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

[Bomb#20]

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

Well sure, to cover their shorts in the end they'll have to bid up the price to the same level somebody else would otherwise have needed to. But this way the cost of somebody making the inevitable happen is borne by a rich speculator who gets off on playing high-stakes poker against Elon Musk, instead of by a regular investor who just wants electric cars in his portfolio. Speaking as a long-term buy-and-hold slow-and-steady-wins-the-race investor who's never made a short sale in his life, I'm glad the short-sellers are out there. (And no, I don't own any Tesla shares. )

I've never heard this as an argument for short-selling.

Other arguments get more press, yes; but this is one of the standard arguments. Here's an example:

...We show that the introduction of short selling significantly improves price efficiency, as measured by the differences in individual stock responses to market returns and the delay in price adjustments. Short selling also enhances stock liquidity, as measured by bid-ask spread and Amihud ... illiquidity measure; and reduces stock volatility. Overall, our results suggest that short selling helps to stabilize asset prices, provides additional liquidity and improves market quality...​

Predictably, the full article is paywalled.

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).

Yes, that's a good reason for short selling too.

 

[Axulus]

If anyone believes these people buying don't mind losing the money I've got a bridge to sell you.

What's going to happen is that this stock will come crashing down since ultimately the fundamentals of the underlying business just aren't there. The losers who bought near the top will scream it was all a conspiracy by the hedge funds and wall street and demand government investigation and intervention, while those who bought before the hype and the other rich investors who already owned the stock will cash out from this old and tired pump and dump scam with healthy profits. Trying to trigger (or actually triggering) a short squeeze is nothing new. I will admit though that the scam has a new twist to it: making it seem like a moral crusade in buying the stock and a virtue to hold on to the stock while your portfolio bleeds red (even though Melvin Capital already exited their position several days ago). Quite ingenious actually and a great way to increase one's profits during the dump phase.

 

[Jarhyn]

And now the wallstreet apologists are here in force, I guess, gish galloping away to prevent from having to substantively argue their positions

We have in evidence a mechanism that allows someone to take a risk with INFINITE liability.

The mechanics of that imply the necessity of an unethical decision. The act of taking up infinite liability is what we are discussing here.

Of course, the fact is, it comes from selling something you do not own.

As others have pointed out, it doesn't matter if this seems like it will improve some aspects of the market for some people, increasing liquidity, or any other market based thing because...

Shorting is an act that assumes more risk than can ethically be considered acceptable because since no action can be infinitely rewarded no action that ostensibly creates this infinite risk can ethically be allowed. It is a gamble that nobody in the universe can actually guarantee a cover of. Thus it is unethical, particularly under the expectations that you do not gamble with other people's money.

Further...

It is, fundamentally, the sale of and profit off of equity you do not own.

It doesn't matter why. It's still. Fucking. Wrong.

Edit: case in point, the clearinghouse and the hedge fund engaged in unethical and illegal collusion with a number of markets to engage in price setting schemes and forced closure of long positions of others to cover their short positions. It was transparently the motivation to commit crimes to prevent the bankruptcy of many firms that made bad decisions.

 

[TV and credit cards]

If anyone believes these people buying don't mind losing the money I've got a bridge to sell you.

What's going to happen is that this stock will come crashing down since ultimately the fundamentals of the underlying business just aren't there. The losers who bought near the top will scream it was all a conspiracy by the hedge funds and wall street and demand government investigation and intervention, while those who bought before the hype and the other rich investors who already owned the stock will cash out from this old and tired pump and dump scam with healthy profits. Trying to trigger (or actually triggering) a short squeeze is nothing new. I will admit though that the scam has a new twist to it: making it seem like a moral crusade in buying the stock and a virtue to hold on to the stock while your portfolio bleeds red (even though Melvin Capital already exited their position several days ago). Quite ingenious actually and a great way to increase one's profits during the dump phase.

But these are always the people who lose. The johnny-come-latelys and those who do not know enough to take at least some profits off the table.
And they always will be.
Back in the day I watched a coworker take a Qualcomm spinoff called Leap Wireless from $9 to $90 and back down again. He may not make that mistake again but there was an endless line of retail investors behind him just itching to make the same mistake.
And there always will be.

What was the misleading information that made this a pump and dump? What were the lies told? Saying "I own GME stock because I believe they are going to turn it around" or "I bought GME because I want to short squeeze a hedge fund" is not a pump and dump.

 

[ZiprHead]

Meet Keith Gill, the man who drove the GameStop Reddit mania and made millions

Meet Keith Gill, the newly minted millionaire and financial folk hero who sparked the GameStop trading frenzy that caused big losses for established hedge funds this week.

He’s a 34-year-old Massachusetts dad who wears cat T-shirts and a collection of headbands while running his “Roaring Kitty” YouTube channel from the basement of his rented residence.

Known as “DeepF---kingValue” on the Reddit forum WallStreetBets, Gill worked in marketing for Massachusetts Mutual Life Insurance Co. before sending shock waves through the financial firmament.

“I didn’t expect this,” Gill told the Wall Street Journal in his first interview since his GameStop evangelizing made him incredibly rich in the span of a few days.

“I thought this trade would be successful,” he said, “but I never expected what happened over the past week.”

 

[Swammerdami]

And now the wallstreet apologists are here in force, I guess, gish galloping away to prevent from having to substantively argue their positions

We have in evidence a mechanism that allows someone to take a risk with INFINITE liability.
...
It doesn't matter why. It's still. Fucking. Wrong.

I am no Wall St. apologist. Earlier in the thread I proposed transaction taxes to reduce the gambling mania that infects post-rational Wall St.

However I urge those condemning short selling to admit there are shades of gray. Jarhyn's post is too absolutist to be sensical.

Suppose Bob buys 1000 shares of a stock at 12:10 pm, and then sells those shares at 12:15 pm. Meanwhile Carl sells 1000 shares of another stock at 12:10 and buys them back at 12:15. Is there really such an absolute moral difference between Bob's trades and Carl's trades?

You emphasize the word "Infinite" but isn't that something of a red herring? In practice won't your broker close your position when your net account value approaches zero? Sure you MIGHT in theory be unable to buy at any price, just as someone who needs to sell might find no buyer. But the market's need to have ready buyers AND ready sellers is actually an argument FOR short-selling.

What do you think of buying call options? If you answer that buying call options is fine, but SELLING them — which can have "infinite" risk — is Fucking.Wrong then I ask: Who is selling you those call options you find it fine to buy?

 

[Bomb#20]

We have in evidence a mechanism that allows someone to take a risk with INFINITE liability.

Why do people keep saying that? It's moronic. The short seller's liability is limited to his assets. They're finite. Capitalizing "INFINITE" doesn't make anything in a real economy infinite. If the stock goes up more than the short seller can afford to cover, he goes bankrupt, same as any other borrower who borrows more than he can repay. The lender gets back only a fraction of what she lent, same as any other lender who lends to a deadbeat. It's a risk she chose to take, same as any other lender, period.

Of course, the fact is, it comes from selling something you do not own.

I'm reminded of the last time I had to explain short selling to somebody outraged at people selling something they don't own. This engineer was a recent immigrant from Bulgaria with no understanding of private property beyond what little the communist authorities had allowed their subjects to experience.

"Sell" is just a word that means "trade", applied to trades where what you're receiving is money. To sell something you don't own is no different from trading away anything you don't own; the circumstance that you get money for it instead of something else is immaterial.

So let's say she and I are standing in line at the company cafeteria and she finds herself short of cash. Not wanting to miss lunch, she asks me to lend her five dollars. I do so. She makes her selections and goes to the cash register. Just as she's about to hand over the money to the cashier and get ownership of her sandwich in exchange, suppose I call a halt. "You can't trade away that five dollars! It's not yours! It's mine! It's unethical for you to trade away something you do not own!" You can see how absurd that would be, yes? The whole point of lending her the money was so she could buy lunch with it. I will never see that V-note again, and that's how it's supposed to be.

What makes it unethical to sell a bicycle you don't own but not stock you don't own isn't that you don't own the bike, but that the bike, unlike money and stock, isn't "fungible". It makes a difference which bike you return to the owner. Handing me five ones, or handing me a ten and getting five more ones as change, are every bit as good ways to return my money as handing me my original V-note back; likewise, returning different shares from the ones a short seller borrowed is as legitimate a way to make good on the debt as returning the original shares. Of course there's a risk that the stock will shoot up so much the short seller can't pay his debt; but then there's a risk the Bulgarian lady might get fired and never be able to pay me back the money she owes me.

Shorting is an act that assumes more risk than can ethically be considered acceptable because since no action can be infinitely rewarded no action that ostensibly creates this infinite risk can ethically be allowed. It is a gamble that nobody in the universe can actually guarantee a cover of.

Nobody can guarantee anything in this probabilistic universe but death and taxes.

Thus it is unethical, particularly under the expectations that you do not gamble with other people's money.

Haven't you ever seen a player "go light" in a poker game? There's no such expectation, at least among rational people.

It is, fundamentally, the sale of and profit off of equity you do not own.

It doesn't matter why. It's still. ... Wrong.

I.e., it's against your religion. You speak with the same fervor, certainty, and economic childishness as every medieval true-believer denouncing a Jew for charging interest.

Edit: case in point, the clearinghouse and the hedge fund engaged in unethical and illegal collusion with a number of markets to engage in price setting schemes and forced closure of long positions of others to cover their short positions. It was transparently the motivation to commit crimes to prevent the bankruptcy of many firms that made bad decisions.

That's not at all clear; but if it's true the courts will sort it out in due time. Nobody here is arguing short selling should be unregulated.

 

[Bomb#20]

But these are always the people who lose. The johnny-come-latelys and those who do not know enough to take at least some profits off the table.

^^^^ This ^^^^

The people who are screaming bloody murder at robinhood for shutting down trading need to be careful what they wish for. This is a bubble. Once the short positions are closed out, the stock is going back down. It's a hot potato. Somebody will end up holding the bag. If a stock goes up to $200 and trading is suspended, that means the unlucky imprudent folks who bought in at $200 are screwed. Of course they'll scream bloody murder and think the broker is in cahoots with nefarious forces. But if trading isn't suspended, they'll be fine. Why will they be fine? Because they'll find some other unluckier and more imprudent folks to unload it on at $250. And when subsequently trading has to be suspended at $300, or else it's never suspended and the stock crashes on its own at $400, the different people who bought in at the higher peak will be screwed worse than the poor guys screaming about their $200 loss. How is that a better scenario?

 

[Rhea]

Appreciation to all the people talking through the details of this with respect for the debate. A lot of great nuance and questioning that is interesting to consider - thanks.

 

[Elixir]

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.

Good description of what you were talking about before.
Minor niggle.... Tesla is out of the gate, but if President Biden has his way Ford, GM and the other usual suspects will all be players very soon - of their own volition, once the incentives landscape changes a little. So is short selling really a necessary mechanism to promote broad ownership?

 

[Loren Pechtel]

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.

Then they wouldn't be buying on margin and objecting to being margin-called.

 

[Rhea]

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.

Then they wouldn't be buying on margin and objecting to being margin-called.

Are you claiming that you know what percentage of the players are making these complaints?

 

[Bomb#20]

Good description of what you were talking about before.
Minor niggle.... Tesla is out of the gate, but if President Biden has his way Ford, GM and the other usual suspects will all be players very soon - of their own volition, once the incentives landscape changes a little.

Maybe that will turn things around for Ford*. I'll bet somebody out there is shorting Ford; maybe it would be worth taking advantage of the opportunity to get some bargain stock that has an upside. (Disclaimer: This is not investment advice; I have no qualifications to give such.)

(* And I don't mean to be dumping on Ford -- kudos to them for actually paying back their Great Recession loans, unlike a couple other car companies I could name.)

So is short selling really a necessary mechanism to promote broad ownership?

As with any other piece of our economic machinery, no, it's not necessary. People make do; people find alternatives. After the Chinese communists legalized private ownership of the means of production, their new stock market was up and running for about twenty-five years before the government legalized short sales. But being able to get by without short selling isn't a reason to want to; like the article linked upthread says, the market works better with it than without it.

(And may I just say, that "cybertruck" is one butt-ugly car. )

 

[Swammerdami]

Markets open in a few hours. It will be interesting to see how GME fares.

Assuming this price collapses, it will be interesting to see what plans prosecutors have for Keith Gill (aka Roaring Kitty, aka DeepF---kingValue). Will he be careful about his sell orders, minimizing his profits to create an evidence trail that his was in no way a "pump and dump"?

By Wall St. standards Gill is just a little guy. His several millions of GME profits hugely dwarfs my meager savings, but he is in turn hugely dwarfed by the Real Players. That makes him a likely target for the Powers That Be.

Recall the 2000 bubble when firms like Merrill Lynch engaged in "pump and dump" on a massive scale. Recall Eliot Spitzer (now most famous for his $2000 call-girl!) getting that firm to settle for $100 million. But pump-dumper Henry Blodget never returned his multi-million dollar bonuses, let alone went to jail. That's the American way, I guess. Betray your country to Russia and get Secret Service protection. Steal billions from the public via stock market lies and drive a Lamborghini. Sell loosies on Staten Island and expect an extrajudical execution.

 

[Gospel]

DeepF---kingValue invested in GME a long time ago. No need to be careful about selling at all as he basically lucked out as a result of current events.

 

[TV and credit cards]

I’d still like to see evidence of Keith Gil’s “pump”. Anything. Anything at all. Pat Toomey would like to know too. As per his comments on CNBC this morning, he doesn’t know of any.

 

[Jarhyn]

So now the dialogue is focused on what? A pump and dump "scam"? The retail investors are focused on holding.

 

[Harry Bosch]

So now the dialogue is focused on what? A pump and dump "scam"? The retail investors are focused on holding.

Anyone who is going to hold this stock is going to lose their ass.

 

[Jarhyn]

So now the dialogue is focused on what? A pump and dump "scam"? The retail investors are focused on holding.

Anyone who is going to hold this stock is going to lose their ass.

And again, you think that matters to them?

Anyway, now there is a global media blitz about what WSB is doing, discussing how they are making a run on silver shorts.

Excepting of course that they aren't.

Over the weekend, a global lie has erupted among the media, an ACTUAL pump and dump with the perpetrator appearing to be none other than Citadel, the #4 holder of long positions on silver. Apparently they think they can recover the capital to clear their short positions on GME by engaging in more illegal market manipulation.

But, the fact is, WSB is already pointing out that this is astroturf and not to fall for it.

SMH...

 

[Elixir]

Good description of what you were talking about before.
Minor niggle.... Tesla is out of the gate, but if President Biden has his way Ford, GM and the other usual suspects will all be players very soon - of their own volition, once the incentives landscape changes a little.

Maybe that will turn things around for Ford*. I'll bet somebody out there is shorting Ford; maybe it would be worth taking advantage of the opportunity to get some bargain stock that has an upside. (Disclaimer: This is not investment advice; I have no qualifications to give such.)

(* And I don't mean to be dumping on Ford -- kudos to them for actually paying back their Great Recession loans, unlike a couple other car companies I could name.)

I've had that thought. I'm too old for adventure like that though.

(And may I just say, that "cybertruck" is one butt-ugly car. )

Yabut do you know of any other vehicle to which you could do six figures worth of damage in a 5mph collision?
(Just sayin' it looks like one mighty fragile "truck" to me, no bumpers, lightweight skin...")

But I'd like to have a Model S P100D ... we have lots of old school redneck muscle cars around here and it would be fun to blow their doors off once in a while (0-60 in 2.5 seconds!).
100k does seem like a lot to invest for 2-3 seconds of gratification though.