Stock market drama llama: GameStop shares dramatically rise in price from some Reddit users' trading in it

[J842P]

Ken Klippenstein on Twitter: "Hedge fund CEO: I lost $3 billion, my company, my home, and now my wife

Me: Have you considered budgeting?" / Twitter
then
Ana Kasparian on Twitter: "@kenklippenstein Too much avocado toast!" / Twitter

dirtiest of hards on Twitter: "@AnaKasparian @kenklippenstein Think about making your own coffee in the mornings, an excellent way to save a few bucks!" / Twitter

Being Reese on Twitter: "@AnaKasparian @kenklippenstein They might want to think about doing their own yard work. In addition to saving money, physical labor helps to build character as well. Either way,, they'd better get to work fast. Those bootstraps aren't going to pull themselves..." / Twitter

This whole line of jokes was sort of dumb. I mean, hedge fund managers aren't managing with their own money.

 

[J842P]

How in the world is placing a big short bet on GameStop an indication of recklessness and greed that needs to be "punished"? The people who buy the stock at these prices are lemming morons and will be incurring big losses when this eventually collapses back down to $20-$30 range. At the end of the day, this isn't a very profitable company nor is it likely to be for the foreseeable future.

There doesn't need to be any regulation against this. The coming financial losses that will be incurred will force them out of the market regardless.

Because they put themselves in a position that allowed them to be squeezed.

Anyway, these sorts of squeezes are not exactly uncommon.

Also, the redditors didn't care about losing money.

 

[lpetrich]

Rashida Tlaib on Twitter: "This is beyond absurd. @FSCDems need to have a hearing on Robinhood's market manipulation. They're blocking the ability to trade to protect Wall St. hedge funds, stealing millions of dollars from their users to protect people who've used the stock market as a casino for decades." / Twitter

RT is now in the House Financial Services Committee, alongside AOC and Ayanna Pressley. I went to @FSCDems and I found

Financial Svcs Cmte on Twitter: " #BREAKING: Following Recent Market Instability, Chairwoman @RepMaxineWaters Announces Hearing on Short Selling, Online Trading Platforms | (links)" / Twitter
Yes, Rep. Maxine Waters is the head of the Financial Services Committee

Following Recent Market Instability, Waters Announces Hearing on Short Selling, Online Trading Platforms

WASHINGTON, D.C. - Today, Congresswoman Maxine Waters (D-CA), Chairwoman of the House Committee on Financial Services, made the following statement regarding recent market instability.

"Hedge funds have a long history of predatory conduct and that conduct is entirely indefensible. Private funds preying on the pension funds of hard working Americans must be stopped. Private funds engaging in predatory short selling to the detriment of other investors must be stopped. Private funds engaging in vulture strategies that hurt workers must be stopped.

"Addressing that predatory and manipulative conduct is the responsibility of lawmakers and securities regulators who are charged with protecting investors and ensuring that our capital markets are fair, orderly, and efficient. As a first step in reining in these abusive practices, I will convene a hearing to examine the recent activity around GameStop (GME) stock and other impacted stocks with a focus on short selling, online trading platforms, gamification and their systemic impact on our capital markets and retail investors.

"We must deal with the hedge funds whose unethical conduct directly led to the recent market volatility and we must examine the market in general and how it has been manipulated by hedge funds and their financial partners to benefit themselves while others pay the price."

That should be interesting.

 

[Swammerdami]

I see that the average recent daily volume in GME stock is 101 million shares. Shares outstanding are 69 million. The average share of GME stock is now bought and sold every few hours!

How does that happen? I assume some of the day traders at zero-commission Robinhood et al are buying shares, selling them a few minutes later, then buying back in! As investors are scared off their short positions, other short sellers probably sell in! Some are making money on the price swings, some losing. Perhaps the HFT boys are getting a cut. In this misbegotten era of "hyper-efficiency", computers detect buy orders BEFORE they're routed to all markets, and use high-speed cables to pre-buy a stock, then sell it, for a profit, to the buyer whose order they intercepted.

IMO it is wrong to label short-selling as uniquely wrong or evil. I'd prefer to regard it as just one tactic in a large repertoire of financial manoeuvres which are reasonable in themselves. It is the glorification of such trading at the expense of productive economic activity that should be condemned. Many of America's brightest young people — who would have become doctors, teachers or nuclear physicists in the rational era — now gravitate to Wall St. for the big bucks.

A tiny tax on financial transactions would do huge good. It's too bad that AOC and the other progressives don't make this a key part of their agenda.



ETA: Setting aside Robinhood et al, there are plenty of ordinary retail investors who are allowed to sell short. However Schwab (and many/most other brokerages) have a gimmick that works against the retail customer. When a big boy sells stock short and realizes $10,000 from the sale he can put most of that $10,000 to work, e,g, by buying another stock. Schwab's retail customers, OTOH, will be required to sequester the cash value of their borrowed shares. To put that $10,000 to work they have to pay interest on it (currently about 6% per annum IIRC).

 

[Rhea]

Following and thinking of the difference between

INVESTING
and
GAMBLING



In many stock buys, the plan is to place your money in an instrument for the purpose of investing in that growth.

It's a risk that you might be wrong in what you hoped would be a good business, but it is not out-and-out gambling.
A philosophical purpose of being a contributor to growth.

 

[Bomb#20]

Short sellers are basically parasitic, providing no benefit to anyone but themselves.

Short sellers in the U.S. collectively donated 245 billion dollars to the rest of us in 2020. At the rate they're going in 2021, they'll up that donation. Sure looks like a benefit to me. The American people should be saying "Thanks, guys!" and laughing all the way to the bank.

Alright, maybe I'm understanding what is happening a bit better now. Still none the less crazy.

The whole concept of shorting is ridiculous.

Oh, absolutely. It is transparently unethical.

Show your work.

People who think shorting is transparently unethical usually think so for exactly the same reason medieval people thought lending at interest was transparently unethical and thought the earth was transparently a few thousand years old: because they believe in religions that teach nonsense about how reality works.

Stock markets arrange transfers of risk from people who are risk averse to people who can afford to bear that risk. Risk is a bad thing people will pay to get rid of; i.e., it's a type of garbage. When you take a risk in the hope of profit, you are in the garbage disposal business. In the case of short sales, what short sellers are doing in aggregate is competing with stock owners in the provision of stock to would-be buyers, thereby making stock more affordable. Making stock more affordable reduces the cost of getting rid of some of your risk, specifically, the risk that over time your money will lose its buying power. Short sellers are in effect selling inflation insurance. What's the problem?

 

[repoman]

Short sellers in the U.S. collectively donated 245 billion dollars to the rest of us in 2020. At the rate they're going in 2021, they'll up that donation. Sure likes like a benefit to me. The American people should be saying "Thanks, guys!" and laughing all the way to the bank.

Oh, absolutely. It is transparently unethical.

Show your work.

People who think shorting is transparently unethical usually think so for exactly the same reason medieval people thought lending at interest was transparently unethical and thought the earth was transparently a few thousand years old: because they believe in religions that teach nonsense about how reality works.

Stock markets arrange transfers of risk from people who are risk averse to people who can afford to bear that risk. Risk is a bad thing people will pay to get rid of; i.e., it's a type of garbage. When you take a risk in the hope of profit, you are in the garbage disposal business. In the case of short sales, what short sellers are doing in aggregate is competing with stock owners in the provision of stock to would-be buyers, thereby making stock more affordable. Making stock more affordable reduces the cost of getting rid of some of your risk, specifically, the risk that over time your money will lose its buying power. Short sellers are in effect selling inflation insurance. What's the problem?

What would be ethically good or at least neutral ways or companies to short? What are unethical ways to short?

I am not asking this as a smart ass, because I think some level of shorting might be good after thinking about it for just a few minutes.

 

[Loren Pechtel]

Why wait when I can tell you now. The short sellers.

We have one hell of a bubble, the people investing in it are going to be hurt. We are already seeing positions being force-liquidated.

There are three kinds of people involved in this situation.

1: The Short Sellers
2: Investors looking for a quick buck
3: WSB Reddit users looking to burn the short sellers to the ground and don't give two shits about losing everything in the process.

There you have it.

I disagree on #3--I don't think most of them realize the horrendous risk they are taking.

This is basically a pump-and-dump scheme writ large. Hopefully the SEC can punish those behind it.

 

[Loren Pechtel]

Why wait when I can tell you now. The short sellers.

We have one hell of a bubble, the people investing in it are going to be hurt. We are already seeing positions being force-liquidated.

Again, wrong way of looking at it. The people holding don't really care. They know it's a bet on a roulette table. The reward isn't the payout the reward is the thrill of the ride.

A bet means a chance of winning. There isn't one.

If they have their positions illegally liquidated, there's a massive wave of class action that will come on the dollars of the people who won their bets against Wall Street.

Nothing illegal about it. When you engage in margin transactions you agree the broker can change the margin requirements and can even force a liquidation if things are changing too fast for you to meet a margin call.

 

[TV and credit cards]

There are three kinds of people involved in this situation.

1: The Short Sellers
2: Investors looking for a quick buck
3: WSB Reddit users looking to burn the short sellers to the ground and don't give two shits about losing everything in the process.

There you have it.

I disagree on #3--I don't think most of them realize the horrendous risk they are taking.

This is basically a pump-and-dump scheme writ large. Hopefully the SEC can punish those behind it.

What risk? Risk of losing money they were fully prepared to lose? The goal was to burn the hedge fund. Sure, there were many clingons after the fact but there always are.

It's a pump and dump if misleading statements were made to deceive investors. Were there? Was the former financial advisor who started this foolish enough to do so?

 

[Elixir]

There are three kinds of people involved in this situation.

1: The Short Sellers
2: Investors looking for a quick buck
3: WSB Reddit users looking to burn the short sellers to the ground and don't give two shits about losing everything in the process.

There you have it.

I disagree on #3--I don't think most of them realize the horrendous risk they are taking.

This is basically a pump-and-dump scheme writ large. Hopefully the SEC can punish those behind it.

What risk? Risk of losing money they were fully prepared to lose? The goal was to burn the hedge fund. Sure, there were many clingons after the fact but there always are.

It's a pump and dump if misleading statements were made to deceive investors. Were there? Was the former financial advisor who started this foolish enough to do so?

Right. The ones ready willing and able to lose whatever they kicked in to screw the hedge funds went into it with their eyes wide open. In fact from what I've read, willingness to lose their "investment" in order to get the return of putting the hurt to the Big Guys was central to the effort right from the start.

 

[Rhea]

There are three kinds of people involved in this situation.

1: The Short Sellers
2: Investors looking for a quick buck
3: WSB Reddit users looking to burn the short sellers to the ground and don't give two shits about losing everything in the process.

There you have it.

I disagree on #3--I don't think most of them realize the horrendous risk they are taking.

This is basically a pump-and-dump scheme writ large. Hopefully the SEC can punish those behind it.

Loren I think you've totally missed the multitude of people on this thread trying to clue you in to the fact that these redditors don't care if the lose their money. They are not investing. They are buying a public flogging, and they feel they are getting their money's worth.

 

[Rhea]

In the case of short sales, what short sellers are doing in aggregate is competing with stock owners in the provision of stock to would-be buyers, thereby making stock more affordable.

Say more about what you mean by this.

 

[Bomb#20]

If enough people can take a slight loss to destroy a hedge fund is this really a problem?

No, it is not a problem. Hedge funds routinely put a short squeeze on other hedge funds. It does, however, further reinforces the truth that the stock market isn't the economy and in fact, it has very little to do with the economy.

In the most recent statistics I could find, total short positions amounted to about 3% of the stock market. I don't think this little kerfuffle is significant enough to reinforce any truths about the stock market as a whole. It's a tempest in a teapot.

 

[Bomb#20]

Oh, absolutely. It is transparently unethical.

Show your work.

What would be ethically good or at least neutral ways or companies to short? What are unethical ways to short?

I am not asking this as a smart ass, because I think some level of shorting might be good after thinking about it for just a few minutes.

Well, short selling is in effect a sort of insurance, so it's similarly susceptible to "moral hazard". The obvious unethical way is to short a stock and then try to trick people into thinking the company is in worse shape than it really is, in order to cause the event you're betting on -- the same as if you buy fire insurance and then torch your house.

More subtly, it's also a form of leverage -- betting with borrowed stakes -- so the same well-known downside of too many people buying too much stock with too much borrowed money applies. One single moderately-sized leveraged trade isn't unethical in and of itself; but too many all at once compared to the whole market creates systemic problems, so leveraged trades could be considered collectively unethical in some sense. It's not so much a reason to condemn an individual for selling short when everybody else is doing it, as a reason to have a regulatory agency policing the activity and tamping it down if it starts to get out of hand.

 

[repoman]

What would be ethically good or at least neutral ways or companies to short? What are unethical ways to short?

I am not asking this as a smart ass, because I think some level of shorting might be good after thinking about it for just a few minutes.

Well, short selling is in effect a sort of insurance, so it's similarly susceptible to "moral hazard". The obvious unethical way is to short a stock and then try to trick people into thinking the company is in worse shape than it really is, in order to cause the event you're betting on -- the same as if you buy fire insurance and then torch your house.

More subtly, it's also a form of leverage -- betting with borrowed stakes -- so the same well-known downside of too many people buying too much stock with too much borrowed money applies. One single moderately-sized leveraged trade isn't unethical in and of itself; but too many all at once compared to the whole market creates systemic problems, so leveraged trades could be considered collectively unethical in some sense. It's not so much a reason to condemn an individual for selling short when everybody else is doing it, as a reason to have a regulatory agency policing the activity and tamping it down if it starts to get out of hand.

Like if you had a very big organization that shorted a company but also practiced predatory cartel power against them to squeeze their profits? Did robber barons short little companies back in the day before bankrupting them and buying them?

But shorting a fraudulent company seems like a moral thing to do. But who defines fraudulent?

 

[J842P]

There are three kinds of people involved in this situation.

1: The Short Sellers
2: Investors looking for a quick buck
3: WSB Reddit users looking to burn the short sellers to the ground and don't give two shits about losing everything in the process.

There you have it.

I disagree on #3--I don't think most of them realize the horrendous risk they are taking.

This is basically a pump-and-dump scheme writ large. Hopefully the SEC can punish those behind it.

They do Loren, you can go to the subreddit for yourself and see what they've written.

 

[Elixir]

... shorting a fraudulent company seems like a moral thing to do. But who defines fraudulent?

Ah, therein lies the rub!
There's nothing that makes a fraudulent company into a legit one faster than the infusion of a few billion dollars!
I don't know where GameStop stock is going to end up, but it's going to be somewhere far north of where it was before this whole kerfuffle began.

 

[Bomb#20]

In the case of short sales, what short sellers are doing in aggregate is competing with stock owners in the provision of stock to would-be buyers, thereby making stock more affordable.

Say more about what you mean by this.

Well, for instance, although GameStop is getting all the press attention, actually the main event in the shorting market these days is Tesla, Inc. Tesla stock is shooting up because people see electric cars as the wave of the future. If you want to take your money out of the old economy and invest in the new economy, companies like Tesla are a natural choice. But of course that reasoning is just as persuasive to people who already own Tesla stock as it is to people afraid their dollars and their Ford stock are headed downward, and want to get on board. Which creates a problem for the latter folks: if you want to buy Tesla stock, why would any of the current shareholders sell it to you? Shareholders tend to sell stocks they're dissatisfied with; who's dissatisfied with Tesla? So to convince a shareholder to sell you her Tesla stock you have to offer her a lot of money. There's a lot more competition between people who want to buy than there is among people who want to sell.

Enter short sellers. They can sell Tesla stock even though they don't own any. This gives a buyer more choices in who to buy from, so he doesn't have to bid the price up as much in order to invest in the new economy. Tesla winds up owned more widely across a broader portion of the community, while Ford drops faster in line with the deteriorating long-term prospects of the internal combustion engine. And who pays for all this improvement in access and liquidity and market efficiency? Volunteers. The short-selling speculators who guessed wrong, gambled that electric cars were just a flash in the pan, and lost $40 billion dollars they could afford to lose, betting against Musk.

 

[J842P]

Enter short sellers. They can sell Tesla stock even though they don't own any. This gives a buyer more choices in who to buy from, so he doesn't have to bid the price up as much in order to invest in the new economy. Tesla winds up owned more widely across a broader portion of the community, while Ford drops faster in line with the deteriorating long-term prospects of the internal combustion engine. And who pays for all this improvement in access and liquidity and market efficiency? Volunteers. The short-selling speculators who guessed wrong, gambled that electric cars were just a flash in the pan, and lost $40 billion dollars they could afford to lose, betting against Musk.

I'm not sure I follow this reasoning. Short sellers have to buy back the shares of stock sold, no?

I've never heard this as an argument for short-selling. Generally, the argument is that it helps the "price discovery process," in the most egregious cases, it can help expose valuations based on fraud (a famous example, Enron).