Guest Post by Andrew Nelson and Rich in Ct, with a note by Humble Talent
[I would say that finance is among my worst topics along with soccer and calculus. My request for clarification on the current GameStop controversy and its ethics implications attracted helpful responses, and I am combining them into one collaborative post. First, Andrew:]
Gamestop, a publicly traded company, was seen as undervalued by some users of an internet forum, in this case, a reddit forum called r/wallstreetbets. That same stock was seen as on the brink of collapse by a hedge fund management group, Melvin Capital, who decided to short sell….
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Here Humble Talent clarifies:
A short sell is when someone, usually a broker, is holding stock in a company they think is overvalued. They owe their client X number of shares, regardless of the price. So if you have 100 shares of Game Stop stock at $4, and you think it’s going to $2, you sell at $4 and then rebuy the stock at $2, pocketing the difference and letting your client swallow the loss. It’s a loss they would have swallowed one way or the other, so they’re not really hurt, per se. Basically, you’re betting that a stock will go down in value. If the stock instead increases in value, you lose the difference. I think it breaks a fundamental fiduciary duty and should be illegal, but it’s where we are.
So what happened here was that a lot of people thought Game Stop was overvalued, it was listed at approximately what I said it was, between $3 and $4 per share. Short sellers were banking on it decreasing in value, so they sold all their client’s shares. Now that there’s been a ridiculous noise buy on these stocks, and they’ve *increased* in value 1000% (real number) instead of decreasing 50% (expectation) the firms that short sold the stock are going to have to find stock to buy to make their client’s portfolios whole. Which means that they will have to buy thousands of shares back at $400 when they sold them at $4, instead of $2, which they expected to. That 2000% difference over all those shares represents tens of millions of dollars, just on the Game Stop shares.
Basically, a bunch of unethical portfolio managers got their paws slammed hard in the cookie jars of their client’s portfolios, and it’s magnificent.
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….Whether through intent or accident, these two groups converged on Gamestop at roughly the same time.Regardless of original intent, the users of the reddit forum got more and more people to buy into that stock, causing the price per share to inflate drastically. It’s sitting at over $400 per share when I last checked. A similar situation is happening with AMC stock, though with less drastic inflation.
Now, when Melvin Capital’s option reaches its end, they’ll have to return the shares they borrowed along with all that money per share above which they initiated the short sell. This would cost the firm billions due to how many shares of Gamestop are involved and the drastic increase in share price.
Earlier today, several stock trading apps, including Robinhood and T.D. Ameritrade stopped allowing users to buy Gamestop, AMC, Nokia, and Blackberry (though I don’t think the last two were being massively inflated at the time). Also, Discord, a popular messaging app, removed r/wallstreetbets from their app, allegedly for spreading hate speech. All these moves are seen by many people, regardless of political views, as terrible actions designed to punish common people for figuring out how to make some money while a multi billion dollar firm loses out for betting that a company would fail.
The basic questions, as I see them, are:
- “Is a private company allowed to stop people from buying a stock?”
- “Are a group of people talking in a public forum about which stocks to buy and why an illegal action (the SEC is trying to determine this as well)?”
- “Is it right to inflate a stock for the purpose of causing a hedge fund to fail, if that hedge fund and/or others have done similar things to stocks in the past that have caused people to lose money?”
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Now more perspective from Rich in Ct….
Near as I can tell, what happened is that users on a Wall Street “sub-Reddit” colluded to manipulate the stock market to harm institutional investors, and many more collaterally. Some of those users made a lot of money in the process of punishing the institutional investors for doing the same. Others bought into GameStock bubble just before it burst, and lost quite a lot.
The activist investors from Reddit noted that big hedge funds were attempting to “short-sell” the stock in failing videogame seller GameStock. The hedge funds sold thousands of shares of stock, and were contractually obligated to buy them back after a certain amount of time. They figured the store would go out of business, and they’d be required to buy back worthless stock, keeping the proceeds from the original sale as profit.
Some Redditors decided they believed in the company, and began buying up GameStock on the market. This caused the price to rise, and forced the hedge funds to buy back stock at a higher price than they sold it for.
Then it became personal. Redditors dumped their life savings into the GameStock. They wanted to cause the hedgefunds as much pain as possible by driving up the sales price. Due to convoluted trade structures, hedgefunds sold more stock than actually existed, forcing them to buy, resell, and buy the stock repeatedly, driving the stock price up 100x its pre-manipulation price. Trade platforms that make it easy for individuals to buy stock suspended trading GameStock, which has slowed the violent price fluctuations.
Some activists were believers in the GameStock. Some wanted to stick it to “the man.” Others were just excited to be part of something.
The stock market relies on rational economic theory, which posits that people will only act in their best interests. “Sticking it to the man” is not a rational strategy. People were will willing to take extreme risks with their own livelihoods on this stunt. One individual took his savings, current month’s income, and paid all his expenses on credit to “make it hurt” for the billionaire -owned hedge funds.
While it might not necessarily be unethical to risk one’s wealth chasing windmills, this event will cause collateral damage to many. Most hurt are individual investors hoping for GameStock to rebound. Their participation was prior to and without knowledge of Reddit’s shenanigans (although investing in a failing company is always a gamble). Then there are the fools and knaves who got excited and threw money at this – the slot machine was blinking, and they pulled the lever. They are victims, but do bear blame for knowingly participating in something they don’t understand. Arguably, the smart people who knew enough about the system to upend it bear much of the blame for making the world a more cynical and ignorant place.
“We did it, Reddit!”
Moreover, the stock market relies on good faith participation. Indeed, democracy itself relies on this. Individuals who collude to screw over big bank investors are no better than those they claim to be sticking it to. The FTC was created to reign in the most egregious of institutional manipulation of the markets. Investment funds continually push the limits, but no system can survive a ground swell insurrection from within.
Where ethics fail, the law steps in. The security of our nation’s capitol requires citizens to voluntarily not storm the gates. Only overwhelming force, antithetical to a democratic society, can protect the Bastille from falling. The free markets cannot survive individuals taking it upon themselves to screw around for the sole purpose of harming others.
The GameStock saga is ultimately an unethical stunt. Individuals abused their freedom to participate in the markets to harm others, unironically to harm institutional investors who they believe hurt the little guy. There are two options to respond: trust that individuals will behave in the future or barn door regulations that limit individual participation. History suggests the latter.
Ethics Alarms 
The barn door laws wouldn’t fix the problem, they’d just leave the big players free to manipulate stock prices in peace at the expense of the companies and individuals they choose to target. When the hedge funds decide to short a company, they make sure the word gets out to drive failures of confidence in the stock and force the price down. Ethically there is no difference in small investors deciding they can make money BUYING rather than SHORTING, and making sure the word gets out to drive confidence in the stock and force the price up.
Either both practices are unethical or neither are. If neither are (because this is an area of non-ethical considerations) then the small traders are fine. If both practices are unethical, then it’s completely anti-American to use the might of the government to say “individual citizens can’t do this, only large and powerful corporations are allowed to do it.”
Thank you for putting my comment as part of the explanation with the Gamestop stock situation. An update to the story: allegedly, Robinhood is selling people’s shares of Gamestop without the individual requesting the sell. Ostensibly, it’s to mitigate the individual’s risk, Multiple class action lawsuits are being filed against Robinhood, and both Representative Ocasio-Cortez and Senator Cruz want a hearing to determine whether Robinhood’s actions are illegal.
https://noqreport.com/2021/01/28/robinhood-forcibly-selling-shares-of-gamestop-without-users-consent/
Robin hood also sells personal investor data to tge hedge funds, so they aren’t so Robinhoody after all.
jvb
Point of clarity; When I wrote:
“So what happened here was that a lot of people thought Game Stop was undervalued, it was listed at approximately what I said it was, between $3 and $4 per share.”
What I meant was:
“So what happened here was that a lot of people thought Game Stop was overvalued, it was listed at approximately what I said it was, between $3 and $4 per share.”
I don’t know why, but sometimes I write the exact opposite of what I mean. It’s a problem.
I have that same problem. Fixed.
And it’s my fault. If I had the finance acumen of a bivalve, I’d have realized it was a typo. Sorry.
I have to disagree with you Andrew. The hedge funds are manipulating the situation just as stridently. Melvin capital was refinanced by citadel a larger hedge fund. Citadel also has a stake in RobinHood. The fact the stocks were put in a restricted selling list by robin hood and various other brokers, was to protect the hedge funds, at the expense of individuals who invested in the stocks whether out of belief in GameStop or just following the hype. Either way I believe this saga just highlights the serious issues in the financial markets and how they execute their business.
Apologies Andrew, I meant to disagree with Rich. My mistake
I don’t disagree. A blanket restriction on trading a particular stock is not ethical. Freedom is a powerful drug. When abused, the powerful will curtail the threat. Tit for tat may not be ethical, but it’s so predictable, that it would be incompetent to not consider it.
Tit for tat also isn’t unethical. Jack has made much the same point with regard to the how the conservative public should treat Biden. Tit for tat as punishment and disincentive is probably the only ethical response without a higher power to appeal to. In the case of elections, there is no higher power, in the case of stocks it’s the various financial regulators. Those financial regulators are however weak and inept so they are higher powers only in cases of clear cut illegal activity. Hedge funds routinely abuse the market through sheer weight of money attacks. A good example with shorts: it’s not uncommon for hedge funds, or their proxies, to engage in a period of rapid investment in dying stocks to temporarily boost their value, they then take a short position on the inflated stock and and stop their investment activity. The stock crashes and they profit from the difference that they created while screwing anyone else who happened to come along and buy the stock at the inflated price or anyone who held the stock originally since price has momentum it often bottoms out lower and faster than it otherwise would have. It’s illegal but very difficult to prove. Hell even the act of taking out a large short position is an attack in and if itself. People don’t like betting against hedge funds so if they come in and short a company in bulk, the stock is going to drive down because everyone will expect it to. Obviously this wont work against sounds companies like Coke or Google, but shaky ones in the middle of restructure or strategic pivot? Yep it’ll work just about every time. It also effectively kills the company since they can’t entice new blood and quality talent to the company with those sweet sweet tax advantaged stock offerings. Their stock is worthless.
Cramer (of Mad Money) did an interview maybe 10 years ago where he explained the many tactics he, and other traders, engaged in to manipulate the stock market up or down and he straight up admits that the SEC is incompetent. Search for “How Hedge Funds Manipulate Stocks” on youtube.
In the absence of competent higher powers the market will provide. In this case, it’s the mass of small public traders. From now on, no hedge fund will be able to safely engage in mass short attacks against a company and I think that’s a good thing. Small shorts? Go ahead. Manipulative big shorts? Get ready to get taken to the cleaners.
Side note: I work in corporate taxes, and dabble in non-traditional investments. I was in no way shape or form involved the GameStop non-sense. Historically the recommendations that r/WallStreetBets makes are losing ones so I don’t really pay attention to them. Now though, I’ll keep an eye on it. Even throwing small money into that bubble early one would have been crazy profitable but the real appeal is in helping the market provide a proper check/balance to large hedge funds.
Tit for tat here refers to engaging in unethical behavior in response to unethical behavior. I am referring in particular to the hedge funds cutting small players out of trading mid scandal, preventing them from acting in their own best interests. This is an abuse of the the hedge fund’s power, in response to what I argue are the Redditor’s abusing their power as individuals. It protects the billionaires, but exposes the fools who participated in the stunt to even greater risk as they no longer have control over their assets. It was a foreseeable response, and those who participated in the stunt without preparing for it were acting incompetently. Activist investors can certainly risk their livelihood chasing windmills, but they have an ethical duty to do it competently with minimal collateral damage to innocent parties.
I’m also going to go out on a limb and disagree strongly with Rich when he calls the people doing the noise trading unethical.
They might be stupid. If they thought that the GME bubble was real, they invested unintelligently, and the market punishes stupid people. It’s not unethical to invest stupidly, it’s financial darwinism.
If they did this specifically to profit of the unfettered greed of Melvin Capital. I’d like to point out that the only reason that companies like Melvin Capital were losing their shorts on this is because they were doing something that in my opinion is inherently unethical: They were betting against the interests of their clients. It’s amazing to me that someone can say something as asinine as “Moreover, the stock market relies on good faith participation. Indeed, democracy itself relies on this. Individuals who collude to screw over big bank investors are no better than those they claim to be sticking it to.” in this context; it inherently misses the forest for the trees. If Melvin Capital wasn’t doing this inherently scummy thing, then this could not have worked. Short trading is the definition of a bad faith participation: They took their client’s money, said they’d invest it wisely, and then used their own money to bet against their clients.
The stock market doesn’t rely on rational economic theory; it enforces it.
Interesting. Sen. Cruz and Rep. Ocasio Cortez want hearings. When they are on the same side something is wrong.
jvb
It’s not the first time. But don’t worry, AOC revealed she’s a partisan idiot again. https://www.theguardian.com/us-news/2021/jan/28/aoc-ted-cruz-gamestop-twitter-capitol
One especially interesting thing I saw in that article was Pelosi proposing to fine congressmen who bypass metal detectors at the entrances. Wouldn’t that be a violation of congressional privilege from arrest? It doesn’t seem like that would fall under “Treason, Felony, and Breach of the Peace”? It’s not an arrest per se though…
I’m also wondering if Cruz can prove actual malice regarding the claim that he almost had her murdered 3 weeks ago, or if would be treated as obvious hyperbole. It doesn’t seem obvious to me, but Poe’s law seems relevant here.
The frustrating thing about the Guardian article is that it never addresses Sandy Cortez’s monumentally vicious accusation.
jvb
Short trading is a legal and predictable behavior. You can argue it should not be legal, but it is. I don’t even disagree that it can be done in bad faith.
However, shorting the market does not justify launching a crusade, rousing thousands of fools into an investment strategy they do not understand, with predictably bad consequences for many.
“I don’t even disagree that it can be done in bad faith.”
Well, that’s mighty white of you. Can you describe for me what a good faith stock short looks like?
“However, shorting the market does not justify launching a crusade, rousing thousands of fools into an investment strategy they do not understand, with predictably bad consequences for many.”
Thousands of those fools made a whole lot of money. The guy who bought in originally has a GME portfolio valued currently at 18 million dollars and he’s *holding*. Of course some of those people will lose money, but I’m going to point out the change in tone between 2021 and 2012 for a moment.
See, 2012 was when Facebook did their IPO, their stock was at the time valued at approximately $20, and noise trading put it up to $40. Those noise traders lost half the value of their investment in the short term… And no one bat an eye. It seems to me like this newfound concern for noise trading bandwagoneers just so happened to materialize at the same time those noise traders became successful, as opposed to donating into the market.
Forgive my skepticism, but I’m not going to pretend that retail traders leveraging their collective investment power to make money, as a class if not individually, while pantsing some of the scummiest actors in finance is anything but glorious.
If a hedge fund is 140 percent shorted a stock ( like Melvin) and they got burned by other hedge fund(s) or an index fund(s). We would consider that fair. Yet when a multitude of retail day traders do its unethical. I am not excusing the ethically gray motivations here at all. It’s just the financial markets are so full of hypocrisy, madness like this is evitable outcome, much like the fallout from the latest US election. Yet the response to this hypocrisy from Elites is to paper over the cracks and point fingers at “the mob” for being extreme and disruptive. These disruptive blows to order and society will continue to fall, until the elites realise the mob is acting destructively as consequence of the Elites indifference to fair play between classes.
Inevitable*
An interesting post from a blog I started following recently:
https://marginalrevolution.com/marginalrevolution/2021/01/why-was-share-trading-restricted.html
As I understand it (and I have the same financial acumen as Jack)
A “Call” is a contract that allows the holder the right (but not the obligation) to buy a stock at a set price. A firm who has 1,000 shares of GME might offer 20 call contracts. Each contract is for 100 shares and can be sold for a premium. If the stock price goes down, no one will execute the contract because shares are cheaper on the open market and the contract expires worthless and the contract seller made money on the premium. If the stock price goes up, you can buy those stocks at the lower set price and you’ve “made money”.
Now, in my example, I said they offered 20 contracts at 100 shares each. They only have 1,000 shares, so their position is half exposed. If they sold these contracts and already held these shares, not too big of a deal, you just turn them over. But if you sell a contract from an uncovered position, well, there’s “unlimited risk”.
Contracts for “Calls” and “Puts” are sold for pennies initially but gain value as the market moves and they get closer to their expiration date. There’s a whole lot more to it that I’m omitting (The Greeks), but I’ll explain “Puts” which is the opposite of a “Call”
If you offered a Put contract, you are allowing the buyer the “right” but not the “obligation” to sell you shares at a set price. If GME is $3, I’ll sell you a contract that requires me to buy 100 shares from you at $2.75. If the stock goes to $1, you’ll want to go get those 100 shares for $100 and I’ll have to buy them from you for $275. If the price goes to $5, you won’t want to execute the contract and it expires worthless.
Now, did I get that all correct? I think so. It’s the most basic info as I understand it.
An explanation thread.
Here’s a simple solution. Make it illegal to short a stock. That would take care of a lot of the problems.
It’s not that simple. Shorting a stock involves dozens of actions, each of which is individually perfectly legal, and not necessarily unethical in isolation.
Although it would have a negative impact on the high end real estate in the Hamptons….
Pump and Dump schemes, which many people have compared this to, are unethical because the traders involved are exploiting an information asymmetry – in a classical pump and dump, traders talk up the value of stocks the trader already owns to the unsuspecting, and then skeddadle with the profits they can make, leaving the investors holding the worthless paper (highlighted in the movie Wolf of Wall Street).
Pump and dumps are inherently unethical, because it involves lying to people, pretending you have their best interests at heart, and then profiting off their trust. It is also illegal (but difficult to prove, especially when laundered through informal business contacts in the finance industry).
The situation with Gamestop is not a pump and dump scenario, but rather a short squeeze – a situation where organized investors, knowing the position of others, leverage a stock to damage the position of other investors. One of the key distinctions here is that almost everyone currently buying Gamestop knows the company has bad fundamentals, bordering on non-viability (fancy speak for should be bankrupt) – there is only a very limited element of investors who are being tricked into buying a worthless stock (ie, those who are investing without paying any attention to the news and reporting on the situation).
Some will turn a huge profit. Many may make a small one. More than a few will lose their shirts.
But most of the people doing the investing understand this – and they have decided they don’t care about potentially ending up with worthless paper. They want to to hurt the large hedge funds. It is not an unprecedented situation – there’ve been multiple instances of million/billionaires using the market in this way to target and damage/destroy personal rivals in the past, as well as companies using similar tactics to engineer failures of competitors.
What makes this unprecedented, is that it was accomplished a) openly (word of what was being done was publicly available for anyone who wanted to pay attention) and b) by tens of thousands of individuals working separately towards the same ends.
While I don’t know that you can call the redditors behavior ethical (since the motivation of most participants lies somewhere between economic class warfare, revenge, and spite), the situation was unethical long before r/wallstreetbets got involved – as Humble points out, shorts themselves are inherently unethical (or at least ethically questionable) instruments, and what the hedgefunds who stand to be majorly hurt by this were doing (where they had more shorts outstanding than there were shares of the stock in existence) was definitely unethical. Reading the discussions of the people involved, they felt the situation was on the same moral and ethical plane as the sort of financial chicanery which precipitated the 2008 recession – and many of them are quite open that this time, they want to make sure the financial institutions that keep doing this sort of irresponsible and unethical thing feel the pain.
Really, what we’re seeing here is a sort of mob vigilantism playing out on the financial markets – and that is exactly how most of the participants see themselves: as vigilantes, finally able to catch out the bad actors and actions that the appropriate regulatory authorities have proven to be unwilling to punish, time and time again.
Which brings us back to the question of vigilantism – the general position we end up coming to on the site is that vigilantism is almost always unethical, and that the rare cases where it may be justified have to be evaluated on the basis of utilitarianism.
I don’t think this situation will ever pass that utilitarian test.
But from a schadenfreude perspective… I’m gonna echo Humble here, and say that it is glorious to watch the bunch of unethical bastards get what they should have years ago. Maybe they’ll learn that the market isn’t a plaything this time.
Also, my popcorn futures are doing really well.
GME stock (coincidentally, I’m sure) fell after Robinhood prevented its users from purchasing more and it closed down from yesterday, but still at $193.6 for the day. It’s gone up to over $311 during after hours trading. The word on the subreddit all day has been to hold and that hasn’t changed.
This story isn’t over.
There’s already been class action suits against Robinhood, and there should be. They’re trying to blame their clearing house, which said that it didn’t have the liquidity to handle all the trading going on. I flat out think that’s a lie and I was enjoying the idea of going to enjoy discovery, but Robinhood apparently had an arbitration clause that would preclude a class action lawsuit. I don’t know what happens, but they’re dealing with Reddit memers, if they say that the class has to file for arbitration separately, they’ll have 1000 arbitrations to pay for.
That said, I’m not convinced that dip was entirely Robinhood’s trading halt; We have to remember that GME is properly valued at less than $3. It’s obviously a bubble, and once the short traders rebuy their losses, what’s left is just a great big pile of noise. While it’s fun to meme, there were going to be people who’s meme appetite bottomed out and their risk appetite topped out, and they bailed, those people bailing will start to correct the price. I don’t know how long the legs on this are, but eventually, GME is going back down to $3.
Yep, this would be really interesting to see exactly what happens. A bunch of people bought stocks for $4 that are now worth almost $400, but once they start trying to cash out on that en masse, the price will drop and everyone who was a bit late to the party and paid closer to $400 are going to be left out.
I’m sure this will make for a riveting movie called “The Big Short 2: Electronic Hullabaloo” starring Steve Carrell.
I’d watch it.
“The free markets cannot survive individuals taking it upon themselves to screw around for the sole purpose of harming others.”
I disagree. The market is incredibly good at shedding little blips like this. It has a habit of destroying people who don’t know what they’re doing and it will correct itself over time to where it needs to be. As for it being unethical, this is the way, truly and factually the WAY your bulk commodities are priced. To say that the stock markets are met with more basic fundamental strategy than commodities is grasping for rainbows and unicorns. We may wish it was based off of fundamentals, but it isn’t.
The description of puts and calls is accurate.
This trading fiasco is incredibly funny. Gen Z literally has nothing to lose. It’s cute people think closing Reddit will stop them. They are far, far more nimble than you or I at navigating social media and collaborating, apparently. It’s not illegal. Not even close. This was like the Trump ticket purchases. Each one did it, individually, as a unit. There’s nothing inanely un American about it either. They saw a chance to make a point, perhaps a dollar and took it.
No, the government shouldn’t get involved. There’s nothing to say thousands of individuals can’t buy public stocks. It wasn’t secret. It was announced on a public forum. I currently don’t think the government could pull out a splinter without causing more damage. The hedge funds thought it was a sure bet, they failed to cover their collective asses, and they lost. Ahem… 2008-2009 market collapse anyone? It’s cute they think that a few Reddit investors can cause more chaos than they did in the past, and no doubt something again will happen.
That said, it’s definitely nearing an ethics train wreck.
1. Reddit users investing for spite or revenge or something other than to make money and use the markets for its intended purpose.
2. Reddit caving to pressure to close the thread.
3. Hedge funds crying foul for others doing what they do, but with – ahem – assumed less pure purposes than they have.
4. Hedge funds calling for government intervention.
5. Robin Hood app selling the stocks back without their owners permission. “For their own good”. Really?!
I’m sure there’s more, Ben Shapiro’s Daily Wire episode has a very nice summary of it all, minus the Robin Hood app, which happened later.
It includes the bit where Biden’s press secretary evades the Game Stop question by referring them to the (female!!!) Treasury secretary.
Sorry, reply failed, responded below.
A) The market is incredibly good at shedding little blips like this.
That is not the point being made.
B) This trading fiasco is incredibly funny.
Yes, I actually do agree.
C) No, the government shouldn’t get involved.
But it will, and this is entirely predictable. There are many things that shouldn’t be regulated, but are.
D) That said, it’s definitely nearing an ethics train wreck.
1. Reddit users investing for spite or revenge or something other than to make money and use the markets for its intended purpose.
2. Reddit caving to pressure to close the thread.
3. Hedge funds crying foul for others doing what they do, but with – ahem – assumed less pure purposes than they have.
4. Hedge funds calling for government intervention.
5. Robin Hood app selling the stocks back without their owners permission. “For their own good”. Really?!
On all five points, I agree.
“1. Reddit users investing for spite or revenge or something other than to make money and use the markets for its intended purpose.”
I don’t get this take…. Could you explain to me what you think the intended purpose of the market is?
Because the stock market is an information game. In an environment with perfect information, no one would be able to get much behind or ahead because all stocks would be properly valued, and people would get their flat 2%ish dividends. That’s obviously not what happens in the wild. People win or lose on a long enough scale because their information or predictions are better than the other people in the market.
In theory your losses in the market would be limited to what you invest in it: You buy a stock, if the stock crashes, you have a penny stock. Sad. Short sellers open themselves up to unlimited risk; They thought they had more information than the sad saps buying GME stock, and so they wanted to make some quick money off the losses of their client and those sad saps. So they sold stock they didn’t own with the intention of buying stock back, leaving their backs wide open to whatever price eventually hits. This is all obvious and open, so a group of people attempted what’s called a “short squeeze”, they just weaponized some good old fashioned internet autism to get it done, and this one was historically successful.
Important against your point, the Redditors *are* making money; the reason Melville Capital et al is talking about losing Billions (more than I originally thought) is because that’s how much money the Redditors, as a class, are making. Melville’s losses are going somewhere, these aren’t equity gains or losses. They’re able to do this by leveraging the publicly available information and their collective buying power to do something that previously had only been done on smaller scales. They didn’t invent anything new, they just did it big, and the wrong kind of people are making money, so they’re being painted as uniquely and deeply evil. I’m not buying that. If another capital company was able to pull something like this off, they’d be heralded as geniuses by their peers, and you probably wouldn’t know about it.
My mother and my sister have been treating the stock market like a slot machine the last couple days, buying low and selling high over and over as the stock dips and rises. They have pulled out quite a bit of money. So people are definitely making money on it. Eventually, the stock will go down, and anyone who leaves money in there will lose it, though. I think that is what Demeter means.
I read that the stock was originally $20ish a share, and the short sellers drove it down to $3-$4 a share. So maybe the value is actually a bit higher than $3-$4 in the first place? Total, all the hedge funds together are looking at about $70 billion in losses if the prices stay where they are throughout today. Some people will pull their money out before the stock crashes again, and take some of that money, others will wait too long and lose their money.
I do know one thing, people on both sides of the political aisle are quite gleeful about taking the hedge funds down a peg or two. Unity! There IS something people agree on. Hedge funds deserve to get mobbed. I think that might be an indicator of something.
I agree with everything except the last paragraph. I think that people are getting to the same place in different ways, the commies are gleeful because Reddit is eating the rich, where I’m not gleeful that someone is taking down hedge funds, I’m gleeful that someone is taking down scummy, short trading hedge funds.
It’s kind of like the second to last scene of an action movie, where the protagonist kills the cold blooded, murderous psychopath of an antagonist. It feels good.
I didn’t mean to imply that both sides were happy for the same reason. I’m sure they have entirely different reasons. I agree with you. The GameStop fiasco is a lot like watching a movie, and the hedge funds are the Big Bad Guy you want to watch get their unhappy ending while the underdog protagonist gets a big reward.
The stock market is not nor has it ever been about ethics, merely “legalities”
If the Hedge fund had a short of over 100% of the total stock they are either stupid or doing an illegal thing. That someone noticed they were doing this is neither illegal or unethical, whether it was a big firm or a bunch of folks using their collective money to make more. Will it harm the investors in the Hedge Fund, of course.
Anyone care to unpack this one now: “Short selling plays an important role in efficient capital markets, conferring positive benefits by facilitating secondary market trading of securities through improved price discovery and liquidity, while also positively impacting corporate governance and, ultimately, the real
economy.” ?
Click to access CCMR-Statement-on-Short-Selling.pdf
Aside:
I can’t even access my Robinhood account right now. It wants a secondary verification after I enter my password, and will only send a code by SMS, not email. Each time I attempt it, it says it has sent a code, but none ever shows up on my phone.
I dabble (gamble) a small bit in cryptocurrency movements, and could have made a few bucks over the past few days if I had actually been able to get in.
I profess in the sincerity of my heart, that I have not the least personal interest in endeavouring to promote this necessary work, having no other motive than the publick good of my country, by advancing our trade, providing for infants, relieving the poor, and giving some pleasure to the rich. I have no children, by which I can propose to get a single penny; the youngest being nine years old, and my wife past child-bearing.
So, we should eat the hedge fund managers? (Or maybe feed them to pipeline workers?)
That may not be the message you meant to convey, but it’s what I’m going with 😉
My point was more that with enough imagination, you can propose almost anything.
The author’s main point in that was that shorting positions serves the market by protecting against a bias for stocks to be overvalued. That’s almost cute when faced with the reality of how shorts actually effect the market.
Ah, OK…Can we eat them anyway?
Today’s WSJ editorial, “The Reddit Wolves of Wall Street”, was quite one-sided. I found two particular quotes ‘a bit’ condescending:
https://www.wsj.com/articles/the-reddit-wolves-of-wall-street-11611877164?st=jrvgegim7dkg5hi&reflink=desktopwebshare_permalink
1) ” Hedge funds are sophisticated investors and know the risks”
Yup, provided that you play by their rules. OTOH, when others engage in asymmetric warfare…Katie, bar the door!
2) “How about reminding people that investments carry risk, that stocks fall and rise, and that the GameStop losers won’t be bailed out?”
So, was that comment directed at the hedge fund short-sellers or the Redditers? Also, IIRC, earlier this week there were rumblings about the unfairness of the situation and having the Government bail out…the hedge fund short-sellers.
When discussing this with a friend who had spent years as a Wall Street investment banker and was invested in hedge funds, I commented that, as an outsider, the same sorts of opinions that were being shared on Reddit were also being shared among hedge fund managers; in a much less public manner. He asserted that opinions were shared, but with a time delay (minutes to hours) that reflected your standing with (value to?) your colleagues.