Some smart person explain the GME (gamestop) thing

[paulster2626]

It's a hallmark of the Padded Room. We love a hot take.

Here's one. GME closes out at a "low" price of $200 or so. RobinHood suddenly reverses course and allows these tickers to show up in their apps tomorrow. GME goes back up, and "real investors" get mad again for some reason.

[BmillsSkier]

Here's one. GME closes out at a "low" price of $200 or so. RobinHood suddenly reverses course and allows these tickers to show up in their apps tomorrow. GME goes back up, and "real investors" get mad again for some reason.

Sure but will Steve Carell sign on to the sequel?

[muted]

rod coming in from the top rope with the worst take of the day

BigDuder with his 'Fauci is an attention whore' hot take this morning is worse, if we are counting in all threads and not just this one.

[Timberridge]

Read a book for once. But okay, let's start with short sales.

Let's say apples are $1 at the market. A snake (hedge fund trader) thinks they're over-valued. So they borrow 10 apples, with a promise to return the apples on Friday. The snake can then sell the apples, or loan them out, or whatever. Let's say the snake then sells the apples for $1.

Friday rolls around. Market apple prices have dropped to $.50. The snake can now make money because they can buy apples for $.50 to "cover" their promise to return the Friday apples.

So far so good?

Now, if apples go up to $1.50, the snake loses money. The snake could have "hedged" the short by, early in the week, entering into a contract with someone who promises to sell their apples for $1.10 on Friday. Snake has now limited their downside risk. But that contract probably costs some money.

Or the snake could get greedy and hold a "naked" short, which means that Snake doesn't have any guaranteed source, or price, for the Friday apple delivery.

Now, if all the apes get together and buy EVERY APPLE, the apes can basically decide how much the Snake has to pay for his Friday apples. Snake has promised to get apples to the market by Friday. Apes could, individually, decide they aren't selling apples for less than $1,000 apiece. Snake is fucked if Apes hold the line.

Now, here's why the Gamestop deal is different from most other shorts. The Snakes were SO CONFIDENT that Gamestop apples were overvalued that they shorted 140% of the shares on the market. That is, in the aggregate, the snakes agreed to deliver ALL THE APPLES, and then would have to buy back 40% of the apples again just to bring them back to the market to fulfill their contracts.

That's fine if they can buy apples at $.51, sell them to the market for $.52, buy them back for $.53, and resell for $.54, to cover all of the apples they got on $1 loans. BUT if all of the Apes buy and hold apples, the Snakes are forced to buy them at whatever the Apes want to sell them for.

So the beautiful parts of the story are that it's the hedge fund snakes getting gouged by the retail (thousandare) investors. All because the snakes took out massively risky bets with nearly unlimited potential risk.

You left out one nuance. An actual "hedge" fund tends to hedge things so their risk is mostly capped. Now there are things calling themselves "hedge funds" because it's easy to say and rolls off the tongue easier than "unhedged funds." And the media are happy to call them all hedge funds, but these new hedge funds are a sort of bastardized prop trading firm who trade their own money and clients money. Real hedge funds with real investors are rather boring and don't like volatility because it's hard and expensive to hedge.

[cravenmorhead]

You left out one nuance.

I mean, that one and others.

[BmillsSkier]

This place DEMANDS nuance.

[cravenmorhead]

This place DEMANDS nuance.

That made me laugh in real life.

But yeah, I guess my snake/ape/apple analogy really should have covered the entirety of the US financial market.

[rideit]

I can sum this up easily in laymen’s terms.
To invoke Gritty,
“They fucked around, and are finding out”.

[BmillsSkier]

The Philadelphia Flyers' mascot Gritty has motivational quotes now?

That's next level.

[MontuckyFried]

Ars just dropped a fun piece on this saga thus far:
The complete moron’s guide to GameStop’s stock roller coaster
https://arstechnica.com/gaming/2021/...oller-coaster/

[old goat]

So somebody explain to this boomer how the world, or the country, or the economy would be worse off if shorting was illegal. The standard argument is that short selling punishes poorly run or unprofitable companies and either forces them to improve or go bust, either way making the economy more efficient. But doesn't the market do that without short selling? The stock price goes down, the board fires the CEO and things turn around, or the company keeps losing money and eventually can't raise any more cash to pay its bills and goes belly up. Seems to me that the only thing that short sellers add is profit to them, if they gamble right, and that's money taken out of someone else's pocket. Short selling is an invitation to manipulate the market by driving down the price of stock. A short position, if it's big enough and public enough drives down the price even if the fundamentals are good.

My grandfather knew what to do with short sellers--line them up against a wall and shoot them. All the other capitalists too. He normally voted straight Socialist Worker but I think he would have voted for Bernie.

[BmillsSkier]

OG, I was under the impression that you and Woolley were the Greatest Generation?

Learning all kinds of stuff in here today.

[MultiVerse]

OG, short sellers help protect other investors with imperfect information from paying too much for a stock that is otherwise overvalued. In a perfect world it's a signal a stock price is too high.

At a fundamental level markets exist to answer questions like how many widgets should we produce, something hard core socialists don't have an answer for. Short sellers help answer the question how much capital should we allocate.

[rideit]

The Philadelphia Flyers' mascot Gritty has motivational quotes now?

That's next level.

[paulster2626]

So somebody explain to this boomer how the world, or the country, or the economy would be worse off if shorting was illegal. The standard argument is that short selling punishes poorly run or unprofitable companies and either forces them to improve or go bust, either way making the economy more efficient. But doesn't the market do that without short selling? The stock price goes down, the board fires the CEO and things turn around, or the company keeps losing money and eventually can't raise any more cash to pay its bills and goes belly up. Seems to me that the only thing that short sellers add is profit to them, if they gamble right, and that's money taken out of someone else's pocket. Short selling is an invitation to manipulate the market by driving down the price of stock. A short position, if it's big enough and public enough drives down the price even if the fundamentals are good.

My grandfather knew what to do with short sellers--line them up against a wall and shoot them. All the other capitalists too. He normally voted straight Socialist Worker but I think he would have voted for Bernie.

One reason is because all companies aren't honestly trying to make it in the world. Enron, for example, propped up on bullshit and electric grid manipulation, would be a company that needed to be kept in check. Herbalife is another one if you want to watch an interesting doc called "Betting on Zero."

The thing is the rules are there and people/orgs will always try to push beyond them. If we want a truly "free" market then we need to let the opposing forces act as they see fit, and sometimes get royally fucked over for their stupidity/greed.

[east or bust]

Without knowing a whole lot about the stock market, this whole situation is kind of blowing my mind. The actions being taken against retail investors here are kind of crazy.

I’m not on reddit but saw that the wall street bets sub got shut down and people are going bananas. The more the big dogs push is going to come with an equal or greater doubling down by the retail investors.

Also, robin hood has already been hit with a class action suit?

This is some exciting shit for a Thursday that I’m stuck in the office and not skiing pow.

[schuss]

So somebody explain to this boomer how the world, or the country, or the economy would be worse off if shorting was illegal. The standard argument is that short selling punishes poorly run or unprofitable companies and either forces them to improve or go bust, either way making the economy more efficient. But doesn't the market do that without short selling? The stock price goes down, the board fires the CEO and things turn around, or the company keeps losing money and eventually can't raise any more cash to pay its bills and goes belly up. Seems to me that the only thing that short sellers add is profit to them, if they gamble right, and that's money taken out of someone else's pocket. Short selling is an invitation to manipulate the market by driving down the price of stock. A short position, if it's big enough and public enough drives down the price even if the fundamentals are good.

My grandfather knew what to do with short sellers--line them up against a wall and shoot them. All the other capitalists too. He normally voted straight Socialist Worker but I think he would have voted for Bernie.

Nothing specifically wrong, but a lot of the issue is hedge funds overleveraging so you see numbers like more than 100% of stock shorted. That would be fine if they had the capital or held stock to fulfill it, but they don't. They also create a meaningful counter to buy and hold. So you have a few options:
1. Ban shorts - a bit overzealous but would solve the problem.
2. Increase capital or stock reqs on short positions - doable but will reduce profit.
3. Crack down on overleveraging and/or positions that short more than 100% of available stock.

All of our recent bubbles have been "financial innovation" of new vehicles that appear to counterbalance risk but have little to no capital test.

[BmillsSkier]

That's pretty sage for a hockey player.

[Core Shot]

I’m still confused about how a stock can be 140% shorted. Hell, anything close to half doesn’t seem possible.

Naked shorts are supposed to be illegal.
But you can borrow against someone that holds the underlying stock. But this is multiple borrowings.

Anyone can explain?

PS, read an interesting Patrick Byrne thing a month ago when he was Drumpf raging. The article is a crazy rage about naked shorts, mafia types, and Jim Kramer inside trading. But the interesting part was where he bought a call for 50,000 shares of overstock, and demanded delivery at the expiry. He got nothing. Stock was so thinly traded it couldn’t be had.
And the SEC did nothing.

[ColMan]

I’m still confused about how a stock can be 140% shorted. Hell, anything close to half doesn’t seem possible.

Naked shorts are supposed to be illegal.
But you can borrow against someone that holds the underlying stock. But this is multiple borrowings.

Anyone can explain?

PS, read an interesting Patrick Byrne thing a month ago when he was Drumpf raging. The article is a crazy rage about naked shorts, mafia types, and Jim Kramer inside trading. But the interesting part was where he bought a call for 50,000 shares of overstock, and demanded delivery at the expiry. He got nothing. Stock was so thinly traded it couldn’t be had.
And the SEC did nothing.

Good explanation here: https://www.fool.com/investing/2021/...ver-100-heres/

[Timberridge]

But yeah, I guess my snake/ape/apple analogy really should have covered the entirety of the US financial market.

A proper analogy is not something that one just "wings."

[jackstraw]

This whole thing is fascinating to me. Thanks for all the info posted.

And when does the movie start production?

[char_]

OG, short sellers help protect other investors with imperfect information from paying too much for a stock that is otherwise overvalued. In a perfect world it's a signal a stock price is too high.

At a fundamental level markets exist to answer questions like how many widgets should we produce, something hard core socialists don't have an answer for. Short sellers help answer the question how much capital should we allocate.

To the layman it appears the markets are completely disconnected from day to day reality, push companies to offshore jobs, funnel capital to the top with little regard for the general welfare, are solely focused on profit and shrug off the secondary effects of their profit based decision making as a necessary evil or even a social good despite the real world impacts on humans not bank accounts.

Im saying that as someone who has their retirement riding on the stock market going up.

[4matic]

RH got a margin call from the clearinghouse. Margin requirements can change and Robinhood is not exactly deep pocketed.

Edit: I see that RH self clears. The risk managers probably stepped in. Like the movie "Margin Call."

[MultiVerse]

To the layman it appears the markets are completely disconnected from day to day reality, push companies to offshore jobs, funnel capital to the top with little regard for the general welfare, are solely focused on profit and shrug off the secondary effects of their profit based decision making as a necessary evil or even a social good despite the real world impacts on humans not bank accounts.

Im saying that as someone who has their retirement riding on the stock market going up.

Yeah, there's an argument equity markets do less to serve the social function equity markets are supposed to serve than they once did. It's also a historical fact that only market-oriented economies allow people to live better lives than their parents lived.

So if casino finance, capital structure manipulation, front-running, socializing risk, creates a situation where lots of people feel like they're no longer seeing forward progress in their material lives then that's a problem for liberal democratic capitalism.

When you step back, it just seems like even though there's always plenty of reasons for short run pessimism the long run story clearly calls for optimism.