And how is Robinhood shutting down the ability of investors to buy GME the market doing what it should? Should the government intervene in this case, or can you come up with another way in which this is actually another instance of the holy free market in action solving its own problems?
Edit: I’m not actually saying you’re wrong, and middlers is an interesting analogy, but it can get tiring when all you’ll ever talk about is how the free market, in all its holy perfection, fixes itself, and habitually and reflexively ignore or fight against obvious cases for regulation. I suppose you’re just picking your battles, but the end result of only ever talking about one side of the issue leaves this impression.
Good post, Sam. I’m pretty sure we ideologically differ on a lot but this was a solid post even if I’m not sure we’re still in agreement on the bigger picture.
I have no problem at all letting market forces sort out companies like Gamestop; the problem I have in this instance is that their value is being pumped up artificially by virtue of a modern technology that makes pump/dump scheming easier, and GME’s value will inevitably come back to earth - and probably hard. I guarantee you that the biggest takers aren’t going to hold forever; they’re going to take the money and run, and that’ll leave everyone else hurting.
I agree that this WSB has exposed the hypocrisy inherent in the system, and you may have a point about the current regulatory structure making a space for hedge fund betting. I have my preferred method of dealing with irrational exuberance: taxation.
If the short seller goes bankrupt and cannot repurchase and return shares, it becomes the broker’s responsibility to repurchase and return. If the broker cannot fulfill and so becomes insolvent, it becomes insurance’s job to repurchase and return. SIPC insures share counts, not dollar values of shares.
Just to add, the narrative is being written as some sort of little-guy vs. big-guy conflict because it makes for compelling story. But it bears keeping in mind that there are plenty of heavy hitters taking the long position. It’s not really just a ragtag band of online folks, standing in solidarity, holding the line against the big bad hedgies. We’re talking about billions of dollars in daily trading volume plus whatever volume is coming out of the options markets. This isn’t happening just because Joe Redditor is gambling his rent money on 5 shares and giving the middle finger to Melvin. A more accurate portrayal is probably institutional vs retail, with some institutional along for the ride on the long side.
I didn’t say anything about that. Since it’s possible that Robinhood shut them down to protect Citadel’s capital, of course they should be investigated.
And you can cut the snark. I have always said that there were lots of ways for markets to fail.
What sort of business investing opportunities are available to someone who has, for example, $2,000-$5,000 to invest?
When you’re in the stock market, you can always sell stock you own on short notice if necessary. You might take a significant financial hit, but if you need cash really fast, you can do it. If I have a few thousand invested in a business, what happens if I need that money in a hurry?
I’m not sure what point you’re making here. ISTM you’re saying that any buyers or even holders at these prices are not “rational” but instead are people doing so based on the “short squeeze” dynamic. These are exactly the people who are going to lose money when the short squeeze runs out of steam.
Melvin Capital’s loss is based on the spread between the price at which they sold the stock pre-squeeze and the price at which they bought it back during the squeeze. Assuming that Redditors bought the same amount of stock at those same pre-squeeze prices and sold the same amount of stock during the squeeze, then they would collectively be up by that same amount. That’s apparently not the case, though. Many of the Redditor purchases were done after the ball got rolling (and are still being done today) at prices much higher than the pre-squeeze prices, and many of the higher priced squeeze-based sales were not being sold by Redditors but rather by pre-squeeze purchasers, and by other hedge funds. So those people are the real winners.
FWIW, if you hold the stock and sell short then you’re effectively canceling out your long position, so there’s no point of making a separate short sale. But leave that aside.
The problem is that “the way up” and “the way down” are not independent of Redditors buying or selling their stock, and the more they sell the faster it gets back to the bottom. So they are going to have to sell some at close to the bottom. Of course, they bought some at close to the bottom too, when it was just getting started. So the way to look at winners and losers is: “were this group collectively net buyers or net sellers when the stock was at its unrealistic short-squeeze driven highs?” Any net buyers will be losers in the end, any net sellers will be net winners.
I don’t understand what this means.
I don’t know the slightest thing about Redditors, but I have a view of how this is going to end for them, financially.
I don’t know who is upset about what. This story has definitely attracted much more public attention than the Robinhood shenanigans - including this thread - for various reasons.
That said, I think the Robinhood “robbing their customers” issue is more complex than you or the SEC are portraying it. As I understand it, Robinhood was the pioneer of commission free trades, which is what enabled a lot of retail stock traders to participate in the market to begin with. Any time you offer to do for free something which costs you money you need to make up that revenue somewhere. “There’s no such a thing as a free lunch.” Apparently the way they did it was to sell their book to big traders, which has negative consequences for the retail traders. But it’s a trade-off, and not a straight-up robbery as you would have it.
Interestingly, I read an article the other day about a very similar issue which was described as a battle between Apple and Facebook - really, a battle between their business models. The Apple approach is to make their money be charging people for things. The Facebook approach is to offer free things, but then to make their revenue by gathering data about their ostensible customers which they then sell for companies for use in running targeted ads. Apple wants to strengthen the privacy of their people which would allow them to block Facebook from doing this and cut off their source of revenue. Facebook says that doing so would have the unintended consequence of making things people take for granted as being free no longer viable without payment. (I would guess whether these things are worth paying for varies by person, but this may be an example of a situation where the collective interest may not be served by each individual acting in their own personal interest. But that’s perhaps another discussion.)
You: Everyone wins except Redditors. The long term holders, the hedge funds, just not the Redditors.
Me: ??? It’s likely that the long term holders either sold to Redditors (as evidenced by the price increase) or they’re in on the game and become effective Redditors.
But let’s change the names because as much as you say you don’t have disdain for Redditors, I’m not sure why you’re categorizing only Redditors as losers. Let’s change the names to retail investors vs. hedge fund investors. That way, it’s clearer that the original holders are also Redditors in the way that you’re describing it.
Why is this necessarily true? Some Redditors have had this plan going since Sept. 8, 2020, long before the rise in price. How do you account for the low level of trading and for why the price hasn’t already plummeted? If there are only a few Redditors who got in after the price skyrocketed, why aren’t the original sellers, who have nothing to do with this, selling off and bringing the price back down before now?
It would have to be the case for Melvin Capital to buy from retail investors at a price above what the retail investors originally bought or Melvin Capital would be at a gain. So as between retail investors and hedge funders, the retail investors are up $2.75B, assuming this money was in trades and not to other hedge funders which is unlikely.
Now it seems like you’re saying that the retail investors ran up the price buying and selling to each other and will cannibalize the price back down to the original level. That might be true. But the reason that people are holding on to the shares is because the stock is still 121% short sold after the Melvin Capital deal.
At some point, the short sellers will have to cover their short positions, so they’ll have to buy stock to do that. At that point, depending on what price this happens, it will answer your question here.
At the point when the hedge funders have to cover their short positions which is now 121% of the stock, they will become net buyers. If the hedge funders can wait it out until the stock drops below their short position, they’ll win. If they can’t, then they’ll have to buy at a higher price and sell at the lower price which is what happened to Melvin Capital supposedly.
It means that short sellers become buyers when they have to cover their short position. Short sellers are not sellers in the way you’re using the term because they don’t own the stock. They have to buy it to resell it. At that point, they become buyers.
We’ll see. Might there be some retail investors who get burned by transacting in the bubble? Probably. But from what I’ve seen on r/wallstreetbets, I’ve not seen a single person who wasn’t willing to lose their entire investment on this. And there are cautions about the risks there all the time. If a retail investor got burned in the bubble, they probably weren’t reading the subreddit very carefully or at all.
Here’s some analysis where the strategy got started on the sub. The original analysis was posted Sept. 8, 2020.
In that case, Robinhood wasn’t fined because of their business model. They were fined because they were misleading or deceptive about it. But I will say that I think there’s a difference between selling information about users on Facebook to show them ads and selling investor information to their competitors without telling their customers.
The original holders are not Redditors for purposes of this discussion because they didn’t buy based on a strategy to cause an organized short squeeze. In aggregate, the people who bought at ~$15 based on company fundamentals would be sellers at current prices. So they emerge as winners. The point here is that those who bought and continued to buy as part of a strategy of causing a short squeeze will inevitably be losers in the end, because the short squeeze is unsustainable.
I’m not sure what you mean by “original sellers” - they can’t sell off because they already sold. Do you mean “original buyers” (i.e. pre-Reddit people)? If so, I would assume that many of these people have already sold, but that at this time there are enough buying pressure from Redditors to keep the prices where they are. But I don’t think they can maintain those prices indefinitely.
Right. But there are a lot of stocks which are heavily shorted and which don’t rise. In fact, it’s common for those stocks to decline further, which is why they get shorted in the first place. (The short interest in stocks is a publicly available number, so it’s not like the people who shorted it up to that level were unaware of it.) If the short thesis is correct, what happens is that the company’s weakness manifests itself further and further such that people who own based on fundamentals sell more and more. What’s different about this case is that there was an organized campaign for a bunch of people to all buy the stock at the same time, which caused the short squeeze. But if that campaign fizzles out, then the mere fact that there’s a high short interest doesn’t mean that there has to be comparable buying pressure to what there is now.
I myself have not been reading r/wallstreetbets, so I don’t know. But even if these people are willing to lose their entire investments over this, ISTM that they’re losing their investments over nothing. Because if all they’re accomplishing is making some hedge funds lose big while other hedge funds gain big - something that happens all the time - then they’re paying a lot for what is ultimately a meaningless accomplishment and all they get out of it is a temporary high based on the false notion that they’re crushing “the hedge funds”. Personally, I would just get some booze.
Right. All I said was that it’s more complex than just “robbing their customers”. They were taking an approach that benefited their customers in some ways and hurt them in other ways, and - per the SEC - didn’t disclose enough of the downside.
Here’s why I’m dubious about your theory. One of the guys who first got in on the deal started buying at $8. I didn’t go through all of his trades, but here’s one for 50K shares at $14.89.
Here’s a little about the guy from a story in Esquire
Granted, he was one of the first to buy in, but I’ve seen several receipts in the sub that had a purchase price of between $15-20. Of course, there are also a lot of people buying in now, but clearly not all of them.
There are a number of things that make GME unique. There are a relatively small number of shares available and a lot of them are held in institutional portfolios that can’t sell. So yes, this doesn’t happen with every stock that is short sold.
I’m grateful for the people in WSB. Whatever their reason or motivation, they’ve already gotten one short seller to change focus and get out of the market and another to take a huge loss. If all that happens is that hedge funds get a little less brazen, that will be a plus. But I also think it shined (shone?) a big light on how unfair the financial markets are and how the deck is stacked against the average person. If somehow that got people to change the system in even a small way to level the playing field, I’d be even more grateful that they did this.
I’ll stand by my word choice. If a company takes $34.1M of value from its customers without their consent or knowledge, that’s robbery, whether it’s complex or simple.
There are exceptions to everything (as you subsequently acknowledged).
That’s why I keep using terms like “net” and “aggregate” and “collectively”.
No doubt some Redditors will do quite well. But collectively, the group which bought based on the short squeeze will have bought high and sold low, and will in aggregate lose money.
[Worth noting, BTW, that the concept of a short squeeze is not a new one, but typically doesn’t come about in this manner. Typically, it’s a naturally occurring event, so to speak, in that the basis for the initial run-up is genuine.
For example, suppose you have a company whose entire future is dependent on the outcome of a certain court ruling. Smart money says the ruling will go against them, for which reason the stock is heavily shorted. Now the ruling comes out in their favor. At this point the stock is going higher, shorts or no shorts, but the impact of the shorts needing to cover is will magnify that increase. If you were fortunate to own the stock or prescient about the court ruling, then you can take advantage and cash out at the top.
The difference here is that the entire basis for the short squeeze was the buying pressure from Redditors, and not any genuine change in the company’s prospects. This meant that the Redditors had to be buyers on the stock on the way up and not just sellers as would typically be the case - especially since the shorts, who were aware of that it was an artificial runup, weren’t going to cover until they absolutely had to.]
I have the opinion that the special treatment of capital gains should be limited to IPO shares - those represent a real investment in a company. People say “I’m investing in Google”, but Google doesn’t see a dime when you buy my 10 shares of Google.
I realize it is unworkable, but it would highlight that subsequent transactions have little actual effect on a company’s operations (except to the extent they can use stock to buy another company).
The second transaction makes the first transaction possible. People are only willing to invest in a company if they know there’s a market for reselling their shares. So Google benefits from that second sale.
[FWIW, I think capital gains should be taxed the same as any other income, but indexed for inflation. Also, I think there should be no inheritance tax but all capital gains should be taxed at death as if it were a sale. But that’s venturing afield …]
I’m aware. In my “if I were king scenario”, each subsequent transaction would have reduced tax advantages (or stop treating capital gains differently, that’s cool also).
And if Google shares only have value because there is a “greater fool” to take them off my hands, then that seems like a problem also. The dot.com bubble (along with tulips) was an example of things being valuable because everyone agreed they were (along with the Kardashian’s and the Gabor sisters back in the day). No clue how to fix something like that, of course.
What I was describing has nothing to do with the “greater fool” aspect. That’s when the entire value is the greater fool. But even something which has genuine value is significantly less valuable if you can’t sell it. That’s why illiquid assets sell for less than liquid assets (all else equal). Something which can’t be sold altogether is the ultimate illiquid asset.
As GameStop’s stock plunged nearly 60 percent Tuesday, the online horde that had raced to invest in the “meme stock” scrambled to reckon with the financial bloodshed, wavering between a desire to sell and settle for heavy losses or stick with their online peers who had admonished them to “hold the line.”
In interviews Tuesday with novice traders on r/wallstreetbets, the gleefully reckless Reddit forum that helped fuel the onslaught, several said they were holding out hope that the hyperinflated stock would turn around.
But others expressed deep turmoil, posting screenshots from their online banks and brokerages to the forum that, in some cases, showed hundreds of thousands of dollars vanishing in a matter of hours.
“As the cheerleading and rage against the machine dies down,” Mark Taylor, a sales trader at Mirabaud Securities, told Bloomberg on Tuesday, “the man on the street is left holding the bag again.”
This is circular reasoning. You’ve defined the group of Redditors to be the group of people who bought when the price was rising. So yes, the group of people who bought GME on the rise will lose when the price falls. I don’t agree that all those people are Redditors I also think that in the aggregate, money was transferred from hedge funds to retail investors, so overall, I think the retail investors did make some gains. But since you have defined Redditors as anyone who was above the threshold of anyone making money, you’ve defined out the possibility of any of those people to be Redditors. Of course, I don’t agree with your assessment, but I won’t be convincing you of that, apparently.
This is not entirely true. There were some changes in the company that led DFV to invest at $8. In Nov. 2020, Ryan Cohen former CEO of Chewy bought some stock and sent a letter to the company’s board.
Cohen wants Gamestop to become more involved in online gaming. The institutional investors are looking at Gamestop like the failing Blockbuster was. But at the time, Blockbuster could have pivoted to become the next Netflix. The problem with Gamestop becoming a major online game player is that, unlike Blockbuster, the online gaming world already exists and is thriving, so Gamestop would have to break into that field and take away market share.
I heard an interesting idea earlier today that Gamestop stores could become like VR centers. I don’t know what kind of capital investment that would take, but it’s an interesting idea.
lol Even he doesn’t just say that these were only Redditors. I agree with him.
In other news, Mark Cuban did an AMA on WSB. He said that the reason that the squeeze wasn’t more successful was the failure of Robinhood to provide the ability to keep pressure on the buys.
Having watched it, I have more questions about how GME went from 121% short sold to supposedly 39% short sold on very little trade activity. But I’m not really looking at the original numbers, just some articles I’m reading.
Steve Huffman, CEO of Reddit who changed his avatar to Diamond Hands, also weighed in on the conversation, although this must have been from several days ago…
This part is hilarious to me. IMO, Steve Huffman gets it.
That’s not correct. (Where did you get this from?)
I’m using the term Redditors to mean the people who bought as part of the Reddit-organized short squeeze effort. I believe this is how most people are using the term.
