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GameStop and the ‘Meme Stock’ Phenomenon
Over the last couple of days, a group of cheap stocks has been pushed to the moon and back by speculative investment. Collectively known as “meme stocks,” GameStop et al., or all those short stocks, or anything else the internet thinks is clever. Here’s a brief history of the phenomenon.
About a week ago, a few hedge-fund guys were galivanting around the internet bragging about all the short positions they had on Gamestop stock. Gamestop is a brick-and-mortar video game store that sells game consoles, new releases, and resells used games. Gamestop has seen better days; they’re getting murdered by direct shipping and direct downloads through Steam.
A short bet seemed to be a sure bet, but other day traders, commoners, and people with a bit of stimulus money took exception to these rich fellows trying to drive a business they have some fondness for into the ground. They decided to run the stock price up, forcing the short sellers to cover for significant losses. The genesis for this was apparently a subreddit called r/wallstreetbets.
As the stock jumped in price, many daytraders, casual investors, and internet squatters took notice and joined the buying frenzy. At this point, a bit of nostalgia turned into a full-on speculative bubble. The primary purpose of the options and stock purchase began to be making scads of money as opposed to just giving a black eye to rich people who brag about being rich.
As the bubble began to inflate, various Wall Street institutions jumped into action attempting to halt runaway trading. Trading in Gamestop was paused, but other stocks took up the mantle through Twitter and Reddit, among them AMC, Blackberry, and Nokia. Overnight these meme stocks became a full-on phenomenon with investors, dabblers, and people who had no experience whatsoever placing buy orders for when trading resumed in the morning.
One of the most popular ways to do this was by an app called Robinhood which allowed regular everyday people to trade commission-free in about five minutes after setting up an account. Robinhood, along with many brokerage firms, disallowed the buying of new shares this morning.
So here we sit. Wall Street, as a collective, has decided to pause these bubbles till they can figure out “what the heck is going on.” The brokerage firms won’t let people trade, some won’t even let people sell, and boy, are people mad about it. Robinhood is taking the brunt of the ire.
Anyway, Dems will call for more regulation. Investing will have higher costs and more barriers to entry. Voters will lose any faith they had left in free markets.
Hopefully, the summary helps. I’m sure people have opinions.
Published in Finance
Unless those individuals are hedge fund managers. Then it’s okay. It’s okay for them to manipulate the stock market. It’s okay for Congress to benefit from insider trading. It’s not okay for the citizen class to engage in “outsider trading.”
There’s a delicious red-pill just sitting there on the table, and millions more are reaching for it.
I used to follow David Einhorn, who was not shy about talking down a stock, and I know it’s done in a variety of ways. This particular instance just strikes me as gilding the lily
As I said, the law makes no exceptions. If you have any factual evidence that the SEC is favoring hedge fund managers in this case, please present it. But I think if you read up on what’s happening, you will find that their concern is about people trying to pump up the prices of stocks using social media in order to punish what are supposed to be diabolical capitalists out of a Marxist propaganda film. Which is exactly what you will discover is happening: their quotes on reddit have been published.
SEC actually has more provisions to protect small investors from big ones than the other way around. Too many, in fact: it explicitly discriminates against the little guy in order to supposedly protect him from his own supposed foolishness, in the case of rules against investing in certain types of private equity firms unless one’s personal wealth is sufficiently high.
You are right that Congress has written laws to make them exempt from the insider trading rules that the public must follow.
But you are confusing two issues. These laws don’t discriminate against small vs. large private investors. They discriminate against ALL private investors, to the benefit of Congressmen.
From different brokers.
The Stop Trading on Congressional Knowledge (STOCK) Act of 2012 was signed into public law by President Obama. Section 3.a of the law removes exemptions from federal securities laws previously enjoyed by congressional members and staffers, specifically the insider trading prohibitions. The online mandatory disclosure requirements (Section 8.b.1.(B)) of that law are how we know that Representative Pelosi purchased a bunch of TSLA options last month.
Despite the existence of this law, the field is still pretty heavily tilted in Congress’ favor…
My father-in-law was a hard working French-Canadian immigrant with an eight grade education. He was an orphan living with his grandfather who took him out of school when he complained about being sexually abused by the priest that ran his school. He worked as a construction worker and eventually as a general contractor after he moved to Florida. He never made much money. As his health began to wane in his 70’s he learned how to use the computer to day trade. He followed about ten stocks that he understood and used their volatility to his advantage. He marveled that by setting up buy and sell options on these stocks daily he was often able to make between 200 and 800 dollars a day. He reveled in how easy that was compared to cleaning roofs in the hot Florida sun for a few dollars a day.
He has been gone for many years but he is smiling. He was a guy who would have loved to sit on a barstool with Dave Portnoy.
In 2019 one of their number did some digging and figured out the massive shorting. He also figured that the “GameStop is dead”
is kind of an exaggeration (which is the kind of rumor that stock shorters propagate). He bought when the price was truly low and profited greatly as the price slowly rose to $20 or so. Then the reddit discussion took off, and the game was on to bankrupt the main hedge fund holding the short positions. It could have been any company (and several other candidates are out there; Robin Hood turned off buying a list of stocks today. So to think they are doing this out of some kind of affection for the company confuses the issue.
I read a thread in reddit An open letter to Melvin Capital, CNBC, Boomers, and WSB and it was interesting. Many posts made nearly identical claims like: I was a little kid in 2008; Wall Street ruined my family/home/etc. and I’m willing to ride this down to losing my entire investment if it means we can do serious damage to a hedge fund.
So for some, at least, money is no more the motivation than affection for GameStop.
Yes, but not on Robinhood. One of the short sellers is an investor in Robinhood, and Robinhood wasn’t letting people buy.
From different dealers in this case. RobinHood is a broker only: It doesn’t buy or sell stocks. It forwards bid/ask pairs to a market maker, who executes the trade at a profit based on the spread, and pays a cut of the gross profit to RobinHood for the tip. That’s how RobinHood offers commission free trades.
For what it’s worth, Microsoft announced a partnership with Gamestop only a few months ago, signaling its confidence in the chain’s future. Gamestop is a company in the process of adapting its business model from resale of hard copies to something that can thrive in a digital era.
I hope this tug-of-war with the company’s share value does not disrupt that transition.
I have a “play money” Roth IRA with a discount broker, and over about 20 years and at least five brokers (original one bought by…bought by…), I have parlayed $740 into $52,000, adding money when I can, but not for the last about ten years due to household income limits. Now, I have to use what I have to buy and sell my individual stocks (which all except one pay dividends), and the only way I have any cash is when one of my holdings gets bought out for cash. My Tiffany stock netted me about $5,000, and I have gradually been deploying it back into the market. I have been a pretty good stock-picker, and all but a couple of my stocks are in the black today. I never “speculate”, and do not trade any derivatives. I have been watching this GameStop thing with interest, but only that. I hope the hedge fund guys take some serious losses on their short-selling.
I do read the Wall Street Journal, and hedge funds in general have done extremely poorly over the last couple of years, with more than a few closing entirely. I understand that some mansions in Greenwich, CT, have been going begging-that’s where hedge funds congregate, and their owners buy huge estates. That market, however, has turned up lately with New Yorkers moving to the suburbs to escape the virus.
I think you are right and it is why a guy like Dave Portnoy promoted it.
And the Sovietitization of our society continues.
I was literally just about to post that.
If Google is on your side, you’re probably The Bad Guy.
More like some unholy combination of the PRC, Venezuela, and the worst excesses of the Gilded Era.
You see? If we really want to harm Google, all we need are the weaponized nerds of Reddit.
Did anyone ever consider that the new Civil War might be all digital?
Unfortunately, hedge funds are small-time compared to Google, and Reddit is controlled by SJWs; I think of this as more of an Allies/Stalin alliance of convenience against a common threat.
A good overview.
GameStop insurgency is just the latest rebellion against ‘the Big Guys’
There’s a major realignment happening right now. “Left vs. Right” doesn’t describe it. It’s really more “Citizen/Working Class” vs. “Corporate/Political Class.” I mean, Reddit might be “controlled” by SJWs, but certainly Redditors aren’t all SJWs. And those weaponized nerds probably see Big Tech as 1) the big threat we all know it is, and 2) a really juicy target.
Interesting. My boss was following this and mentioned it to me. I didn’t know that it got to the point where they stopped trading on certain stocks.
The real question is how a hedge fund got a greater than 100% short position on a stock.
It’s actually worse than I thought. Looking at Tesla’s recent earnings is an interesting exercise. There much ballyhooed recent financials showed – at long last – a profit. Well…kind’a. While they did finally end up in the black, it wasn’t from selling cars. That bit of the business is still hemorrhaging money. If they aren’t making money selling cars. what do they sell to make a buck? Here’s where Nancy Pelosi comes into the picture. See, Tesla sells ‘regulatory credits’ to other auto companies that might otherwise run afoul of the government regulators. The more regulations the more valuable Tesla’s regulatory credits.
What’s good for the goose is good for the gander. Individual investor should never have been shut down and censored despite some acting from spite or for recreation.
(1) Class Action Lawsuits
Robinhood, E*Trade, TD and the other individual investor platforms that prohibited investors from trading should be subjected to class action lawsuits. The purpose of these firms is to provide individuals a direct means of doing financial transactions in the manner the customer sees fit – period. Heck it’s even in the marketing for the firms. Blocking a customer from either unloading a big loser or from making a gain is unethical and I think illegal.
(2) “Values Investing”
You here this as a big buzzword nowadays among trendy types. All over Bloomberg. There are even financial products based on advocating so called social justice and environmental justice. A brand new buzz word “ESG” was recently unveiled for the promotion of Progressive causes. Stands for Environmental, Social and Governance. Intended to direct companies going forward. Part of values investing includes ideas like cutting off oil&gas, gun & ammo from financing and investing. And whatever else. Certain values including putting people out of work and jeopardizing reliable affordable energy. It’s fashionable. So since advocacy investing is well established now, what’s to say a value of going after Hedge Funds that short companies is not a valid “Value”? To each his own.
(3) Public Knowledge
It’s common for Hedge Funds to short stocks and be very public about it. Sometimes it doesn’t work out for Hedge Funds. A prominent example is Bill Ackerman and his fund shorting Herbelife and battling other inventors. Hedge Funds will make a bet and then go out on tour telling the public that they shorted and why everyone else should think the company sucks basically. The value goes down and the Fund makes money in a nut shell. But sometimes people disagree or just like to create a short squeeze. This recent Reddit case is simply a crowd sourced short squeeze. If the Hedge Funds hadn’t taken such a risk in taking a large position, then the Reddit gang wouldn’t have been able to make such a big deal in the short squeeze.
(4) Investing Disclaimer
Read a generic investing disclaimer. There is a possibility to lose money. Market has risk, but your trading platform shouldn’t be the bigger risk.
(5) Motto of Affected Hedge Fund
Melvin Capital:
The firm uses a bottom-up, fundamental research-driven process to identify investments employing a long-short equity strategy.
New meaning to this post-Reddit.
(6) High Frequency Trading
There are other systems such as the one that created the “Flash Crash” that are still in use today. I don’t see why crowd sourcing is more of a threat. And yes, markets have been shut down from that before.
(7) It’s still America
Let’s face it, this was an epic play by some guys who made bank.
My grandfather lost his money on the stock market in 1929, I think. I don’t know if he had that kind of money, I never met him because he died before I was born. I do know that my dad told me that I should stay away from the stock market unless I really knew what I was doing. He said that when amateurs get active in the stock market is when the market crashes.
I’ve heeded my father’s advice, more out of disinterest than anything else, but I think his advice is still good. I’m also not rich, and the two might be related. Maybe his point was to encourage me to not be an amateur and instead to be good at it. Hmm.
I don’t understand why the market encourages the trade of stocks that don’t pay dividends. I know that seems to have ended a long time ago, but it really does highlight that most money is made by people who don’t make things or provide things, and often have no idea how things are made. It’s a perverse incentive and I think a big weakness in our economy. Except for Elon Musk, most CEO’s have never made a thing in their lives. There’s something wrong with that.
Some people think that shorting stock is a cheap gimmick. I don’t. I think trading stock with no dividends is the gimmick.
But what do I know?
I hope the SEC is asking the same question. But, I fear they are not, because they don’t want to know the answer.
I imagine it’s much easier to exert a full court press on MyPony2379. And his or her chat room partners.
Except that “market capitalization” doesn’t go to the company.
MyPony2379 et al don’t have DC lobbyists, or high-price lawyers on retainer.
Well it was another discord of about 150K that went after AMC to pump it. I only bought 100 but got 8X, and you can’t beat that. That’s another company to me with way too much debt and lease liabilities as an investment.
Melvin Capital has made bank not just shorting but buying puts (options on shorts) since 2015, basically double dipping. They have a crap ton set to expire in the 135-155 range tomorrow if they truly didn’t close out their position, which I think might have been leaked to stop the hemorrhaging
Something about how “Don’t Be Evil” used too many characters, so they had to shorten it over time to “Be Evil”.
Except when they sell their reserve shares.