Why Did Reddit Trigger a GameStop Stock Surge?

[Astronuc]

Not Reddit, but related as in 'speculative investing'.

Close today: BTC-USD (Bitcoin USD) $36,490.42 $-4,400.04 -10.76%

Sometime after hours. $36,416.80

Change in value in one month ~$-12,241.80 (25.16%)

During the period 23-37 December, Bitcoin was valued over $50K, but since then has declined, especially in the last two days, after Russia apparently is thinking about banning it.

 

[InkTide]

You said, if the stock goes down, you haven't lost liquid assets if you don't sell it. You clearly have. If you do sell it, you get less money back than you started with. If you refuse to sell it, then it's not liquid

The act of selling is what tests the liquidity - you can't assume not testing liquidity means a reduction in liquidity. Liquidity is ease of exchange, which cannot be established without actually exchanging something. This is why stock is considered an asset and not a position - the position you take is holding, selling, or buying (ignoring the derivatives market where positions are sold as assets for the moment). Holding contains no exchange with which to test liquidity of the asset - selling or buying are the exchanges, and the measured liquidity is dependent on the exchange price at the time of selling or buying. In other words, you don't measure liquidity by holding - you only lose liquid assets in the case that the asset ceases to be exchangeable or you test liquidity by selling at a time where the asset you exchanged for the stock is worth more relative to the stock as an asset than it was when you bought. The delta affecting the asset's price is the aggregate of positions; the only delta for holding is the arrow of time or a breakdown of the exchange itself... which, by the way, is not unique to stocks - it's exactly what happens to currency during a bank run, because the relationship that accounting finance has with banks is simply not an accurate representation of the macroeconomic reality of what banks are and do.

The money in my bank isn't considered lost liquid assets because I can withdraw it for its full value whenever I want.

The inputting of the money into the bank is itself an exchange. If the bank decides you can't withdraw your "liquid assets" because they don't have it to give you (such as during a bank run), the fact the asset is cash does not make the liquidity you test by trying to withdraw and establish to be zero when that exchange fails suddenly positive just because it is convention to treat "liquid" as synonymous with "converted to a cash equivalent". The position you take by holding is essentially that the asset will be worth exactly what you put in when you withdraw - by your definition, you have indeed lost liquid assets by putting it into the bank, because you're assuming that not selling now (exchanging your position of cash held by a bank for the position of cash held by you in the case of a withdrawal) means not selling ever (i.e. never withdrawing).

 

[kyphysics]

Not Reddit, but related as in 'speculative investing'.

Close today: BTC-USD (Bitcoin USD) $36,490.42 $-4,400.04 -10.76%

Sometime after hours. $36,416.80

Change in value in one month ~$-12,241.80 (25.16%)

I think BTC is possibly the world's most volatile asset. I pretty much just shrug if it drops 25% in a day (or rises).

The connection to WSB meme stock trading is that a lot of the Reddit crowd probably owns a lot of BTC too...as their assets all fall, perhaps they'll have less capital to deploy going forward. Some might go broke entirely during this Fed liquidity pull and probable small tightening cycle afterwards.

I'm like many people, who believe we get a 20-30% market crash by summer or so - after which the Fed has an excuse to swoop in and cut rates + deploy QE again to save markets before the mid-term elections. An unstated rule by Fed insiders is that they try hard not to do anything crazy around election season. They want calm markets, so as to not show an appearance of favoring one party/candidate over another.

QE goes to $0 by mid-March, after which I suspect we could get rate hikes for several months that reset market multiples and bring on that Fed savior moment by late-July. That gives about three months for markets to recover into the November mid-terms.

Regardless, Q2 2022 is universally expected to be horrendous from a macroeconomic front. All the data will have impossible to surpass base effects on top of genuinely slowing economic data hitting at the same time. Bumpy ride perhaps and maybe crashing asset prices will wipe out that retail crowd at home trading in their pajamas.

 

[Office_Shredder]

The act of selling is what tests the liquidity - you can't assume not testing liquidity means a reduction in liquidity.

What are you talking about? It's a stock, the price is publicly available for anyone to look at. Unless you're trading warren buffet sizes or you're trading a super illiquid microcap stock (which gme is not) you will not get a noticeably different price than the public quote.

 

[scompi]

after Russia apparently is thinking about banning it.

Russia's central bank in particular. Of course it is proposing banning cryptocurrencies. Bitcoin, at least, is a potential threat to them. Any so-called "decentralized" currency has no use for a central bank.

I'm like many people, who believe we get a 20-30% market crash by summer or so - after which the Fed as an excuse to swoop in and cut rates + deploy QE again to save markets before the mid-term elections. An unstated rule by Fed insiders is that they try hard not to do anything crazy around election season. They want calm markets, so as to not show an appearance

Couldn't agree more. I expect the Fed will capitulate and reverse course once the markets actually tank. In that case, the next few months can be seen as a great buying opportunity.

 

[InkTide]

What are you talking about? It's a stock, the price is publicly available for anyone to look at. Unless you're trading warren buffet sizes or you're trading a super illiquid microcap stock (which gme is not) you will not get a noticeably different price than the public quote.

The price of a unit of currency is also available to look at. Price is not liquidity. The volatility of price movements is, in theory, a representation of other market actors testing the liquidity. In practice, the affects of the derivatives market and the actual representation of price change on the security's ticker (which is unchanged by exchanges with a volume under 100 total shares) mean this relationship is largely indirect.

GME is not microcap, but its volume had been steadily going down prior to January and buying has become much more difficult. A better representation of the share asset's liquidity relative to cash is the price movement of options contracts within the derivative markets, which have been extremely volatile over the last month as well as extremely expensive on the buying side. The large number of publicly reported FTDs is another indicator of severe illiquidity of attempts to exchange "liquid" cash for GME shares. When the asset fails to deliver after an exchange (what FTDs mean), the liquidity of the asset you traded (cash) for that undelivered asset (a share) has failed - in other words, if you had a FTD, you're basically being told that the market maker you bought from wasn't able to find any available shares being sold at that price during the entire ~30 day period that has to elapse before FTDs are even reported. Market makers can suppress FTD data as I described above in several ways, one of which is hiding it in something called stock ETFs (Exchange Traded Funds), which are like baskets of pre-diversified shares that have their own ticker symbol that can be traded like a single stock. The largest number of GME shares in ETFs are in the XRT ticker - that ticker had over 1 million FTDs last month reported by the SEC.

Yesterday, short interest in XRT was reported at over 715%. This means that some group in the market has open short positions on 7.15 times more XRT than there exists XRT.

 

[Office_Shredder]

Price is not liquidity.

No, but current price represents the best price you can get. If you send an order to sell a stock, it's not going to go up and give you a better price than what it's currently trading at. And if you have a regular person amount of size, it probably won't go down either. Gme traded yesterday more than 500 million dollars, if you sell 10,000 dollars (100 shares), nobody is going to notice/react in any serious way.
I don't know, if you want to continue to believe that if you bought gme for 200 dollars, that you still have 200 dollars of liquidity available, go for it. Hopefully everyone else reading this realizes that's wrong. There's obviously not much point in this back and forth.

 

[InkTide]

The connection to WSB meme stock trading is that a lot of the Reddit crowd probably owns a lot of BTC too

This is why I mentioned that the culture outside of WSB is very different, and in general very different around GME. Most GME-focused communities are highly bearish on cryptocurrencies, BTC and Eth especially - many of them have been theorizing for months that the cryptocurrencies were being buoyed by hedge funds using them as a way to store value and facilitate exchanges protected from taxation.

WSB has always loved crypto, in large part because WSB as a community loves the entertainment that volatility creates - it's antithetical to going long on any asset, even ignoring GME, because going long is boring to the "YOLO" loss/gain porn zeitgeist of WSB. WSB is simply not analogous to "retail investors long on GME", and hasn't even been host to a significant subcommunity of them since early last year (until the volatility-loving options players started looking at the volatility in GME options and started to increase their interest as of late).

No, but current price represents the best price you can get.

Price is not a universal measure of value that is location/choice of market/circumstance invariant. It is, nominally, a measure of the amount of local currency for which a given seller will exchange the asset they are selling with a given buyer.

If you send an order to sell a stock, it's not going to go up and give you a better price than what it's currently trading at.

This depends on the structure of your broker and the contractual relationship you have with them - the money you get from a sale of the asset is actually, in theory, the market price when the order is carried out, not when you placed the order (minus fees). If the share is directly registered to your name, you are the broker - if not, the broker and/or market maker is legally free to delay or expedite your order to carry out the trade if the price goes above when you ordered (giving you the price at order time and burying their own gain in the settlement period, which is two entire business days), or sell high in a dark pool (i.e. nonpublic trading) or internalize the transaction with themselves to not affect the price if they don't want to. Buying information about pending transactions (whose wait time is something market makers can control to a significant degree) is called "Payment For Order Flow", and is essentially unregulated and the method by which market makers essentially extort all direct participants in the market for profit. Banks and large market players don't mind the relatively minimal fees compared to the sizes of their usual moves, and it rarely affects them significantly to have that inherent disadvantage in the market because most of their own liquid assets spend their time floating around in the derivatives market. Basically nothing has structurally changed since 2008, with the sole exception of QE, which has created the precedent of state-backed protection from market risk for banks and market makers. This is what macroeconomics might call a "systemic moral hazard."

And if you have a regular person amount of size, it probably won't go down either.

If you have anything less than 100 in volume, it is not recorded in the ticker. If a market maker or broker wishes to split one side of transactions to influence the public representation of the price in the other direction, they can - and they can do so without buying or selling anything.

Gme traded yesterday more than 500 million dollars, if you sell 10,000 dollars (100 shares), nobody is going to notice/react in any serious way.

The reaction is irrelevant; the effect on the ticker is dependent on how your broker decides to structure your transaction (though they are limited by what other transactions of that security they are processing in a given timeframe).

if you want to continue to believe that if you bought gme for 200 dollars, that you still have 200 dollars of liquidity available

Here again you are equating cash with liquidity. This is simply not the case - just because cash is a differently backed asset doesn't mean it isn't an asset (see: the existence of currency exchanges).

It's also implying an imperative to sell at current value that simply doesn't exist unless you need to divest because for some reason you bought on margin - in which case your obligation is debt not related to the asset in question reducing your own liquid assets elsewhere.

Fun fact, banks and hedge funds buy on margin constantly. Goldman Sachs is leveraged something like 2:1.

There's obviously not much point in this back and forth.

On the contrary, I've found it quite instructive on the general beliefs from a personal accounting perspective of the public in regards to market and asset finance. Between that and the revolving door of Wall Street funds and financial regulators, and the immense short term profits of the derivatives market, they're the only feasible reasons I can surmise that this system has still persisted since 2008 with nothing more than a new name (CLOs instead of CDOs) and a literal reward (bailout) for irresponsible gambling by people whose central provided economic service is literally "take your cash and sit on it until you need to use it".

 

[Office_Shredder]

This depends on the structure of your broker and the contractual relationship you have with them - the money you get from a sale of the asset is actually, in theory, the market price when the order is carried out, not when you placed the order (minus fees)

Right, so if you want to sell it now, you get the current price.

. If the share is directly registered to your name, you are the broker - if not, the broker and/or market maker is legally free to delay or expedite your order to carry out the trade if the price goes above when you ordered

This is false. If your order is marketable they are required to execute it immediately. If it's non marketable, they are required to post it on an exchange, unless it's "block size" (feel free to disapprove of the block size rule, I'm not attached to it).

(giving you the price at order time and burying their own gain in the settlement period, which is two entire business days),

The settlement period of two days has no economic effect on the trade that you get.

or sell high in a dark pool (i.e. nonpublic trading) or internalize the transaction with themselves to not affect the price if they don't want to.

If they choose to internalize your transaction it's because they think it's a good trade, not because they want to manipulate the price.

When a market maker receives your order, if they route out to them market they are required to give the fills they get to you. So if you send an order to sell and they send a sell order to a dark pool to see if they get filled as part of handling your order, they have to give you the fill they get.

Buying information about pending transactions (whose wait time is something market makers can control to a significant degree) is called "Payment For Order Flow",

This is not true at all. All trades are required to be reported immediately upon execution, you can't wait.

Payment for order flow is where they pay to get your order so they can make money by trading against you, because on average retail traders do not make money.

and is essentially unregulated and the method by which market makers essentially extort all direct participants in the market for profit.

Market maker internalization is a competitive business. Citadel, virtu and other companies give price improvement to the orders they receive (that is, give people a better price than that market on average), and whoever gives the most price improvement gets the most flow from the retail broker.

Separately, Claiming anything in this industry is unregulated is kind of absurd, all that parties here are large finra regulated broker dealers.

If you have anything less than 100 in volume, it is not recorded in the ticker. If a market maker or broker wishes to split one side of transactions to influence the public representation of the price in the other direction, they can - and they can do so without buying or selling anything.

This isn't true, every trade of any size is reported on the tape. You're probably thinking of the fact that odd lot *quotes* are not reported to the SIP, but they still show up in the exchanges' proprietary marketdata which many professionals pay for, so a lot of people know about the quotes anyway (that said, the sec is considering making odd lot quotes show up in the SIP feed).

The reaction is irrelevant; the effect on the ticker is dependent on how your broker decides to structure your transaction (though they are limited by what other transactions of that security they are processing in a given timeframe).

I mean, in as far as if they choose to route you vs internalize, yes, the price you get and the subsequent market price will be a little different. But not like, forty dollars different in a hundred dollar stock. We're talking about like pennies different.

It's also implying an imperative to sell at current value that simply doesn't exist unless you need to divest because for some reason you bought on margin - in which case your obligation is debt not related to the asset in question reducing your own liquid assets elsewhere.

No, liquid means liquid. It means your can get the cash when you want it for whatever you want it. If you bought gme for 200, and today you want to buy a house, or you want to buy a car, or pay for your kid's college, you simply do not have the same amount of money to pay for those things. That's the definition of liquidity, and why people want liquid assets, so they can pay for things.

On the contrary, I've found it quite instructive on the general beliefs from a personal accounting perspective of the public in regards to market and asset finance

.

I'm sorry, you don't actually know very much about how the industry works.

 

[mfb]

$92.72 $GME...

$106.36, up 15% from that point.
You are so eager to update us every time it goes down, but when it goes up there is silence.

 

[kyphysics]

$106.36, up 15% from that point.
You are so eager to update us every time it goes down, but when it goes up there is silence.

I'm only interested when it goes down, though. It's more fun/exciting to report.

 

[InkTide]

This is false. If your order is marketable they are required to execute it immediately.

First off, it's not really your order that executes - it's the broker's. The broker has a fiduciary duty to make your order match theirs.

The legal penalty for not honoring that duty of immediacy is not a robust enough guarantee that it will be honored when the profit of essentially lying about it and profiting in the margin of time between when you as an investor made the order and when your personal finances reflect the order's execution is so enormous compared to the penalty.

Right, so if you want to sell it now, you get the current price.

"If" does a remarkable amount of work in this sentence.

If it's non marketable, they are required to post it on an exchange, unless it's "block size" (feel free to disapprove of the block size rule, I'm not attached to it).

The issue isn't even them shirking the requirements - the problem is actually that time exists.

You cannot have an instantaneous exchange. Physics itself prevents this. Law does not supersede physics.

Even in the best case scenario, where every rule is followed to the best of the market maker's reasonable ability there is a period of time during which the transaction is pending - economic theory, especially neoclassical, has a very difficult time handling... well, time. So difficult in fact that one of the primary criticisms of the EMH is that not only does it require universality of simultaneity, which anyone on this forum should know is untenable, but it also requires that all market actors have instantaneous and universally simultaneous access to market information.

Another big problem is the EMH is circular logic in even its weak form, and yet another is that its foundations fundamentally do not accommodate the very real nature of error propagation, but the EMH is a whole other can of worms.

The settlement period of two days has no economic effect on the trade that you get.

You're right, I should have been more clear that I meant mostly the time it will take to transact, but settlement requires that asset exchanges be fully completed by that time - even honoring that cannot in and of itself guarantee that what occurred to the assets between the order and the settlement was only the relevant exchange. The economic effects on you are minimal during the settlement period, because the abuses I'm talking about there occur on a literally minute-to-minute basis before the settlement period even starts.

If they choose to internalize your transaction it's because they think it's a good trade, not because they want to manipulate the price.

Ultimately I think the problem here is assuming that their motives are the same as those of an individual doing their personal accounting, just at a larger scale.

The problem with this assumption is the motives are not scale invariant - if you are one of these big players, the fact that you internalizing can manipulate the price means that it is a tool you would be highly motivated to use... because the money from the market itself, even if you lose out on that internalization, is absolutely miniscule compared to the money you can make on the derivatives market from the price change itself.

When it a market maker receives your order, if they route out to them market they are required to give the fills they get to you.

This process is not instantaneous - the wiggle room is miniscule but it exists, and it's the reason HFT is algorithmic and highly affected by literally the geographical proximity to the exchange for simple physics latency reasons (a factor that all by itself would destroy the EMH provided the market and the transactor are located at non-identical points in space and therefore not both in violation of the Pauli exclusion principle).

So if you send an order to sell and they send a sell order to a dark pool to see if they get filled as part of handling your order, they have to give you the fill they get.

In 2 days from the order. If this were always honored, FTDs would not exist. Curiously, they do.

This is not true at all. All trades are required to be reported immediately upon execution, you can't wait.

I'm not talking about time between execution and report, I'm talking about the time between order and execution.

Payment for order flow is where they pay to get your order so they can make money by trading against you, because on average retail traders do not make money.

You've mistaken a consequence for a cause.

Market maker internalization is a competitive business. Citadel, virtu and other companies give price improvement to the orders they receive (that is, give people a better price than that market on average), and whoever gives the most price improvement gets the most flow from the retail broker.

I'm not remotely arguing that these entities are not competing with each other.

There's a surprising amount one can accomplish collectively if the competition has certain constraints, however.

Separately, Claiming anything in this industry is unregulated is kind of absurd, all that parties here are large finra regulated broker dealers.

FINRA is a private organization, not a publicly funded agency - it has been genuinely illegal for the government to regulate the derivatives markets since 2000.

FINRA is, of course, trusted to regulate itself.

This isn't true, every trade of any size is reported on the tape. You're probably thinking of the fact that odd lot *quotes* are not reported to the SIP, but they still show up in the exchanges' proprietary marketdata which many professionals pay for, so a lot of people know about the quotes anyway (that said, the sec is considering making odd lot quotes show up in the SIP feed).

Did you miss the part where I said "public" representation? If you have to pay to access the data, it is not public.

But not like, forty dollars different in a hundred dollar stock. We're talking about like pennies different.

Uh huh. We are talking about pennies of difference - but pennies of difference across the entire publicly traded economy does not add up to pennies of difference total. This is why the motives are not scale invariant: having access to huge chunks of the market makes those pennies an enormous potential source of revenue, at the expense of anyone using a broker to invest.

No, liquid means liquid. It means your can get the cash when you want it for whatever you want it.

The logical construction of these two sentences is "Not A, because B = B implies B = C."

Even ignoring A (my statement), the issue I'm taking is with B's relationship to C not being unequivocally true. Using liquid to describe cash is not the same thing as the word "liquid" being synonymous with "cash". This is why I made the distinction earlier between the common definition of "liquid" in personal finance (i.e. accounting) being importantly different from its meaning in the context of an asset exchange.

Technically speaking, the asset itself is never liquid in the overall market sense - the exchanges of the asset are, and it can depend on which direction the exchange is relative to the asset. For instance, the obtaining of a cash asset in exchange for something else is considered far more illiquid than the obtaining of a non-cash asset (or good or service) in exchange for cash. The liquidity isn't the amount of cash exchanged, it's basically the odds of the exchange actually being completed. And yes, making those odds worse does tend to increase the required volume of cash assets, and making those odds better does tend to decrease the required volume of cash, but this is a function of the relative liquidity of cash transactions tending to exceed everything else - it is neither an intrinsic property of money nor exclusive to money.

Ironically, much like the EMH, it is entirely dependent on real market activity and thus by necessity a post-hoc measurement - it pretends time does not exist.

If you bought gme for 200, and today you want to buy a house, or you want to buy a car, or pay for your kid's college, you simply do not have the same amount of money to pay for those things.

Again, "if" does a lot of work here - at least this time it's helped out by some other hypotheticals that would be relevant to liquidity if their own "if"s were true.

Not being able to trade a stock for a car (in theory this is not preventable; barter is still both legal and common) doesn't make the stock illiquid - just because local currency is usually the most liquid asset does not mean currency is liquidity.

That's the definition of liquidity, and why people want liquid assets, so they can pay for things.

People want their assets to be movable when they move those assets - it does not mean that the definition of motion is "the thing that is easy to move most of the time".

I'm sorry, you don't actually know very much about how the industry works.

Perhaps, but I think this has more to do with how little I believe what the industry says about itself.

Ultimately, the thesis of holding GME is basically a hedge against the legitimacy of the market and financial system itself. If the short positions were closed, those holding GME are more likely to forget that they hold GME than sell for a loss. The position is, in essence, "don't sell GME for a loss regardless of how long that takes", which is why even if the short positions were closed last January, it's difficult not to see this as something of a self-fulfilling prophecy given enough time. If holders believe (rather reasonably, given their assets and nonexistent debt, IMO) that GameStop is not actually in danger of bankruptcy, and they are not in immediate need of the funds spent on the stock, they don't need to exchange anything - the longer their strategy takes, the more risky any short position - even entirely backed and legal ones - becomes.

The risk to a short position is theoretically infinite - the risk to a naked short of a company exceeding the available shares if that company does not go out of business is also theoretically infinite.

The realization of that risk must, mathematically, always be to the disadvantage of retail investors, because otherwise market makers and brokers become an existential threat to both each other and themselves. If FINRA wants a cut of the profits as a fine, they're happy to oblige - just a cost of doing business.

I'd like to remind you that XRT is basically a tradable index fund for the entertainment industry EDIT: I was wrong, it's even worse - it's broader than that. Do you really think market makers, brokers, and banks following FINRA rules as if they took precedence over the laws of physics would mean that shorting an index fund for 7.15 times the volume of the fund itself is "business as usual, everything normal, nothing to see"?

Because that was last Friday.

 

[InkTide]

I'm only interested when it goes down, though. It's more fun/exciting to report.

I always appreciate when people are honest and open about their selection biases.

Your selection of a low that lasted too small a time to even appear on most online tickers is truly a testament to your commitment to those biases.

 

[kyphysics]

psssst InkTide: Your perspectives are always interesting. But, your posts are a bit long. Any chance you can review them before posting and trim if need be?

 

[kyphysics]

Couldn't agree more. I expect the Fed will capitulate and reverse course once the markets actually tank. In that case, the next few months can be seen as a great buying opportunity.

I've got some cash stashed. I think it could definitely be a great buying opportunity.

In other news, I probably bought $ZM a tad too soon ($158). I'm willing to load up more if it drops precipitously (it's $147 now - which I'm holding off on buying more of).

On top of Fed capitulation, I wonder if the Dems can use a market/economic crash to also force Joe Manchin and his corporate-bought Dem friends (e.g., Sinema) to cave to a larger stimulus plan. They ain't budging unless there is a lot to lose.

 

[InkTide]

psssst InkTide: Your perspectives are always interesting. But, your posts are a bit long. Any chance you can review them before posting and trim if need be?

First, I appreciate that you can take a jab in good humor - second, I do get carried away a bit when it comes to living up to my username (which I use all over the place, have for years).

Truth is, there are a lot of complicated reasons I hold the positions I do, and the way I think is very "analogy heavy" and abstract. It takes a lot of words to express an explanation of what I think and why I think it - and I try to avoid completely inflexible statements.

Naturally, I still make tons of them anyway...

 

[kyphysics]

Naturally, I still make tons of them anyway...

Lest I be an absolute hypocrite, I am guilty of overly long posts myself! People have complained about my rambling and long emails at work. I had to learn that people's time is valuable in the business world and they don't put up with length like in academia.

They are different worlds. I learned the hard way. Professors LOVE long emails and talks. My business colleagues think you're annoying if you do that. Although, each profession/company has its own culture. I guess it depends. But, even then, there sometimes IS JUST an overly long response too. lol

 

[russ_watters]

First off, it's not really your order that executes - it's the broker's. The broker has a fiduciary duty to make your order match theirs.

The legal penalty for not honoring that duty of immediacy is not a robust enough guarantee that it will be honored when the profit of essentially lying about it and profiting in the margin of time between when you as an investor made the order and when your personal finances reflect the order's execution is so enormous compared to the penalty.

So, what you are alleging here is widespread fraud by brokerage firms, to profit from buying/selling a security at one price while telling the client they did so at another price? Have any evidence of this?

 

[InkTide]

So, what you are alleging here is widespread fraud by brokerage firms, to profit from buying/selling a security at one price while telling the client they did so at another price? Have any evidence of this?

Correct, I am alleging - and describing as one of the core motives behind current retail sentiment around holding GME - that securities fraud both exists at scale and investor protections against it are woefully inadequate.

That it exists is not really much of a question, it does - the question is to what extent and how good are the protections, especially in the context of a law passed 22 years ago that made it illegal to make laws about the derivatives market (the derivatives market was basically destroyed by legislation seeking to prevent a repeat of the Great Depression in 1936; in the early 1990s, this legislation was, after an enormous lobbying campaign, gutted; over the next decade, attempts to reimplement it were fought with additional lobbying and ultimately defeated in 2000 with one of the most blatant examples of regulatory capture in existence). I see very little reason to believe that the extent is not enormous and the protections are perfectly adequate, especially in the context of the structural causes of the 2008 crisis and the lack of changes to that structure (and the precedent that the big players that caused the crisis in the first place get protected from the broader consequences of their own actions, creating what I described earlier as a "systemic moral hazard.")

I am also very concerned that banks have done with CLOs exactly what they did with CDOs prior to 2008 - except CLOs are mostly corporate debt. And the CLO market is much, much larger than the CDO market ever was.

As an aside, were you aware that, out of nowhere, $1.44 QUADRILLION of cryptocurrency exchange volume happened in a single 24 hour period to create that "crypto crash" on Friday?

 

[Office_Shredder]

That it exists is not really much of a question, it does - the question is to what extent and how good are the protections, especially in the context of a law passed 22 years ago that made it illegal to make laws about the derivatives market

I think the thing you linked earlier was only about otc derivatives. The cftc literally regulates derivatives. Besides, what does any of this have to do with stock trading, which is regulated by the sec. If you want to complain that Bill Clinton caused the 2008 crash, then fine, but I have no idea what that has to do with the rest of this thread.

I see very little reason to believe that the extent is not enormous and the protections are perfectly adequate, especially in the context of the structural causes of the 2008 crisis and the lack of changes to that structure (and the precedent that the big players that caused the crisis in the first place get protected from the broader consequences of their own actions, creating what I described earlier as a "systemic moral hazard.")

Do you literally believe that banks over leveraging themselves and market makers violating clearly written laws that are enforced by a regulator who exists only to enforce these laws, are the exact same thing? Like, even if the structure that permitted to let the first thing happened still exists, what does it have to do with the second thing, besides the fact that they are both "finance".

I am also very concerned that banks have done with CLOs exactly what they did with CDOs prior to 2008 - except CLOs are mostly corporate debt. And the CLO market is much, much larger than the CDO market ever was.

Fine, but what does this have to do with market manipulation or giving retail customers bad prices.

View attachment 295904
As an aside, were you aware that, out of nowhere, $1.44 QUADRILLION of cryptocurrency exchange volume happened in a single 24 hour period to create that "crypto crash" on Friday?

I have no idea what this is supposed to imply.

 

[russ_watters]

Correct, I am alleging - and describing as one of the core motives behind current retail sentiment around holding GME - that securities fraud both exists at scale and investor protections against it are woefully inadequate.

And do you have any evidence of either of those claims? (the third is an opinion)

Do you have the market data to back that declaration of majority motive/belief up?

No. Perhaps like your first claim, motive is something you can only find by polling people. However, I wouldn't have expected this to be controversial; isn't it common knowledge that Jan 2021 happened because the reddit crowd got mad at the hedge funds and wanted to try and hurt them -- regardless of the actual value of the company Gamestop? On the other end, it would be hard to believe that people who are setting the price actually believe Gamestop is worth its current market value.

 

[InkTide]

And do you have any evidence of either of those claims? (the third is an opinion)

Yes, actually. Here's the synopsis written in one of the largest communities around this now, one that is very much not r/WallStreetBets. The polling on reddit is essentially done by the community itself, and they will quite readily tell you what their beliefs surrounding the market currently are. Naturally there's good and bad, but the general sentiment of what they're doing is... kinda obvious because it's so consistent and pervasive.

the reddit crowd got mad at the hedge funds and wanted to try and hurt them

It would be more accurate to say that a group of people suspected that some of what was theorized to be a central cause of the corporate decline after the 2008 financial crisis was naked short selling, and that GameStop's stock was being artificially kept down by securities fraud in large part by hedge funds who intended to turn it into a penny stock or drive GameStop into bankruptcy so their short positions would be protected from risk by the effect the positions had on the stock. It was widely believed that COVID was being used to reinforce that position. EDIT: A narrative around COVID being poised to bankrupt GameStop - I am by no means blaming these people for COVID, it was just a good way to "short and distort."

January was a vindication of that hypothesis, but importantly it was entirely in the context of a lack of awareness that shares in a broker are "beneficially owned". The trust in the markets and market makers is predicated on things like turning off the ability to buy a stock being illegal and thus impossible. There is no way to describe market makers actively refusing to execute only one side of an exchange as anything but a complete failure of the market to facilitate liquidity.

What's happened since is GameStop hasn't gone bankrupt, nothing about the markets has changed structurally, and far more people in general are aware that they can remove a share from DTCC circulation by directly registering it. It's mostly become a movement around distrust of the DTCC and markets in general because of what happened in January last year. It is definitely motivated by hatred of hedge funds now, but only because of what they did to protect themselves when a bet that they were naked shorting GameStop happened to pay off not in their favor.

I expect the next week to be very interesting. Friday last week certainly was.

 

[russ_watters]

Yes, actually. Here's the synopsis written in one of the largest communities around this now, one that is very much not r/WallStreetBets. The polling on reddit is essentially done by the community itself, and they will quite readily tell you what their beliefs surrounding the market currently are. Naturally there's good and bad, but the general sentiment of what they're doing is... kinda obvious because it's so consistent and pervasive.

Did you mix two responses into one there? Your link appears to be answering the wrong question. I asked for your evidence of fraud in the market by the brokerage firms, not by the reddit crowd. In either case, you've been verbose to this point, but can't say more than a few words of substantiation for what appears to be your major theses? Please try again.

It would be more accurate to say that a group of people suspected that some of what was theorized to be a central cause of the corporate decline after the 2008 financial crisis was naked short selling, and that GameStop's stock was being artificially kept down by securities fraud...

Again: is there any evidence of that? Not the part about guessing what redditors believe/are motivated by, but the part about securities fraud leading to artificial suppression of GME.

Note, the SEC says there was no naked shorting:
https://investorplace.com/2021/10/s...-to-know-about-the-landmark-gme-stock-report/

Maybe I should just ask this: do you think the company Gamestop is worth $20 a share? $100 a share? Do you think it will even exist in 5 years?

January was a vindication of that hypothesis...

How so?

I'll repeat: this all sounds very hand-wavey/conspiracy-theoryish.

 

[InkTide]

I think the thing you linked earlier was only about otc derivatives.

A big part of it was essentially redefining terms to sidestep the language regarding futures trading in the 1936 legislation.

The cftc literally regulates derivatives.

And it has been functionally toothless since the legislation that I'm talking about.

Besides, what does any of this have to do with stock trading, which is regulated by the sec.

Do... do you know what the derivatives market is? Stock trading is asset trading; the derivatives markets are exchanges of contracts to engage in certain asset trades within asset trading markets. This is why they are called derivatives - they are derivative of the asset markets.

If you want to complain that Bill Clinton caused the 2008 crash

The 2008 crash was essentially caused by banks assuming that charging someone a million dollars means you will eventually receive a million dollars, and then bundling a bunch of those assumptions into CDOs with the further assumption that putting an enormous amount of those assumptions together means it is impossible for nearly all of them to be wrong.

A lot of them were wrong.

I have no idea what that has to do with the rest of this thread.

CDOs are a derivative of mortgage backed securities. They were a substantial component of the derivatives market that collapsed in 2007/8.

Do you literally believe that banks over leveraging themselves and market makers violating clearly written laws that are enforced by a regulator who exists only to enforce these laws, are the exact same thing?

It's not that they're the same thing - it's that what the banks are over leveraged into is this poorly regulated derivatives market.

Like, even if the structure that permitted to let the first thing happened still exists, what does it have to do with the second thing, besides the fact that they are both "finance".

That structure does still exist. It is quite literally the reason for bank runs being such a systemic risk. And because that overleverage is largely in the derivatives market... well, if the derivatives market is broken, so is the entire financial industry.

Oops.

Fine, but what does this have to do with market manipulation or giving retail customers bad prices.

This is where the derivatives market and HFT makes its money - trading on the motion of an asset exchange creates an entire new dimension of incentives to manipulate the price. And those are incentives in the market that banks are overleveraged into because it's the market that the entire financial industry has overleveraged into.

I have no idea what this is supposed to imply.

That is a logarithmic scale.

In the span of one of those bars - roughly 20 minutes - there was such a massive spike in volume in the market that the 24h volume would have exceeded the entire theorized value of the world's derivatives markets by nearly $450,000,000,000,000. The huge volume spike was followed almost immediately by a precipitous decline in market cap, meaning the volume was mostly selling off.

Remember when I said one of the hypotheses floating around was that cryptocurrencies were being inflated by the financial industry using them as a less regulated and more difficult to tax way to keep liquid assets? I don't know exactly what it would look like if, say, I were a hedge fund and I was using cryptocurrencies to store value and suddenly needed to load up on cash because an enormous number of FTDs around GME start to hit their deadlines for settlement next week (because they do, even according to public information)... but a huge and sudden selloff of a bunch of cryptocurrency assets late on the Friday before might look strikingly similar.

There's also a... rather large number of year-long puts for something like $0.50 a share from last January currently expiring in the GME options chain.

 

[InkTide]

Did you mix two responses into one there?

Believe it or not, yes, that paragraph answers more than one of your statements, I am trying to be less verbose.

I asked for your evidence of fraud in the market by the brokerage firms

I linked you to a community maintained resource that itself links to a great deal of

not by the reddit crowd

Are you alleging widespread securities fraud by the reddit crowd? The reddit crowd is not a market maker or broker. Their forums of discussion are entirely public and not subject to anything that could be considered a directing leadership. It's just a bunch of people who agree about something.

Or is your implication that I should implicitly and exclusively trust what the actual brokerage firms say publicly about themselves in an industry with an entire sub-industry dedicated to profiting off of selling proprietary information in a market largely 'regulated' by SROs (Self Regulatory Organizations) with minimal external oversight that has been effectively lobbied out of relevance to the discussion?

but can't say more than a few words of substantiation for what appears to be your major theses?

I gave you a link to resources. I am trying to be a bit less verbose.

If you would like for me to reproduce the entire pages of text, links, and data across the last year of posts in that community that composes the extent of what I linked to you, I'm afraid I'll have to decline and suggest you follow the context of what I linked to whatever extend leaves you satisfied it is either reasonable or not.

Again: is there any evidence of that?

See above.

Not the part about guessing what redditors believe

I'm not guessing, their posts rather explicitly lay those beliefs out if you actually read them.

but the part about securities fraud leading to artificial suppression of GME.

Basically, the theory was that GME was nakedly shorted and being hit by a COVID-reinforced "short-and-distort" campaign, as well as internal manipulation by board members within GameStop that had publicly prominent ties to the theorized entities shorting the stock (more a corporate fraud thing than securities fraud, but super difficult to prove and helps the whole thing along immensely). According to that theory, the price of the stock was far below market value, but more importantly the obligations of a short position meant naked shorting created the potential for a short squeeze.

Then the short squeeze started to happen, and it was bigger than anyone expected - and market makers/brokers started to take the very clearly illegal step of shutting off one direction of the exchange.

Maybe I should just ask this: do you think the company Gamestop is worth $20 a share? $100 a share?

It's basically unknown at this point - because the buy buttons were shut off, and because such a large short position is hypothesized to exist, GameStop stock price has become less a function of the value of the company and more a function of whatever the derivatives market is doing with it.

That has always been the risk that derivatives markets pose - a complete divorce of stock price from the fundamentals of its asset value.

Do you think it will even exist in 5 years?

Yes. They have no outstanding debts, a huge amount of assets, and a decent cash flow. They are mostly finished internally restructuring, and building infrastructure to enter into an emerging digital market as well as in general becoming more of a tech company. I find it very unlikely that they are in danger of bankruptcy within the next decade.

How so?

The rate of the squeeze and absolute horror of Wall Street establishment that it had happened caught even the bullish WSB members by surprise - the fact the squeeze happened meant that they were absolutely correct in their theory that a squeeze could happen (because that was the extent of their thesis at the time).

The hatred for hedge funds, brokers, and market makers alike arose from the fact that the stock was blatantly manipulated to stop the squeeze from happening (the fact multiple brokers made trading GME one-way, sale only, is not an indicator of a healthy market) and regulators did basically nothing.

I'll repeat: this all sounds very hand-wavey/conspiracy-theoryish.

I've provided plenty of text for you to cherry pick through, surely you can do better than that.

Besides, if it is "hand-wavey/conspiracy-theoryish", the evidence should simply make that evident by demonstrating that the market is functioning and its facilitators and regulators have created a system without flaws of note.

There is nothing accomplished by weasel-wording an accusation that the act of noting potential problems is a conspiracy theory. It's entirely possible my belief is wrong - but finding that out is science. Calling it hand-wavey is not.

 

[kyphysics]

$87 LOL

 

[InkTide]

$87 LOL

This guy quite literally follows the daily trading trends of GME specifically, if you want something to listen to to tell you the minute-by-minute price actions from the perspective of a professional day trader (he does a lot of options trading).

 

[InkTide]

Note, the SEC says there was no naked shorting:

This (specifically section 3) raises significant issues with the SEC report, including simple term definition errors (like accidentally replacing the word "volume" with "value" for volume-weighted average price - there is no such thing as "value weighted average price").

Here's a video going over a 2016 SEC report describing the ways naked shorting is suspected to be hidden using ETFs. Note the SEC report on GameStop specifically identifies the GME ticker and not the 106 ETF tickers that contain GME shares.

 

[kyphysics]

This guy quite literally follows the daily trading trends of GME specifically, if you want something to listen to to tell you the minute-by-minute price actions from the perspective of a professional day trader (he does a lot of options trading).

Nah. I just like watching the "low of the day" price action. I'd have to be nuts to follow it on a play-by-play level.

I mean...mayyyyyybe if I owned the stock...even then, I'd probably not follow price action that closely. I'm mostly a value investor, so I don't care what happens to the price over the next 3-5 years. I just buy and hold. If it goes down, I buy more...traders fret every second...I fret every 3-5 years.

 

[InkTide]

Nah. I just like watching the "low of the day" price action. I'd have to be nuts to follow it on a play-by-play level.

I mean...mayyyyyybe if I owned the stock...even then, I'd probably not follow price action that closely. I'm mostly a value investor, so I don't care what happens to the price over the next 3-5 years. I just buy and hold. If it goes down, I buy more...traders fret every second...I fret every 3-5 years.

That's actually pretty close to verbatim the position of people investing in GME - "buy, hold, directly register to pull the share from DTCC circulation." They just happen to be following price action as well.

The only price actions they change positions to are drops, which they respond to by buying more - that's why I think this is something of a self-fulfilling prophecy even absent the ample evidence that the price has been manipulated. Anyone with short interest above 0 is up against a contingent of retail GME value investors that are dead-set on buying and holding every single GME share in existence to make covering the short impossible, and never selling unless and until a short squeeze happens.

Also, holding for a long time means you may want to consider figuring out who the transfer agent of the related security is, to prevent your own shares from being lent out for legal short selling (how short selling is supposed to work - though personally I still consider it a flaw in market structure even in its legalized form).

 

[kyphysics]

 

[gleem]

Well maybe the "little guy" inflicted some pain on some pro's but according to the WSJ the pro's raked in the dough.

https://www.msn.com/en-us/money/com...the-gamestop-revolution/ar-AATgc4A?li=BBnb7Kz

One should always remember, "You should not get into a micturating contest with a skunk."

 

[Astronuc]

Somewhat related to the Reddit influence on short sellers

How a Columbia professor became the scourge of activist short sellers​

https://finance.yahoo.com/news/columbia-professor-became-scourge-activist-100856402.html

 

[bhobba]

Somewhat related to the Reddit influence on short sellers

Now I am learning about options from professionals (I joined SMB Options Tribe, which has a lot of professional options traders and is run by the head options trader at SMB Capital); you realize the whole thing is simply mad - even madder than I thought before. All you have to do is buy an in the money put. Options are just contracts - it has zero effect on the stock itself. You also learn about LEAPS which are options that act the same as shares (except you do not get dividends) but at a much lower price. Trading options usually takes about 15 minutes a day - if that. It can be as low as a minute a week. There is a minority of options traders that use options for day trading. I think they are mad, stressed out and will burn out early. But each to their own I suppose. SMB has many day/swing traders, and very very few can make big money. Most 'just' make a good 6 figure income - maybe double what I got in today's dollars working as a programmer for the government or what contractors not attracted by the security of government work get. The superstars are very few, and SMB is always on the lookout for them. They even offered me a tryout. I laughed my head off - and politely said no. Although it is all part of their business model which is interesting but way off-topic.

Note that some options traders are not exactly Lilly white. There is the story of Karen - the so called Super Trader:

https://investormint.com/investing/how-karen-the-supertrader-blew-up

All the strategies she uses are well known and legit. I use one myself called an Iron Condor with profits taken at 25%. It lasts on average 22 days and wins 92% of the time with a profit of $274. But that 8% loss really hurts - it is $1347 each loss. To mitigate that a bit before it expires you have a look at if it is in loss or close to it. If so it is easy to convert to what is called an Iron Butterfly which at a 1% profit target is $15 profitable 92% of the time - but the losing trades only lose $73. So overall you only have a 3% chance of a loss of $73 and an average profit, without doing the exact calculation of about $250 in around 22 days. These are typical profits that can be made with strategies options traders use - not the massive profits Kathy made which should have been a red flag something was wrong.

Thanks
Bill

 

[StevieTNZ]

Now I am learning about options from professionals (I joined SMB Options Tribe, which has a lot of professional options traders and is run by the head options trader at SMB Capital); you realize the whole thing is simply mad - even madder than I thought before.

Have you made enough money in order to buy me Updown Court -- https://en.wikipedia.org/wiki/Updown_Court ?

 

[bhobba]

Have you made enough money in order to buy me Updown Court -- https://en.wikipedia.org/wiki/Updown_Court ?

Seriously though anybody that claims they can quickly get that sort of money from options is either pulling your leg or lying. When you start about 20% is possible. That's my level right now. After years of experience you can make the returns of this guy:

https://real-pl.com/

To cut to the chase it is about 3.9% a month or about 60% a year. You may think - wow that's great - I should do it. Well, I think all advanced investors should (Warren Buffett does it all the time) but let's be clear about the actual profits being made here. YOU MUST PAY TAX. Buy and hold you do not. Here in Aus the maximum tax rate is 45% - so this is equivalent to 33% buy and hold. Well, you think - that pretty hard to do. Have a look at the Hedgefunge passive portfolio:



Things are not always what they seem in the whacky world of investing. I could say more but this forum is not really about investing, although a discussion of Mathematical Finance such as the math of options etc would be on-topic. I may do post/paper on it.

Thanks
Bill

 

[BWV]

Short vol strategies like the iron condor are like picking up pennies in front of a steamroller - you can make consistent, seemingly above market returns but the gamma risk can wipe you out if vol spikes like it did in 2018’s volmageddon or in March 20. If everyone could make 20% per year trading options, then why don’t they? More importantly, who are the suckers on the other side of the trade willing to give you these sort of returns? You really think you can win in a zero sum competition against professional traders/algos over the long term as a part time dilettante?

 

[jrmichler]

Back in the 1980's, I studied option strategies. I convinced myself that a conservative low risk approach would give me returns comparable to CD's, but at higher risk. I have not touched options since then.

 

[bhobba]

If everyone could make 20% per year trading options, then why don’t they?

Well, Warren Buffett does them all the time. Once you learn about puts and picking shares up at bargain prices many people indeed buy shares using puts. The reason most do not emulate Warren Buffett is simply the average investor doesn't know about it. And even if they did many couldn't be bothered. An Iron Condor is a defined risk strategy - you can't lose more than your margin which is, for that trade on the index, about $1500 - and what you mention occurs very rarely.

There are plenty of people that trade options quite profitably - not massive amounts of money unless you have a big bank - but it is not hard to do OK. And as you get more experience 60% is not out of the question. It is not done with an Iron Condor though. They are beginner strategies. A better strategy that works regardless of market direction is a delta neutral Broken Wing Iron Butterfly. An example is the following on the S&P index. Sell a 20 delta put and a call at the same price. Go 50 points down from that price and buy a put. Buy a call above that price so the trade is delta neutral. You take profits at about 1%-1.5% of the premium. You see how it works as you step through each day looking at the t+0, t+1, t+2 etc lines. It initially starts out narrow and flat, but after each day it gets slightly less wide but higher. It does not take much for the profit to be a small amount like 1% or 1.5%. It has over a 90% win rate from my backtesting and the backtesting of its inventor. He also has traded it for 5 years confirming its profitability. It returns about $50 on $500 dollar margin. He has a better trade, but I can't reveal its details except again my and the inventors backtesting over the last 10 years plus his trading it for 5 years confirms it is profitable. Have a look at the real profit and loss in the link I gave where the details of his account balances are given. The trade is called the 5 step.

A popular trade invented by Seth Freudberg whose overall strategy can be revealed is the so-called Rhino:
https://www.smbtraining.com/blog/rhino

Here is the profit and loss:
https://www.smbtraining.com/blog/wp-content/uploads/2018/07/SMB-Rhino-Backtest.pdf

Thanks
Bill

 

[bhobba]

Back in the 1980's, I studied option strategies. I convinced myself that a conservative low risk approach would give me returns comparable to CD's, but at higher risk. I have not touched options since then.

I gave it my like. Many people in retirement use covered calls on shares they own at 10% delta, which rarely gets assigned. If it does, they have made a big profit on a stock they will likely eventually sell anyway since they are retired. Some don't want to sell and buy back the call for a loss. A test ran using it with $250k on SPY shares to create income to live off showed to make it work; you would need to reinvest 50% of profits and occasionally make use of margin:

It is debatable if it performs better than the 4% rule unless you are willing to take on more risk. It certainly is not set and forget.

Thanks
Bill

 

[Astronuc]

GameStop shares soar 30% and take other meme stocks on a ride, after Reddit poster touts shares at a ‘58.2%’ discount​

https://finance.yahoo.com/m/48583f41-b547-3c50-abda-daaa64293325/gamestop-shares-soar-30-and.html

Meanwhile, 55 minutes before markets close -

GME GameStop Corp.

$136.43

-$4.57

-3.24%

 

[bhobba]

Will people never learn? Simply dollar cost average into a good ETF for buy and hold investing. It is very tax-efficient even if you do not do it out of some tax-advantaged vehicle since you never sell. I like NTSX because it let's you get a traditional 60/40 portfolio at 2/3 the cost:


If you get the urge to trade, do it with options. If you want to buy a share, you can do it with LEAPS at half or less than the price of purchasing the shares. You can even sell covered calls over them - your broker recognises LEAPS means you effectively own the shares. Sell short - buy an in the money put instead. Plus many, many other strategies are available. As I said before, once you know about options - forget actual trading shares. Only a very few can make decent money at it anyway. A study of 40,000 day-traders showed only a few made money - and most of the time, it was not much. Only a handful made a good living. Options traders are another matter - there are very low-risk strategies, e.g. covered calls at ten delta that even retirees use. If it is worthwhile is another matter, as has been discussed in previous posts. For the more adventurous, there are strategies like the Rhino:
https://www.smbtraining.com/blog/rhino

I don't trade it. Even though it is reasonably hands off it still needs adjustments. I prefer trades with no, or virtually no, adjustments.

The only explanation I have is hope spings eternal - even amongst professionals who should know better. Full disclosure - I am an Options Tribe member so I am likely biased.

Thanks
Bill

 

[StevieTNZ]

Will people never learn? Simply dollar cost average into a good ETF for buy and hold investing. It is very tax-efficient even if you do not do it out of some tax-advantaged vehicle since you never sell. I like NTSX because it let's you get a traditional 60/40 portfolio at 2/3 the cost:

Have you made some money from what you have currently traded? I guess it is nice to have that extra dosh in retirement.

 

[bhobba]

Have you made some money from what you have currently traded? I guess it is nice to have that extra dosh in retirement.

If you watch the start of the options tribe video, it is emphasized, as is always done in every meeting, you first paper trade any strategy for at least four months, preferably longer. Then you trade in small lots. And slowly increase as you get more experience and it is profitable. As for the ETF Dollar Cost Averaging - yes, I have made money on that - not much, but it is profitable. It is a long-term tax-efficient strategy, so I suggest it as the foundation of your options trading. NTFS is perfect because you get the traditional 60/40 portfolio at 2/3 the price. If purchased in an options trading account, you only lose 1/2 the cost of the shares in reducing your option buying power. Say you have $15,000, you would invest $10,000 in NTFS and effectively have your $15k in a 60/40 portfolio but $10k to use as margin for options trading. You do not have to use it for options trading; you can invest in something like Berkshire Hathaway class B shares which have performed very well as you would expect from Warren Buffett. Dollar-cost average into it, and slowly start trading options in small amounts as you feel more confident. With options slow and steady wins the race.

Under no circumstances trade the Rhino or any other advanced strategy until you have had significant experience. You likely would not be able to do it anyway because you need to know concepts like rolling down and calendar spread.

I only mention this in regard to this thread because professional proprietary trading firms that know what they are doing don't actually short shares (or only rarely do it) and do not run into issues like the short squeeze. It still amazes me it happened. They use options - at least SMB does - even their day traders.

Thanks
Bill

 

[kyphysics]

In all seriousness, what is the future of GameStop's retail business?

Retail is considered the most brutal business on Earth by some:

i.) fixed costs + uncertain revenue & net income (might have to go into debt to survive rough patches)
ii.) low barrier to entry (thus lots of competition)
iii.) Amazon hunting you down
iv.) fluctuating consumer tastes (means your products or services can go out-of-style and you have to constantly keep up with the times)
v.) lots of employee turnover (the second Joe Smith gets a job paying higher than $7.25-min. wage, he's gone)

Yes, GameStop has a niche business with a brand, but it's basic value premise is still lacking as consumers can just download games and never enter a brick and mortar store. Best Buy offers gaming consoles and some games (probably not as much as GameStop), but with a diversified retail business that can draw in customers for other purposes and have them simultaneously "convenience shop" for their gaming needs/wants. Same with other retail stores. ...GameStop is just literally a single concept store with its core product easily downloadable.

Additionally, they're at the mercy of big games makers releasing to them (using them as a middle-man) in a way that may be like Foot Locker being at the mercy of Nike. Foot Locker's stock crashed recently when Nike allegedly broke news it may have its own distribution centers/stores. Foot Locker could always release its own signature brands, but...GOOD LUCK with that. ...GameStop feels like it could also always be at the mercy of big games makers in the same way. It's not like GameStop has a game designing department and can release their own stuff. They have no pricing power either. They are just single-concept niche store middle-men in an increasingly digitally dominant sector within an equally bad and brutal retail space.

RIP
~500,000M debt
negative net income (i.e., they are losing money) last few quarters
market cap of $11B *mmmm hmmm...makes total sense*

 

[Vanadium 50]

It is very tax-efficient

It's probably worth pointing out that you're in Australia and other countries may be more or less so.

If you get the urge to trade, do it with options. If you want to buy a share, you can do it with LEAPS at half or less than the price of purchasing the shares.

What you are saying here is that LEAPS provide a lot of leverage. They do. But leverage works in both directions: gains and losses. Leverage is not for everyone.

One thing that I find scary about this thread is that it's clear many people are investing without goals. As they say, "if you don't know where you are going, any road will take you there."

 

[bhobba]

It's probably worth pointing out that you're in Australia and other countries may be more or less so.

It is worth pointing out. I do not know the details of complex Australian tax law, except in general terms. The US, obviously, even more so. That knowledge is enough for me to leave it to my accountant. Financial advisors are worse than a waste of money IMHO; they hurt your returns. The Royal Commission held into them here in Australia showed what they did was close to criminal. Stay clear is my advice. Accountants are another matter. Tax codes are generally so complex you need professional advice. Having a good relationship with one is very important. I see mine at least once a year. Since starting trading, it will be even more critical. For example, it is generally thought in Australia, unless you are a high wealth individual, you do not set up a Self Managed Super Fund (SMSF). My accountant showed me the very cheap ways to set one up (it costs about $199), and providing your investing is simple; his fees are not much. You calculate the fees you pay for a retail superannuation fund and do it when it is more than the cost of setting an SMSF up. The amount was MUCH smaller than I thought (about $50,000 if I remember correctly - generally, people think you need millions). I am very positive about good accountants' advice.

What you are saying here is that LEAPS provide a lot of leverage. They do. But leverage works in both directions: gains and losses. Leverage is not for everyone.

Yes. For most people, dollar-cost averaging into a low-cost growth ETF (or ETFs) is not only all that needs to be done; it will beat the vast majority of those that actively trade. You must have a reason to actively invest and realize the odds of beating passive long term investing is not good. You do it because you think you know enough to beat the odds. I think I can - but we will see if it is all hubris. Besides, I am only doing it with at most 1/3 of what I invest.

One thing that I find scary about this thread is that it's clear many people are investing without goals. As they say, "if you don't know where you are going, any road will take you there."

Hmmm. Many do not. I know my goal in taking investing/trading up again after a hiatus. I am financially independent, but the recent experience I had with spending $22k on fixing termite damage made me realize you need to be more than economically independent. You need to be able to weather 'storms' that will inevitably occur without it causing friction in your 'family'. I, and my sister, have more than enough money to cope with this, but it was not a harmonious time. I want to be in a position where when similar things happen, money is not an issue that will cause problems. I also want to leave money to secure my niece's future when I die. Without going into details, they are doing it tough because of health issues.

Thanks
Bill

 

[kyphysics]

Is this funny...sad...wise...or what?

GameStop's meme stock cousin, AMC, is investing in the gold mining space.

 

[InkTide]

i.) fixed costs + uncertain revenue & net income (might have to go into debt to survive rough patches)

This describes all businesses.

ii.) low barrier to entry (thus lots of competition)

This is just untrue, in large part because:

iii.) Amazon hunting you down

You can replace "Amazon" with "large competitor"; anti-monopoly laws are sitting unused and forgotten about. As such, one of the most common avenues of expansion is monopolistic accumulation of anything even suggesting it might become a competitor.

iv.) fluctuating consumer tastes (means your products or services can go out-of-style and you have to constantly keep up with the times)

This applies to all businesses.

v.) lots of employee turnover (the second Joe Smith gets a job paying higher than $7.25-min. wage, he's gone)

This is dependent on internal structure, culture, what the actual wage is, etc. One of the worst examples of high turnover/pathetic retention in the retail space is literally:

Best Buy

... in large part because they have been attempting to turn all their employees into salesmen for Best Buy's garbage "repair subscription service".

GameStop is just literally a single concept store with its core product easily downloadable.

It's clear to me that you don't know what GameStop's business model actually is - GameStop is, in essence, a direct competitor to BestBuy in the consumer electronics space. You seem to be under the impression that it's somehow an exclusively game disk/physical game merchandise vendor, when in reality it's much more like RadioShack or a physical version of Newegg. The death of RadioShack and the continually unraveling reputation of Newegg are direct boons to the core retail business of GameStop.

It's not like GameStop has a game designing department and can release their own stuff.

They are expanding significantly into the digital space, have been for the last year at least.

~500,000M debt

No, GameStop is not $500 billion in debt. I'm going to assume you meant $50 million in long term debt (it's actually $41 million as of their last quarterly report).

This conveniently doesn't mention that they paid off over a billion in long term debt over the last 2 years, and own enough of their existing logistical network to be opening a new hub for it. Part of the benefit of being a chain retailer the size of GameStop is access to a large network of dedicated transportation for stocking each branch of your business - the barrier to entry for a single store is middling (mostly to do with the current real estate market), the barrier to entry for creation of a viable chain of businesses is enormous. Individual retailers are so disadvantaged that they usually aren't even considered business competitors to chain businesses, just local competitors of individual branches.

negative net income (i.e., they are losing money) last few quarters

Paying off debt, expansion of the business, and restructuring internally will do that, yeah. They've been focused on increasing sales and beat expectations last quarter (net sales was $2.2 billion - for context, the net income for the quarter was -$148 million) because they are currently operating in the context of their digital ventures being constructed but not contributing to net income (the effect likely won't be known until the Q3 2022 report, as it's scheduled to launch in Q2 2022). They managed this in spite of the wobbly status of overall economic trends (the real estate market is widely thought to be in a bubble and war in Ukraine is threatening a significant portion of internationally traded food - stuff seems rather precariously trying to avoid a downturn, but nobody really knows if it ultimately will).

GameStop's meme stock cousin, AMC, is investing in the gold mining space.

AMC has completely different market circumstances, significantly more long term debt (to the tune of about $5.4 billion), and a business model that is threatened by both physical retail (DVDs) and digital sales (downloads/streaming). Investing in raw materials mining is actually a pretty good way to hedge operating expenses; the common parlance is "diversification", and mining investment is a bit like agricultural investment - fluctuating supply but reliable demand. In that sense, GameStop's entrance into the digital space with a marketplace for NFTs and cryptocurrencies is quite similar as a diversification strategy - whether either will work remains to be seen, but the post-earnings performance of GameStop's stock is, assuming it actually reflects market sentiment, an endorsement.

If it doesn't reflect market sentiment, then the price manipulation narrative is at least to some extent correct, and the current price action may be approaching a squeeze. The increasing difficulty of borrowing GME shares, high volume currently, and consistently high utilization are suggestive of this.

 

[kyphysics]

Yes and no. It's complicated.

Not all businesses have high fixed costs, nor high variable income - at least, not in the same way as simple concept retail. Key word: high

Subscription/membership businesses like Costco (general/wholesale store) and Planet Fitness (gym) or long-term contract businesses, such as property managers and utility-like service providers (Verizon residential phone/internet, for example) have very stable income. Yes, one can argue they might lose a giant portion of that over time, but it's not a month-to-month sort of thing or even a three or four month type of thing.

Likewise, not every business has equally high fixed costs. When I worked at AMC Theaters in high school, my supervisor said there were lots of dumb aspects of the business. Whether a movie showing had literally just 1 customer or a fully packed 280 person seated theater, they still had to pay a licensing fee to the studio to show the film, turn on the projector, turn on the lights, and warm/cool the theater room. It's a huge space to have to "pay for" during slow periods or even zero person showings. On a super slow day, you might have lots of 0-person, 1-person, or 2-person audiences for showings. There is still the same fixed cost to run that movie. You can't tell Disney you're sorry that no one showed up and that you don't want to pay them a licensing fee or tell the lone customer to leave and come back for a more packed showing so you can shut the theater room down.

Some online math tutor, on the other hand, probably has much lower overhead and can even just Zoom chat with you. No major monthly recurring big fixed costs. I guess it's all relative. Yes, everyone has SOME fixed costs.