The reddit people aren’t in it for the money; they’re in it for the pain. They’re trying to hit a very specific target and are ok with any collateral damage (including self damage) that occurs in the pursuit of that target. The redditors are fine. The price has already been factored into their involvement and the costs are fine with them.
The people who hopped onto the bandwagon (individual investors) who hopped onto Gamestop when they saw it take off without bothering to dig into why or ask questions about how or what or think that they can time it perfectly are likely to lose.
Part of me is seeing this as kind of poetic justice (or maybe ironic justice?). Melvin Capital doesn’t have clean hands. I have a hard time taking their complaints. I have a hard time with letting the part of the institution that enabled them for so long suddenly have a crisis of conscience.
If Melvin Capital just lost $2.75B and it’s a zero sum game, won’t this go to the people holding the long position, the Redditors? If not, where does it go?
Just for some background. (Fotheringay-Phipps can correct me if I’m wrong here). Gamestop was 140% short sold when the Redditors started this which is why they did it. They knew that Melvin Capital wouldn’t have enough shares to cover their short position. To me, that means that some of the Redditors and not many of the hedge fund people hold long positions in Gamestop. Obviously, if the Redditors who got in late to the game and miss the sell on the way down, they’ll lose money. But I’m not understanding how all the Redditors will be losing.
In other news, Tucker Carlson is railing against the hedge funds. Dave Portnoy says that some people should be jailed. Others are railing against Robinhoodapp
Is there any evidence the short positions were not based on fundamental analysis but the Reddit-fuelled frenzy is?
In any case while it’s possible that the initial long trades were based on some kind of semi-rational short squeeze, the whole thing has moved far beyond that and become a massive bubble drawing in many thousands of completely naive investors from all over the world.
Which is also why analyzing Reddit posts to understand the motivation of these investors is now pointless. There may be kernel of investors posting on Reddit who are quite clear-eyed about what is happening and prepared to lose money but they are now overwhelmed by completely clueless investors who think they can make a quick buck. When all this is over they will end up losing a lot of money.
I have a couple of questions about this whole thing, if I might ask.
First, I understand the concept of what is being attempted by WSB pretty well, but what I don’t get is this: if the Wall Street big guys are all sweating so hard, why don’t they just tell their shorted pals not to worry about making the margin call or returning the shares. Just have them wait it out. I assume if you are big brokerage 1 that lent out a share to big hedge fund 1 to short, you don’t want big hedge fund 1 going under, so why not just tell them don’t worry about it until the price is lower? Are there regulations about this kind of thing? I know there are certain margins that must be maintained, but is that just broker rules or SEC rules (and how much is the fine)?
Second, what legitimate reason other than stopping the squeeze on their pals might Robin Hood et al claim for stopping trading in those stocks? It seems very blatant manipulation to me, so I’m wondering if there is another plausible excuse that I am missing…
They aren’t really pals, they are competitors. They would be fine with sending someone else under if they still made a profit on the deal. On the other hand, things like this do happen all the time in business. A simpler example is when a business owes a bank money, and can’t repay on the agreed terms. The bank can either eat a loss, force the company into bankruptcy, and collect what it can, or it can agree to renegotiated terms with the company in the hope that the company will recover sufficiently to eventually repay in full. It wouldn’t surprise me if similar calculations existed here. But I suspect, as you mention, this particular situation is more tightly regulated.
As for Robin Hood, I think as someone else already mentioned, the plausible ‘decent’ reason for them stopping their clients buying more is to prevent the unwary from being sucked into the bubble just before it bursts. I personally don’t think they should have done this. I work for a (UK-based) retail execution-only stockbroker and we haven’t imposed this (though we have put an extra warning on the page for GME). Ultimately, unless you are advising your client I think you have to let them make their own mistakes. After all, what if GME shoots up again today? Then you face a whole raft of complaints from people who wanted to buy, and you stopped them. I would think it would be very hard to defend such complaints successfully.
Do brokers ever close the option to buy stocks in order to protect customers from themselves?
There’s no way that was the reason.
Citadel capital owns Melvin Capital. Citadel Capital owns Robinhood. They took away the ability to buy GME stock so that buyers could not drive up the price, and therefore the stocks Melvin shorted would be cheaper to buy back up.
100% unambiguous rigging the market in their own favor. If this isn’t super illegal then it’s just more evidence that our system is a joke.
There’s a tweet that seems to indicate that robinhood is selling shares from their customers that hold the stock. If true, that is fucking absurd. Literally selling people’s property against their will in order to mitigate the losses of their subsidiary.
I’m with you in that I don’t agree with Robin Hood’s actions in this case, but it’s not 100% clearcut that they are doing it due to their ownership - though there is certainly a smoking gun here that should be investigated.
To answer your question, yes it certainly can happen that distributors to retail investors prevent their clients from purchasing more of a stock (while still allowing them to sell). This can happen quite legitimately for a number of reasons, the one I can think of that may be closest to this is situation is where a fund changes its investment strategy such that it is no longer deemed suitable for retail investors.
To be clear though, it seems to me that Robin Hood have acted poorly here regardless of the reason, and it could well be a reason that should land them in a lot of trouble if there is any justice (spoiler: there isn’t).
This is a great story and will be even greater if it actually results in change. I don’t think it’s mere nihilism – it’s recognition that the system is rigged, and the use of what limited power the non-wealthy have to influence these markets. It’s a statement of warning – change things, or events like this will become commonplace.
I don’t know enough about financial law and regulation to know what should be changed, but perhaps as a start, short-selling should be outlawed. Perhaps there should be a financial transaction tax (very small, so as to only affect those brokers/funds that manipulate the markets with thousands upon thousands of transactions every day). I’m sure there are many other possibilities. But what a story!
To my knowledge, RobinHood has never restricted the buying or selling of cryptocurrencies in a way they did with GME, AMC and other stocks, and we all know cryptocurrencies are just the most stable and not at all speculative investment vehicles.
So the idea that RobinHood and some other brokerages are limiting or stoping people from buying these shares to protect retail investors is a bunch of bs.
There’s a fair amount of research to indicate that short-selling, conceptually, is a valuable component in a healthy market. The idea is that there needs to be a mechanism to apply downward counterpressure to irrational exuberance; this has been found to accelerate the settling of a fluctuating stock on its “actual” value.
However, in real-world practice, obviously, it becomes a tool by which very large players can manufacture manipulative distortions for their own purposes. Establish a major short position with a quick turnaround, push the stock down a couple of pennies, cash out for a tiny gain per unit that translates into a substantial profit because of the volume you’re able to command. Do that repeatedly, sabotage the image of the company, and then launch a leveraged buyout to exploit the depressed valuation, in order to strip the company for parts and walk away from its bones. This is called “vulture capitalism” for a reason.
Shorting, I think, should be allowed, but it should be regulated much more tightly. You can establish a short position, but it has to have an extended timeframe, no less than ninety days (more would be better), to force you to make the bet on the company’s fundamentals and actual performance, rather than trying to manipulate or exploit transitory conditions over a few days or a couple of weeks. No new short positions where a previous position is coming due. Absolutely no shorting where you are pursuing a buyout, or an acquisition of a majority stake, or anywhere else there’s a conflict of interest. And same vice versa: If you’ve shorted, you’re prohibited from pursuing any sort of controlling deal for a solid year afterward.
They won’t all be losing. But collectively they will be losing.
The Redditors have apparently continued to buy Gamestock throughout its runup. (That’s why they’re so upset about Robinhood restrictions on further purchases.) Meanwhile, a lot of other hedge funds have been shorting the stock at the recent highs (I read a couple of days ago that the short interest in GSE was actually higher than it was at the beginning of the short squeeze. Which makes sense logically when you think about it. Outfits like Melvin which shorted back when the stock was at much lower levels can’t continue to maintain their positions, even if they continue to believe their original thesis was correct. This is because they are currently in a huge loss position, and the survival of their firms can be impacted by exposure to more short-term losses. But another hedge fund, which is in a strong financial position, would now have the opportunity to short stock which is clearly enormously overpriced and virtually certain to collapse in price - this is a rare opportunity to make a killing, and there’s nothing hedge funds like better than making a killing.)
Bottom line is that the action at these ridiculously inflated prices has hedge funds as net sellers (some hedge funds have had to buy to cover their prior shorts but in aggregate it would appear that hedge are selling as above) while the Redditors (and possibly other retail investors along for the Greater Fool ride) are net buyers.
At some point it’s virtually certain that the price will fall to a point which is supported by the copany fundamentals and prospects. What happens then to the people who sold at these inflated prices and to the people who bought at the inflated prices? The former make big time profits and the latter take big time losses.
That doesn’t mean that every Redditor will lose money. Some will sell soon enough. But collectively there’s no way they can unload all the stock they purchased at prices close to what they paid for it. There aren’t enough non-Redditor buyers at these prices. In fact there probably aren’t any at all. No one really thinks the company is worth what it’s currently selling for. The only reason to buy it at these prices is as part of this campaign. So in aggregate, when the Redditor group leaves the market for the stock, it will be at reasonable prices which will be far lower than what they paid for it.
[There’s an old joke about a new immigrant to the country who gets off the boat and sees a vending machine for the first time. So he puts in his nickel and gets a bag of pretzels or whatever, puts in another nickel, gets another item, and so on, again and again. A guy comes over to him and starts trying to tell him that if he really wants so much food he’s much better off in a store - and the guy turns on him “what’s it to you if I keep winning?!?”]
Some of it will go to Redditors, much of it will go to longer term (pre-squeeze) owners of the stock who thought it was worth holding at $15 but will jump at the chance to unload at these prices, and a lot of it will go to other hedge funds initiating new short positions.
