Why Did Reddit Trigger a GameStop Stock Surge?

[bhobba]

I don't see the business itself improving a whole lot.

Nor do I - that's why it was targeted for short selling. But there were enough people on forums such as Reddit that actually like going to the store. So they bought shares hoping to keep its stock price from falling too much and it going out of business. That sent the share price up - basic economics - demand goes up - so does price. Now to sell short what you do is borrow shares from somewhere like an institutional investor, sell it, and later buy it back at a cheaper price thus making a profit. But let's say you just decided to get into the short selling action on this stock. You would see the price rise making a loss so you buy it back. This in turn creates more demand, and combined with the Reddit guys also buying it, up goes the price even more. Then for some other short sellers they are making a loss so they have to buy. It creates a positive feedback loop if you understand a bit of engineering. Positive feedback loops can quickly cause large changes. Soon the share price has risen considerably leading to large losses from those that short sold the shares. It would have been even worse for those that when the price rose they did not sell straight away hoping it was just a temporary blip - its fundamentals were not sound would be their thinking. Or maybe it just happened so fast they could not get out quick enough. For those it could mean the loss of a fortune. And of course the Reddit guys that originally bought them would have seen large gains. Normally institutional investors like Hedge funds 'give the finger' to the ordinary investor. This was a case of the ordinary investor 'giving the finger' to financial institutions. And they did not like it one bit. Some of the comments I heard on the news were laughable. But really it's a case of you live by the sword, you die by the sword. Funny thing is once this settles down the stock price will start to fall because of less demand - and then it will be a good short selling opportunity. But do not get too greedy - or the same could happen to you.

Thanks
Bill

 

[bhobba]

WSB's Reddit posters are all coming out saying they're holding their shares and not selling. If enough people do this, is the end game ultimately the bankrupting of these funds?

I doubt the Reddit guys are the only owners of stock. But if they were then the short sellers will have to go to those that lent them the shares and say we will have to buy them from you instead - and the price they would want would be - how to express it - 'nasty'.

Thanks
Bill

 

[Mondayman]

This was a case of the ordinary investor 'giving the finger' to financial institutions.

This is all I need to hear. Nothing against money, I just generally feel the need to flip the bird to some of these useless fat cats.

 

[mfb]

It would have been even worse for those that when the price rose they did not sell straight away hoping it was just a temporary blip - its fundamentals were not sound would be their thinking. Or maybe it just happened so fast they could not get out quick enough.

You need to find people who sell it. If multiple/large short sellers need to buy it at the same time there might simply be not enough shares for all of them.

If you buy shares for X then X is everything you can ever lose. If you short them then X is everything you can ever gain (buy them back for nothing) - but you can lose a large multiple of X.

Multiple hedge funds say they covered all their shorts, but there are still many of them around. Some people will try to short it now, of course. We'll see if they can keep their positions.

 

[Vanadium 50]

Some people will try to short it now, of course.

Easier said than done.

The way one shorts a stock is that one borrows the stock, sells it, buys it back later (hoping it will cost less so they can pocket the difference) and returns it. What does this look like for the counterparty? They get the same gain that they would have had the stock stayed in their own account, plus a little extra for their trouble. That little extra compensates them for the risk of something called "failure to deliver" - essentially the person you loaned the stock to running off with it. Of course, eventually this gets sorted out, so more realistically, it means that the owner of the stock won't be able to get it back exactly when he or she wants to sell it. And even when things go right, contracts typically give the borrower three days to deliver.

The problem now is that the risk to the lender of GameStop stock is very high - with the market craziness, he may want to sell it Right This Minute, and further it is likely that the person he lends it to is doing his very first short sale, so the odds of something going wrong are even higher than usual. So the "little extra" does not compensate the lender for the additional risk, and that means it is currently very difficult to borrow shares of GME to short them.

 

[kyphysics]

I doubt the Reddit guys are the only owners of stock. But if they were then the short sellers will have to go to those that lent them the shares and say we will have to buy them from you instead - and the price they would want would be - how to express it - 'nasty'.

Thanks
Bill

Thanks, Bill. I think the price is already nasty, no? The wallstreetbets "diamond hands" crowd is not selling and that naturally puts upward pressure on prices (less sellers).

Then, you have the call options forcing brokers to hedge more and more by buying GME themselves (forcing up the price).

This chart circulating online shows ~58M short interest shares yet to be covered:

Seems the price of GME could get nastier, no?

 

[kyphysics]

Michael Burry (of "The Big Short" fame) had this to say yesterday:

 

[Vanadium 50]

but you can lose a large multiple of X

Brokerages set limits so that this multiple doesn't get too large. For me, I believe the multiple is around 4 (I believe I am allowed 50% margin, half in anyone transaction, and if things go awry, my broker will sell my assets to cover), but normally limits kick in at around 2X. This, of course assumes a certain liquidity and price moves are slow enough to react. There was a famous case in 2015 with a guy named Joe Campbell - he shorted a company that took off in overnight trading, and ended up losing about 6.6X.

Had things moved slowly, he would have lost about 2X.

The institutional investors are not bound by this, so they can lose much, much more. The upside is, of course, the same.

 

[nsaspook]

This is not investing, this is social engineering with a wet noodle.

https://apnews.com/article/us-news-...ncial-crisis-834f2dd17cbbc5222e2fc4be3f41ab42

Feeding the frenzy have been young traders like 27-year-old Zach Weir, who this week bought five shares of GameStop.

“I’m a college student, so that’s basically a month’s rent for me,” said Weir, who is pursuing a master’s degree in marketing.

He did it, he said, because he believes in the cause: Protecting a cherished game store, where he would hang out as a teenager on Friday nights, from financial tycoons who want the company to fail.

And if he loses his investment?

“If my account goes to zero, it goes to zero,” Weir said. “At this point, it’s not about the money. I think this is bigger than the money now”

When all of the shorts crash (brokers taking their losses) out of the market these stocks will have no support when they go south.

 

[kyphysics]

Michael Burry's latest:

 

[kyphysics]

impressive...I definitely didn't have $3,000 at 15 y/o.



Hope this kid uses it wisely!

 

[Astronuc]

Nine Investors Instantly Make $16 Billion On GameStop Stock 'Squeeze'
https://www.investors.com/etfs-and-...16-billion-gamestop-stock-squeeze/?src=A00220

BlackRock may have raked in $2.4 billion on GameStop's retail-driven stock frenzy
https://www.reuters.com/article/us-blackrock-investment-gamestop-idUSKBN29W22T

From - https://finance.yahoo.com/news/how-...ory-is-part-of-5-bigger-trends-130701087.html
Over the past several weeks, a group of investors, often communicating on a Reddit community called Wall Street Bets, (WSB)—which has 6 million members . . . —bought shares in GameStop, the beaten down video game retailer.

A few saw promise in the company, but recently, mostly because word had gotten out that hedge fund Melvin Capital, among others, had shorted the stock (betting it would go down.) That the belief that they could make the stock go “to the moon” (how WSBers put it.) As demand for GameStop’s stock rose, (these investors bought options as well), so did its price, creating “a short squeeze,” i.e., the short seller is forced to buy shares at a higher price to prevent greater losses if the price continues to climb.

 

[Vanadium 50]

Nine Investors Instantly Make $16 Billion On GameStop Stock 'Squeeze'

Sure, people who already held GME have did well, at least on paper. The problem is if they want to turn paper into cash. If you've made a billion on paper, you need to find a billion dollars worth of people who want to buy it. That's probably not a bunch of guys on the internet who live in their parents' basement.

However, if they are smart, they will unload a small fraction of their shares. Let's say they bought 3M shares at $20, hoping it will go up. That cost $60M. Now it's at $325, so on paper it's worth $975M - almost a billion. By the argument above, they aren't going to turn this into $975M in case. But they may be able to get rid of 1% of that. That gets them $9.75M or a 16.25% gain. Further, they can try and sell it as it goes down -at $100 there are more buyers and at $50 more still.

They will do just fine on this, but they won't make billions, because there aren't really billions to be had.

 

[mfb]

If you look at post 104, at least 4 million shorts were bought back when the price was over $200 - that's at least something close to a billion that went to people/companies who sold when the price was high. Not 16 billions, of course, but it's still a lot of money that changes owners here.

 

[Astronuc]

However, if they are smart, they will unload a small fraction of their shares. Let's say they bought 3M shares at $20, hoping it will go up. That cost $60M. Now it's at $325, so on paper it's worth $975M - almost a billion. By the argument above, they aren't going to turn this into $975M in case. But they may be able to get rid of 1% of that. That gets them $9.75M or a 16.25% gain. Further, they can try and sell it as it goes down -at $100 there are more buyers and at $50 more still.

According to an article by ArsTechnica, "wealthy investors had shorted more shares of stock than the total number of shares available to trade." For GME, there are apparently 69.75M shares outstanding, 46.89M shares floating. I'm not sure of the accuracy of the numbers of shares, or the claim by ArsTechnica, but it seems dodgy if the number of shorted shares exceeds the number shares available for trade.

https://finance.yahoo.com/quote/GME/key-statistics/ - as of January 15. Apparently one must subscribe for more recent data.

https://www.marketwatch.com/story/g...ff-stake-valued-at-over-1-billion-11611855951

 

[Vanadium 50]

GME has a present market cap of $22B. (So the $16B people represent a 73% ownership in the country) Before this began, it was more like $1B. That plot shows $800M in sales. Astro's numbers show $1.1B. So that's the new cash that's gone into the system, and the only way for the "wealthy investors" to get that $16B is for $16B of new money to enter the system.

There is something called the "greater fool theory". But that only works until it doesn't.

The Ars Technica article I saw said that investors wanted to borrow more shares than were available. They didn't say they did. And of course they do. If they thought the stock was overvalued at $30, they must really think it's overvalued at $300.

(As an aside, does anyone believe GameStop is a Fortune 500 compay? It's #463 at the moment. Bigger than Deutsche Bank. Bigger than Kellogg. Bigger than Western Digital. Bigger than Burger King, Popeye's and Tim Horton's combined!)

 

[phinds]

(As an aside, does anyone believe GameStop is a Fortune 500 compay? It's #463 at the moment. Bigger than Deutsche Bank. Bigger than Kellogg. Bigger than Western Digital. Bigger than Burger King, Popeye's and Tim Horton's combined!)

Exactly. I keep wondering what the devil is letting it continue to defy economic gravity. Every day I expect it to go back to $20 / $30 where it belongs(*) and every day my jaw drops at the continuing high price.

* based on fundamentals

 

[gleem]

....., but it seems dodgy if the number of shorted shares exceeds the number shares available for trade.

Here is how. https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/

 

[Vanadium 50]

I keep wondering what the devil is letting it continue to defy economic gravity.

Ironically, GME is illiquid. If you are short, you want to wait so you will be less short. If you are long, you want to liquidate slowly.

 

[Astronuc]

Here is how. https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/

Dodgy.

 

[Vanadium 50]

I keep wondering what the devil is letting it continue to defy economic gravity.

What's ultimately going to do this is good old-fashioned greed enlightened self-interest.

Suppose I am one of this major investors. I'd love to sell it at $315, but there aren't enough billions in liquid cash who will buy it. But what if I sold it at $40? I probably bought it at less than $20, so I'd still make a ton of money. And at $40, people who shorted it will buy - I imagine they will think "well, $40 is bad, but it's a lot better than $315." At $315, maybe I can sell a percent of it, but at $40, I could get out.

OK, if $40 works, what about $50? Or $100? You can bet that every major investor is thinking this through now, while they slowly unwind their long positions. But eventually you will see someone offering a large number of shares at a price between today's price and a "reasonable" price trying to grab profits before their neighbor can. And that will start the fall.

In interesting question is whether the Roninhooders will panic when this happens.

 

[kyphysics]

If you look at post 104, at least 4 million shorts were bought back when the price was over $200 - that's at least something close to a billion that went to people/companies who sold when the price was high. Not 16 billions, of course, but it's still a lot of money that changes owners here.

There are 58 million short interest shares right now (per that chart I posted).

Assuming all shorts covered at $300, that'd equate to (58M x $300): $17,400,000,000 ($17.4B) per my calculator.

Unless GME explodes in price from here (possible), it'll be hard for those 9 investors with $16B to cash out that high. Not enough buyers and/or current price is not adequate.

Anecdotally, from obsessively reading online chat forums, there seem like a ton of people who want to still buy (but are limited by brokerage restrictions) either to join this "social cause" or maybe b/c they think they can cash out higher.

Buying call options can also be a cheap way to "bet" on things. Just a fraction of the share price. ...If you get enough call options and a price increase in GME at the same time, you can trigger a gamma squeeze in brokers/market makers that forces them to buy the underlying shares too (bumping the price up). ...This will be an interesting month ahead. Kind of exciting for me as a completely uninvolved observer (no shares of GME and certainly no assets in a hedge fund with exposure). It's like a movie.

 

[Vanadium 50]

to join this "social cause"

What social cause? Enriching one group of wealthy investors at the expense of another group of wealthy investors?

 

[vela]

What social cause?

Stickin' it to the Man!

 

[kyphysics]

Stickin' it to the Man!

That's the sense I get from reading Reddit. So many upset about 2008-9 as well and see this as a form of payback even if they don't make money off it. They just want to short squeeze these big hedge funds and make them lose some $$$.

 

[Vanadium 50]

Stickin' it to the Man!

Does anyone here actually believe it? Raise your hands. In fact, is there anyone here who believes this isn't just another example of a pump and dump?

 

[kyphysics]

There are probably elements of both in the GME situation.

 

[etotheipi]

Papa Musk is going to take us all to Mars woooooo

 

[phinds]

Does anyone here actually believe it? Raise your hands. In fact, is there anyone here who believes this isn't just another example of a pump and dump?

I think that some of the Reddit crowd do believe, unwisely, that it is otherwise, and I think a lot of them are going to get hurt when gravity sets in.

 

[Office_Shredder]

Buying call options can also be a cheap way to "bet" on things. Just a fraction of the share price. ...If you get enough call options and a price increase in GME at the same time, you can trigger a gamma squeeze in brokers/market makers that forces them to buy the underlying shares too (bumping the price up). ...This will be an interesting month ahead. Kind of exciting for me as a completely uninvolved observer (no shares of GME and certainly no assets in a hedge fund with exposure). It's like a movie.

Options markets are efficient. The price of a call option in gamestop is crazy right now, implying something like a 25-50% move in the stock every day (which is... Maybe too low?). Buying call options in GameStop two weeks ago is genius, but it's too late to get a ton of cheap exposure now.

For some reason some of the brokers let you get a lot more exposure in call options than in stock right now. So if you're annoyed at the 1-5 share limits in place, call options are a pretty good place to get more.

 

[Vanadium 50]

Both call and put options are crazy now. It's as if the market feels the stock prices are very volatile. As if.

 

[kyphysics]

Options markets are efficient. The price of a call option in gamestop is crazy right now, implying something like a 25-50% move in the stock every day (which is... Maybe too low?). Buying call options in GameStop two weeks ago is genius, but it's too late to get a ton of cheap exposure now.

For some reason some of the brokers let you get a lot more exposure in call options than in stock right now. So if you're annoyed at the 1-5 share limits in place, call options are a pretty good place to get more.

Thanks, OS. I didn't know the pricing as of now. I just knew that's what the WSBers were doing (buying tons of calls) earlier to run up GME (causing a gamma squeeze).

I think some on the forum said you can buy unlimited shares of GME on some brokerages still, though. Maybe Fidelity or Vanguard?

 

[nduka-san]

i wonder how much money was lost in total, and how much money the redditors gained in total?

 

[Vanadium 50]

There are two sides to every trade.

 

[phinds]

i wonder how much money was lost in total, and how much money the redditors gained in total?

it ain't over 'til the fat lady sings. And gravity sets in.

 

[kyphysics]

it ain't over 'til the fat lady sings. And gravity sets in.

Or 11:30 AM as someone said. . .seems like the "real" stock moves happen after that...West Coast waking up, lol?

 

[russ_watters]

Down about 95 so far this morning. Maybe the kids found a new video game to play over the weekend?

 

[nduka-san]

Down about 95 so far this morning. Maybe the kids found a new video game to play over the weekend?

maybe they're going to do it to another stock few months away

 

[kyphysics]

a.) I've read it's illegal to short over 100% of outstanding shares.
b.) Hedge funds manage a portion of many state pensioners' assets.

Could pensioners sue these hedge funds with ridiculous short positions that got blown up?

Normally, they give up even the right to know what the heck hedge funds are doing with their money:
https://www.forbes.com/sites/edward...s-like-gamestop-all-the-time/?sh=14ceb6d9752d

That’s because state pensions routinely agree to be kept in the dark about alternative investment portfolio holdings and strategies. For reasons that have always been incomprehensible at least to me, state pensions demand transparency regarding their most liquid (publicly-traded) investments but readily consent to a complete lack of transparency regarding their riskiest, blithely accepting assurances by Wall Street that secrecy is required to achieve market-beating returns. This complicity between state pensions and Wall Street eviscerates state access to public records laws since the pensions conveniently have no information regarding their riskiest investments to disclose in response to pesky public records requests.

With state pensions already severely underfunded, allocating 26 percent to as much as 50 percent of their assets to alternative investment strategies including long-short equity poses enormous risk. Bear in mind, the ability to engage in short selling is not limited to hedge funds. Most other alternative investment managers are largely unconstrained in their investment strategies—they can invest in almost anything at any time. As a result, on any given day a private equity fund may be 100 percent invested in gold, the next 100 percent in silver, the next, 100 percent shorting GameStop.

What what if the hedge funds illegally shorted more shares than even available for GME? Possible to recover losses?

 

[kyphysics]

Or 11:30 AM as someone said. . .seems like the "real" stock moves happen after that...West Coast waking up, lol?

Right on schedule everyday!

 

[mfb]

Down about 95 so far this morning. Maybe the kids found a new video game to play over the weekend?

If hedge funds do it then it's investing, if reddit users to the same it's kids playing a video game?

 

[russ_watters]

If hedge funds do it then it's investing, if reddit users to the same it's kids playing a video game?

Yes.

Caveat: I think it is also likely that V50 is right that in part they have been manipulated into playing it.

 

[kyphysics]

Hmmmm.

Shorts are covering. Wallstreetbets community has lots of posts about why they should hold and not sell, b/c hedge funds are using short ladder attacks and trying to make it look like the game is over.

...Has WSB gotten to a point of delusion and paranoia where they could lose it all by holding when the data turns and they're not aware or believing it? https://www.bloomberg.com/news/arti...erest-plummets-in-a-sign-traders-are-covering

 

[mfb]

Yes.

At least you are open about your inconsistent labels.

Caveat: I think it is also likely that V50 is right that in part they have been manipulated into playing it.

I don't see where V50 would have claimed that.

...Has WSB gotten to a point of delusion and paranoia where they could lose it all by holding when the data turns and they're not aware or believing it?

Some have cashed out, at least partially, and made a lot of money. Some will sell soon, some will sell later. Many different people, many different strategies.

 

[russ_watters]

There has been a suggestion that somehow short sales are, while legal, immoral. I'd like people who think this to expound on this.

Are other transactions between willing partners immoral? Why or why not?
If so, which ones? Put and call options?
Is one side of the transaction OK but the other not?
Is it OK for institutions to trade with each other but not individuals?

In short, I am very interested in why people think short sales are wrong, and how this might (or might not) be generalized.

Nobody responded to this. I think I know why, and while I'm not your target audience, I'll respond.

I think it is pretty obvious that a small, mutually agreed upon transaction where neither side is behaving fraudulently or attempting to manipulate the other side can't be unethical/immoral.

Large individual transactions or groups of transactions carry a risk of manipulation, and that's what people are concerned about: the power of large transactions/groups of transactions. What can make those immoral (or illegal) is malicious intent to cause harm to another party.

Clearly, the reddit group is motivated in part by a desire to cause harm (and succeeded), but their actions have been judged by many as a righteous counter-attack: morally acceptable harm.

The hedge funds are being judged to be intending to cause harm to Gamestop and its other investors. My understanding (admittedly thin) is that massive shorts themselves can push a stock down. I'm not sure if a single hedge fund is big enough to cause harm by throwing its own weight around, but maybe multiple hedge funds together would. So the question is; are the coordinating the attack or are they all independently making the same judgement and taking the same action, which together causes harm? I think coordination would be illegal, and if they aren't I don't see how their actions can be judged immoral.

Other possibilities:
Rich = evil.
Predicting bankruptcy = mean.

 

[russ_watters]

At least you are open about your inconsistent labels.

I also label rain and snow differently. Maybe you can comment on that too, or make your point. I'll be more pointed: You are claiming a sameness, so describe the actions that you see that are similar/the same. Because to me it seems pretty clear that many if not most are motivated primarily by a desire to harm the hedge funds and are willing to lose their own money to do it. That's definitely not investing. That's spending money on activism.

Overlapping that group is another group who hopes to make money, but are very new to investing (some even never have before). Some may even think they are investing, but they aren't. Not any more than tossing a piece of crumpled-up paper into a trash can is playing basketball.

[edit] Note, I'm not even calling that "betting", but there is another group that is betting, and I draw a distinction between betting and investing. Remember, the name of the reddit forum is "wallstreetbets". Not "wallstreetinvesting".

Some have cashed out, at least partially, and made a lot of money. Some will sell soon, some will sell later. Many different people, many different strategies.

Yes.

 

[nduka-san]

how about everyone calms down do some yoga or somthing

 

[Bandersnatch]

I don't see how smithing is a good way to chill out.

 

[nduka-san]

I don't see how smithing is a good way to chill out.

something

 

[Vanadium 50]

I don't see how smithing is a good way to chill out.

I dunno, all that banging and pounding? Relieves a lot of tension. And that's not even considering that there's fire involved.