Why Did Reddit Trigger a GameStop Stock Surge?

[russ_watters]

Two weeks ago Gamestop was worth $20 a share. Today it's worth $350. As I just heard on CNBC: for the same money, you could by Gamestop or you could buy Delta. Why is this happening? Because a reddit sub saw that Wall Street was bearish on Gamestop and got annoyed. So in order to Stick it to the Man, they started buying. And buying. And buying. And it worked! Cost hedge funds billions, earned assumed to be real redditors millions (on paper). Meanwhile, Gamestop is still dying, though it feels better about it.

I predict that next week there will be a run on Kleenex.

https://www.cnn.com/2021/01/27/investing/gamestop-reddit-stock/index.html

 

[Jarvis323]

It's pretty cool that they pulled this off. It's too bad that Wall Street fat cats have the power to sway regulators to step in and protect them when their bets go wrong.

 

[bhobba]

Short it using CFD's if you are that way inclined. During my days of share trading I saw all sorts of similar stuff. That's why I gave away short term trading - first I was not that good at it and secondly long term trading based on buying when below a line of linear regression and selling when above worked well (ie relying on regression to the mean) and was much easier on the nerves. Or you can simply switch between classes depending on how far above or below you were - above go for high yield defensive bonds - below - high growth although I found a small cap index fund was a bit better - strange. Medium term trading was OK but it still required you to watch your positions like a hawk. You could do long term trading on the weekend. ETF's have really changed things from when I did it.

Thanks
Bill

 

[fresh_42]

 

[Greg Bernhardt]

I wouldn't call it an attack. Hedge funds use the same tactics to game the system and no one bats an eyelash.

 

[Vanadium 50]

Short it using CFD's if you are that way inclined.

CFDs are illegal in the US.

 

[kyphysics]

Two weeks ago Gamestop was worth $20 a share. Today it's worth $350. As I just heard on CNBC: for the same money, you could by Gamestop or you could buy Delta. Why is this happening? Because a reddit sub saw that Wall Stree
https://www.cnn.com/2021/01/27/investing/gamestop-reddit-stock/index.html

See this Twitter thread. It's possibly more complex than that:

 

[Greg Bernhardt]

Robinhood just stopped orders for GME and AMC. Such a rigged system. That platform is now dead.

 

[russ_watters]

Watching the graph in real-time is wild. It opened at 290, now at 440.

 

[nduka-san]

Robinhood just stopped orders for GME and AMC. Such a rigged system. That platform is now dead.

i use robinhood for buying doge coin and ill admit its a little dead

 

[kyphysics]

Maybe disregard my tweet pastes above...The wallstreetbets Reddit has many people saying they are buying all over the world. Even though Robinhood has paused trading on those targeted stocks, non-U.S. investors can buy (people are reporting in from Canada, Singapore, Australia, India, etc.).

That seems to debunk the "evidence" listed above.

Very crazy stuff! The whole world is watching and getting involved.

 

[nduka-san]

its fun to watch the little guy win

 

[Greg Bernhardt]

GME crashing right now. Maybe they can't hold it any longer.

 

[fresh_42]

Can we call this outsider trading in contrast to the usual insider trading of the established trading places?

 

[nduka-san]

Can we call this outsider trading in contrast to the usual insider trading of the established trading places?

i think it is outsider trading, don't take my word for it though.

 

[nduka-san]

throwback stocks like GameStop, AMC, Nokia, and even Tootsie Roll, soared thanks to cyberbulls.

 

[russ_watters]

I wouldn't call it an attack.

My understanding is part of the motivation of the redditors is to harm the hedge funds(which they did). I think it's fair to call that an attack. I'm not sure what else to call it. Competition? Maybe, but in managing my portfolio, what good/harm I'm doing to other investors never enters my head.

Hedge funds use the same tactics to game the system and no one bats an eyelash.

These reddit users batted an eyelash. I think it's fair to say that if hedge fund managers knowingly take actions that will depress a stock (while they profit from it), that's an attack too. So, the way I see this; the hedge fund managers attacked Gamestop. Reddit saw that and didn't like it, so they counter-attacked on Gamestop's behalf (successfully).

What I'm not sure the redditors have thought through is their own endgame and risk.

 

[russ_watters]

Can we call this outsider trading in contrast to the usual insider trading of the established trading places?

I'd call it a pump and dump if an investment firm did it. It would be illegal. Not illegal for outsiders as far as I know, but still wrong if some make a ton of money while others lose a ton.

 

[nduka-san]

I'd call it a pump and dump if an investment firm did it. It would be illegal. Not illegal for outsiders as far as I know, but still wrong if some make a ton of money while others lose a ton.

I find it hilarious that one of the stocks was tootsie rolls going up by 14 dollars in 5 days

 

[fresh_42]

It would be illegal.

Yes, as is speeding. Me, too, once signed these forms where I had to promise not to do it, before they let me have a look on how it is done. And it is done. It's only a matter how it is disguised as.

 

[russ_watters]

Yes, as is speeding. Me, too, once signed these forms where I had to promise not to do it, before they let me have a look on how it is done. And it is done. It's only a matter how it is disguised as.

What? You're defending investment companies that defraud their investors? Am I misunderstanding you?

 

[Vanadium 50]

Not illegal for outsiders as far as I know

It certainly is. 15 USC 77. Penalty up to 5 years in prison.

 

[nduka-san]

It certainly is. 15 USC 77. Penalty up to 5 years in prison.

wow that's harsh

 

[russ_watters]

It certainly is. 15 USC 77. Penalty up to 5 years in prison.

Doesn't the first exception say it doesn't apply to individual investors? It's kind of a double-negative, so I'm unclear.

 

[fresh_42]

What? You're defending investment companies that defraud their investors? Am I misunderstanding you?

I am not defending it. I only claim that it is happening. Analysts regularly visit companies ahead of balance reports, and at other times. Their job is to gather information. Maybe it will also be available in the NYT, WJ or FT, but personal contacts work different from press conferences, so I won't bet on it.

11a.m. Broker xxx has a long phone call with fund manger yyy about buying 100,000 stocks of zzz at the price of ppp. An hour later he is somewhere outside to have lunch. And guess who else has lunch at the same time in the financial districts of the world. And this is only one opportunity to talk about the weather.

The only question is where to draw the line. If you call a market that rocks up because of simultaneous, global orders already an attack, then you have to forbid automatic stop-loss orders and computer trading.

Edit: quod licet iovi non licet bovi

 

[russ_watters]

I am not defending it. I only claim that it is happening. Analysts regularly visit companies ahead of balance reports...

You're talking about insider trading. I'm talking about a pump-and-dump. Totally different things. I agree that the line for insider trading is blurry. The line for a pump-and-dump may be blurry too.

 

[Vanadium 50]

Doesn't the first exception say it doesn't apply to individual investors?

Which section and which line?

 

[russ_watters]

Which section and which line?

a1

 

[Vanadium 50]

I don't get it. 77a says, it its entirety 'This subchapter may be cited as the “Securities Act of 1933”. '

 

[nduka-san]

i wonder how this will affect the companys ?

 

[kyphysics]

My understanding is part of the motivation of the redditors is to harm the hedge funds(which they did). I think it's fair to call that an attack. I'm not sure what else to call it. Competition? Maybe, but in managing my portfolio, what good/harm I'm doing to other investors never enters my head.

It's not wrong to short squeeze in the markets, as it happens all the time. Hedge funds do it to each other when they smell blood from a vulnerable position. Big institutional investors can do it to the entire market of shorts if they want to as well (just push up all the indexes). "Hurt" would be considered what naturally happens in any of these transactions.

The part that does seem illegal potentially is market manipulation via collusion to do this. That's why these Redditers are saying, "We like the stock." They are saying they just want to buy it for its own sake to deny they are colluding to short squeeze big hedge fund shorts.

As far as I can tell, it's the outright collusion that would be illegal market manipulation - not short squeezing, which is perfectly legal. Mark Cuban - not saying I agree with him - had some interesting comments, Russ:


Any thoughts on his take?

 

[Vanadium 50]

There are a number of claims here that I would like to challenge, but unfortunately I will need to do this in chunks.

One is the implication is that this is largely victimless. Sure, "Wall Street" (which isn't an entity, but that'll have to wait) is harmed, but they are rich, and therefore evil, so it's okay. But GameStop's credit just vanished - they can't borrow against the value of the company while its stock is being manipulated. And GameStop is surely troubled - that was kind of the point. They may not survive this, especially if this triggers loans to be called in.

If GameStop goes under, what happens to the people who work in their 5500 stores? They are out of a job.

One might argue that it's OK - they are inessential, they are uninportant, it's a small price to pay for sticking it to The Man, you can't amke an omelette without breaking some eggs, etc. That's fair enough, but it needs to be argued on those grounds, and not just ignore these people who are likely to be harmed, and are less able to deal with it than a hedge fund manager.

Disclaimer: I own Russell 2000 index funds, and GME is part of the Russell 2000.

 

[Greg Bernhardt]

One is the implication is that this is largely victimless. Sure, "Wall Street" (which isn't an entity, but that'll have to wait) is harmed, but they are rich, and therefore evil, so it's okay.

No, they are evil because they prey on retail investors, play by different rules and when they get in trouble they just call up the SEC or brokerages and halt the stocks where they are under pressure. So much for free market.

 

[russ_watters]

I expect that in the end most of the redditors who are participating in this action will be harmed as well.

 

[russ_watters]

I don't get it. 77a says, it its entirety 'This subchapter may be cited as the “Securities Act of 1933”. '

Oops, somehow the link I got from google took me straight to 77d and I didn't notice. It says:
(a)In generalThe provisions of section 77e of this title shall not apply to—
(1)transactions by any person other than an issuer, underwriter, or dealer.

Anyway, it's a long law and I'm not inclined to try to read through and digest it. I hope you're right that it applies to individual investors. Even if it does, I'm not confident it will be applied. I have the same concern about bitcoin.

 

[nduka-san]

i don think they're going to charge everyone and if they do its probably going to be light

 

[bhobba]

No, they are evil because they prey on retail investors

Exactly. Austin Donnely who was my 'guru' in my early investment education worked tirelessly against it:
https://www.investmentmagazine.com....nelly-tireless-worker-for-shareholder-rights/

When you first realize it, as happened to me all those years ago now, it really makes you mad.

These days I have given it away, although I still subscribe to an investing newsletter that I am thinking of canceling. It is far less stressful.

Thanks
Bill

 

[Klystron]

Short it using CFD's if you are that way inclined. During my days of share trading I saw all sorts of similar stuff. That's why I gave away short term trading - first I was not that good at it and secondly long term trading based on buying when below a line of linear regression and selling when above worked well (ie relying on regression to the mean) and was much easier on the nerves. Or you can simply switch between classes depending on how far above or below you were - above go for high yield below - high growth although I found a small cap index fund was a bit better - strange. Medium term trading was OK but it still required you to watch your positions like a hawk. You could do long term trading on the weekend. ETF's have really changed things from when I did it.

Thanks
Bill

Subtracting several components not applicable to trading in the US, I concur with the general approach to modern trading. Try similar methods using your country's markets. Select amenable trading software and test the system with paper trades over different time frames. Forget about profit and loss for a moment. Treat shorting or purchasing an entity as equal tools, más o menos.

No, they are evil because they prey on retail investors, play by different rules and when they get in trouble they just call up the SEC or brokerages and halt the stocks where they are under pressure. So much for free market.

Concur. The kernel of most trading tracking software originally developed from AAA 'gun' tracking systems. While bereft of financial expertise, I was expert in tracking, including developing electronic systems that augmented then replaced electromechanical track computers. In the field staring at and acting on information from multiple screens and graphs, anticipating motions, became second nature.

A wily broker handling my portfolio at the dawn of the 21^st C. got me interested in the maths. The results, even using paper trades without "skin in the game", invariably indicated market price manipulation, usually near close of trading depending on the instruments and exchanges.

Pro gamblers; i.e., small traders; at that time often day traded, opening and closing large positions on margin between opening and closing bells attempting to 'surf the gnarl' and profit from perceived trends before the fix invariably set in. Like all gambling: never play with what you cannot afford to lose.

 

[Vanadium 50]

OK, in what sense is the market fixed?

The purpose of the stock market is to allow companies to raise capital by allowing investors to share in their profits. I can buy 5.4 x10^-9 of the profits of Alcoa (just an example) for $18.70, and this will get me about 12 cents per year. For this to work, there has to be a secondary market; nobody will buy a share of stock if they need to hold it for the rest of their lives. "The market" is really driven by the secondary market. It looks like Alcoa last issued shares at the end of 2019. What if I want to buy stock today? And what if someone who has it doesn't want it anymore? That's what the stock market tries to do. I would argue that it performs this function reasonably well.

Company prioces change over time. Thus, the value of your five-billonths of Alcoa is worth more on some days and less on others. There is money to be made speculating on which way this will move. Even if everything is above-board, the individual investor is at a serious disadvantage here. I can spend nights and weekends studying Alcoa, but JPMorgan can have a person whose entire job is to follow Alcoa. Next to his desk is someone who studies only Kaiser Aluminum, and they have a boss who supervises the entire sluminum market and so on.

Big banks will do better at speculation than individual investors even without skulduggery because they are better at it. They are better at it because they put more into it. Individual investors better understand that. Ignorance of the facts is no excuse. Of course, if one plans on holding stocks for a very long time, this doesn't matter so much. The longer you hold it, the less it matters.

It is certainly true that brokerages make their money in ways that are opaque and in some cases legal but unsavory, e.g. profiting off the bid-ask spread off their own clients. But it is also true that trading has gottem much cheaper. Fifty years ago, a guy named Charles Schwab made his name offering trades for a mere $70 commission. Back then, you paid extra for odd lots (not a multiple of 100 shares), extra if you were a small investor (or, if you like, a discount if you were a large investor), had a bid-ask spread twice what it is today, didn't get your trade executed in seconds, and so on. Would I prefer a more transparent model, without the monkey business? Absolutely. Do I want to go back to 1974? Not on your life.

 

[nduka-san]

Exactly. Austin Donnely who was my 'guru' in my early investment education worked tirelessly against it:
https://www.investmentmagazine.com....nelly-tireless-worker-for-shareholder-rights/

When you first realize it, as happened to me all those years ago now, it really makes you mad.

These days I have given it away, although I still subscribe to an investing newsletter that I am thinking of canceling. It is far less stressful.

Thanks
Bill

is it a good news letter

 

[Greg Bernhardt]

OK, in what sense is the market fixed?

There are numerous insidious advantages big institutions have over the common retail trader and it's a lot more than just knowing the industry, it's a stacked game. Just look at this current fiasco. Hedge funds can use their billions to short sell a company into oblivion and hop on CNBC and bash the stock and then that's okay, but the minute there is a crowdsourced counter to it, it's manipulation and they pressure brokerages to stop allowing them to buy the stock (they are allowed to only sell), but oh the Hedge funds can still buy it.

 

[vela]

Robinhood has prohibited individual investors from buying the stocks. They can still sell. Meanwhile, traditional firms are free to buy and sell as usual. It seems pretty obvious Robinhood is acting to protect the hedge funds.

https://www.theverge.com/2021/1/28/22254102/robinhood-gamestop-bloc-stock-purchase-amc-reddit-wsb

 

[russ_watters]

Robinhood has prohibited individual investors from buying the stocks. They can still sell. Meanwhile, traditional firms are free to buy and sell as usual. It seems pretty obvious Robinhood is acting to protect the hedge funds.

https://www.theverge.com/2021/1/28/22254102/robinhood-gamestop-bloc-stock-purchase-amc-reddit-wsb

Doesn't that also protect individual investors from themselves? Sooner or later the music is going to stop on this. Redditors that keep buying and buying are playing chicken with a brick wall, with their eyes closed.

 

[Greg Bernhardt]

Doesn't that also protect individual investors from themselves?

Lots of fine lines with that logic though and I certainly don't trust any PR from them like that. Robinhood is already finished as a platform. They are getting put through the ringer and traders are leaving in troves. The hedge fund that was shorting GME closed out and lost like $22B. You don't think there were some calls made?

 

[russ_watters]

OK, in what sense is the market fixed?

...Even if everything is above-board, the individual investor is at a serious disadvantage here. I can spend nights and weekends studying Alcoa, but JPMorgan can have a person whose entire job is to follow Alcoa. Next to his desk is someone who studies only Kaiser Aluminum, and they have a boss who supervises the entire sluminum market and so on.

There are numerous insidious advantages big institutions have over the common retail trader and it's a lot more than just knowing the industry, it's a stacked game.

I think we all know the game is fixed, for both perfectly legitimate and insidious/underhanded reasons. My question is: why do so many individual people still insist on playing? Do they not really believe it is fixed?

 

[Greg Bernhardt]

My question is: why do so individual people still insist on playing? Do they not really believe it is fixed?

Have you been to Vegas lately? :)

 

[russ_watters]

Have you been to Vegas lately? :)

It's been a while. Not that interested. So is the answer then that so many of these people are degenerate gamblers? Most people only go to Vegas for a vacation and there's only so much you can lose over a weekend unless you put real effort into it. But here, people are gambling their life savings!

 

[Greg Bernhardt]

It's been a while. Not that interested. So is the answer then that so many of these people are degenerate gamblers? Most people only go to Vegas for a vacation and there's only so much you can lose over a weekend unless you put real effort into it. But here, people are gambling their life savings!

For many, day trading and individual stock picking is gambling wrapped with a sense of financial responsibility marketed by big institutions. I think we can all agree long investment in funds and indexes is an actual responsible plan. Single day traders don't have the systems or cash in place to manipulate and so they are often preyed on. Never before have we seen a crowdsourced day trader effort to achieve what big institutions do all the time, often among themselves. They lost and now are cry babies.

 

[russ_watters]

After a boring afternoon of only swinging +/-25%, it closed at $197. Session high: $468 session low: $126.

 

[russ_watters]

For many, day trading and individual stock picking is gambling wrapped with a sense of financial responsibility marketed by big institutions. I think we can all agree long investment in funds and indexes is an actual responsible plan.

Yes, I suppose that is probably true. And I'll admit I'm not immune (I have a few individual stocks). I also wonder if people think they are winning because they are making money even if they are losing? If I'm looking for an emotional/political reason to like index funds, it's because I'm getting the Fat Cats to work for me without having to pay them. That's probably why I'm not as upset about them for being them.

Single day traders don't have the systems or cash in place to manipulate and so they are often preyed on. Never before have we seen a crowdsourced day trader effort to achieve what big institutions do all the time, often among themselves. They lost and now are cry babies.

I enjoy seeing hedge funds lose too (probably not as much as you), but my concern is that I'm not even sure the redditors recognize how much they themselves stand to lose. I don't think they are in the same game or league as each other and I think many don't realize it. It will be interesting to see what happens to the redditors when it collapses underneath them.