This is the only passage anyone with too much at stake (than they can afford) in this short needs to read.
Other than that, I believe industry insiders / traders are missing the mark in that the current dynamic is also fueled in part by a million-strong (if not more?) rejecting the fundamentals and pumping cash in to businesses that Wall Street's hive mind has decided has no job being in existence.
AMC made a billion dollars during the rally [0] (and it is not lost on me that this capital would be dumped into parachute payments and bonuses to c-suite and nothing's going to trickle-down). In the off-chance AMC makes the capital work, then, that'd have vindicated retail, but it kind of seems too optimistic but that's the whole point.
[0] https://movieweb.com/amc-theatres-raises-one-billion-dollars...
I think what is missing in many people's analysis is that there is a new fundamental value in this situation. Buying GME shares is now linked to destroying a hedge fund and ruining some billionaire's days. For many people, and I include myself in this group, that has a real tangible value that outweighs the actual dollar amount it costs to buy a few GME shares.
When the leaders of these brokerages and hedge funds ponder as to why people are throwing money at something that is likely to crash and burn when it will likely not make money and is just hurting the billionaires, they are staring the answer in the face
It's a mistake to see "the billionaires" or "Wall Street" as a single homogenous group. 99% of them don't mind Melvin capital going under at all.
Who do you think is making money off all the trades you're losing on? Doh!
Some billionaires will lose money - actually they already did a few days ago when they exited. Some others will make a few millions or billions. Robinhood looks like they've got some explaining to do. Just another day on Wall Street.
Even if it turns out that GME can be short squeezed until there is not a single share shorted anymore, the retail investors will then collectively be HODLing a ton of stock in a company losing hundreds of millions per year. Buying pressure for such stocks is typically low. There is no way everyone can get out at the top, so a lot of people will have to sell at very low prices. This is even true if the original thesis of "we can pump this stock to $1000" is true.
This is what I've been thinking about the whole time. They can definitely pump the stock if they keep HODLing, since sellers effectively set the price when the short positions have to be closed.
Someone still has to be the bagholder and end up holding near worthless stock at the end of this though.
$GME will come crashing down once the short squeeze is over, and there's only going to be a small minority of retail traders who get out at the top.
People who have bought in later at hundreds of dollars are likely to lose a lot of money IMO. Possibly to the tune of over half their initial investment.
Note that fundamentals include things like bonds and government manipulation.
I think there's a lesson here for people making massive short bets, and for hedge funds and anybody making a bet instead of an investment: that someone else might take the other side and have more power than you might think. This is all just betting at this point, with WSB still betting they can trigger even more of a short squeeze. If this has somehow crossed the line from "bet" to "investment" that starts affecting the rest of the economy, then the consequences should be interesting to watch. Trading on exchanges shouldn't be able to be restricted by someone like Robinhood, though they have other problems too.
I have more confidence in our equities markets because of the existence of short sellers. I’m glad to know there are people researching companies that are not being honest about their financials.
If there were another way to incentivize finding these types of companies without short selling, I would be interested.
Put options can’t be written at scale without shorting.
In ye olde times before the invention and institutionalization of short selling and other financial instruments, this kind of research was the responsibility of the media (to raise the alarm) and the SEC/police (to investigate claims with the authority of the government, and prosecute offenders).
Unfortunately, most newsrooms have been "consolidated" or shut down entirely as the market for quality journalism has declined over the last decades, and there is an unhealthy "revolving door" between banks, hedge funds and other market players on one side, and regulatory agencies on the other side.
Journalists are better spent digging into political situations that aren’t directly tradable.
Even if you think journalists should do the research and make results public instead of funds doing the research and keeping it private (until they reveal their conclusions through trading), I think you want shorting available as a RESPONSE to the reporting. Why would the companies change their behavior in response to negative press if they aren’t subjected to economic pain for ignoring it?
All of the ingredients are there.
1) Use social media to organize motivated groups of people
2) Align the mob to a target that is inherently disliked. Hedge funds and wall street more generally.
3) Cause world wide market volatility. In this case, it's moving institutional investors out of the market, eventually causing a lack of liquidity that reveals structural problems. In other words, How many Lehman Brothers does it take to cause a 2008 type crash?
This type of risk taking behavior must have the associated consequences, otherwise there is no reason to stop behaving this way at larger and larger scales. Moral hazard - again a finance / trading 101 concept - just like shorting can result in infinite loss.
If a foreign adversary was using bots or social media manipulation to drive up this behavior, perhaps they could target the right companies in the market to reveal structural weakness. Similar to how the 2016 election interference happened. Though that is getting much more on the conspiratorial side.
Basically, astroturf these campaigns to target specific companies in the market. You only need a small dedicated core then the herd follows. As we have seen time and again with social media manipulation.
This was happening since early December. It looked suspicious and was reported to the SEC. Read comments for receipts.
https://www.reddit.com/r/wallstreetbets/comments/kr98ym/gme_...
https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga...
For example, its easy to understand utility of food, cloths, car, house, money. But I am not able to find a reason about stock market existence for day-to-day trading, where secondary stocks are traded daily after IPO. It seems none of the day-to-day trading money/profit ever goes back to business to help them to improve that business.
The answer is that the casino-like activity of the secondary market provides a great incentive to companies to primary-list. This engine drives business formation through the valuations it can provide to companies. And companies can issue more shares to raise more capital from the very liquid casino. So it's helpful in that way.
The lack of any mechanism for payment for order flow is quite interesting - how do market makers get incentivized to provide liquidity in such situations? Or asked another way, are American market makers being subsidized by retail traders?
I'm not sure this still happens, but Marketmakers (and broker dealers) also used to earn rebates from new venues to incentivise them to trade on MTFs (multilateral trading facilities or alternative execution venues).
You'll hear a lot of people talking about market makers (eg Citadel) paying for flow. The common opinion is that this is because that flow contains information that the marketmaker can profit from. This is almost never the case, and in fact if the flow has alpha (positive or negative) or is overly directional that's not great for the marketmaker as they are forced to temporarily take the other side of that trade and try to find unwinds. Marketmakers want more flow because that makes it easier for them to do their job of hedging their inventory and unwinding positions with minimal impact. They are betting on the underlying math that if the flow gets large enough it becomes zero alpha by definition and they can just earn the spread.
So, profitability depends on the ratio of the nice "random crossing" to the nasty "toxic flow". The toxic flow tends to come from large, well-informed market participants who can act very quickly. That means institutional players with colocated trading machines and so on. There are none of those on retail brokerages, so retail flow has a great ratio of random crossing to toxic flow, and so market makers are happy to pay for it. Meanwhile, the exchange itself is crowded with players like that, and there's a worse ratio, so market makers are a lot more wary.
This is why market makers invest a lot in low-latency trading. If you can find out about an impending market move, and cancel your resting orders before other participants cross into you, you can dodge the toxic flow, and have a better chance of making money.
Longer explanation: https://insights.deribit.com/market-research/toxic-flow-its-...
Unrelatedly, another source of revenue for market makers is maker-taker pricing, where the person crossing the market pays a little fee to the person who rested the order they crossed into:
https://www.investopedia.com/articles/active-trading/042414/...
But i'm not sure how common this is these days.
So, they short more stocks that exist. OK, I will not ask why this is allowed, but how is this done?
There's one stock, but when people count shorts, they're counting the [shorts to] edges. That 140% ratio is essentially the (amount of [shorts to] edges) / (amount of stock in circulation).
There are a few different ways to be short of a stock but the most common are to sell short in which case you have a few days to buy the stock or locate a borrow before the trade settles. Other ways to be short are to write call options which you can just do by selling that option to someone, or buy put options. In certain cases you can short a contract for difference or single stock future or short the return on the stock in an equity swap. For all of these you'll need your broker to facilitate.
Brokers don't work together which is how the aggregate position of all shorts can get larger than the total number of stocks in issue. This is obviously not a healthy situation but the brokers are relying on the collateral to enable them to make good any losses.
Finally some people may have a short as a partial hedge for an overall long position (eg "Crash put protection") so may be net long overall.
In those examples the price of the stock is just a reference point used to calculate the quantity of the cash payment between the two parties so although the short will lose money if the stock rises they are not "squeezed" in the sense they are not desperately searching for stock to buy at any price.
But houses are non- distinguishable. You don't need to give him back exactly that house, just an identical one.
Also, there is a difference between 100% of the stock and 100% of the float. Because in theory the institutions holding could alter their positions or lend their shares as well.
Madness?
(Anyway, my actual knowledge of the stock market is limited, but is my scenario a realistic one?)
