People with inside knowledge and ability to affect the actual workings of a stock are fairly limited in what trades they can make.
It’s not that they are using company funds, it’s that they represent and control the company.
If they were doing it behind closed doors, then I believe that that could have been considered to be illegal. I am pretty sure that hedge funds aren’t allowed to call each other up and coordinate their trades.
But, since they did it entirely on a publicly available messagebaord, with absolutely full transparency, they we operating with the same publicly available information as everyone else.
What these hedge funds were doing is a somewhat risky endeavor, but if it works out, they stand to profit from everyone else’s loss. It will be interesting if, going forward, they stop this practice, as it’s arguably not really good for anyone but themselves.
It will at least somewhat depend on how the members of WSB fare in the end. They didn’t really do it to make money, but if they ended up losing a ton of money in the process, it’s not really a sustainable way of keeping hedge funds “honest.” OTOH, if they managed to make money off of it, or even breaking even, then I would almost say that massively short selling companies may end up being a thing of the past.
The smart ones sold. The dumb ones bought once this hit the news and are trying to catch a falling knife - a lot of them are going to get sliced badly.
If 10 people each bought a million dollars worth of GME well up in the run-up those 10 people are going to take a bad hit when the price collapses.
If 1 million people each bought 10 dollars worth at the same point and then experience the same price collapse, the collective hit is the same, but any individual’s harm amounts to two visits to Starbucks.
That’s part of the power of this crowdsourcing idea. If you can persuade a big enough army to each do a small thing as much for lulz as for profit, then you’re swinging a really really large bat with no necessary target other than mayhem.
That’s also part of the problem. A lot of people seem like they are fine with what’s happening because it seems to be happening to “Evil Wall Street Hedge Funds”. But do we really want a financial system where a bunch of idiots (spurred on by some very smart people with their own ax to grind) swinging a large bat can create lots of mayhem.
IMHO, it’s not really any different from the Capital riot or BLM riots (not to be confused with those who protested peacefully). It basically amounts to a system where enough people feel doesn’t “work” properly, such that they feel justified in trying to smash it.
Yeah, but isn’t not as though the giant bat is able to hit just anything.
The only reason that this works is because the hedge funds had severely overshorted GME.
If they just wanted to inflate the price of a particular stock, that would be fairly pointless and wouldn’t have any effect on anything.
It’s only because the big players were playing a dangerous game, one that is arguably not in the best interests of the economy overall, that this works.
If this discourages funds from running up 140% shorts on a stock, then that will actually improve market stability.
It really is very different from either of those situations, which are also very different from eachother.
Here’s the sequence of events as I understand it. It was essentially a series of waves of investors each reacting to what the previous wave had done.
GameStop is a company that runs brick and mortar stores that mainly buy and sell used video game cartridges. Because of changing technology, their market is shrinking and they are experiencing long term problems. Their stock price was dropping.
Ryan Cohen is a star in the financial world. He bought a significant share of GameStop stock and then maneuvered himself into a leadership position of the company. (I’ll admit I don’t know why he did this. Cohen has made public statement about how bad the prospects are for GameStop.)
A lot of people thought “Wow, Ryan Cohen. He’s a really smart investor. If he bought into GameStop like this he must have a plan. He’s going to somehow save the company. And I want in.” So people began buying GameStop stock and the price began rising.
Professional investors thought “GameStop is doomed. There’s nothing Cohen can do that will save it in the long run. Those people who are buying stock are fooling themselves. Once they realize the truth, the stock price will plummet back down to where it belongs based on the company’s real value.” So these investors sold shorts, which is what you do when you think a company’s stock price will be dropping. You collect the money now in exchange for a promise to deliver the shares at a fixed point in the future. You don’t own the shares yet. What you’re hoping for is that the stock price will drop before you need to deliver them and you can buy the shares you need to deliver for less than the price you’ve already collected for them.
The final wave was the online investors who saw what these professional investors had done and thought “These guys are committed. They’ve already sold the stock and will have to deliver. Which means they will have to buy shares. We can buy up the shares now, which will raise the price instead of it going down like they were expecting. But they still have to buy those shares, so they will have to pay us that higher price.”
The professional investors saw this happening. They realized the price wasn’t going to drop as they had predicted. So they abandoned the plan of waiting for the price to go down and started buying shares at the current prices which they now figured would be lower than the future prices. This purchasing of shares by the investors preparing to cover their shorts was added to the purchasing by the online investors and the purchasing by that earlier group who believed in Cohen. All of this purchasing pushed the price of GameStop shares to ridiculously high prices.
I’m guessing the bubble will pop when the dates on those shorts arrive. On those dates, the professional investors will have to deliver the shares they promised. If they’ve been able to buy enough shares before then, they’ll deliver those. If they haven’t, they’ll have to buy shares from the online investors. Which way it goes will determine who ends up losing money. Because either way, once the shorts have been delivered, this situation is going to disappear and the share price will drop back down to the level based on the value of the company.
If a bunch of idiots Reddit can fuck you over to the tune of billions, maybe these financial wizards should think ahead and do something to manage their risk profile.
I just wanted to thank everyone in this thread who took the time to explain the situation and/or posted links to help others understand. This thread is a fantastic example of what’s best about the Straight Dope Message Board.
Watch the classic movie, Trading Places, and substitute Gamestop stock for frozen concentrated orange juice, and you pretty much have the plot here.
In the end, a lot of short sellers are going to lose a lot of money, a lot of initial individual investors who ran up the stock price are going to make a lot of money, and a lot of late individual investors who are speculating on speculation are going to lose a lot of money. And since you can only define “early” and “late” after the inevitable crash happens, this is just gambling on a stock whose price is entirely divorced from the fundamentals of the company itself, which is at this point completely incidental to the story.
I don’t know the slightest thing about Ryan Cohen or why he bought a significant share of GameStop. But in general, it’s not uncommon or irrational for Big Money people who think a company has bad prospects to buy a controlling interest in that company.
The basic gist of things is that these people think the company has dismal prospects if they keep doing what they’re doing now. But if they make radical changes in their business model or the like, then they can be worth more than the current stock price indicates. So the idea is to buy a controlling interest in the company, radically change the company’s direction, and maximize the value.
You see this type of thing in the case of old time Blue Chip companies which have fallen on hard times due to changing business conditions. These companies can frequently lose money for years and years, with significant doubt as to whether they can turn it around. But they also frequently own significant assets, e.g. real estate or shares of other companies. So someone who believes the business model is still viable might keep spending down the company’s assets year after year while hoping the latest turnaround plan is going to work. The market, which is frequently skeptical of that plan, will bid the value of the company lower than the value of the assets, since they’re assessing they will eventually be spent down. But suppose you’re an outsider with Big Money who thinks the company’s prospects are dismal. You take over control of the company, shut down whatever the company is losing money at, and then you have the full value of the assets.
There’s no such thing as a date on which shorts arrive. Short positions can be held indefinitely.
You may be confusing shorts with options, which are buy/sell contracts tied to specific delivery dates.
But once the Russians (or whoever) start swinging this bat at real companies for a real reason that isn’t financial, then what? I’m no fan of unrestrained finance-centric capitalism. I’m also no fan of seditious vandals with big mobs for muscle and possibly foreign governments for brains.
I don’t see what good it would do to drive up the price of a healthy company that is not being severely shorted.
The only reason that this worked is because the hedge funds overextended their positions, ending up with 140% of GME’s stock being shorted.
It doesn’t hurt the company, it doesn’t hurt regular investors, it only hurts those who are already trying to manipulate the market for their own profit.
In the minds of the Reddit gang, they’re the gorilla and the hedge funds are the guy in the gorilla suit.
In reality, both are Reddit trolls: the ones who know they’re trolling and “I’m gonna hold no matter what” is a lie will get out before it’s too late and are the gorillas, the fools who don’t get the trolling/“ironic” nature of the group and actually try to ride it out are the ones in the gorilla suit.
The guys shorting the stock had access to enormous bully pulpits to run it down. That has to be part of the context here–reddit running it up is the other side of a coin that’s been in play a long time.
In the vast majority of covered shorts, the lender of shares can demand them back at any time, with little notice. If I’ve shorted that stock & think it’s going to keep rising substantially, I’m returning the shares now rather than wait for them to get called later.
I assume you mean the broker can call them back. (The lender has no idea that his shares have been sold.) The broker can call in the shares, but that’s not tied to a specific date, as the poster I was responding to implied. That’s generally a margin issue.
[I’m not sure what you mean by a “covered short”. A covered short would mean that you own an offsetting call option and are thus protected against price increases. But that’s a completely separate transaction and wouldn’t make the short any more callable.]
That’s true regardless of whether or not the shares can be called.
