero, so they borrow the 100 cows for one month and sell them for $1 each.
Then they borrow them again, and sell them once more for 90c. Certain that they will worth $0 at the end of the month
A Redditor notices this. She knows that in a month's time, the hedge-fund will have to buy 200 cows, and there are only 100 available.
Her plan is simple. Buy all 100 cows, and at the end of the month, when the hedge fund will have to buy the cows back(twice), she will be able to dictate the price.
Hedge-fund cries foul. Doesn't like being beaten in it's own game.
> A Redditor notices this. She knows that in a month's time, the hedge-fund will have to buy 200 cows, and there are only 100 available.
This is a common misconception, but fundamentally wrong. Every short sell has an equal but opposite buy. Therefore every share shorted creates a new synthetic long share. Alice owns 100 shares. Bob borrows 100 shares from Alice, then short sells them to Chuck. There are now 200 shares long available to buy back- 100 owned by Alice and 100 by Chuck.
Therefore it's easily possible for short interest to be well over 100% of the float. There's no upper limit, it could literally be 10,000% of float. Shares sold short, can then be re-borrowed for new short sellers in an arbitrarily long chain. It's the same way that fractional reserve banking creates money out of thin air. It starts with a small set of "hard assets", then lends, say 90%, of them out to other banks. Those banks then lend out 90% to other banks. And so on, until the system has 10 times the money supply it started with.
Now, the reason that high short interest may result in a short squeeze is because usually some percent of longs at any given time tend to be long-term investors who are unlikely to sell. If, say 66% of investors are long-term holders, then short-interest above 50% could create a squeeze. If float's a million shares, then they'll be 1.5 million shares long and 500 thousand shares held short. But 1 million of those shares will be held by long-term investors. Therefore there won't be enough immediate buyers if all 500 thousand short sellers liquidate in a short period.
But... With Gamestop this logic makes no sense. At $300 per share, no one is a long-term investor. Nobody is buying or even holding at that price because they think the company is worth $10 billion (more than five times higher than its 2007 peak). Since there are always more shares held long than short, and since every share held long is held in anticipation of a short squeeze event, then even in the event of a massive unwind there will still be more sellers than buyers, and the price will fall, not rise. In fact during this whole price runup, short interest has actually increased. So clearly it's not short squeeze driving the melt-up.
The only reason Gamestop is going up is because of Tulip-mania. It's a classic bubble. Some early people on the hype train reaped eye-popping gains as more jumped on and bid up the price. That attracted even more attention, more buyers, and higher price. Like any classic bubble it requires an ever-widening net of greedy but foolish patsies to jump in at the bottom of the pyramid.
> The only reason Gamestop is going up is because of Tulip-mania. It's a classic bubble.
If only. This has no signs of being "classic". People on WSB realize that if many people purchase and hold on to GME stock for long periods of time, there will be an increase in stock price. If/when this occurs, this increases the annual cost for GME short sellers through increases in both Margin Interest and Stock Borrowing Costs, which is a direct percentage of the GME stock price. This depends on the short type, but either by a certain timeframe or if the lender desires, short sellers will be forced to buy back their GME stocks. Buying back GME can also be forced through a Margin Call. When this happens, you will see a short squeeze.
> People on WSB realize that if many people purchase and hold on to GME stock for long periods of time
You have a lot of faith in a bunch of people not wanting to realize their profits on a stock that everyone knows is going to tank sooner or later. I'm sure some of them who got in on the run early won't make a dime because they'll hold on too long and then not give up even on the way back down, but some will want to make sure it's real money for them and then this thing is going to go down fast.
You obviously know nothing about the folks at wallstreetbets. It's not just a bunch of random people doing pump and dumps. Their methods and DD might be questionable at times but they base them on something and at times try to stick to that thesis.
Thesis in this case being “let’s protect GME from vultures and make some money on the side?” I have a hard time believing that is anything but PR. I’d hardly call the denizens of r/WSB altruistic. Sanctimonious, energetic, and smart? Absolutely. But they aren’t there because they want to empower the meek against the mighty.
Having lived through a number of cryptocurrency boom/bust cycles I’ve seen first hand how everyone is coordinated and holding the line...until those who have profit in their sights decide to find a bunch of bag holders to cover their exit. Poof.
> Having lived through a number of cryptocurrency boom/bust cycles
Strange statement. Everyone here has lived through the same, you aren't some special snowflake in this regard. Paying more attention than others to the daily price or memes means absolutely nothing in the end.
All the talk of short squeezing and sticking it to the hedge funds and Wall Street aside, they are really basing it on the belief that someone will buy it at a higher price than it is now which will be true until it's not.
Unlike Tesla or Bitcoin which many think are bubbles, this is a case where absolutely no one believes in Gamestop (being a $24 billion company, at least). There's not anyone who thinks holding it forever is a good idea at this price (or even at a fraction of the current price). In these cases when the stock stops going up it implodes very very quickly.
Additionally... Tulip-mania was driven up by false scarcity. People are buying up GME on principal as punitive action against hedge funds. SWJs + Day Trading = /r/WSB
I understand how this short sale "chaining" can result in a stock being over 100% shorted without any illegal naked short selling taking place, but why wouldn't this chaining not result in a short squeeze and therefore bid up the price?
I'll walk through an example and maybe someone can point out what I missed.
Let's say we have a market for some stock. There are only 5 traders (Alice, Bob, Chuck, Dave, Eli) and 100 shares that are all owned by Alice.
Bob borrows all 100 shares from Alice and sells them to Chuck.
Dave borrows the 100 shares from Chuck and sells them to Eli.
Thus, Alice and Chuck are each owed 100 shares, Bob and Dave are in debt for 100 shares, and Eli owns the 100 shares.
Thus, Bob and Dave must now compete for the 100 shares owned by Eli, which then drives up the price.
I don't know how the synthetic long shares mentioned fit into this.
I believe that this is correct. The parent comment sounds very sure of themselves but I don't think the statement "there will always be more shares held long than short" is necessarily true.
After researching a little more I've found I was incorrect. There are always more long shares than short shares. However, the "long" shares are not necessarily real shares in the company. They could be ones that have been lent out as described above.
I think the misconception is thinking that shares, once loaned, are somehow locked. In the above scenario, Alice and Chuck open their Robinhood account and see 100 shares just the same as Eli or any other long.
In reality their shares are actually on loan, but they're probably not even aware of it. If and when they go to sell their positions, it will instantly execute, and the broker will recall the shares before settlement (which occurs three days after the trade's executed.)
So, in fact Bob and Dave now have their pick of the litter and can buy back from either Alice, Chuck, or Eli.
You are not wrong, but you are also missing the part where risk management departments will forcibly unwind shorts of institutional investors, option gamma creating massive amounts of reflexivity and the Weaponized autism of /r/WSB and the viral network effects of its memes encouraging even more reflexivity.
I have no doubt this will end in tears for investors on both sides.
GME's management would be wise to issue 1-200% of new equity at a substantial discount to present market value to short holders (this lets them cover at a lower loss) and sit on the cash to transform their businesses strategic outlook.
Except that would potentially make GME complicit in activity that regulators are already making threatening "market manipulation" noises about. Also, if they were to issue more shares, the mere news of this would likely pop the bubble hard before they would realize any gains.
GME doesn't care if they pop the bubble though. They know their shares aren't actually worth $350 and they're not making strategic decisions based on them being worth that much. They'd much rather issue more shares, take the increase they get, and get back to their own business.
is that fair to say? certainly some of them are buying at $350 now? Some people are selling now and others are buying, setting the market price. From a selfish standpoint, it makes sense to sell now, if for nothing else, to take those profits to manipulate some other poor company, no?
This is the exact thing I have been trying to convince people of since this began. It started with a kernel of truth and a case to be made for a potential short squeeze but at some point along the way transitioned from a squeeze to a bubble with more and more chasing gains out of fomo and some ridiculous concocted story about the little guy vs the big bad Wall Street. This is further evident from the spillover effect seen in amc, Nokia, and many others.
All that said you do need to understand that if your impulse is to short or buy puts you’re almost certainly early as bubbles always go much further than anyone thinks possible and the extraordinary IV of the options makes it very difficult to profit from.
It's literally impossible for it all to be retail money.
What I think people are missing is that in about a month we'll find that "Wallstreetbets" and "retail" were also other fund managers like Ackman.
This is not the first time one fund manager messed up with their short and got absolutely eaten up by other fund managers (see, famously, Herbalife where Ackman and Icahn were direct adversaries). Melvin Capital clearly messed up - their losses exceed any reasonable risk-managed short position and it's clear there was some naked shorting in there because you cannot lost 30% of your fund in a week unless you're being reckless.
The media - in classic post-Trumpian mentality - is just fabricating a reality about market insurrections, how male traders are incels, or how Trumpism has spread into the market. The reality is we're witnessing another classic short squeeze between fund managers - and sure - retail got in on this one too, but they are at best a spark, rather than the gun powder.
Here here. It’s plainly obvious from the large block buys happening in extended hours trading that most retail doesn’t have access to. This is substantial money moving. Retail isn’t the driving force, but they’re riding shotgun and being used as a scapegoat for risk management failures.
Some guy makes 50mm (mostly unrealized at this point). Where do you think the rest of the 14 billion is owed? Probably institutional investors and HFT guys that have been playing market volitility, as they do.
There's a couple guys that are fucked, but most of that money is going back into the pockets of 'the big bad fund managers'
Same with Tesla, I don't think the institutions that profited handsomely in that run up think it's worth the price, but they think that the real gains are good for their funds.
Also note, retail guys are still probably pretty close to the one percent. Who else has 50k lying around for something like this. Sure he might not be a hedge fund, but he's probably not working a minimum wage job and fixing inequality with his trades.
I don’t recall saying anything about retail money. There are many things at play- short squeezing, gamma squeezing, retail buying, trend based algo buying. Trying to attribute a move to any one thing is folly because it’s never one thing.
But, when you get mass hysteria around a certain asset class and frenzied buying with the expectation said asset will just keep going up without regard for the fair value (in this case heavily shorted stocks), that’s a bubble. Just because you’re a large institutional buyer doesn’t make you immune from participation.
I can't answer most of your questions, but I think I can answer the voting part.
There are 100 shares, Alice owns all of them, but loans them all to Bob so Bob can short them. Bob sells all of them to Charlie.
So Alice owns 100 shares and Charlie owns 100 shares even though only 100 real shares exist. (Bob owns -100 shares.) But Alice can't use her shares for voting because she loaned them out, only Charlie can vote.
That's not correct. Alice does not own anymore the shares, only Charlie does.
There are 2 steps involved:
1) shares borrowing
2) shares selling
Shares borrowing: Bob will borrow 100 shares from Alice. Bob will have to give Alice a collateral, valued at 100% value of the shares + a percentage. Bob also has to pay a borrowing fee to Alice, daily.
At this point, Bob owns the shares, not Alice. Alice does not receive dividends directly from the company that issued the shares and Alice does not have any voting rights.
If those shares produce dividends, then Bob has to pay those dividends to Alice. If Alice invests the collateral and that produces profit, Alice needs to pay some of it to Bob.
When Bob thinks all is said and done, he has to return 100 shares (not particularly the same shares, but the same type and amount). At that point, Alice will return the collateral. Alice regains the voting rights and will get dividends.
Shares selling: Bob sells 100 shares to Chuck. Chuck owns 100 shares (the ones previously owned by Alice), has the voting rights associated with the shares and will receive dividends (if the shares generate that).
There are no extra shares generated by this process.
Alice is not a person, but a financial institution, most likely a bank.
Right, which when the float is short any significant amount... is when things can get sticky.
Bob sees the name go up, and instead of buying the 100 shares to close the position, he goes back to Alice. Alice says, 'sure, I'll lend you another 100 shares.' But Alice doesn't have any at the moment, so she buys the 100 from Chuck (from Bob, from Alice), and now....
200 shares short on the original 100 shares?
If Bob wants to close out (or must close out)... there must be many more people with shares for this to work out nicely.
However, if it's all through puts, none of this matters!
I'm curious, if this is the case, why doesn't the market realize this and short sell like crazy right now, given it's clear the price isn't sustainable. That would then generate more negative price pressure and generally keep the whole thing from happening in the first place, no?
I’m not convinced that the economics work like this. Suppose there are n real shares, i.e. longs - shorts = n. A short squeeze happens if the number of shorts exceeds the number of long shares that aren’t trying to squeeze the shorts. That’s longs - squeezers < shorts. Rearranging gives n < squeezers. So the short holders are in trouble if the number of squeezing shares exceeds the number that actually exist.
Imagine there’s a near-squeeze situation, and someone shorts more shares. This drives the price down, which makes it less expensive for squeezers to buy shares, which exacerbates the problem.
This is complicated by margin calls and their institutional equivalents. This cuts both ways. Enough downward price pressure could cause some longs to get margin called. But more shorting also means more danger.
If I were the SEC, I would consider restricting the total short interest to a fixed fraction of total outstanding shares to improve market stability. I don’t know whether this would be a good policy overall.
That's happening. I just tried to short GME and my brokerage gave me an error message that it was "hard-to-borrow" and no shares were available at this time, and to check back tomorrow.
That's what I figured might be the limiting factor. At some point, nobody wants to take the other end of the short, so it becomes impossible to short further.
It's worth noting a lot of the investors are holding for ideology, so that is certainly not your typical hold. Many may very well hold all the way back down to their buy in.
What I am interested in is how far this can get twisted. Are there more mechanisms at the hedge funds disposal? Will the financial institutions step in at all?
just because it was held at $6, doesn't mean that is the fair market price. These Hedge funds had significant incentive to bankrupt this company. 300+ is most likely a bubble, but $50-$90 is completely reasonable looking at the fundamentals. And besides, traditional wall street fundamentals are not the end all be all of a stocks value. Tesla is living proof of that.
I don’t fully buy it either but it’s not irrational. GameStop still sells a lot of games. Online is gradually taking over but it has been for what 20 years now and people still go to the store and consoles still have disk drives. B&M is not going away any time soon, and in some ways I think the hardest hits have already come and gone, what’s left now is likely to stay.
Some consoles have disk drives. Playstation released their "Digital Edition" Playstation 5 which doesn't have a disk drive, and Microsoft released the Xbox Series S which also doesn't have a disk drive. Phones and tablets never did have disk drives, and the gaming market on them is large.
I think it's pretty clear that the days of physically buying games are quickly coming to an end. Years ago there were chains of computer software stores, and long after that, stores like Best Buy had huge computer software sections. The same thing will happen to games now that every console is connected to high speed internet.
Gamestop has lost money for the past two years, and it only shows signs of getting worse.
> Retail is a liability, and they're retail that's ESPECIALLY being eaten alive by online.
Retail may be a liability. But real estate is not.
GameStop has small stores that should shut down. However, they also a not insignifcant number bigger stores that can become "gaming places" once we get Covid under control.
Being a "Safe place for Mom to drop the kids to play Pokemon" has real value.
Perhaps, pick your favorite number. I think it's pretty clear nobody believes fundamentals support $300 though. Was wondering why market short pressure doesn't prevent it from getting that high.
>The only reason Gamestop is going up is because of Tulip-mania. It's a classic bubble. Some early people on the hype train reaped eye-popping gains as more jumped on and bid up the price.
A cursory look at /r/WallStreetBets suggests this is statement is mostly wrong. You're suggesting the price is rising due to speculation/hype, but this phenomenon is fundamentally different. The reason for this rally is clearly activistic in nature, an attempt to bankrupt the hedge funds who engage in vulture capitalism.
Some might be greedy, but many aren't trying to make money and greed wasn't the cause of the rally. At the end of all this, there will absolutely be a redistribution of money, but even if the "diamond hands" investors walk home with a loss, they (hopefully) will have strangled a few hedge funds far greedier than the speculators who are taking advantage of this market dynamic.
This is far from a "classic bubble", driven by over exuberance, or a classic squeeze, driven by greed. This is an example of a new phenomenon that will change how hedge funds operate in the future.
> The reason for this rally is clearly activistic in nature, an attempt to bankrupt the hedge funds who engage in vulture capitalism.
That's a fun rally cry that happens to be true, but even if it wasn't true and the conditions existed naturally, these WSB folks just spotted an opportunity to make money and jumped on it like anyone else. Activism is just trash talk like much of this subreddit has always been.
You're incorrect, nobody can go around shorting stocks like crazy. First one need to borrow the stock, which may be difficult for some stocks. This creates a concrete imbalance between long and short holders and a limit for how much can be sold short. But that's not the whole problem, every short stock needs to be covered by some margin. If the stock goes up too much, the short seller needs to buy it back no matter water, for lack of margin. In other words, it is NOT just the buyers who are forcing the price up, but the short sellers who are forced to cover their shorts. That's why it doesn't matter that the price is insane, it will go up as long as the shorts are forced to buy back the stock at those ridiculous prices.
> First one need to borrow the stock, which may be difficult for some stocks.
In the US, stock loan markets are extremely deep and liquid. Finding borrow is rarely a problem. Borrow fees may be relatively high, about 0.1% per day right now for GME. But considering that short sellers are targeting an 80%+ profit within a few weeks, that's not a real deterrent
Virtually 100% of shares held at retail brokers are available to borrow. This is especially true at discount brokers like Robinhood, where borrow fees are a primary revenue stream. Ironically the more WSB people that buy GME, the easier it becomes to borrow.
> If the stock goes up too much, the short seller needs to buy it back no matter what, for lack of margin.
This is incorrect in the vast majority of cases. Virtually every prime broker (i.e. the brokers used by hedge funds), uses portfolio margining. The prime broker calculates an aggregate "value-at-risk" for the entire portfolio, then requires the fund to post that collateral. As long as they have over that threshold, they won't trigger any margin calls. But even if they do, there's no reason they have to buy back GME specifically. They could just as easily liquidate any other position to bring down VaR in another less lucrative position.
Remember a major multistrat fund like Citadel or SAC will have something like $30 billion AUM, then lever that up by 500% or more. One of these players could short 30% of the float in GME, and it'd still only be 2% of their portfolio.
> could short 30% of the float in GME, and it'd still only be 2% of their portfolio
That would be true if it wasn't for leverage. When using portfolio margining, the leverage is huge. So a relatively small change in the stock will result in large losses. Now, you're right that this is not going to break a fund like Citadel, but not all hedge funds are that huge.
From [0] and [1] I don't think chaining shorts, as described in the parent comment, is possible. Alice cedes control over the shares in return of a fee. Therefore, when Bob borrows 100 shares from Alice and sells them to Chuck, there are still only 100 on the market, not 200.
> When a security is sold, the seller is contractually obliged to deliver it to the buyer. If a seller sells a security short without owning it first, the seller must borrow the security from a third party to fulfill its obligation.
To actually answer your question, is worth noting that Bob has to provide a collateral to Alice at 100% + some margin (from wiki) the value of the borrowed stock. So, in short (ha!), Alice sells Bob a bunch of shares with the idea that they will revert the transaction at a later date.
>Alice owns 100 shares. Bob borrows 100 shares from Alice, then short sells them to Chuck. There are now 200 shares long available to buy back- 100 owned by Alice and 100 by Chuck.
That is not quite true. If after Bob has borrowed and sold 100 shares to Chuck, and then David comes along and makes an offer to Alice to buy 100 shares, Alice can only sell her shares once they are recalled. Which means Bob now has to scramble to return those shares, specially if Chuck does not want to sell (or if Chuck has lent out those shares and they need to be recalled in turn).
This is true. But shares are fungible. So, even if Alice sells, the broker will just locate 100 different shares on the loan market and invisibly swap them out for Bob. Very likely whoever Alice sells her shares to, will also put them up for lending.
But once borrowed, the shares can’t be borrowed a second time. So if 100 shares are borrowed and sold short, they’re back on the market, yes. But the total number of shares available is 100, not 200.
That's not true. The same share can be borrowed an arbitrary amount of times. Palm reached short interest of nearly 150% during its heyday. By definition that would require float to be borrowed a second time.
No, it is saying something different. You can only loan out your share of stock once, but the person who buys the stock can lend it out again.
So let's imagine there is one share of a stock and person A owns it... they lend it to person B, who sells it to person C, who lends it to person D who sells it to person E....
Now, person E is the only person who currently holds an actual 'share', and is the only person who can lend it out. Person A and C will have an IOU saying they will be given back their share at date x... they can sell the IOU, since it has the same value as a share, but they can't lend out an IOU.
Can the value of that IOU drop to zero if the lendee can't return the share, e.g. if lendee no longer holds the share and none are for sale? Does the IOU specify alternate restitution in that case?
The broker usually guarantees the stock to the lender, and will sell any other assets the short seller has to cover. A broker isn’t going to let the short seller get in too over their head.
While conceivably what you are suggesting could happen, I don’t know if it ever has.
Not always true. I've had brokers force me to close short positions (esp in '08-'09) because 'no shares available' which forced me to buy at the market in order to close out the position. It had nothing to do with interest or margin.
(Granted, they were some pretty illiquid stocks so I suspect that the broker had managed to get into a naked short situation when they allowed the trade to execute before actually trying to go out and borrow them. Of course, their mistake was made my problem.)
I'm not saying that your example isn't valid, but it's kind of different than what you are responding to.
Your short position may have been called, but (I am assuming) you didn't take out a short position with an explicit expiration date. Ie, it wasn't "due" on Friday, and you likely didn't know days/weeks in advance of when it was going to be called.
No, it wasn't called. The broker would inform me, after executing the trades, (typically after the close on the day of the trade) that they literally could not borrow the shares and would send me a 'sucks to be you' message saying I had to close the position before the end of the settlement period or they would close it for me at the market price on settlement day. IIRC, it was less than 72 hours notice and I was given no option for any amount of money to keep the position open. Since these were thinly traded stocks, there were no options available on them so I couldn't keep it going that way either.
No, the person who lent the share out can demand it back and refuse to lend it out again... normally, the short seller would just turn around and borrow another share from someone else to sell short, "rolling over" their short position, but that assumes there is another share to borrow. There usually is, it not always.... and it might be VERY expensive to borrow if it is a heavily shorted stock.
That is not naked short selling. Naked short selling is when you sell a stock short without first borrowing it.
The parent to your comment describes someone buying a stock from someone who sold it short, and turning around and it selling it short themselves. This happens organically and is not "naked."
Beware the incredible amount of false and misleading information about this situation online. Things catch on in the zeitgeist and don't really get fact checked.
Right. But you can buy a stock (without knowing it was a borrowed share in a short sale), and then lend it to someone else (who intends to sell, it, thus creating another short sale).
So to unwind this, the one existing share has to get bought (by someone who short-sold it), and returned (to the owner who lent it out), twice.
yes for hedge funds. some market-making entities are legitimately allowed to be short without borrowing, but is it absolutely not just any random hedge fund!
Isn't it the opposite of what parent is saying, that market makers are allowed to do naked short selling for "liquidity purposes" but hedge funds I'm not so sure
I agree. The anger seems like an ancillary phenomenon. People seem to be buying because they think it's a sure thing that the asset price will increase. Maybe anger at shorters helps justify exploiting their error, but it's not the primary motive.
Anger/vengence seems like a primary motivator. Let me put it this way: how much money do you think these folks would pay to see a hedge fund manager crap his pants?
Not much. Everyone is mainly hoping for big profits and if they manage to show they're powerful enough to bring a hedge fund to its knees in the process then that's simply an added benefit. The anger at the big guy is just an artificial banner behind which to rally the troops. The objective is profit and the motivation is greed.
I have no skin in the game so I don't care who comes out on top, but it's delusional to think there's some noble cause behind all this on either side of the game.
HODLers also use emotion and ideology to keep from selling.
It’s decentralized motivation to coordinate!! :)
Someone would do well to inspire a cult following and a viral one at that... then it will attract people who just believe in the To the Moon rocket emojis
This is some of the oldest stuff in the book in terms of human psychology: how to create group beliefs, how to punish defectors, etc. I think it might work surprisingly well, given the rise of populist movements in the past few years.
The redditor doesn't need to pay 1 dollar per cow (the market price as sold by fund), the redditor pays .01 cents for an option contract to buy the cow for 2 dollars at the end of the month. The options contract requires the bank selling the contract to buy a cow today. In effect, the redditor is able to force the bank to buy 100 cows by spending only 1 cent.
The bank has to buy the cows right away? I thought when the redditor buys the call someone else, let's say Bob, sells the call. If Bob already owns 100 cows (covered calls), then no one will be forced to buy cows ever. If Bob doesn't own 100 cows (naked calls), Bob will have to buy 100 cows at the end of the month if the call is in the money, not right away.
Yea, but we’re describing the basic mechanics of what’s happening, we don’t need to get into the details of delta hedging. The basic mechanic is that large groups of folks buying Out of the money calls results in the sellers of those options buying shares to offset risk in the trade. In effect, in an env where lots of shares are locked up due to shorts, an cash efficient way to cause a squeeze is to buy out out of the money options, causing more shares to be bought to offset risk, sending the price up.
I don't get the over 100 percent part though. Is it required to squeeze the short (i.e., beat hedge-fund at this game)? Wouldn't hedge-fund still need to purchase 100 cows even if they only borrowed once?
Because as I understand, the way it works is that:
- You borrow 100 cows.
- You sell them immediately.
- You wait for the cow price to drop.
- Now you buy 100 cows, netting a profit. (but they need to buy back those 100 cows here, and they only borrowed once).
Hedge funds typically buy on margin so when they 'borrow' the 100 shares, they are only required to have a fraction of the amount borrowed in their account (either in cash or other securities) essentially to guarantee the broker doesn't get stuck holding the bag. They have to maintain this margin ratio (i.e. percentage of the position) whichever direction the stock is going.
When there is a rapid increase in the price of a stock they have shorted, they will no longer meet the margin requirements. So they either need to deposit more funds/securities to keep the position going or start buying back shares to get back in line with their margin requirements. However, if the fund is maxed out on their positions buying back shares often just helps raise the price further causing them yet another margin problem... it's a downward spiral. Plus, once other hedge funds smell 'blood in the water', they'll start piling on too (i.e. buying shares raising the price further) knowing that the fund(s) that are in trouble have no choice but to cover their short position regardless of the price. That's part of why you'll see these gigantic price spikes.
You don't have to have over 100% but you do need a significant amount. For a squeeze to occur you have to have 1) some initial upward price movement and 2) enough short interest that as people get uncomfortable with the increased downside (or their broker calls them on their margin), they have to buy real shares to close out their short positions, thus increasing the upward pressure on the price. That drives the price higher, and causes more people to get uncomfortable and more margin calls to be made, driving the price even higher. Other people notice the price and trade volume going up and want in on the action, which drives the price even higher. This cascades until there are no more surviving short positions.
The whole thing about borrowing 200 cows is illustrating the concept of leverage, but it isn't necessary. We could have illustrated the concept of a short squeeze by saying the hedge fund borrowed 50 cows, and a Redditor noticed and bought 51 cows. When the hedge fund needs to close their position there are only 49 cows available and the Redditor can ask an insane amount of money for the last cow. And that isn't even really how a short squeeze works (see top paragraph).
A squeeze can happen with any amount of short interest. But if it's a tiny amount it will be swallowed by the other random noise in the market, and won't cascade into a giant news story. Gamestop had right around 150% short interest in December. The other crazy thing is not just the number of shares shorted, but what prices they might be at. The 50 day moving average is about $30. If you shorted at $30, you had a 500% downside yesterday. If you still weren't forced to close your position then you were at 1000% downside today. The one year low is $2.57. If you shorted any sizeable position at $2.57 you're probably thinking about jumping off a skyscraper.
You don't need to borrow more than 100 cows, the short squeeze of Porsche/VW had a much lower short interest because the shares were all tied up in institutional holdings.
CNN is an entertainment network. They don’t need quotes from hedge funds. It’s easier and more engaging to get “an expert on hedge funds” to rant on-air about how mad they must be, and then report on it as if it were news.
They also have had a few stories about how this is "Trumpism". They're desperate for eyes. It think it's great and the fact that discord dropped the WSB channel because of bad users (which could easily have been infiltrated users) falls right into the same issues we were having a couple weeks back.
All of this makes it clear that people are frustrated and upset. My only concern is people that can't take the squeeze jumping in on the train and losing in the end.
Since no one replied with anything substantive yet, I looked around a bit to try and answer my own question. Nothing I've found from a hedge fund is even remotely close to crying foul... but here's a collection of quotes
Citron research (not a hedge fund, but one of the parties that had a large short position) put out the following video generally supporting redditors and wsb: https://www.youtube.com/watch?v=yS4yPsmaDDQ
Melvin Captital (Hedge fund that took a big hit), as far as I can tell, has not put out any substantial statement, but none of what I can find that they did put out is crying foul. Examples of what I can find include "The social media posts about Melvin Capital going bankrupt are categorically false", ""Melvin Capital has repositioned our portfolio over the past few days. We have closed out our position in GME (GameStop)"
The only statement I can find from Citadel (hedge fund that invested in Melvin) is from their CEO, saying "Gabe Plotkin and team have delivered exceptional results over the history of Melvin. We have great confidence in Gabe and his team".
Point72 (another hedge fund investing in Melvin to bail them out - and who already had $1 billion under management with Melvin) had their chairman say "I've known Gabe Plotkin since 2006 and he is an exceptional investor and leader. We are pleased to have the opportunity to invest additional capital and take a non-controlling revenue share in Melvin Capital,". I haven't found anything else.
> The only statement I can find from Citadel (hedge fund that invested in Melvin) is from their CEO, saying "Gabe Plotkin and team have delivered exceptional results over the history of Melvin. We have great confidence in Gabe and his team".
That sounds like the kind of thing a GM says a week before they can a couch. If you actually HAVE great confidence, you don't have to say you do. Actions speak.
I mean, the action here was Griffin's company investing two billion dollars into Melvin, so that sort of lends credence to the idea that Griffin does have confidence in Gabe and his team.
>> We are pleased to have the opportunity to invest additional capital and take a non-controlling revenue share in Melvin Capital
Haha, seems to me like other funds are taking advantage of Melvin's position to buy up some of Melvin on the cheap. All those hedge funds must love the squeeze!
yeah - this is just a squeeze. they happen. any sophisticated player in the market will recognize this as a normal (though not common) thing.
the weird and new part is that the people cornering the market are a horde of retail traders who are colluding in the open, but in a way regulators probably don't have tools to address.
what you are describing is not collusion or market manipulation. If it was, CNBC should be investigated for recommending stocks daily.
random people post analysis and others decide if they agree. Even if there were people saying to buy to cause a short squeeze, that is also perfectly fine. Institutions trade on momentum all the time, that is basically the entire HFT sector. If anything, the people on reddit are even less egregious that wall street because they are doing it in a public forum, where institutions do it in secrecy during three martini lunches or "idea dinners"
Do we know if anyone actually complain to the SEC? I know they put out a statement they are monitoring it, but it's rather hard to miss, especially when noticing weird market trends is literally your job, unless they've said something otherwise it seems likely they did that on their own initiative. Especially when congress members (i.e. your bosses) have been putting out various statements about it...
If there was a complaint there are also lots of other options than hedge funds... banks, mutual funds, pension funds, etc...
It seems somewhat unlikely that they were short, but they are the parties who I would generally expect to want increased regulation. Hedge funds on the other hand are probably delighted as a whole that there are lots of retail investors throwing money around in interesting ways - they generally excel in taking money from people doing that.
What makes no sense to me as a layman is how can you sell something you don’t own legally? If I borrow your cow and sell it that’s illegal without consent, if you give me consent to sell the cow, there is still only one cow and ownership changes hands, there are not now two cows.
Because cows aren't really fungible, but stocks are.
If I borrow $10 from you, you don't expect the literal note that you gave me back. I can give you $10 back in coins, or $10 transferred to your bank account. I can burn the $10 note you gave me, give it to a homeless person, or re-lend it to my friend. There's nothing illegal about that.
On the other hand if I borrow your car, you're expecting the same car back. I can't sell it and then give you another similar car in return. I can't borrow your car and then lend it to my friend.
>>I can burn the $10 note you gave me [...]. There's nothing illegal about that.
Not to detract too much from your analogy but burning money is illegal in some jurisdictions[1], and in the United States is prohibited under 18 U.S.C. §333: "Mutilation of national bank obligations"[2].
Cows aren't fungible, so that analogy isn't great. The key thing to keep in mind is that here you do legally own the share you bought, except that when buying it you also signed a contract that says you will resell a share to the original owner at the original price, plus interest.
This is exactly how loans from banks work. You took money from the bank and bought a house. You now do not have enough money to pay back the bank, but the bank doesn't mind, because they only care about the contract that says they will get their money back plus interest.
The bank has an "asset" in their account that is the debt note from you. This asset has the value of the money you borrowed, plus interest, and it can be sold for that. One dollar just became two. (If it's a mortgage it's called a mortgage-backed security which the Federal Reserve will gladly take off your hands currently. The money they pay is created from nothing.)
That asset has associated risk vs cash that for the most part doesn’t. The risk being you don’t get the cash back. One dollar did not become two. If you sell the asset you get your cash back from whoever bought it, and it comes out of their account, again one dollar did not become two, unless it’s the Fed sure, they can create money.
Shares aren’t created unless the company issues more right?
So I think you do actually have it right. That's why you'll see careful commenters in this thread referring to "synthetic shares", which are like normal shares but come with that risk that you don't get it back. Except, if I understand correctly there are also laws around shorts which say that you are required to have the money to cover the share, which helps diminish the risk.
"Synthetic Shares" just sounds like a fancy way of saying you have a loan on the books. Its like if I loan you money and saying now I have "Synthetic Money" in the form of the loan you owe me. Money people seem to love to make up new terminology to obfuscate the meaning.
The risk is priced. That's the excess interest (above the risk-free rate) embedded in the asset value.
I should also add that it's not the case that the bank "no longer has" the money lent out. The bank doesn't actually move money from some depositor to the borrower. The bank credits the borrower's account with money created from nothing, and it feels comfortable doing so because there is the asset backing it. The Federal Reserve doesn't have to be directly involved at this stage. It allows banks to do this as long as capital requirements are satisfied.
So fractional reserve banking, once they hit reserve fraction they can't legally lend more cash out right?
This also doesn't occur with shares, you either own the share to lend or you don't? There are no new shares created only loans on a fixed amount of shares in circulation unless the company issues more shares, right?
You don't own the share you lend as in it's no longer your property, but you own a new contract claim against the brokerage house whom you lent to. As with any loan, this is newly created financial property. It acts and is priced like the original share, plus additional compensation for the risk (payment for share lending).
It's not the same as company issuing a new share since there is no voting right and there is no SIPC insurance. But in all other ways, financially, it's as if the brokerage created a new share. Real share owners can lend again, so one real share can leverage into any number of outstanding synthetic shares. The only thing holding leverage in line is the margin requirement, and how many people who lent real shares want their loans back.
Right, risk plays into it, but the loan the bank creates is an asset, (a liability for the bloke that has to pay it back in the future) - If I can sell that loan to someone else great, I just have to make it look low risk. But whether or not I sell the contract/loan off, I do have an asset that I didn't have before. It may not be a dollar from the Fed, but it's worth a dollar as long as the risk is low.
Absolutely correct. The cows remain 100. When I said buy 200 cows back, I meant by the 100 cows TWICE. Buy them, give them back to the second person you borrowed them from, then buy them again, and give them back to the person you borrowed them from originally.
Sorry for making it confusing in my attempt to simplify it.
I have to admit. Its really a bit disappointing to see how many people don't understand the short, given we bailed out and financial institutions, its worth everyone to know.
Isn't this more like "10000 people each buy a fraction of the 100 cows" and you need all 10,000 of them to coordinate extremely well to manage it?
Would even getting 1 cow from someone breaking with the big group let you break the pressure if the person you initially borrowed the cows from isn't part of the group trying to squeeze you? Return them 1 cow first, then buy it back, then return it again as the second cow you borrowed, etc? You're gonna lose on this trade, but so is everyone else, then?
You don't even need them to coordinate extremely well. This isn't some sophisticated group with plans, this is a bunch of randos making jokes on the internet. If you have a large enough starting pool (like say a subreddit with 3 million followers), you've got a pretty big force even if it's just a small fraction of them buying a single stock for the lulz. And once the price starts moving up, even more will join in without you asking. If all of those people are using their play money then they aren't getting hurt at all.
But with that said, u/DeepFuckingValue started his YOLO over a year ago- he was super committed and it finally came around. How many other idiots did something similar and went bankrupt? How many will try it because they saw it happen this time?
Even if you think a stock should be worthless, it may make sense to hold it, even if eventually it will become worthless. The sale value may be zero, but as long as people are making shorts, the use value is the fee you can charge for lending them out. (And since it has a use value to make more profit, the sale value isn't exactly zero, but is more related to its use value than anything about the underlying product being securitized.)
Being able to sell it on is one exit from this gamble; but also, simply having accrued more lending fees (over time) than the share cost to acquire. Mostly, it's some combination of the two.
No it's not illegal. Reasonable people can disagree about whether it should be illegal, but it would be nontrivial to enforce and it's meaningfully distinct from what's termed "naked short selling."
There's really not any other way to get to shorted at 150% of the float, which was the GME reality. So... yes, likely illegal things happened by the hedge funds. Will the SEC investigate or fine them for it? Probably not, they'll probably get a(nother) bailout instead.
Can you provide some factual basis for these claims? We can type out claims without foundation endlessly; the Internet demonstrates that well; what we need is real knowledge and facts.
"Claim" seems like the wrong word. It's explaining shorts, but I think it's actually doing it inaccurately. It's saying the hedge fund will have to buy the cows at the end of the month. I don't think that's accurate. I don't think shorts ever expire.
The part that's understated is that the short sellers engage in their own broadcasting - and no one ever REALLY knows whether to trust them. Citron Research and Muddy Waters and these others post, places like CNBC re-tweet, Bloomberg mentions it, etc. And that has a predictable effect, or an effect that's a self-fulfilling prophecy.
I don't know if the David and Goliath story that played out here (if it is even really that) is that of longs banding together against shorts with greater aggregate cash and causing the squeeze, but rather a social platform having more social influence of information transfer than the traditional short broadcast mediums, and causing the squeeze.
Maybe that's the interesting story here of 2021 that makes it a unique twist. A 'democratized' medium of information exchange causing random people to organize in new ways.
It wasn't David vs. Goliath. CNBC, Financial Times, WSJ, etc. can't tell you what it really was, because they're beholden to all these Wall Street types. They don't get stories unless their relationships are cordial.
This was arrogant idiot billionaires vs. autistic retards of the Internet, and the arrogant billionaires in this case (Melvin Capital) had the chance to walk away when they got their $2.75 billion capital injection. They could have closed their position out and taken a relatively moderate loss compared to the total destruction of the fund that they're going to be facing in two days.
The reason no one on CNBC is framing it that way, is because while Melvin Capital is the face of the short sellers, a lot of people piled on after Melvin Capital, but no one else piled on with the level of idiocy they did. So if you actually call it like it is, and remind everyone that a 139% short on a company is literally the most fucking retarded thing in finance ever, then you incur the wrath of a lot of wealthy people who are pieces of shit and will use their money as weapon.
The problem is, the arrogant idiot billionaires have been assfucking not only the American people, but a good portion of the world for so long, that they're not used to someone spitting in their face, so they doubled-down. Unfortunately for them, they forgot that when you go up against the Internet as a collective, you always... always lose. No one fights the Internet and wins.
They released a story that said that Melvin Capital AND Citron both covered their massive short position (in a company with > 100% shared shorted), in one day, including AH? I don't buy it. AH volume was 4M in premarket, and even though there was ridiculous volume the day before, I'm willing to bet that most of it was fuelled by Blackrock, Chamath and Elon.
people in /r/wsb are assuming these stories are planted. Given the ridiculously nervous delivery of the story when it broke by the chap on TV (has to be seen to be believed) I can understand how people would be suspicious but idk.
The suggestion is that Friday is apparently the day when the bets actually become due and then we'll actually know if Melvin did cover or lied about covering and actually doubled down.
There’s nothing wrong with >100% short interest. Think of shorting a stock as a derivative which it is technically. In fact, if you were to add up all the outstanding interests of call options for certain stocks, you are going to get more than the float available for purchase. So does that mean call buyers are in the wrong? Oversubscribed short interest just tells you there were a lot of people short the stock with delta 1 infinite put options. I understand there’s this hate for Wall Street but really let’s at least get the math and details right.
The assumption that this is a bunch of robin hood everyday-man sorts conspiring on Reddit seems incredibly naive.
The GameStop play (as with BBB, AMC, Express, etc) are classic pump and dumps, albeit with a short-squeeze magnifier (basically equal to a DDOS amplification). And if you really traced back to the origin, I highly doubt you're going to find some Joe Nobody -- you're going to find some very well financed, planned player.
GameStop is a doomed enterprise in an obsolete space (selling physical copies of games), so it was incredible seeing WSB spin fantastical tales of the marvelous future ahead for it.
Everyone else gets some intense FOMO that leads them to piss away their own money (you can't just buy options because options on hyper-volatile stocks price that in), and then a lot of people get burned. Everyone is running around talking about how everyone made millions from WSB tips or something, it's farce.
As is always the case, a tiny number of people benefit, and a huge number of people financed their return.
The whole story seems super dumb. And the SEC is likely paying very close attention.
Loads of people throughout this discussion have absolutely no clue what they're talking about. What a low information crowd this is.
> you're going to find some very well financed, planned player.
You're going to find Dr. Michael Burry. He started buying GameStop under his Scion Capital shop back in June 2020, and /u/DeepFuckingValue on Reddit / Roaring Kitty on YouTube made the case for GameStop as far back as June of 2019.
EDIT: Corrected "Mr." to "Dr.". Corrected the timeline of DFV / Roaring Kitty to the correct dates.
Nobody thought GME was a good company (certainly not worth $15+ a share). They thought that the short interest in GME stock was too large, and that longing the stock could trigger a short squeeze the likes of which has never been seen. So far it seems they were right.
What a funny retort. Wait, are you just making up the notion that we can "identify" whales moving billions? Do we check the central trade registry and cross reference with billionaires?
Do you know how any of this works? Or are you just making this up?
Unless you're the SEC, this isn't possible. Reporters can't do that, so if you're taking the absence of that evidence as evidence, you are simply ignorant.
This is a great example of how the stock market is not about fundamentals, just like Bitcoin, it’s all about popularity and perception.
In the end, people don’t care if the “stock is really worth” the price, they only care if themselves or someone else are willing to pay the price, nothing else really matters.
Since we're doing JMK quotes, he also said "Capitalism is the extraordinary belief that he nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all."
It seems "the long run" in the context of this quote is getting longer over the past 20 years (or more), with high multiples and companies that won't return the capital invested in them for many, many years, even in optimistic scenarios.
Does that mean the weighing part is becoming less important, and the voting part more so?
I'd say that it's always been about the long run; however, with (real) rates around, say, 5%, as in the 90s, what matters for the present value is mostly within the next 20 years. With rates about 1%, what happens after the next 50 years still determines more than half of your PV.
Do investors really think they can predict the income of a company in the 2070s with ANY degree of accuracy? None of the top five companies by market cap even existed 50 years ago.
That's my point - with high ("normal") interest rates, your horizon becomes shorter, what happens in 30+ years doesn't really matter, and the fundamental value of a share should become visible more quickly, so the uncertainty now is lower. With rates near zero, what happens in 50 years still matters, so who knows what the share should be worth today?
The fundamentals of bitcoin are illegal drug deals and money laundering. We can argue over how much that's worth, given the volume of BTC, and difficulty of the necessary conversion back to currency that banks/landlords/cafes/etc will accept, but that's not zero.
I don’t think that’s accurate anymore. Bitcoin ten years ago was like the www in 1995. Now we have DeFi which runs on crypto. DeFi is to banks what e-commerce was to retail stores in 2000.
To keep the analogies, GP asked if the Internet was useful for anything, I gave one - 'buying pizza on webpages' - and you're objecting to my use of the word 'webpage' vs 'app'.
Underneath all the talk of smart contracts running on ETH, behind DApps, the system at large skirts money laundering laws, and that's not a property of the system that conveniently just happened. A big reason for choosing crypto over something boring and normal, ie banks and the whole regulated financial industry, is because it skirts money laundering and other financial regulation, and because it's outside of the regulated financial industry, a lot of users don't believe they have to pay taxes on any gains made. For those that don't believe in the concept of taxes, that's very attractive.
That is true for businesses with "reasonable" P/E multiples of ~5 or less.
When a business has a P/E multiple of >100+, a significant portion of the investment is speculative rather than a rational projection assets and future earnings.
It's really hard to make a rational value fundamentals argument for why anyone is willing to invest in TSLA, with its current price putting its P/E of 1700.
What that means tangibly varies from business to business.
You might get a cut of the profits in the form of dividends... unless you don't. Plenty of stocks never pay dividends. A lot of companies pay more to charity than to dividends to investors.
Or, you get a vote on company policy at the stockholder's meeting... But if the founders own more than half the stock, that doesn't actually matter. And that's assuming the founders haven't just sold stock with no voting privileges.
If the company files for Chapter 7 bankruptcy, stock owners are entitled to company assets... And almost never see any, because they're last in line behind every other creditor.
So it's unclear what, precisely, the practical weight of "partial ownership in a real business" has in general. In specific, sure; stock could be access to dividends or a meaningful voice in company policy. For a lot of stock, the only real value is "How much will someone else pay me for this piece of the action?"
Well. If you hold the stock for long enough, over time its fundamental value will be realised.
To mangle something that Lincoln probably never said:
All the stock prices can be somewhat wrong for some time, and some stock prices can be very wrong all the time, but all stock prices can't be very wrong all the time.
You´re right in the short term. But in the long term the hope is that things average out and true value emerges as a function of countless transactions over years and years. Markets are a value ascribing heuristic machine. There is nothing about them that can deterministically point to objective value. However, the idea is that over a longer period of time, an approximation of true value emerges though wisdom of the crowd.
> Markets are a value ascribing heuristic machine. There is nothing about them that can deterministically point to objective value. However, the idea is that over a longer period of time, an approximation of true value emerges though wisdom of the crowd.
It's a beautiful idea in principle. Ultimately the reality that emerges will reflect the underlying values of the society.
Really makes you wonder about our values, given that presently emerging realities include an increasingly inhospitable homeworld.
I would say it's more than a hope. Any trader whose strategy is closer to optimal will have larger profits over time and come to own a larger and larger fraction of the market. Though saying that out loud makes me realize optimal doesn't have to mean buying and selling according to true value. Optimal would in fact be predicting the behavior of other participants and trading off those predictions. I still think certain events ground value though: bankruptcies, mergers, and dividends attach a real cost/gain to holding a stock.
"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." Keynes, 1936.
But what if retail investors start to make up a larger % of investors? Then the dominant philosophy is hype, popularity and trying to sell to a greater fool. This is already happening: retail investors are growing in number.
Originally, when institutions were the major players, stock prices followed fundamentals because most ppl cared about the revenue, earnings and cash flow. But what happens when the demographics change?
How confident are you that they followed fundamentals in any original setting? "Fundamentals" is just a collection of metrics and patterns a certain class of investor believes in. Usually those with most money and thus, power.
I think you have a rosier view of what drives most of our markets than what happens in reality. Look at the dot com bubbles. Look at how HFT firms make money by exploiting the tiniest of pricing discrepancies and leveraging them heavily. Or perhaps "analyst reports" that can make or break a stock because one person believes something and we give them a megaphone. We switched focuse from present earnings to forward looking revenue. We have stock buybacks. We applied large multiples to financially unsustainable businesses because "maybe one day they can monetize these millions of users with Ads". etc. etc.
The GFC was a game of trying to sell to the greater fool and involved intentional manipulation at the highest levels. It seems the system has been has always had these holes and it was "ok" until regular folks began to identify and act on these opportunities.
We likely wouldn't be having this conversation if another large hedge fund was making the play retail investors are today. We'd read articles talking about the public battle of the billions.
Reminds me of anytime a govt entity creates & exploits a backdoor and is surprised when other actors use the same door for their own activities.
No rosy view - hedge funds and algos follow momentum and copy each other as well. I actually agree with some of your points but was questioning OP. Sometimes I ask questions and present a counter-argument to understand another viewpoint better, not because it’s what I believe in.
It's really not. Because eventually retail is going to get destroyed.
Yes, some hedge funds have lost their shirts, but those are the first ones who were in the short before the squeeze. The hedge funds and more importantly day trading shops making money right now are the ones who saw the activity and are goosing the stock price right now. I don't know if people realize that there are thousands of day trading shops where hundreds of people are in a single room, like an internet cafe, where people are day trading at terminals and people bark orders to each other and they all jump on the same stocks. These are probably the shops that are responsible for most of this volume.
There is no way that WSB boosted the price for $40 to $400. Those are hedge funds and trading shops that jumped into it afterwards.
They will sell at the top, and retail investors are going to buy on the fall, thinking it's "on sale" and then they will get wiped out.
I don't think you understand what's happening here.
There's only so much volume available as a result of the short positions. WSB et al are putting in money on a long hold. As a result that drives up the price. Yeah gamma's are in for sure making money. There are some people who have made multiple millions. One individual sitting at $31M currently on a $50k investment.
Some retail will lose, but wall street institutional short sellers are getting hit hard right now. For them to win this they need to keep putting more money into the fire which pulls in bigger and bigger fish. At some point large institutional investors aren't willing to bail out the short sellers.
It is also a strong argument that wall street isn't as intelligent or in control as they like to promote.
General public doesn't understand the trade or the sentiment behind it.
> For them to win this they need to keep putting more money into the fire which pulls in bigger and bigger fish.
This isn't true. The institutions with Short Exposure are connected to the institutions who buy Robinhood data and perform high frequency trading on those orders. Citadel and Melvin can BUY GME themselves to mitigate the risks. It is likely that a substantial amount of GME is being held by the institutions who had short exposure. It's basic risk mitigation.
The high frequency traders who have the Robinhood data are making money on every Buy GME order and will make money on every sell when this bubble collapses.
It is wrong to present this as a populist uprising.
This is an incredible fluctuation, a hilarious anomaly, but it is nothing more than that. It will have no lasting impact.
I firmly believe that the hedge funds that held GME short positions have bought into GME to mitigate their exposure. They likely bought in algorithmically using robinhood data and are making money off of retail right now.
My message to the people here: /r/wallstreetbets is not a gameshark. You are still playing their game. You are still playing a rigged game and you are still losing.
"Melvin and Citadel can BUY GME themselves to mitigate the risk."
Melvin buying GME is not "mitigating," it's closing the short position. If you close your short position high, you got screwed and you lost money. They did close it recently... At a massive loss.
"I firmly believe that the hedge funds that held GME short positions have bought into GME to mitigate their exposure. They likely bought in algorithmically using robinhood data and are making money off of retail right now."
How... Would "making money off of retail" in a pernicious sense be possible right now? If a retail trader on WSB bought in at $20, and sold at $200, they got 1000% ROI on their trades. Do you think that a bank secretly snuck in greater than 1000% ROI? The WSB trader got 1000% ROI, but the bank got 2000% ROI on the set of trades? The stock would have to be trading at $600 and the bank secretly pocketed $400 for that to happen.
Sure, the HFT front-run orders. But they are constantly buying and selling the shares they trade, they're not just buying. They don't get the buy-and-hold wins that the slow retail traders got off of a rally like this. HFT make money by providing liquidity, not by buying and holding GME.
Also, just as a technicality, Melvin is not a high frequency trader. They are not the same people front-running Robinhood orders. Melvin lost big time.
"My message to the people here: ... you are still losing"
My message to the people here: if you got >1000% ROI, you won. Don't let randos on HN make you feel bad.
Oh, Citadel made money off of GME — but Melvin didn't. Melvin had to take investment in what I can only imagine were very unfavorable terms from Citadel because they were bleeding money so badly. Then they were fools and didn't close their short position immediately, and lost even more massive amounts of money. As a sidenote, I doubt Citadel's investment in Melvin is looking very good right now. (Since somehow Melvin seems to have not been bankrupted, maybe it will look better in a few years if Melvin recovers.)
I would also be fairly surprised if Citadel made, say, 1000% ROI on their total GME trades this week. Giant bull runs are fine for HFT, sure; everyone wins when stonks go up (except for shorts, who lose big time). But giant bull runs are generally better for buy-and-hold investors than for HFT, because the buy-and-hold investors weren't doing all the useless intermediate buying and selling that the HFTs were. If a stock goes up and to the right, the best (retrospective) move is to have invested all of your position early, not to have constantly invested a bit of it over time as it went up like HFTs do. Basically: GME's performance favored avid WSB investors who got in early, much more than it favored HFTs front-running Robinhood for pennies on every trade. To quote Matt Levine, "you don't need special evil HFT powers to see" GME going up, it was happening for weeks [1]. You didn't need HFT powers to see WSB posts about the squeeze, or about short interest being 130% of the float. If you were an avid WSB user, and you got in early, you really did take Melvin for a ride. Sure, Citadel did well too — but your returns would still probably blow theirs out of the water.
IMO, WSB won the biggest.
(I do worry about the retail traders who bought in late due to the hype; this rally doesn't seem sustainable.)
> This isn't true. The institutions with Short Exposure are connected to the institutions who buy Robinhood data and perform high frequency trading on those orders. Citadel and Melvin can BUY GME themselves to mitigate the risks. It is likely that a substantial amount of GME is being held by the institutions who had short exposure. It's basic risk mitigation.
-- They would have to do this at great cost and loss (rumor mill has it at current loss of $4B). If you believe the reports in the media Melvin has had to go ask for money from other institutions. Thus bigger fish would now be involved as they are putting money out to Melvin.
> The high frequency traders who have the Robinhood data are making money on every Buy GME order and will make money on every sell when this bubble collapses.
-- Agreed i said as much in my comment that people will make money on it - some retail some institutionals.
> It is wrong to present this as a populist uprising.
-- Disagree. This is a trade that at its core is a sentiment of disenfranchisement, anger at wall street short sellers, financial establishment - and of course with the hope of making money.
> This is an incredible fluctuation, a hilarious anomaly, but it is nothing more than that. It will have no lasting impact.
- Agree - most likely - it will however make wallstreet institutional short sellers think more carefully about their positions. There will be impacts but doubtful anything transcendent on the markets. If anything SEC will investigate Wallstreetbets traders as opposed to doing anything to Wall street (which has been having carte blanche under the last administration's effort to neuter the SEC).
> I firmly believe that the hedge funds that held GME short positions have bought into GME to mitigate their exposure. They likely bought in algorithmically using robinhood data and are making money off of retail right now.
-- Might be, however the losses they took at the beginning on their position were pretty steep to jump right back into the pool.
> My message to the people here: /r/wallstreetbets is not a gameshark. You are still playing their game. You are still playing a rigged game and you are still losing.
-- I don't think anyone has allusions that the tables have turned. This is more like the chance for this one time give a giant F U to wallstreet who has been perceived to be making money off the backs of the population without any care at all from retail investors.
It's worth noting that these funds blowing up causes large sell-offs of their other holdings, which can in turn cause prices of those assets to fall. Falling prices can cause more sell-offs, and can spiral. Nobody really knows what's going to happen as a result of this since it's pretty unprecedented. IIRC the SPX is down ~3% and VIX is up 60% today.
"A few firms losing a bet can spiral into huge effects," if true, sounds like a really, really, really good argument for eliminating higher-risk instruments.
"We don't know how bad things we could get if we are wrong" means you're doing something you shouldn't be.
Don't disagree with you - the markets are heavily balanced in favor of entrenched players who have informational, scale and timing advantages (ie wall street). I do think that there's something else at play here ... we will have to see what happens over the next couple of weeks as things shake out.
Also - Citron has already said that they will take this trade into account in how they allocate in the future. I don't think this will really change anything though.
> My message to the people here: /r/wallstreetbets is not a gameshark. You are still playing their game. You are still playing a rigged game and you are still losing.
I understand your sentiment but that's a pretty overbroad assessment. There are obviously non-pro traders people killing it, and a lot more than a blip, tons of people have bought and sold out of their positions, average schmoes. There will be a ton of bagholders and losers, and expired options "Loss Porn". But to say that EVERYONE is a loser in a rigged game is too bold a statement. Maybe, Most will be losers in the rigged game.
WSB is trying to get stock removed from the pool available for shorts as well to break the cycle of shorts borrowing the stock, selling it, and then borrowing it again and selling it again.
FWIW, he was sitting on $31M at close yesterday (~$141/share), Jan 26th. It's mid $300's now, Jan 27th, easily doubling his position from yesterday north of $60M.
Edit: He just updating his daily position. Cashed out 13M, has 35M still riding in shares and options.
Assuming they liquidate the position before it crashes, yes.
It's very easy for retail investors to look at points in time and see stellar results. Unless they cash out some of that, before things start to drop, their massive position vanishes as quickly as it arrived.
In this case (/u/DeepF*ckingValue) it's a rolling options positions so: yes, less the fees they've accumulated over the 2+ year history of the position.
u/DFV has closed $13 million of the position (ie sold for cash, cash in their account). Total position including cash was almost $50 million at close. Incredible.
Presumably they'd want to split the sell offer into smaller portions to avoid indicating a turn in the market which might cause a fall in price before they realise [as big a] profit on their position?
Like trying to get out of a place when you see things heading south (ie a calamity approaching). If you run for the door then everyone will see you and the people close to the door might block your exit as they seek to escape. If you cautiously walk, avoid being direct, etc., you've more chance to get out.
Large positions are most likely sold off in smaller portions as you said. I don't know what the person you are responding to is implying.
Often large positions as a single order are used to create buy or sell walls that can influence sentiment and algorithms to move the price in a way that they desire.
It isn't just retail that is going to get destroyed -- the option-sellers may not have enough capital to hedge effectively. A lot of parties are going to be harmed by this; it is an expensive tuition payment to the school of hard knocks.
The most interesting technical thing about this fracas is the fact that WSB has managed to play the options-sellers off against the shorts to set this off. The kids have temporarily played the adults off against one another and caused an explosion.
In the end, the savvy and the lucky will have more capital than in the beginning, and the un-trained and unlucky are going to be very sad. In the meantime, food-fights are fun while the food is flying.
Reading through the comments on WSB, I actually don't think the losers care. They just want to see the short sellers suffer. They're just mad, and while I think they hope they make money, I think most of them just want to see the people they feel like control their lives suffer.
I think it largely spilled over at this point, it's been mentioned in every mainstream media around the globe, and I'd assume there's a lot of FOMO going on.
While it's likely that some of the wsb crowd plays it yolo style and doesn't care (it's for the lulz), I don't think the people who invest because they saw it on mainstream media will see it that way.
And (no one seems to be talking about this) but there's definitely a systemic cost. Going forward, how do you effectively manage the risk of one of your positions becoming a meme? This happening once is an interesting situation and I've certainly enjoyed watching it play out. If it happens repeatedly it will definitely start to undermine the investing public & market participant confidence in the market. That's certainly not something anyone should be rooting for.
I don’t think dismissing this phenomenon as a stock turning into a meme is right. WSB is...something, but there is actually a rationale behind going long GME. If you think that the new CEO, known for turning dead retail into profitable online content and e-commerce businesses (as I understand it), is going to turn GME around, then buying $12 Apr 21 calls for thirteen cents or whatever it was makes sense absent any notion of a short squeeze or market manipulation. That it was one of the most shorted stocks and there was an obvious opportunity for a short squeeze, and that this seems to all be multiplied by HFT, is quite the force multiplier.
It’s not like this is some random event that could happen to any position. There seem to be a number of factors in play, but it’s not random, and it’s not because a meme got popular.
To clarify: not a new CEO (current one has been in place since April 2019) but rather an activist shareholder who bought a large stake and got seats on the board as a result, and that guy has the e-commerce turnaround story
One way to counter the risk is broadening the diversification of your positions. Half the time, meme-status will make you a lot of money, too.
A more-sophisticated investor than I could also hedge against undesirable long-tail events.
To me, with a long-term/value perspective, these transients are a bummer because they distract from efficient price discovery. But, with a long-term perspective, these transients are mostly irrelevant. If a quality company's price drops precipitously, it is then on sale and worth buying. If it becomes quickly inflated, I can either hold with a smile or, if it is just too insane, sell with the expectation of buying in again later. The only real risk is of a meme-driven fluctuation shorting an otherwise-okay company into bankruptcy.
You underestimate just how much concentrated retail volume is. I have had more than ten people ask me how to buy GME. Its on the front page of everything. Bitcoin’s nearly $1T market cap is more or less all retail.
You don't understand. The original multi million dollar positions with WSB are static now. They're not trading anymore. They can't possibly boost the stock price any further.
The way the stock price goes up is by more volume coming in at the highs. But we are talking 57 M shares traded at noon today with outstanding float of 65M. Those are professional day traders propelling the stock. Buying high and selling higher. It's not WSB.
Margin calls are surely coming for large short positions, starting Friday and likely continuing in coming weeks. If the short positions need to cover, there's forced demand.
> Plenty of WSB posts with multi million positions.
This is interesting. I wonder what percent of outstanding shares of $GME WSB commenters collectively own and whether the SEC could make the case they're operating as a "group" for disclosure purposes.
I don't even think the SEC would have to characterize the WSB commenters as a group, merely that "alone or with 1 or more persons" they caused trades that increased GME's price and that their goal was to cause others to buy/sell the stock. The real question is why wouldn't the SEC get involved!
15 U.S. Code § 78(i)(a)(2) - Manipulation of security prices
[It shall be unlawful...] ...to effect, alone or with 1 or more other persons, a series of transactions in any security registered on a national securities exchange, any security not so registered, or in connection with any security-based swap or security-based swap agreement with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.
It's all complicated and up to interpretation to be honest.
Basically, doing any effort to raise stock price beyond it's "proper" price in a coordinating way is a violation. Proving it is an entire another thing. I doubt this is what happening right now. I would like to see anyone trying to prove that ":rocket::rocket::rocket: GME to 1000" counts as such.
However, liability like that is why AMC is forbidden to mention in r/WSB by its name. It's easy to pump and dump that ticket.
This is why many "Let's take over this company with small market cap" threads were removed back in a day.
I wonder if that was an administrative decision. Browsing to it directly constantly errors out and when browsing /r/all it doesn’t show up. They complained to the mods about limiting comment threads. I wonder just how taxing this activity is on their servers.
What does it mean? The passive ownership usually follows market cap, it doesn't need to buy because the share goes up, it was already owning the correct fraction (ok unless it suddenly enters the sp500 then it might move the price :))
that isn’t what the article is saying. it’s arguing that the short squeeze is less about pure profit making, though of course that’s part of it, but more about actively trying to hurt hedge funds who are naked short selling and potentially forcing them to liquidate as a sort of populist driven “payback” against the elite.
It's all about making money. WSB was about hurting the hedge funds or screwing the system. And to be clear, I know wsb because I was one of the first group of subscribers of wsb way way back, but quit it because it wasn't engaged in what I thought was trading strategies, but a lot of shitposting.
But they didn't cause this crazy short squeeze. It's the other hedge funds and day trading shops that are causing this because they see weakness and an easy way to day trade to crazy profits.
That's absurd. People in WSB probably bought low and haven't sold at all or sold on the way up. Look at the volume. Who is shorting at these prices with this kind of activity?
Who has the money to keep buying at $350 to propel the stock to $400? Definitely not WSB. I know plenty of people dipping their toes in and buying 10 or 20 shares for fun right now. But there's 55M shares trading at all time highs. That's not retail. That's day trading shops and deep pockets.
> Who has the money to keep buying at $350 to propel the stock to $400
Delta hedging, potentially
> But there's 55M shares trading at all time highs
55M is the float but there's nowhere near that much actively available. Fidelity and Blackrock together own about 25M I think [0], along with other institutional investors as well as staff in stock incentives. Some of this will be liquidated as the price goes up but not all of it.
> But there's 55M shares trading at all time highs.
One thing that’s different is commission-free trades. Plenty of folks buying and selling 10 shares at a time a dozen times/day “to profit off volatility”.
Doesn’t explain everything, but retail can put through more volume than ever before.
Just checked GME spread though, and it’s about $1.50 or about 0.5%, so the market makers must be happy with that and the volume.
Are market makers happy? Don’t they have to do a bunch of delta hedging, and isn’t that harder to do with the stock being so volatile? I expect that risk is reflected in the spread, but then again, I don’t really understand markets.
The models for any short selling have just imploded. I’d imagine a lot of low-capitalized short sellers just exited a lot of positions and won’t take any for a while.
“Holding until it’s over” now means having enough capital for 100x any short position you take. That limits how much you can short.
The total market cap of GME is about $25bn at today's prices. That doesn't seem beyond the ability of retail. There's a lot of people with $10-100K to play with: rich but not mega rich.
The aggressiveness of the short squeeze is unprecedented and can only be executed with aggressive cheap out of money call options. That looks like gamers to me :)
Every thread about WSB has comments like this, pretending that tons of stupid kids haven't made fortunes rolling the dice on meme stocks. You ignore or misunderstand what's going on at your own peril.
If the argument is everyone’s making bank on these meme stonks and it turns out to only be a tiny fraction of the user base that are ending in the black, the argument isn’t very well founded.
Some of them are really intelligent investors who know what they're doing, and some others are jumping on the bandwagon and don't really understand what's going on.
> I don't know if people realize that there are thousands of day trading shops where hundreds of people are in a single room, like an internet cafe, where people are day trading at terminals and people bark orders to each other and they all jump on the same stocks.
I'm here just puzzled, why exactly would you need hundreds of people? And why would all of them "jump on the same stocks" as opposed to a single person doing that? Do stocks care how many people jump on them, or what?
There is simply a supply shortage of GameStop stock at the moment. There are no massive hedge funds that took huge positions before the price started rocketing up. Maybe some smaller prop shops with sentiment based strats, but this is mostly retail volume, now being reigned in by market makers. Obviously the smart, patient, and principled retail traders will do better than the uninformed and emotional when all is said and done and the price stabilizes near realistic levels. That is just how markets work. They are not perfect, but allow us to asymptotically approach pricing perfection to the degree that available information is perfect, in the long term. Such phenomenons are much less volatile on larger market cap components of the economy where the big funds can aid in price discovery.
The companies aren't similar, but both are/were heavily shorted "meme" stocks used as examples of an irrational market or bubble. Both short squeezed, and were heavily shorted by many of the same groups.
I mentioned this on a different thread, but the Money Stuff column has had some pretty good (informative & humorous) coverage of the GameStop and r/wallstreetbets craziness.
I'd like to know whether these retail investors see Gamestop as artwork or as speculation/investment.
Artwork - they buy it not because of any intrinsic value or expectation of a dividend/capital gain, but because of reasons pertaining to subjective utility - childhood nostalgia, a desire to get symbolic revenge at hedge funds, entertainment value, or a desire to access gambling services in a country where online gambling is restricted.
Investment - expecting to make a profit through greater fool hypothesis, a short squeeze, or because they believe in the company (e.g positive reflexivity of stock price and exposure leading to more funding and business, respectively).
Arguably it's a combination of both, and I'd say it's a fairly new phenomenon in financial markets (not so much other markets), perhaps TSLA being another good example.
For those downvoting: that‘s u/DeepFuckingValue. He got laughed off by WSB for a year and is now making millions every day. Turned 50k to 48 million as of today.
They already cashed out $13MM, and the remaining stock were bought at like $14/share. Even if it crashes, they still called this thing like a year out and got rich off of it.
They could leverage their brand and hype to pivot into new business, supposedly. Maybe it's another WeWork situation where they have a lot of retail and claim to be tech but never make the switch into true tech.
Am I missing something in the Gamestop news that isn't "hedge fund gambles billions on naked shorts and loses"? That seems like a real blunder on their part. In other contexts we would just call this gambling, I think. Shorts have infinite liability, not hedging them is not something I can get behind.
The problem I have isn't that a hedge fund screwed up. It isn't even with WSB.
The problem I have is that this seems to be another red flag that we are in the late stages of a bull market. The point where, at least according to folk wisdom, the least sophisticated investors enthusiastically enter the market.
You are missing something - these aren't naked shorts. The fact that more than the whole float is out on loan does not imply that naked shorting is going on.
Please explain. I thought this was the whole purpose behind hedging, was to avoid the short squeeze. Are people reneging on the purchase agreements or overpromising? How can we know these aren't naked shorts and if so, why are they still facing the short squeeze?
See footnote 3. "This does not necessarily mean a lot of people are doing evil illegal nefarious naked shorting! Really, I promise! There is no special limit on shorting at 100% of shares outstanding! Here is an explanation of how options market makers (discussed below) are allowed to short without a locate, but I want to offer an even simpler explanation. There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine."
Right, seems like a similar problem to banks and leverage. People can short more in aggregate than exists the same way the money multiplier exists for banks. But there are bank runs and it's built on trust, so that's risky too and we make people hold on to a certain amount to cover what they lend.
I guess I'd just prefer they use call options to cover the shorts instead of borrowing. No leverage or multiplier effect there. Gets too high, just execute the call. Am I also missing something there?
So, first of all, the net shares outstanding are still 100. All the extra, whatever, 200 shorts are balanced out by 200 extra longs, and that creates obligations between them, which must be managed as usual (collateral, margin calls, risk limits, ...)
To short a share, you must borrow and sell it.
If you buy a call, you're long. You could write a call and then you'd have short exposure, indeed, but on the wrong side - you lose on the way up, while you want to win on the way down. So, you could buy a put - that makes you short, winning on the way down. However, now the entity that wrote the put is long, and will generally cover their exposure by - shorting. No magic bullet there.
You can have a short squeeze without naked shorting. Shorts who aren't naked have borrowed the stock from someone. If that person asks for it back, they have to go out and buy it in order to return it.
At least in theory, if retail investors buy up the stock, some of the institutional investors who own it, and who have lent it out, will sell it to them. This could mean that they recall lent stock. As this happens, shorts might have to compete to buy the stock. Equally, as the price gets higher, shorts might have to cut their losses, which also means buying back the stock. If the people buying it now don't sell it and don't lend it they will withdraw a lot of the supply.
Since you're nice and explaining things...what happens if a naked short gets called in but literally no one will sell any stock for any amount of money, so the shorter can't fulfill their obligation?
Obviously not going to happen with GME or anywhere realistically, but I'm just curious how that would be handled.
Something called a Failure To Deliver. Basically you have to pay extra to keep the stock one more day or whatever, and you have to deliver it the next day, or next settlement period.
The fee could be quite punitive, or fairly trivial depending on the market. In some markets failure to deliver would be a very big deal and multiple could lead to some sort of disciplinary action. In other markets they might be commonplace for whatever technical reason, and everyone expects that they will happen, just tries to avoid them because of the fee.
There are various theories that in certain markets everyone fails to deliver all the time and it means that there isn't enough of whatever to meet all the obligations. I can't really comment on how much they make sense.
So it seems the issue is that people have borrowing agreements that can be recalled early (seems like it functions like a margin call in a way). Call it half-naked shorting, I guess. Still seems risky. I feel like they could've just bought call options and called it a day instead. Maybe that's too naive or call options are hard to find/pricey for Gamestop?
That still doesn't explain how you know folks aren't naked shorting. Maybe you can read the trades?
I don't know they aren't, but it's illegal. Large hedge funds are unlikely to be breaking the law, and I haven't seen any evidence that they are which wasn't based on a misunderstanding of the free float numbers.
Stock borrowing is very very commonly done and renewed per-day, in the vast majority of situations this works fine.
I appreciate the explanations, thanks. I don't have the trading context. Seems like tail risk or Black Swan events yet again. I hope they made enough money on these shorts that it wasn't "picking up pennies in front of steamrollers". If not, then I wish there would be better rules to prevent the short squeeze, like requiring calls instead of stock borrowing (maybe this is too expensive). When the liability is theoretically infinite, it just seems really risky to count on the hope that you can keep borrowing the stock (which works great the vast majority of the time but every now and then you lose billions).
They have a large chunk of cash, they got new investors with Ryan Cohen coming onboard and are moving into an ecommerce direction + they are a familiar and established brand. The "resurrection" story here serves fuel on the brand fire. Real news is that gamestop really has turnaround potential.
Demand for physical media is declining and seems certain to be extinguished by the console manufacturers within the next few years. GameStop has no leverage to slow or change that.
Because the Masters of the Universe are obviously better and smarter than the pleb masses. That's why they're rich, right? They're the ones who are supposed to be manipulating the market, not these filthy peasant swine who dare to cost their betters money. Their faithful, obsequious servants in the financial news and investor class are merely crying about how unfair this all is to their masters.
"I just wanted to play video games, why couldn't you leave me alone?"
The culture of a lot of redditors and internet trolls in general seems to be that they feel like they are the eternal punching bag of society. They were the punching bag in high school, they didn't get into a good school (or go to college at all), and now they're the punching bag of society as "incels" or "white males" or whatever, and I think what you're seeing here in a big way is them fighting back.
I'm not sure there's much of an overlap. Incels are a rather small group, and I think most wallstreetbets users are surprisingly... normal. You can't bet on stocks if you're poor. So you'll have lots of mid/late 20s educated guys with decent incomes. This to me really feels like a classic "for the lulz" (and some personal profit), avalanche-style event.
This applies even to the internet "cesspools" really. Most of my friends were/are regular posters on reddit/4chan, and they are surprisingly normal. All of them have decent jobs that pay well, some are married. If you met them in real life, you couldn't really tell there's something wrong with them.
They seem a far cry from what internet tells you a 4chan user looks like. Funny enough, none of them (including me) are white.
> you couldn't really tell there's something wrong with them.
Okay, but is there? The way you're phrasing it sounds that merely posting to 4chan makes them abnormal.
The other way around is true: there's an unusually high share of abnormal people on 4chan. Just posting there shouldn't be a sign of abnormality. It's just a Mongolian basket weaving forum after all.
The people that are getting the highest praise in the subreddit are probably not in that group. We're seeing people investing $10^4 to $10^5 in GME.
If they are gambling their entire life savings away, then I guess they got lucky this time but I do hope they see this as the anomalous event that it is. I have invested a small amount into the WSB "portfolio" and have similar great returns. But given that I only do this with the "play" money in my portfolio, I'm not retiring because of it.
Tim Dillon is one of the funniest and most thoughtful comedians out there right now. His ability to describe the ongoing political and social climate is unmatched.
I don't think you're quite right. These people don't actually think this way (or think of themselves this way). They maybe think that they could have ended up that way, but that's much different.
What ties all these communities together is idolizing that archetype, without necessarily yearning to be that archetype.
So, can someone explain rationally how options/derivatives are actually useful to the economy, rather than a market manipulation and gambling mechanism?
In the traditional, elementary school understanding of stock, people buy into a company because they want part ownership, and the stock goes up as the company does well and has solid financial strength.
Derivatives seem to be an unnecessary accelerator.
Derivatives provide useful abstractions over primitive financial data types. Instead of saying "give me the {id: int, name: string, birthday: date}" we can just say "give me the User" and that's helpful. But as in software, it's possible to build towers of abstraction high enough so as to lose sight of the fundamental data upon which they rest, and then differences between the abstraction and implementation open the door for bugs (i.e. financial crises).
Options are similar to a down payment, or trip cancellation insurance. It gives you the ability to buy something (or not buy it) in the future, but for that privilege you must pay something right now. Options provide leverage (using more money than you presently have), like a credit card or mortgage. Just as most people can't bring piles of cash to buy a car or house outright, options give you the ability to buy the thing but also the chance to walk away. Key caveat: there situations where options that have unlimited risk; these can easily be avoided, but that's where options get their bad reputation.
You're right that both can serve to accelerate growth, and that's a good thing for individuals, companies, and nations. But if things go wrong, crashes at high speeds are much more dangerous than those at low speeds.
I'm generally sympathetic to the idea that financial derivatives are a great evil, and a huge part of what feels "broken" about the current system.
However, consider futures, which are very similar to options. Futures were, as I understand it, popularized in Chicago as a way for farmers to be able to get money for their crop right now, at a fixed price. In this way, they could pass the risk -- and a little bit of the profit -- off to people with more capital, who were better able to weather all possible outcomes.
And in practice, how would that be different from incorporating and selling stocks to those investors, thus raising money now, and then growing in value as the crops are reaped?
I wouldn't call futures as very similar to options. The mathematical profiles of the two are very different, though a far ITM option is basically a future
If you put $X in to AAPL, you can hedge against catastrophe by putting $X/10 in to an option to sell AAPL, which will limit your losses if the stock drops to 0 tomorrow. So in theory, they can be used sensibly.
But in practice I think it's not the existence of the derivatives market, it's the size. Our economy is like a town with 1 farmer and 9 investors who spend all day wagering with each other on whether the farmer will have a good crop.
Measured how? I would argue that some of the finance industry contributes to GDP (e.g. derivatives that facilitate some kind of real capital investment that wouldn't have happened without them), but John Q. Billionaire shorting a stock because he thinks it will go down does not.
- If you own a stock and want to reduce the downside risk, you can buy a put option to ensure you'll always be able to sell your stock for a reasonable price, even if there's a financial crash.
- If you have the ability to produce some product (e.g. grain) but need some extra money (e.g. to buy seed or fix a tractor) or just want to lock in a sale price for your product, you can sell a futures contract.
- If you want need some product at some point in the future (e.g. fuel for your jets) and want to lock in the price, you can buy a futures contract.
Fundamentally, derivatives allow you to trade risk. You can pay somebody to absorb some risk for you or you can accept some risk in exchange for money.
Options are valuable because they are how Wall St. deals with probabilities.
We don't actually know what a company is worth. You can imagine estimating the worth (a.k.a., "net present value") of a company based on its future dividends (or stock buybacks). But any formula will contain a lot of probabilities of when each dividend will occur, the amount, and the discount factor (that is, how much future money is worth today). So what you get is actually a distribution of how much a company is worth.
The stock market doesn't deal with distributions directly. It uses options. A call option is the ability to buy a stock at a given price called the "strike price". So, from the prices for two call options, you can infer the probability that the stock's worth is between their strike prices.
This isn't really true. An options value is derived from a variety of inputs that have nothing to do with the price of the stock, namely, forecasted volatility and interest rates.
No real option market maker is using anything except the current price of the stock to price their options. This isn't strictly true, but what I'm saying is that people don't determine the fair value of a stock through looking at option prices.
If you want to learn more, check out black Scholes pricing model and option Greeks.
The most traditional version of the stock market is that a company issued shares in order to gain cash for investment, with shareholders essentially fronting the risk for a portion of the pie. If it things went well, there would be dividends, then you addition of trading shares to someone other than the originating company.
Can't say much on derivatives and others, at least futures made sense as way of fronting money for agriculture :/
Let's say you want to invest your corporate treasury in equities (you've raised several years of burn and don't need it all now). If you lose the treasury you're out of business.
You decide you can accept X% risk. You estimate portfolio risk is Y%.
You can enter options positions for the portfolio components to force Y to X.
A nice mind-blowing true exemple I've read is you buy gas futures (cheap), you sell electricity futures (expensive) and you use the profit to build a power plant which turns gas into electricity.
If you use them like WSB they are an unnecessary accelerator, they're intended for being used as a hedge (and probably other things more savvy investors know more about).
They're a means of wealth extraction disguised under whatever load of bullshit someone wants you to believe.
I'll even prove it to you. Ask someone with skin in the Wall Street game to explain this stuff to you, not mathematically, but in layperson's terms, so simple that a young child could understand it. They either won't be able to do it, or they won't do it. You'll get one of two answers, "It's really complex." or "It can't be simplified."
When you hear this kind of shit, you're can safely deduce one of two things:
1. The person in question doesn't have a deep understanding of the phenomenon or principle they're trying to explain.
2. The person in question isn't interested in explaining it because it directly affects them.
Ask a Ph.D.-holding, teaching nuclear physicist to explain how a star works. They'll be able to break it down for a 5 year old, a 15 year old, and a 24 year old graduate student, at various levels of complexity.
Ask a Ph.D-holding investment banker or hedge fund manager how all this works. They don't want you to know, because it isn't creating value. Not the kind of value an Amazon or a Tesla creates. It creates value for them and for the large investors they represent. Not for you the layperson.
Tell your 5 year old you're going to give him 10 cookies, but he has a choice. Either he can have the 10 cookies right now, or he can pick up his room, and then he has the option of getting 10 cookies from you any time of the day or night during the next month, whenever he wants, no questions asked, no matter how busy daddy is. Or he can sell the option to any one of his friends or family, to guarantee they get 10 cookies in exchange for those pokemon cards he's had his eye on.
Aren't options like insurance? insurance can be explained rather easily. People buy insurance in their home, to protect their investment in an unlikely event that it gets destroyed. Similarly people can buy insurance to protect their investments in financial instruments.
How does this differ from other populist manipulation via social media? We've seen this technique used repeatedly in many domains. IMHO, it looks obviously the same in many ways.
It's very effective and we should have anticipated that it would be used to move markets. I expect people on HN to recognize it. The question is, what will we do about it? It's tearing society apart and now it looks to damage our economy too.
It is well documented that authoritarian governments, including Russia and China, have invested heavily in these techniques. I don't know the source of the GameStop bubble, but if Russia/China didn't see the potential to attack U.S. society and financial markets before, they see it now and will use it.
The question is, what will we do? How do we maintain an open society, which is essential, and protect against this manipulation?
I think an essential part of the solution is the power of critical thinking and reason, the very foundations of the Enlightenment, and that the well-educated (not only them, but definitely them) have to take the lead in applying those skills, and start a social media movement in that direction. The people reading this should be leaders; unfortunately, I see them again and again allowing themselves to participate in mob psychology. The response to these events is particularly chilling. Where is the forum of intellect, knowledge and facts? Almost everything I see is misinformation and conspiracy theories.
IMHO the time to ask that question was when Congress reversed the rules allowing them to trade stocks.
Or when it was decided it was okay for Wall St to spy on limits and front run the trades of retail investors by having their order flows sold to Wall St through the only accessible means of trading
Or when you have the entire SEC staffed through a revolving door of Wall St insiders that won't prosecute anyone
Or when Wall St gets bailed out for creating a bubble while 5 million people get kicked out of their homes
> allowing themselves to participate in mob psychology
By your definition are democratic elections "mob psychology"? If thousands of common folk decide they like GameStop and want them to succeed suddenly that's a problem but none of the above is?
With all due respect your perspective on what's going on is totally backwards. It is a GOOD thing. The masses SHOULD have control over the markets.
> It's tearing society apart and now it looks to damage our economy too.
I don’t see how in this case. If anything it’s revealing the casino that is a huge percentage of our economy as what it is. There are trillions of dollars being bet every day, and frankly this is taking money from hedge funds who “always win no matter what”. Robin Hood indeed.
90% of the stock market is owned by 1% of the population. We have the highest wealth gap in the countries history except maybe the 1920s. Those who benefit from the system control the system - I’ll personally sit here and cheer for the people who managed to get a piece.
And @ your point - you want a rational system where prices are set per the real value of the company, or its future value. This has not been the case since at minimum 1980. The market is currently a casino that happens to capitalize companies, and with 0% interest rates it’s a economy wide Ponzi scheme because everyone with money has to buy high risk stocks to get a real return. WSB or not I do not think a depression due to a financial or currency collapse is almost likely at this point.
> How does this differ than other populist manipulation via social media? We've seen this technique used repeatedly in many domains. IMHO, it looks obviously the same in many ways.
Are you sure you are up to date with what happened?
My understanding, and in layman's terms, is that a hedge fund shorted more GME stocks than they are available. Redditors noticed and correctly thought that if they buy all the stocks available, when the shorts expire and the hedge funds will be forced to buy, they(redditors) can dictate the price.
Regulations (https://www.investopedia.com/terms/r/regsho.asp) exist to prevent more shares being shorted than exist. However, those lending out shares to be used in a short can demand them back. Also, banks might demand you put up more capital as a stock you shorted increased in value. But I wanted to clarify that there are regulations such that you can't short a stock out of thin air, the stock you're shorting must be "located". Making shorting completely illegal would likely lead to irrationally high values in the market, creating more bubbles like this one.
Short sellers profit from exposing fraud (like those that researched Enron and Wirecard). Making the only market participants with financial incentive to put downward pressure on stock prices illegal seems like a bad idea.
They also profit from creating the perception of fraud, filing spurious lawsuits and marketing against companies they are shorting.
Shorting is illegal in Australia, Germany, Italy, Spain, Portugal and a few other countries with large financial markets. The US has the most "open" policies on shorting in the world. Short selling was an extremely large contributor to the 1929 stock market crash.
Short selling is not illegal in Germany. I also suspect you are wrong about some of the other countries as well. But regardless, you would be hard pressed to find anyone in the industry who thinks shorting is bad. The overwhelming consensus is that shorting is very good to allow
You could restrict how much one stock can be shorted. This situation should have never arisen - it only happened because one firm was holding on to a ridiculous amount of risk. They gambled, someone noticed and posted about it. Either you restrict how much one can gamble with stocks, or you accept that allowing infinite profit carries infinite risk. Anything else is in effect saying "only the rich are allowed to exploit market conditions and get richer", which is obscene.
Big difference. The OP clearly stated his positions in the stock and laid out a strategy for why it would work. Very different than a mass email campaign meant to boost penny stocks.
At the end of the day though...a lot of people are going to be left with a lot of worthless stock that they paid a lot for.
I am loving every minute of this. The "professionals" gamble on the market all the time, front run, high frequency trade, and relentless tactics to get rich at the expense of the "retail" investors. Now they are upset that apps like Robinhood has provided unprecedented access to the markets. Their exclusive access to insane gambling nonsense is being torn down in real time.
If Wall St can gamble and cause a global financial crisis, I see no reason why "retail" traders can't fuck around on Robinhood and cause some meme stocks to explode.
I think what is really going on here is that the "professionals" are bothered that the "idiots on WSB" are making a mockery of the market. Make no mistake, the market is already a mockery, what's happening now is that the public is finding out.
Yes, but retail is going to get destroyed in the end.
The power elite always get what they want. Right now there appear to be curbs on GME and AMC buy orders for TD Ameritrade and Schwab customers.
If you have to pull strings with your drinking buddy from Dartmouth to blow up a bunch of propertyless zoomers in order to prevent a margin call on the account you've leveraged to buy your house in the Hamptons, then that's what you're going to do.
This is absolutely fucking ridiculous. Someone is getting fucked by their own leverage, they got caught, isn't that what the market is supposed to do? Kill the overleveraged non-sense to redistribute wealth to more efficient investments?
It isn't a bank run to be blocked for the sake of society, this is just a bunch of rich people paying the price for risking too much... Boils my blood so deeply.
The hardest part of gambling is not coming up with the big winning bet -- it's getting whatever counterparty to pay you once you've won. It's always been this way, in sports, in horses, and on Wall Street. People come up with all sorts of reasons to not pay you and you have to shape your strategy around this.
Aaron Brown talks about how being a successful gambler is not about a few high-stakes wins, or a super-consistent record. It's about winning the right fraction of bets, so that nobody suspects you're a winner.
The Big Short talks about this too— people trying to figure out how to bet against subprime mortgages in a way that the entity on the other side of it will actually be in a position to pay out (and be able to be compelled to do so).
>The hardest part of gambling is not coming up with the big winning bet -- it's getting whatever counterparty to pay you once you've won.
Isn't that the truth. I know crypto is hated on here but just as an anecdote, I've traded on a lot of exchanges in the last few years and I almost wince whenever I make a really great trade that 5 or 10x's because as sure as the day is long inside of an hour my account will get frozen and I'll have to submit documentation, answer a bunch of questions, or whatever else to get my account unfrozen and access to the funds. It's almost like they're saying thanks for your business and we don't mind you getting lucky but don't get too lucky.
Business Adventures has the tale of the Piggly Wiggly short squeeze of 1923. The old boys of the NYSE changed the rules to help the shorts and undo trades after the fact.
So you think GameStop shares are genuinely worth $375? GameStop traded around $20 a share for the past couple of years. You think that right now the company is worth almost 20 times what it was worth two years ago?
Remember you can file a dispute for things like this. Gather as much evidence as you can that you attempted to exercise. If you win the dispute they have to exercise at whatever the price was during your attempt (IANAL, this is just my understanding).
Are you trying to do an early exercise, or do you mean that they won't let you sell your calls? If you are trying to exercise, do you have the cash to cover, or are you trying to use margin to do it?
Also they apparently have the "biden economic team" looking into the situation so it does go to show that lobbying dollars allows you to get your concerns addressed rather quickly.
Same stuff goes down on 4chan and several other sites. Not to mention the fact that the SEC has neglected to investigate insider trading for years now.
IMHO why the fuck is shorting legal to begin with. Short insurance should be mandatory for short trading.
Scale dictates enforcement priorities, obviously. Like a lot of people, they don't deal with issues until they are large and impact the market. They are ABSOLUTELY going to intervene here. First with some immediate action, and later they'll craft a new rule to guide social media on stock advice being not allowed on their platforms (IMO).
> why the f** is shorting legal
Short selling rewards investors who believe that certain stocks are overvalued or that the company is covering up fraud. They helped bring Lehman Brothers down, as well as Enron, Wirecard, etc... In those instances, the shorts were instrumental in reverting stocks down to correct (sometimes zero) prices. Without them, bubbles would rise higher and poop much bigger. That sort of volatility destroys liquidity and confidence in the market.
> Short insurance should be mandatory for short trading.
There are naked short limits already, but yeah, this issue with GameStop should have those rules re-evaluated, because they obviously didn't work in this case.
> "First with some immediate action, and later they'll craft a new rule to guide social media on stock advice being not allowed on their platforms (IMO)."
Well, the IRS doesn't go after rich people because they don't have the funding[1]; they only go after the people they can afford to go after[2].
I know the IRS is different from the SEC, Apples to Oranges. But like you said, they've neglected insider trading; it's probably for very similar reasons, because those being investigated just have too much power to take down. I'm sure the SEC will hammer these easy targets on WSB well before they even dare touch the Big Boys.
You are correct that they cherry picked information. However you are still incorrect on the original assertion that SEC is not in fact neutered. There have been more enforcement actions but insider trading enforcement has been the lowest in decades:
Could you note any major cases the previous administration pursued that didn't involve some lone scapegoat trader and/or a minority everyone could agree to dislike? Were there any actual cases after the 2008 mortgage/cdo/cds crisis, for example?
I don't know why you're being voted down here. These are legitimate articles in major publications that are broadly accepted by experts in the field. Sad!
I’m worried what will happen down the road. Robinhood is likely getting super valuable data on this. Combine that with correlating post activity on Reddit and you have a recipe for obliterating the arbitrage of retail investors. These hedge funds will also buy the data that Robinhood freely sells [1]. Sure, squeezes like this will still happen every so often, but on average the hedge funds will win more in the long run.
So, I think Robinhood needs to get some competitors, who charge $1-2 per month, while enforcing data privacy.
This all feels like a classic Black Swan at work, and I guess the main question is if you believe that the long term expected return justifies such risky short sells.
Really the only thing the hedge funds could do to "win more" in the long run is to stop shorting stocks en masse.
The more they short sell, the more this can be pulled off again and again.
Which is good IMO, I'd be happy in a market where short selling and negativity in general just isn't a thing. If you aren't optimistic about a company just stay out.
Hard no! I want scams and shady schemes uncovered. What a disappointment that Herbalife wasn't brought down by the shorts.
I'm struggling to even understand what a market with "no negativity" means. We want to evaluate firms with a critical eye. If they are mis-valued, that serves no one.
>I'm struggling to even understand what a market with "no negativity" means.
Just imagine basically... every single other market. The price of goods at Walmart is not based on your bet on supply and demand.
If there are more buyers than sellers, the price goes up. If there are more sellers than buyers, the price goes down. If a business wants to raise money by issuing new shares, supply and demand will dictate the price.
The market doesn't need uninvested third parties sitting outside the ring gambling on the supply and demand outcome in order to set a price.
I think you're arguing for a market with only direct investments and no secondary derivatives. If that was all the equity market was, we could be in the same zip code.
However, we live in this hyper-securitized world, where every part of the economic fabric has bets for and against, with insurance, leverage and information asymmetry baked in.
The only way to "discover" price is to provide instruments that provide "gravity" for both upward and downward price movements. The lack of supply on it's own is not enough, especially when malicious actors are pushing on the supply and demand levers.
> The price of goods at Walmart is not based on your bet on supply and demand.
This is a specious argument. You literally could go out, borrow your friend's crate of 10,000 bananas, sell them on the open market, then wait for the price of bananas to crash, and then buy them back (maybe even the same crate!) and give them back to your friend, plus whatever the banana margin costs. Effectively, if you were to do this at scale, you would directly be influencing the price of goods at Walmart. Mechanically, this isn't how it works, and I don't think there are banana futures and options, but thinking that all derivatives activity is speculation is simply naïve.
On the GameStop excitement, all I have to say is...
For better or worse, derivatives-based economies are incredibly resource-efficient. By creating a formal system for actually assigning universally-understood value to promises, we can do a lot more with a lot less.
Sometimes bad things happen, but you can be sure we'd have none of the niceties of modern society without a derivatives-based economy.
Immediate cash just has a ceiling for what it's capable of supporting.
Well the general discontent with the financial system stems, I believe, from it being perceived as mostly a walled garden in which professionals have built a complicated and highly self-referential system few control (Blackrock cough) that makes and keeps them disproportionately wealthy.
To anyone in the working population it must seem like an instrument designed to keep the pressure on and not serve general society or those providing actual tangible things of value to the market, like goods and (non-financial) services.
I actually tend to agree but it's pointless to battle the market's cold logic (which often does make sense to me from what little I know) or existing power structures.
Solutions/counterforces need to come from society and civil institutions. If those are weak, gotta fix that first and the market would depict a more equitable society without prejudice. It's the same old rich vs poor repainted with complicated terminology and systems, really.
Another thing to improve would be transparency and education about what's going on in finance like with personal accounts of people working there for instance, making it less of a stranger and showing some of its internal logic and the things it does well or not so much.
> We want to evaluate firms with a critical eye. If they are mis-valued, that serves no one.
Hard disagree here. Sometimes mis-valuing firms serves a LOT of people. There are many firms who could create value if only they had more capital to work with. As an example, it's very possible that a company hard hit by COVID could recover if they got fresh capital and used it to explore new business models that are quarantine-friendly. I'm all for kicking out non-believers from being involved in their equities in any way.
You can't short sell most early stage startups. If you don't believe in them you just don't invest in them. It's that simple.
As for companies who do bad things, like laundering money or misusing funds, we don't need to short their stock, we need to take them to court and get them punished.
You know which firms are really mis-valued? Hedge funds. They sit in armchairs in high rises on Wall Street and do nothing for me.
Exactly! from who the short are getting their money when they crash a company stock like Wirecard? Not from the company management who did it but from other shareholders, and most of the time "retail" shareholder.
They are running to the ground company that may survive with a fresh injection of capital, and destroying company that suddenly cannot raise more capital or have no more collateral for a loan.
Moreover they are this hedge fund are manipulating information to the level of a troll farm. I was a shareholder of AMD when they where starting to release the Zen architecture. Every other week, they were sending report of "problems" with the new architecture, or even basic feature behaving normally. Hedging is ok, but betting as they do is not. And when they get burned I celebrate!
> You can't short sell most early stage startups. If you don't believe in them you just don't invest in them. It's that simple.
I'm not sure the world would have been a worse place for it to have been profitable to point out the failings of say, Theranos.
And the unlimited downside means that shorting startups that are merely unlikely to succeed wouldn't be worth the effort.
Shorting public companies that can survive COVID perfectly well by raising additional funds would be a terrible strategy too: their ability to raise funds won't really be dependent on their share price (they'll be raising debt funding instead) but every time they find a lender the share price will rebound.
Short sellers are incentivized to uncover scams and overvalued equities, as a few other folks pointed out. There are firms like Muddy Water doing the hard work of finding companies swindling investors and using publicly available data to make a case against them. Without short selling, they lose the incentive to do that.
Scams can be uncovered by CUSTOMERS and plenty of other people than short sellers, and I don't think overvalued equities is actually a problem. Many times overvalued equities leads to faster adoption of EVs and solar and better GPUs and other nice things, which are more important to my personal life than maintaining the sanctity of capitalism.
Overvalued equities lead to market crashes that tend to wipe out the retirement funds of unsophisticated investors and bankrupt otherwise viable companies. Has everyone forgotten about the dot com bubble of 2000? If so I think we're headed for a reminder.
I believe you are far off the mark here. Retail investors are well within their rights to drive up a stock to what could be above fair market value....some may well lose money in doing so. The whole narrative around retail vs. hedge funds/wall street is naive to say the least...people in financial services are worried that retail investors may lose a lot of money here which may dent confidence in the market.
The irony here is that you believe the market is a mockery which most of the time it isnt but at times it can be irrational. This is clearly one of those times....as an investment professional.....I look at this and see the irrationality of the price which is not underpinned by cash flow or a fair valuation close to the price...which is called fundamental investing and not trading like what is happening here.
value of a stock is what the market dictates is the value of the stock, not what an analyst wants the price to be. It is laughable to say that Hedges were using purely "fundamentals" for the past 10 years.
Were people in the financial services worried about retail investors when Melvin was shorting GME into the ground at $5 a share? Intentional manipulation to quickly bankrupt a company. How about with the 2000s derivatives bubble?
The only thing they are worried about is that they are getting the shitty other side of the game they made for the first time.
Price is what you pay in the market and value is what something is worth...clear difference.
Some people with in a group who hold a view does not mean the entire group holds that view.
In this game, I believe retail investors feel like they are winning now but ultimately many will lose money when the price comes down. In my view the price is not sustainable....
how much is a $20 USD bill worth to you? Its a penny or less of cotton.
obviously its not sustainable, we are entering a short squeeze. But capping at $4 a share shouldn't have been either, I think $60-$80 is a really reasonable assessment, it will spike, and rightly so, as the too greedy naked short sellers get screwed over and forced to cover their positions
A $20 USD bill is worth US$20 to me. That one is easy. My point still stands with regards to price vs value and that is how I invest. I buy stocks I think are undervalued and hold.
On GME, I have read r/WSB and the most of the posts/comments are emotional in terms of reasoning. When I’ve lost money investing it has been because I made decisions based on emotions. Often I wanted something to be true and I wasn’t able to face up to reality.
I believe short selling has a place in the market if done correctly. Don’t get me wrong, I’m against market manipulation. the buying or selling of shares by rational parties allows for true price/value discovery. My fear for WSB retail investors is that they are not rational and eventually the price of GME will come crashing down to a more realistic level in line with its future prospects and cash flow/earnings yield.
Under all the WSB bravado, I believe there is greed in that they all want to make big bucks. In that sense they are no different to the hedge funds. It’s really many small greedy fish vs a few large greedy fish....who will win? .... I’d rather avoid this fight and play a game where I’m more confident of winning.
Well I work in financial services and I care about people including retail investors which disproves your point. Everything is not black and white. There are of course people in the sector who dont care. There are a mix of views.....
Agree - and glad to hear that. I think the statement should have been posted along the lines of a majority of people who are in positions of power in the financial industry barely care about retail.
But what they're trying to achieve here (AFAIK) is a short squeeze. The whole point of this move is that there's massive short interest in GME, and the WSB crew (and anyone else long on it) can take advantage of it until those positions are closed.
After that, if people hang around, sure they'll likely lose money if they bought at the top, but until those big positions close, there's money to be made.
So from what I read, the shorts were (at least at one point) at 140% of the available float. If that's true (AFAIK) that means at least some were naked.
Agree 100%. I think the smartest bet here is buying put options that expire far out. Currently, the price of the $320 GME PUT expiring in Jan 2022 is $240. That's free money...
I've been keeping an eye on the far-out-dated put options, and I haven't seen anything that's more compelling than simply leaving money parked in an index fund. The expectation that GME will drop back down to Earth over that timeframe remains priced in.
The main takeaway from this incident is that margin-call-constrained short selling is even more dangerous than previously understood.
>The expectation that GME will drop back down to Earth over that timeframe remains priced in.
Yea, it does seem largely priced in, but perhaps not completely. If share price is $60 in 1 year, the ROI on that contract would be 9% -- so slightly better than what you'd reasonably expect an index fund to return. A $60 share price is higher than GME's all-time high prior this fiasco.
So you're paying $24,000 to bet that the stock will fall below a breakeven price of $80. Even if we assume that that's likely to happen, your maximum upside (i.e. if the stock goes to zero) is only $8,000.
THe price of that put is $240 .
So GME has to fall to 320-240 = $80.
Also the cost of that put is twenty four thousand dollars. Not exactly chump change.
> Make no mistake, the market is already a mockery, what's happening now is that the public is finding out.
Pretty sure that was about a century ago and resulted in the Great Depression.
I don't think the solution to the crock that has been going on is to "do it back". Setting one or two hedge funds back a year or so, or even to close completely, isn't going to do anything resembling justice.
It starts to look more and more like just more pigs rolling around in the mud together, if you ask me (saying nothing of the collateral damage along the way).
> You know why front running isn't illegal? Because it keeps happening and companies keep getting fined for it.
This is not a logical sentence. They are obviously getting fined because it's illegal. The traders involved are also terminated, fyi.
All banks are required to submit automated reports on Front Running detection algorithms daily to the regulators. Every trade is evaluated by the compliance systems.
If you think the fines are not big enough or that the algorithms are missing things, then make that more logical argument.
Stay away from hyperbole because it discredits you.
> Which is why the fines are always greater than the net gains.
The $3 billion in fines Wells Fargo paid versus the multiple billions it made from 2002-2015. The bank has almost $2 trillion in assets as of 2020.
> Do you think the SEC is full of morons?
No, worse. Cowards. Entirely too many see the SEC as a pathway to a high-paying job on Wall Street. You learn the ins and outs of compliance and go from a GS-8 - GS-13 making $70,000 - $150,000 a year, to making $1 million a year helping these banks, hedge funds, and other investors sidestep regulations by the most narrow of line-toeing.
I’m sure the SEC is full of extremely intelligent and well educated people. I’m equally sure that most of them are corrupt and are part of the revolving door.
There's a lot of victimhood mentality going on right now. Everything is being blamed on Wall Street and market makers 'ripping off the little guys'. I believe you 100% but sadly you're not going to get through to them.
Ha! Not only does front running happen all the time, but high frequency trading is de facto legal front running. Just beat them on a shorter or faster wire.
Front Running is when you receive an order from a large client and you yourself trade in the same stock before them, and then sell the stock to them, or allow the spread to narrow and pocket the difference.
High frequency trading is not front running unless it illegally takes data from the client trading desk - which would be both obvious and highly illegal.
There is a reason high frequency trading is typically referred to as legal front running. Sure, it's not front running by legal definition, but in practice it is absolutely front running. Beating trades to the market and making micro-gains on a mass scale.
> There is a reason high frequency trading is typically referred to as legal front running. Sure, it's not front running by legal definition, but in practice it is absolutely front running. Beating trades to the market and making micro-gains on a mass scale.
It's only referred that may by people who have no idea what they're talking about.
Front running isn't about "beating" anyone to anything. It's about stealing non-public information about an actor's intent to trade and using it to make trades before that information becomes public, and specifically before that trade executes. It's the theft bit which is the reason it's illegal.
What HFT firms are doing is simply rushing to execute as fast as possible on generally available information. They're not acting on information that's not legally available to everyone else, because that would be illegal misuse of that information. This sort of thing is pretty easy to detect, and the SEC comes down pretty hard on it.
I'm also really loving that there are a whole bunch of Redditors donating part of their gains to charity, something that those hedge funds would never do.
In my eyes those hedge funds never did anything good for humanity, and I too am loving every minute of this and how some of the big money is being siphoned into the hands of people that actually need it more.
> Now they are upset that apps like Robinhood has provided unprecedented access to the markets. Their exclusive access to insane gambling nonsense is being torn down in real time.
This is such hilariously clueless nonsense, the fact that it's expressed with such smug confidence and upvoted to the top of the thread is really emblematic of HN's complete ignorance of any topic outside of programming.
When retail volume goes up there a plenty of "professionals" (brokerages, market makers) that make a killing off executing the retail flow. I assure you the industry is loving the fact that everyone and their cat is FOMOing into trying to day-trade on Robinhood. If you really want to stick it to Wall Street put all your money into a low-fee index fund.
Whilst most of Wall street may like this, I'd guess there's at least some parts (the hedge funds with large short positions in GME) who aren't having a good time today.
The WSB thing could just be cover for them. There were more shares shorted than were outstanding, so it's a great opportunity for a trader/raider with a pile of cash.
> I see no reason why "retail" traders can't fuck around on Robinhood and cause some meme stocks to explode.
It's called 15USC78i "Manipulation of security prices" [1]. It is unlawful to transact just for the purpose of forcing others to transact. Going through a fund's 13F filings, and deliberately driving up the prices of put options they sold should fall squarely into that area. And there are more than enough posts on reddit of people stating that this is exactly what they are doing. At the scale this is happening now, there is no doubt that there are going to be legal repercussions.
Steve Cohen and Gabe Plotkin both traded on inside information at SAC (Gabe was cc'ed on several of the communications). Why are they not in jail? Ohhhh because the justice system only impacts the 99%.
That's some nice whataboutism, but that doesn't mean this isn't exactly the kind of market manipulation for which the Securities Act of 1933 was written.
I think that only works on co-ordinated activity. Everyone on their is so small and not working in co-ordinated way. There is considerable discussion in the thread about the legality of it.
Also - what do you think short sellers like Citron do all the time. Put out fake reports about companies to make money off their short positions.
The sentiment on the trade is eff those short sellers and their sketchy tactics.
> I think that only works on co-ordinated activity. Everyone on their is so small and not working in co-ordinated way. There is considerable discussion in the thread about the legality of it.
There are entire threads and Discord channels dedicated to coordinating this. It will be extremely difficult to convince a court that there is no coordination or market manipulation, especially when there are people who are spelling that fact out. And reddit have all of their IP addresses.
> Also - what do you think short sellers like Citron do all the time. Put out fake reports about companies to make money off their short positions.
If you can prove that those allegations are indeed fake, then they can be held liable for that. But Citron's influence stems from the fact that they have published a large number of reports that were indeed correct, e.g. Valiant.
> The sentiment on the trade is eff those short sellers and their sketchy tactics.
What sketchy tactics? Expressing their view that a company like Gamestop is not worth very much on account of their outdated business model that relies on physical retail in a sector that has been going fully digital for the last 15 years?
In Citron's case they cast super sketchy dispersions about companies and hope that they influence investors who don't understand how the companies operate. It's right at the line and the cost of proving them wrong is not worth the effort... plus the SEC has bigger fish to fry when they have a mandate to enforce.
There's a pretty simple defense here. "I saw the posts on reddit and wanted to get in on the upward swing". Efficient markets at work. Unless you can tie real identities to the reddit posts there's not much to be done.
I don't think what they're doing violates the law[0], but they could easily subpoena Reddit and find out who the users are if they wanted to.
[0]: too complicated to get into here, but basically my interpretation of the law is that you need to be making trades that you intend to cancel or revert immediately in order for it to apply to you, and what these traders are doing is instead speculating on the price going up and hoping to cause the shorts to liquidate their positions, thus further driving the price up. Not spoofing to create fake demand.
In theory. I'm not sure if Protonmail or the VPN provider would respond to a subpoena, but I wouldn't rule it out. But realistically most of these people are using their home IP address and their gmail account.
Yes, but it can't be more than a few percent of people who go through the effort to set that up right? I know it's not hard to do (I've done it), but I think most people on reddit are using either their personal email or a throwaway gmail account they use from their home IP.
You actually still don't need an email address to create a Reddit account.
Reddit has stayed true to their word of maintaining the old design, and it's free of the dark patterns in the redesign. Go to https://old.reddit.com/register and just leave the email field blank or if you use the pop-up menu (the thing you get when you click login/register in the top right of the old design), you can click skip on the first screen where it just asks you for your email.
Indeed. In many cases, you can get far just by looking at post and comment history. You can tell what town they live in and see screenshots of their texts and FB posts (albeit with names and faces blurred).
There are some base requirements for market manipulation that are not met here. Namely, lying. You're allowed to tell your "friends" they should buy a stock.
Yes, but some of them also manage funds that are people from Mainstreet's retirements.
So while, yeah fun to stick it to the wealthy elite, I feel the law of unintended consequences is going to rear it's head much like crash of the housing market in 2007.
> the "professionals" are bothered that the "idiots on WSB" are making a mockery of the market
I think it's deeper. if they get forced by a margin call to purchase stock people that shorted without a lend will quickly come under scrutiny from sec, which will be quite interested to know which broker(s) allowed to reach this ridiculous float volume without securing the shares
they're not just covering their losses, whose whom will remain with uncovered short can get fines and or jail time.
Retirement funds are a scam: when prices go up, funds manager take their bonus, when it goes down, the funds shareholders (that is, everyone) swallow up the loss. It even a double-edge scam, because now people are supposed to stand up for the finance behemoth because they holds their retirement hostage.
Within the United States, you will have a hard time finding a company with a traditional pension system. Almost all use 401(k) or similar retirement systems. If it is a scam, it is a well-supported scam.
Companies switched to 401ks from pensions precisely because it's a scam. With a traditional pension, the company needs to guarantee the availablity of funds for retirees. With a 401k, each individual employee is required to gamble their life savings on the stock market.
The result is that the company doesn't need to give a damn about long-term stability, they can focus on short-term gains for a carousel of owners that each demands a quick return and cash out. As a bonus, the 401k system forces the government to bow to the whim of the stock market because every citizen is now clinging for dear life onto the same mechanism the owning class use to grow their hoards.
It's a win-win-win for the rich:
* they don't need to pay retirees
* they can squeeze more money out of companies at the expense of customers, workers, future owners, and the environment
* they can get leverage over the entire society by credibly threatening the lives of millions of retirees dependent on their table scraps
No, they can't. In a bankrupcy, pension funds get first dibs on all company assets, before lenders, shareholders, or any other interested party. A company has to be really, really fucked for their bankruptcy to not produce enough money to fund the pension.
And in the rare event that that happens, pensions in the US are required to hold pension insurance, which continues to pay benefits when a pension loses income and their coffers run dry.
My grandpa is still getting pension checks of around 40k/yr from the Pullman Car Company, which went bankrupt in 1968. Pensions are, very literally, guaranteed retirement income.
> In a bankrupcy, pension funds get first dibs on all company assets, before lenders, shareholders, or any other interested party.
No, they aren't; funds already in the pension fund are separate and can't be taken in bankruptcy; wages owed have the kind of high priority claim you reference, but earned pension obligations do not. A bill was put forward in Congress in 2019 to alter this for Chapter 11 bankruptcies (to eliminate the “strategic bankruptcy to cut pension contributions” practice that explored the fact that it is not true), but died.
Plans are typically terminated by a Chapter 7 bankruptcy, and can be terminated or modified in a Chapter 11.
> And in the rare event that that happens, pensions in the US are required to hold pension insurance, which continues to pay benefits when a pension loses income and their coffers run dry.
Aside from the fact that the PBGC multiemployer fund is itself underfunded, PBGC has an age-based maximum benefit guarantee, which will often be significantly lower than what a pensioner would have been entitled to under their original pension plan:
Pensions funded by current workers towards the pensioners are also very widespread worldwide, doesn't mean they aren't an unsustainable practice.
The same can be the case for 401(k)s and similar systems. And I say that living in Sweden where the majority of my pension will consist of funds that I can manage myself the split, so I should believe in this system for my own sake.
Seriously those guys claim they are holding companies accountable and the market efficient. They are just sleazy stock traders. Grinds my gears people try and defend them through efficient capital markets when you see the garbage reports they put out there to manipulate the market for their positions.
It shouldn't unless those funds are invested in hedge funds (some are, but usually only a few percent of their total assets). Day-to-day volatility shouldn't affect them that much.
The gravedigger always has a job, and it's plenty honest. No need to direct misdirect your ire at the killer towards the gravedigger for the existence of the corpse.
In the last few hours, the WSB Discord was banned for 'hate speech' and the WSB subreddit had to close for a while because of a massive influx of bots. To me, that does not really seem like an indication of the short squeeze being over and the big players being safe out of the game.
And yet, the prevalent opinion here seems to be that retail investors can only lose from here on out... what am I missing?
But let's not kid ourselves here - a lot of WSB users are trading under the pretense that this is some great class war against the "elite".
Here's what's going to happen, in the end (my predictions):
- Some institutional investors will make an absolute killing
- Some retail investors will make a killing
- A bunch will make fast'n easy gains
- A good share of retail investors will stand holding the bag.
Sure, some short sellers / funds will lose their shirts, if they can't come up with the funds - but it's not the end for those managers. They'll continue to get work, and continue to short companies they think are on the way down.
In the end, the "evil" hedge funds will walk out as the winners.
This just seems like a continuation of the anti-short selling hysteria whipped up by Elon Musk over the last few years. As you say nothing will have changed in a years time.
A more boring conversation about this is how will it actually impact Gamestop? Could the new price levels become a self fulfilling prophecy, with Gamestop being able to raise enough capital to revamp the business?
"Irrational" retail investors have perhaps saved a company before - Tesla - by holding onto the stock even when every hedge fund was saying it's doomed.
As far as I know GME has not executed on any ATM sale which is very puzzling. Compare this to AMC which basically tripled its shares since last year. This leads me to believe that this is not all kosher. GME counsel is probably advising them to not go through with it. Frankly, I think Ryan Cohen bit off more than he can chew. His ideas to revive Gamestop is mostly half baked and there are way too many big players to compete against. Any money they raised from here will only delay the inevitable.
I think if you really want to understand what is going on you actually have to read the DD "due diligence" and not just look at the funny memes. I found [1] might be a good starting point.
I'm not that into finance stuff, but the idea of a short squeeze still happening at the end of this week definetly seems interesting. It could be triggered by all the call options expiring on Friday, which will have to be covered by then. If that increases the price even more, I guess the short sellers will have to cut there losses and buy back stock, which supposably still might be sold short over 100%.
That's at least how I understood it and I have no clue if that might actually work. Of course there is a huge amount of people buying into GME just beacuse it is fun, memes, or whatever. But the idea behind all that definelty seems like an interesting bet.
The way I understood it, is that its a combination of a short squeeze and gamma squeeze that could potentially bring it way up and then have it plummet down. This only works is if the hedge funds have!’t already liquidated their short positions (as the media says they have) and it’s a bluff. Seeing as its down aftermarket, it may have happened already but no one really knows. Seeing as WSB is down, found this[1] to be a pretty informative breakdown into all this.
No. As we approach Friday there will be greater selling pressure from all the weekly call buyers trying to cash out. This is because most retails who bought these options do not want to exercise the option to purchase. So what happens when millions of people smash the sell button on Friday? Most likely sell off starts tomorrow toward closing bell.
By the way, the move we saw today was not squeeze driven. It was entirely driven by speculation craze. They’re not squeezing anyone but each other.
It's impossible to time the top, but one thing you can say with certainty is that eventually the price of these stocks will come back down (because the underlying firm is clearly not worth its market cap).
Hence, the smartest bet here seems to be buying put options that expire far out. Currently, the price of the $320 GME PUT expiring in Jan 2022 is $240. That seems like free money?
Note that $240 is the price of a put for a single share, which are typically bought in increments of 100 with options. So buying a single one of those options requires $24,000. There are definitely people spending that kind of money over in WSB, for given the volatility nature of the meme stock, its a lot of money to put on the line for anyone not in the WSB mindset, or who isn't so flush with cash that that's a drop in the bucket.
Yea, it's definitely not a small amount, but at the same time, it seems like a very safe bet given the fundamentals of the underlying company. You're basically betting that the volatility will subside within 1 year.
If you're right, your ROI will be (320-240-X)/240 where X is the share price 1 year from now. If X is 30, ROI is 20%. Even if you're wildly wrong, and the share price is still $100 1 year from now, your ROI is only -9%.
I think a lot of people commenting here have not read the comments on WSB.
People there know it will crash. They're buying call options to force the market makers to buy to delta hedge, thus driving up the price and making actual shares scarce.
The point is to screw over the hedge fund shorting gamestop. nothing more, nothing less
Because GME already has more cash than it’s debt. It’s always had a great balance sheet. Shorts were not very justifiable: it was hardly going to go bankrupt.
This is not accurate. There is no such thing as “prices are wrong”. The price is being set by arm’s length third parties transacting. Their motivations may be questionable but that doesn’t make the price “wrong”.
What I don't understand is all of the chatter in various places about how the short positions will be the only ones to lose. Even with more shorts than shares driving up the price, eventually when all shorts are covered, there will still be folks holding the original shares, and the demand will vanish. So not only will the short positions lose a lot of money, but everyone left holding shares will lose a ton of money as well. And if the float is 140% (or whatever) then isn't that like 2/5 of the total shares which is about to crash hard? So if you are holding $GME and get out randomly, you have a 2/5 chance of losing it all (by getting out after the shorts close)?
There are so many assumptions in this narrative that have no foundation. (Neither repetition and emotion are signals of truth; the inflammation and use of those things is a good signal that some manipulation is going on and that facts are lacking.)
* The 'little guy' is powering this movement. We don't know who is leading it and who is pushing it. We do know that social media is often used for mass manipulation, leading large numbers into highly delusional, angry territory.
* The intention is retribution: We don't know who is pushing this or why.
* The 'little guy' will benefit: Investment activities with no economic benefit will lose money, in a functioning market. The 'little guys' are the ones who most need an increase in economic activity and suffer most from the economic loss, especially right now.
* Markets are gambling: Financial markets serve an economic benefit to the public; otherwise they have no purpose. Market activity that has no economic benefit wastes precious resources. It denies resources to the people who are most productive to them,and gives them to the unproductive and sometimes to the corrupt, empowering them.
* This angry mob is driving GameStop's securities prices: Do we have evidence that it's not others?
* Regulations are to control the 'little guy': Regulations protect everyone from fraud and stabilize our markets. Not all regulations are well-intended or perfect, but an unregulated market is not realistic or desirable.
* There is a 'little guy' and 'big guy': These are just arbitrary divisions with no definition, and they may have nothing to so with the situation. Whenever something goes wrong, there are always people who will try to gain power buy inflaming a mob and pointing them toward a target. In the past, it was often religion that was used. We know this technique is often used on social media, to great effect.
What I see is an angry mob. I wouldn't treat it as anything else. Edit: Looking at past angry mobs and financial bubbles, it's the mob that suffers. Someone else will make money off of them.
Maybe Robinhood's mission of democratizing finance is succeeding. The locus of power is being sucked out of Wall Street into a lumbering giant in the hills. My question is: how isn't this the most useful outcome for the most people?
It absolutely is. This is competition forcing entrenched companies to adapt and compete. Funds will have to compete by offering new financial products/models/offerings/services etc.
The public now has access to information and means of trading at a level that was never before possible.
All the funds must be crazy upset since their once cornerd industry, gated by terminology, tools, information and institutional knowledge is suddenly far less valuable.
This at its core is exactly how a market should work. People made stupid trades, and a bunch of others figured it out and called them out. Perfect self regulating behavior but only possible due to the massive expansion of access to information and tooling by individuals.
What WSB and similar communities do is no different than a fund manager going on the news and stating their recent positions and reasoning.
Well if the valuation where it is now is undeserved then it will likely come down. It may well be over priced so there is a chance investors loss money from here. Not sure if this democratizing....true democratizing is giving retail investors access to financial markets on a level playing field (information, trading/prices, all assets).
Meanwhile a handful of families still own and control 70% of all stocks which aren't traded, that is they aren't buying or selling and will likely transfer the ownership to family in decades time. The only way that will change is by changes in taxation. What we are looking at with WSB and GME is a very, very tiny perspective of the entire machine. It is interesting but a very small influence on the entirety. Nonetheless, all these instruments, such as short selling and options, are designed to create liquidity and stability. It's working by design. This isn't a bug, it is a feature.
I tried to buy last night at $146, but I didn't get in before the market closed. Today I bought one single share at $360 and I feel like an idiot on multiple levels. Pure gambling, but it's fun.
How do you know it is not in wonderland already? What price would you put on it? For me what is important is the fundamental valuation of the company...
Normally that's true, but I don't think the company's actual valuation has much to do with what's happening here - the company is basically worthless. The only question is how much money you're willing to throw away, because absolutely no one can predict what will happen tomorrow.
I bought quite a bit around 88, later theorized that shorts would be able to stair-step down to ~60 on circuit breakers yesterday (like the day they did before), so I sold around neutral. Feeling pretty dang dumb now.
I gotta give Bloomberg credit here - they really nailed the title on the article. Normally I complain about clickbait but this is right on the money. Gotta give credit where it's due.
It is unbelievably telling how suddenly this sort of activity is a problem.
I'm looking forward to seeing what kind of new regulations we're going to be enjoying as a result. Some people's feelings and sense of superiority are truly hurt by this I expect and the SEC are probably hard at work trying to figure something out and to the extent that they're failing to do so, salivating at thought of new powers. All in the name of saving the undeserving from themselves of course.
The "retail traders vs Wall Street" narrative is so fucking stupid. Who do you think is earning PFOF for every trade that someone makes through their brokerage? Who do you think is earning the bid/ask spread every time someone buys or sells? Who do you think is collecting the theta from all the calls and puts people are buying?
And last of all, who do you think is going to be left holding the bag when the price eventually collapses after the short squeeze ends?
There is one thing not being discussed anywhere that I would like to see discussed.
Sometime in Sept 2020 GME had purchased sum of shares that had in effecting had reduced the number of shares outstanding or the float and that purchase likely to have created the imbalance where the are more short shares than existing shares in my opinion.
I can not believe that the whole scheme has not been by design. I recall seeing GME pump starting right about then in Sept. I am also convinced that the shorting hedge funds could have been playing it on the up side via options. They could have sold puts; bought calls. There are a lot of dark pools that are not transparent to know who is doing what. It is pretty naive to believe that all these hedge funds dabbling in these type of games are the sheep and not the wolves.
Both the new shareholders who are now the insiders and the hedge funds are likely to be aware of the small float that would kick started the short covering pyramiding scheme and reddit would have provided the pawns to spawn it really fast.
Don't be naive. They fundies have been hitting all the high volatility stocks with small floats/ high short ratios.
If people think the big players in wall street are sitting back thinking, "oh no, a bunch of retail traders defeated us, lets pack our bags and go home" then its pure naivety.
They are already 3 steps ahead and will extract most of the gains and benefit from the losses of these retail traders over the next few weeks. They have the resources to destroy this hubris and make $$$
Sadly, those piling on are much more likely to have their shirts lost than the short sellers who will take a loss and move on. When it crashes, it will be the RobinHooders left holding the bag and many of them stand to lose a lot to make a point, possibly much more than they thought.
I'm not happy that Musk is getting in on this, egging on crowds to take risks that might have material risks on their lives. He stands to lose nothing.
Finally - nobody seems to be talking about 'Game Stop'. Their CEO/CFO in reality must be soiling their pants under this kind of stress, nobody wants to be the pinata.
If the kids want to be smart, they can act conscientiously and organize a fund to structure initiatives they deem worthy. But then they have to face the reality that 85% of most of business is fairly 'reality driven'.
Weirdly - the most rational thing for executives to do, at this very moment - is to sell all of their shares to the mob. 'Now you own it'.
A couple of weeks ago I stumbled across some youtube or whatever that made me aware that Michael Burry was long in GameStop and I thought that was quite interesting. I don't normal follow much stock/fund news or current affairs and so I'm sure I'd be one of many that stumbled across this. I then think games are all something everyone can relate to and feel they understand and have a high degree of confidence in. Covid lockdowns mean that quite a few individuals have been spending less and may have some disposable income and so a sort of fall the leader lemmings investment run happened and then generates the hype and brings more a'la bitcoin a year or two ago.
One of main points I've seen from people angry about a perceived deliberate manipulation to reduce Gamestop's stock price is that this will directly impact retail workers in the form of job loss.
Could anyone explain how this might happen? My naive assumption is that the relationship between a company and it's stock is (mostly) one-way. If a company cuts jobs, this along with all other signals from that company will be perceived by the market in some way and potentially impact the price of stock in that company. Would the opposite ("Our stock price is going down, lets fire people") be at all likely to happen?
Stock prices typically rise after layoffs because the perception is that the company is cutting underperformers that don't have the same marginal contribution as the remaining staff.
Generally, a declining stock price could have implications for debt covenants, compensation packages, and, requires selling more stock to finance the same level of capital expenditure.
I think that can happen if the board decides to sell the company because the stock is low, then it is bought by another company that just wants to extract as much profit as quickly as possible. For example by taking on a bunch of debt to pay themselves bonsues, then declaring bankruptcy and liquidating the remaining assets. I am far from an expert, but I think something similar happened to Toys R Us.
Would the real power move be for everyone to pull their money out of the stock market? I realize that's not an option for those who don't already have money in it. If a few small players can expose the ponzi scheme/grift that is the modern stock market, that sounds pretty good to me.
I know everyone is having an absurd amount of fun watching this and laughing (so it seems), but I think we should be more aware of the many ways in which this is bad, which definitely includes millions of retail investors losing their money when they buy at the peak, use too much leverage, and so on.
The idea of "Don't invest what you cannot afford to lose" has gone from a mantra to an outright joke that many investors now purposefully ignore, and not everyone can end up on the right side of this at the end of the day.
This is without mentioning what type of institutional consequences we may see as a result, which I think there will be many including regulatory, but it's too hard to predict exactly what, given the mess that we're in.
Again, the memes and redditors becoming millionaires are funny and I wish everyone the best, but there will be a vastly under-reported dark side to this story as well; life cannot literally just be everyone getting free money from nowhere with no downsides.
Reddit "wins" by buying enough to take GameStop private so they can exit in an orderly fashion 100% screwing the shorters and not letting Citadel front run the exist.
I think the GameStop CEO can offer up a class "R" share that retail investors will be happy with.
The Wall Street doesn't make money on direct bets, but on option spreads, commissions, margin rates, order flow etc. So they must love Robinhood and WSB ... the more excited the retail dummies are - the better, in the end the house always wins.
I wonder if anyone has used AI to figure out how many of the people pumping this are actually not real and mults (x10 or 20) of the same few people and others are helping them attain their market dreams, when they sell very soon. Just a hunch
When people are risking and betting their money like casinos for 2x-10x gains. I’m not sure if any of that are in peoples thoughts when people trade $GME.
The bottom line is always $$. The “Rage” is a good story to sell to buyers
Can anyone tell me why SEC won't just step in, suspend trading, and force some kind of resolution? Its obvious that the market has been effectively broken by the short sellers. It might just make the redditors more angry and likely to hit other shorted stocks, and possibly cause markets to decline, but its the best applicable solution i see.
The forced resolution will be to force the shorts to cover. Screwing people that took the other side of the trade because the short sellers screwed up doesn't really make any sense to me.
yes, the resolution would entail that. its not about screwing people, its about fixing something thats broken. Isn't that what happened in 2008? Banks made stupid decisions, and government bailed them out for it. Obviously more complicated and probably higher stakes, but the crisis essentially boils down to that. Don't see why it can't happen here.
It's not like this is the first time a short squeeze has happened. Has the SEC stepped in for other squeezes? If they were gonna step in, it should have been when naked shorting was occurring, not now.
It looks like there was a listed short squeeze fund, SQZZ [1], which closed in 2018 only for lack of investors [2], so the SEC doesn't seem to have a fundamental problem with the strategy.
They only interfere when the amount of magical floating stock that would need to materialize to fulfill all the contracts and pay back all the loans is too much to actually break down the market. That is not the case yet. As long as the only consequence of a squeeze is that people that made bets loose all their money the SEC is not going to do anything. No one is being fooled into buying something that's riskier than it looks here.
Of course if GME asked to be delisted they could also help, but that also hasn't happened yet I think.
Short sellers illegally borrowed more stock that actually existed. They are the criminals here. Not the people discovering this and taking the criminals for everything they have.
GME was heavily shorted at ~148% and the institutional shorts got too greedy and /r/wallstreetbets caught them as they failed to close their shorts.
Now they are forced to buy back the stock to cover their positions whist everyone is buying and holding GME as the stock price goes higher; rinse and repeat.
If anything, the hedge-funds over-shorting these stocks are the criminals which have manipulated them (GME) for years with other hedge-funds bailing them out and the media covering their asses for their illegal activities; as usual.
Then they cry and lie with the media: 'ThiS is mAnIpulAtIOn' to /r/wallstreetbets.
All I can say is: /r/wallstreetbets is literally robinhood.
It's entirely possible for short sellers to have legally borrowed more stock than is actually outstanding. There is no evidence that I've seen that they've done so illegally.
I have one stock in GME, and borrow it to you. You then sell it on the market to somebody. That somebody can subsequently borrow it again to a short seller who will again sell it on the market. Repeat.
I understood “this” to mean “borrowing [more stock that actually existed] and shorting”.
As your link explains “Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing [...]”
After someone has setup a covered short, the stock they borrowed and sold is again on the open market, is it not? And thus could be lent out by the new owner, enabling a second covered short?
why would the SEC step in? I think if they step in they need to put in stronger rules from the wall street shamans not inhibit the retail traders.
the stock market is not gonna get in trouble if a bunch a people are buying an overvalued stock. it is gonna get in trouble when you short 140% of the float and b*tch moan for more restrictions when you get called on it
A lot of ppl are expecting this to be dumped hard. i dont think that is going to happen. I think rather it is going to stabilize eventually and not crash, much like Tesla. The market tends to do what consensus does not expect. GME is flush with cash and has the backing of various high profile billionaires. It may make a major acquisition or something like that.
There is a massive difference between Tesla and GameStop. The latter is not flush with cash, but rather hundreds of millions of dollars in debt. Their revenue has been declining every quarter. There is no long term business plan, the digital game sales space is already too crowded. It will be a miracle if they can manage to turn around.
I'm honestly dissapointed by the amount of wall street bootlickers over here on HN. You of all people should know that unlike in the past, information is freely available. Hedge funds have some amazing smart people who can think so hard they float, but they're limited.
There is a high chance that they started closing their position. Just look at other long positions Melvin had and what those started doing, i'll give you a hint : they started going down due to the possibility of them starting to liquidate other positions to raise more cash for covering their shorts.
But this is also speculation, until they release their books on what they own nothing is 100% sure.
To know for sure? Not really unless they themselves announce it. Right now the announcement comes from a third party CNBC reporter, so it's not official and there's plenty of room to claim a misunderstanding.
But there are ways to gain some insight based on how hard GME is to borrow and the shorting interest, and that hasn't changed much from yesterday.
If Melvin did manage to get out of their short, they handed that short to another party almost share for share, or they found a way to hedge their position. At any rate, GME remains the most shorted stock on the market, which means another short squeeze is possible.
This Friday when options expire is going to be an absolute circus.
the reality is all of their major shorts are being squeezed not just Gamestop, but I agree I think their CNBC interview was just a distraction and doubt they could’ve closed out their entire short position overnight.
Dumb question - could the shorts actually negotiate with Gamestop directly to get them to issue new stocks? Wouldn't that be a win-win (and the retail loses, because a) the stock is diluted, and b) no one would be "forced" to buy from them)
An associated qn is what price GME would issue new stock at if such a deal took place? higher/ lower/ current stock price?
Suppose lower. Unlikely. Because a better price for GME to raise capital exists -- the current stock price.
Suppose at (approx.) current stock price. Possible. But what's in it for GME to offer such a deal to shorts instead of offering it to stockholders? Suppose offer to stockholders, then shorts still have to cover and thus potential of short squeeze remains (which is beneficial to future capital raises). Now, suppose GME offered it to shorts, squeeze is extinguished, the rally fizzles, stockholders who propped up GME's price feel betrayed. At offer to raise capital at current stock prices seem better placed with stockholders than shorts.
Suppose higher. Now we might be on to something. Without GME's offer, the shorts have to close out huge positions by buying from the secondary mkt -- short squeezing the price up and making future purchases to close remaining short positions increasingly costly. Shorts don't want this. Shorts would rather close by buying shares at a higher, _constant_ price (constant means not subject to squeeze). GME, if desperate for capital, could extend an olive branch to shorts with a deal that says, hey, I'm offering n stocks at a 75% premium to the current price of $400, wanna take it?
If no one is selling GME, but someone is willing to buy GME, and GME actually gets to pocket the cash, that sounds like it would be in the long-term interest of GME shareholders to me. But like I've said elsewhere, I'm an idiot.
who knows but their market cap has become so bloated that any new issuance would probably not be that dilutive. i doubt that is what would trigger a crash.
WSB retail is so ignorant these days, their only criteria are cheap ticker prices (GME, NOK, BB all started < $10) with a commonly recognized brand name to them, because that is all that matters to get people on board.
I am tired of this misguided narrative that pits retail and r/wsb vs big bad wolf Wall Street hedge funds. This is not David and Goliath. There are hedge funds with deep pockets on both sides. Retail traders do not run sophisticated algos to jam the price 15 minutes from the open because they want to neuter circuit breakers. C’mon guys...
I don't see anything there about algos being used to neuter circuit breakers. Just a claim about some large trades being made (which is interesting too, but different).
Bloomberg seems determined to make people feel bad for the short sellers. No. I will not. They made a gamble and it costs them billions. Good. No one should be gambling with billions on the line, for any reason.
> and I don’t think the answer to today’s many ills is to empower poor people to bankrupt themselves with margin accounts and derivatives.
I love the double speak wrt margin accounts. They want to mix up naked margin accounts where your broker gives you a loan of money to trade with, with the types of margin accounts used by WSB peeps, where the margin is only to cover the 2 day settlement window or the time it takes a deposit to transfer, ie: covered margins.
My counter point: I don’t think the answer to today’s many ills is to parentalise retail investors with a holier than thou attitude that is driving half of the spite from these investors.
The soundbite is that they have to protect the poor whittle retail investor from scam stocks, but the effect is and will always be to lock off higher gain opportunities to institutional investors and away from poorer investors.
YES. Not enough people understand this. Normies love to take a shit from on high on WSB, thinking they are a bunch of retards about to lose their money, but anyone who goes a little bit deeper than the surface can see its a very, very powerful resource to learn how to trade and how markets really work.
Of course if you only see WSB as a stock pumping forum and throw your money into whatever ticker is mentioned, you are at the mercy of fortune. But the ones who do use WSB productively to learn can make enormous returns previously reserved only for hedge funds. The normies only see the news stories about the first kind of user who gambled and lost, clamor for even MORE regulation, and soon that pathetic 7% annual return on index funds will be even lower as you close off more and more opportunities. The VCs and sophisticated investors will gain even more from further asymmetric opportunities and the wealth inequality will widen.
Ultimately protecting those who are at poor at investing from their own incompetence also means locking out those who are good at it and only cements inequality further. Every reduction in risk means a reduction in reward.
Many people will lose money is this little game.
The hedge funds deserve to lose since they took too many risks, but I'm afraid they'll be bailed out.
GameStop is bleeding money, and if the stock value is really closer to $3, then once this is out of the news, price will fall down to under $10 pretty quickly. Many smaller investors will lose out in the end.
> do people still think Efficient Market Hypothesis is a thing?
Sure, it's a thing. But underdamping is also a thing. And information diffusion is also a thing.
The efficient market hypothesis doesn't say "markets are always efficient, and prices only move based on new public information." Rather, that information diffuses into the market. Some idiot hotshot billionaire short-seller overshorted GME, and it took time for that information to spread to other market participants. Then, once the information was there, it took time for the upward price impact to un-do the impact of the short. And it is going to overshoot the true asset value because the market is underdamped -- contrarians aren't going to step in immediately, and longs are still waiting to put in a clear indication of a top.
The real joke here is that Plotkin went so heavily short a name that was trading at a mere fraction of its annual sales.
Personally I think there are two SEC rules that should come out of all of this:
First, shorts should be reported alongside longs in 13F filings.
Second, there should either be a limitation on re-hypothecation for heavily shorted names, or short sellers should not be able to add to new positions once shorts go beyond 100% of the float.
A November 2021 "put" at the present market price of ~$360, the right to sell GameStop stock in November at $360, is selling for about $300.
For comparison, a January 2022 put at Microsoft's present market price of ~$235 is selling for ~$30.
GameStop is presently a cafeteria food-fight. It will end, a lot of people will be sad, everyone will remember the story, and GameStop stock will eventually better-correlate with business performance.
Edit: Indeed, the fact that one can buy puts for so cheap is interesting, as GameStop is probably "worth" $30 or less at present. However, is it worth risking $300 to perhaps make $30 while food is flying around? Not for me.
You should probably put the bottom, italicized part closer to the top of what is a good illustration. Many folks (most?) won't immediately know what a $300 premium means to a $360 strike price. Meaning even if it goes to zero, you make a whopping $60. But your point of making $30 on a $300 risk clears it up, I think.
You don’t actually understand option prices. Put-call parity. The reason why options are so expensive is because of high implied volatility. Both calls AND puts are expensive; as they always will be, because if they’re not balanced, a risk free arbitrage ensures.
No, they are only the same price under very strict assumptions. The put-call parity says that buying a call and selling a put creates the same payoff structure as being long the stock itself. Depending on the strike, the put or the call could be ~100% of the value of the position. Only when you get near the price of the underlying do the put and call equal each other.
I think I do understand them, from a value-investor's perspective. If I buy an option, I actually intend to exercise it or hold it until expiration, not hedge with it.
If I bought a GameStop put today, for the pricing in my post above, it would be because I was willing to make a strong bet that GameStop's intrinsic value in November would remain below $60/share and that I was fairly sure the market would return to its senses by then. How the option-seller reaches her offering price is entirely irrelevant to me.
It is true that much of the pricing of options comes from volatility, but for me, as a buyer, it is perhaps irrelevant.
Thanks for your perspective, though. I'll read your link with interest.
What I mean is you cannot make directional predictions of a stock from option prices. The information just isn’t there. The same way you can’t use long dated futures. Because S&P 500 futures (during regular trading hours) will always be the current price, modified by the financing cost. There can never be a directional prediction, because all directional predictions get arbitraged away into the current price.
I've had more time to think about this now -- it would appear that directional prediction can be arbitraged away in a world where the future cannot be known. In general, however, through research, one can begin to divine a glimmer (or more) of the future direction of the underlying.
In that situation, someone with a reasonable guess at the future could absolutely murder uninformed arbitrageurs, right? It is my expectation that "correct" pricing of the options should fold in information about both the expected volatility and the direction of the underlying.
I think you're just seeing volatility difference between the stocks, not sentiment difference. Calls on Gamestop are also more expensive than Microsoft right?
I guess it is not the efficient market in the sense of valued according to the underlying financials. But to me at least it is "efficient" in the sense that the price is now basically tied to supply and demand. You have a stock that has >100% of outstanding shares short and a ton of people buying and holding the stock intentionally to prevent those users from covering the shorts. If nobody wants to sell you a share at 100$ you have to offer more and the more you offer the more in the hole other shorts become. This is the market punishing people who thought they were getting easy money by shorting the hell out of a dying company.
This is a reductive take, there is the idealized model of the market that the efficient market hypothesis refers to and there is the real one, which can get quite messy.
The market does serve a real purpose, ie deploying capital and providing liquidity.
It serves that purpose, but is the market as it exists today the best way for society to achieve that purpose?
K-shaped recoveries make me think "I wish there were a better way."
But I'm an idiot. So my best idea right now is, "When a business issues stock, they also have to issue an additional 20% to the government, and then we need to keep the tax rate low-ish on dividends, but increase the tax rate on capital gains - hopefully encouraging companies to pay dividends, which the government would receive."
I'd appreciate if someone could tell me why my plan is awful. Because I'm sure it is, but I haven't been able to figure out why it's awful.
You're proposing to make the market more efficient by giving the politicians more power to boss companies around and pick winners and losers. This is an excellent thesis if you believe central planning is the best way to allocate society's resources and is definitely never a vehicle for official corruption, and taxpayer funds are never ever misused for bailouts and other political favors. If not, such a move will only exacerbate the common complaints of today.
As it turns out, government is already entitled to N% of a company's profit, through corporate taxes. If you are greedy on behalf of the politicians and want N to be a bigger cut of that, that's one thing.
But if politicians want to boss companies around, they already have the option to go on record and pass neutral and generally-applicable laws to do that — and such laws are a fair sight better than the shady backroom deals that will go in when politicians start filling board seats with political apparatchiks. Do you want Donald Trump filling a board seat at Disney with someone like Jared Kushner? If you do, do you want Biden appointing his son Hunter to a board seat at Tesla? Can you imagine the insane conflicts of interest multiplied by the entire economy? It's bad enough already. We really, really don't need to glue together everything shady about big business with everything shadowy about government.
P.S. Oh, and the other thing is that people start raising capital and incorporating in ways that these confiscatory taxes and seizures of control that you propose just don't apply. More private equity, or just incorporating overseas.
P.P.S. Oh, it also favors the companies who don't need to raise capital on the markets: Apple can just take its cash hoarde and invest like crazy, while the next hot Silicon Valley player that would challenge them has to pay 20%.
> You're proposing to make the market more efficient by giving the politicians more power to boss companies around and pick winners and losers.
I'd love to hear your analysis of how Norway is handling their oil reserves.
Huge companies are not paying taxes. That's a problem. You seem to think there's no good solution. I maybe agree. But I'm willing to move on to a bad solution. How about you?
> As it turns out, government is already entitled to N% of a company's profit, through corporate taxes.
If you think in practice that actually works, then you and I are on completely different pages.
> politicians start filling board seats with political apparatchiks
I'm proposing the government receive non-voting shares, or is just restricted from voting. I don't want politicians on boards.
In fact, if you're curious, I think that the major political parties should refuse to endorse anyone who doesn't 100% divest themselves of all future income, instead promising to receive all of their future income through their government pension. And elections should be publicly funded (each citizen gets $100 per year to allocate to whichever politician or party they want to, and that's it). Amend the Constitution to overturn Citizens United. Re-instate the Fairness Doctrine.
> everything shady about big business with everything shadowy about government
That you apparently believe they're not already 100% glued together already shows again that you and I are on completely different pages.
> More private equity, or just incorporating overseas.
Yes, we need a "Uniform Commercial Code" for taxation, around the world. We all suffer that that doesn't exist.
> Apple can just take its cash hoarde and invest like crazy
That problem already exists in many ways. We should never have allowed corporations to get as big as they are, and we should start to break them up. Competition is good.
Yeah, you can't isolate one aspect of how our global economy works and talk about it in isolation.
And no, I didn't say "I want to deploy capital more efficiently."
I actually used the phrase "is [this] the BEST way" [emphasis added].
We went through a K-shaped recovery. Capital did AWESOME. I'm now asserting that the society should think about better ways to ALLOW capital to be deployed.
Lol, if you want to attack anything that stops companies from controlling politics, abusing monopoly powers, and paying no taxes, maybe you should open with that.
Well, not sure which country you're writing from but here in the US, private property laws should be enough to nip the idea of government taking shares of a private company.
Dividends and capital gains in general have an inverse relationship, ie dividend paying stocks typically are low growing and as such don't tend to experience much price increase (ie capital gains). You own such shares so you can get the consistent dividend (share of profits) as your return...There may be exceptions but in general this relationship holds.
In a non-bubble market, the capital gains are a reflection of company's growth and expected future profits, thus the stock price is based on present-value-of-future-cashflows model (ideally of course, the reality is often messy).
In other words dividends and capital gains are not inherently in conflict, they merely reflect life-cycles of companies. Of course there are a ton of unprofitable companies on the market currently with high stock prices, there is a larger debate to be had on why that is and how to curtail it.
In one dimension, the new GME management (which did occur) does a secondary market offering directly into liquidity, recapitalizing themselves which changes all the fundamentals. This wouldnt be known information because the expectation of no liquidity, but now that there is liquidity it creates new information
The only way this could get stupider is if GME took their impressive new warchest and bought/merged with Valve, pulling a unicorn into the stock market. At that point, reddit would have memed a brick and mortar retailer into a SPAC.
The wall street casino recoils in horror that some people are good at counting cards at black jack stock market and teaching millions in how to count cards at black jack stock market.
As for this thread, it's got 1000+ comments. If you want to see them all you'll need to click through the More links at the bottom, or like this:
https://news.ycombinator.com/item?id=25930214&p=2
https://news.ycombinator.com/item?id=25930214&p=3
https://news.ycombinator.com/item?id=25930214&p=4