FTSE & DOW slide because of Reddit users!

Albermarle

Grenage said:

The Reddit malarkey is amusing; it's being hailed as David vs Goliath - the little man sticking it to the fund managers.  Popular sites such as imgur are full of people cheering about poor people hurting fund managers.

I'm somewhat more cynical; it just looks like a massive pump and dump.  The original manipulators will have cashed out by now, the hedge funds will quite possible open new shorts at the higher price, and a lot of people who bundled in will be left holding the bag.

Yes I am sure there will be a few people behind it all, stoking up the inexperienced investors/day traders .
Probably like you say they will have cashed out near the top, and the mugs will pay the price. 

Thrugelmir

Robinhood cannot run on fumes. Makes much of it's money by selling customer trading data to Hedge Funds.  Poacher turned gamekeeper it seems. 

talexuser

I don't get this David vs Goliath malarky. If small investors are buying to get to this price, then they must be buying at high prices. When the bubble bursts small investors who bought at higher prices lose money. How is that winning or shafting hedge funds, even if they also lost money?

BananaRepublic

talexuser said:

I don't get this David vs Goliath malarky. If small investors are buying to get to this price, then they must be buying at high prices. When the bubble bursts small investors who bought at higher prices lose money. How is that winning or shafting hedge funds, even if they also lost money?

I don’t understand it either. They know the shares aren’t worth the current price, why would anyone knowingly buy an overpriced asset to give hedge funds a bloody nose? Maybe there is more to this than meets the eye. 

ProDave

talexuser said:

I don't get this David vs Goliath malarky. If small investors are buying to get to this price, then they must be buying at high prices. When the bubble bursts small investors who bought at higher prices lose money. How is that winning or shafting hedge funds, even if they also lost money?

My take is a few people bought low and started pumping this on the cover of wanting to hurt the shorters.  Other people jumped on the bandwagon and pushed the price up.  I bet the originators never expected it to go this high and cannot believe their luck and have sold out at a very handsom profit.

Meanwhile the later investers who paid a high price will do well to sell without a loss and some will be left still holding when it does crash and will make a big loss.

Meanwhile I bet the same or other shorters have shorted at this high price and cannot believe their luck at the chance to make a massive killing when it does crash.

this exercise does not make money, it just transfers if from one to another, there are going to be a lot of losers lets hope people have only staked what they can afford to lose, not their shirt or their house.

Meanwhile anyone care to post the "next one" when it is spotted?  It might be a chance to buy and sell quick for a modest profit rather than get greedy and lose it all hoping for something silly.

YellowStarling

ProDave said:

talexuser said:

I don't get this David vs Goliath malarky. If small investors are buying to get to this price, then they must be buying at high prices. When the bubble bursts small investors who bought at higher prices lose money. How is that winning or shafting hedge funds, even if they also lost money?

My take is a few people bought low and started pumping this on the cover of wanting to hurt the shorters.  Other people jumped on the bandwagon and pushed the price up.  I bet the originators never expected it to go this high and cannot believe their luck and have sold out at a very handsom profit.

Meanwhile the later investers who paid a high price will do well to sell without a loss and some will be left still holding when it does crash and will make a big loss.

Meanwhile I bet the same or other shorters have shorted at this high price and cannot believe their luck at the chance to make a massive killing when it does crash.

this exercise does not make money, it just transfers if from one to another, there are going to be a lot of losers lets hope people have only staked what they can afford to lose, not their shirt or their house.

Meanwhile anyone care to post the "next one" when it is spotted?  It might be a chance to buy and sell quick for a modest profit rather than get greedy and lose it all hoping for something silly.

Whilst I agree that this was likely a campaign started by a few that enticed many, helping it to truly take off, my understanding is there was a method to the madness that has ensued.  That is, that stocks with exceptionally leveraged short positions were targeted (in the case of GameStop, I believe Melvin Capital had shorted it by borrowing more shares than there were available).  In this regard, it was anticipated that the squeeze would cause the price to rapidly appreciate through a scramble by the shorts to buy what remaining shares they could get their hands on to cover their contracts and limit the damage.

So, yes, there will be some colossal losers here I fear - some or all of the original shorters, as well as the later squeezers.  I'd also wager along with you that there are some recent short positions being taken out ready for when this campaign finally concludes and the share price tumbles back towards its merited valuation.  The environment that allows this sort of opportunity, for a clash between squeezers and shorters (who most likely agree on the idea that buying the stock in these companies generally wouldn't be a good idea based on fundamentals alone), where shorters can overleverage themselves and therefore make a squeeze appealing, probably needs some discouragement somewhere, whether through reform, heightened regulation, I don't know.

In terms of the next ones, they're already in motion - whilst GameStop has taken the headlines, other struggling stocks like AMC, Koss, Express, etc. have all been touted as potential gains through squeezes, and have been the subjects of restricted trading this week too.  And in terms of what effect it has on the markets and practices, at least one US short seller (Citron Research) has today announced it will no longer be publicly shorting companies after 20 years of doing so, to avoid being the target of squeezes (of course, it's nowhere in the league of some hedge funds, but it's an example of how these last couple of weeks have bruised a few).

jamesmorgan

My understanding is that over 100% of the stock in GME has been shorted.  This is potentially a very volatile situation which could cause significant market ripples.  It may help to use a simplified scenario of what is happening.  Imagine a small company with 30 shares valued at £10 each.  Person A owns 10 of these and person B owes 20.  Hedgefund X wants to short 20 of these shares so borrows them from person B and sells them to person C.  Hedgefund Y wants to join the party and also wants to short 20 of the shares.  They borrow them from person C and sells them to person A.  Person A now owns all 30 of the company shares.  Hedgefunds X and Y have a combined short position of 40 shares which is more than the number in existance.

Now, person A doesn't like hedgefunds so decides he is not going to sell his shares without making a huge profit.  When the short positions close, hedgefunds X and Y have to tempt person A to sell at increasing prices.  Eventually when the share price reaches £1000 he gives in and sells 20 shares to Hedgefund Y.  They close their position with person C.  Person C then sells his shares to hedgefund X which can close its position with person B.  At this point the share price returns to its normal market price of £10/share.

At the end of this manipulation of the market, persons A and C have both made £20K and Hedgefunds X and Y have both lost £20K.

However, person A is in an incredibly powerful position.  What happens if he decides not to sell at any price?  Not even at a £trillion/share.  Hedgefunds X and Y are going to go bankrupt.  If they are major players this is likely to cause significant volatility across all major markets.

This is what can happen with small companies when market players aren't looking to make money but to cause anarchy and bring down large players.

talexuser

I was amused by an article defending short selling in the borisgraph today, whereby this "peasants revolt" attack was in effect terrible, because hedge funds short selling were an integral part of an efficient market, and causing them losses was bad for us. Hedge funds identified poor companies before anyone else and thus helped prevent fraud. I laughed like a drain. It was written by the manager of the Argonaut Absolute Return fund, invest in his fund and you would have made minus 5% over the past 5 years... a man to trust.

BananaRepublic

talexuser said:

I was amused by an article defending short selling in the borisgraph today, whereby this "peasants revolt" attack was in effect terrible, because hedge funds short selling were an integral part of an efficient market, and causing them losses was bad for us. Hedge funds identified poor companies before anyone else and thus helped prevent fraud. I laughed like a drain. It was written by the manager of the Argonaut Absolute Return fund, invest in his fund and you would have made minus 5% over the past 5 years... a man to trust.

Derivatives have a valuable roll to play but traders who mess around with them don’t deserve any sympathy. A few years back basic food prices were sky high causing huge problems for poor countries, all due to speculators. Not that they gave a monkeys. 

ultrasilvam

AlanP_2 said:

John Authers from Bloomberg has been discussing this in some of his recent articles and he made the interesting observation that those people using shorting pre the 2008 crash are regarded as "heroes" and have had a film made about them (The Big Short en.wikipedia.org/wiki/The_Big_Short_(film) )

It looks like Michael Burry - the guy portrayed in The Big Short - might have made some money from GME as well. 

Burry’s play helped set off one of the wackiest and most out of control trades in financial history, which has minted billions of dollars in paper profits for some investors, including many amateur speculators, and caused what may be billions in losses for some of the world’s most sophisticated hedge funds.

forbes.com/sites/antoinegara/2021/01/26/the-hedge-fund-genius-who-started-gamestops-4800-rally-now-calls-it-unnatural-insane-and-dangerous/?sh=4a3065df303b

markets.businessinsider.com/news/stocks/big-short-michael-burry-1500-percent-gain-gamestop-stake-2021-1-1030004676