Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
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
Which is why the market manipulation that occurred on Thursday 28, Jan at the behest of Melvin is … wrong.
winner.
While The Babylon Bee is supposed to write satire, sometimes the truth gets through. (Well, most of the time for the ‘Bee)
https://babylonbee.com/news/the-bee-explains-what-the-heck-is-going-on-with-gamestop
Here is the explainer for the sides.
Short selling has always been a risky venture since your upside is limited by the current price of the stock, but the downside is unlimited. With Gamestop at c.$5/ share, the best one could hope for is to sell short, and then cover the short by buying it back for next to nothing, thus gaining a $5/ share profit when you cover the short position. However, every dollar the stock price increases over the original price it was short sold for costs the gambler (not really investor) that much more. I saw some horrible things happen to people in 1987 when the market crashed and people with short positions got clobbered in strange reversals. It is notoriously dangerous.
The entire concept of the market is putting together buyers and sellers. Some believing in price rise of a particular stock, others believing the price will go down. I see no problem with the short sellers being clobbered by speculators who buy into a rising market for a particular stock. No one holds a gun to the head of the short seller. He is simply betting against the company’s value. Essentially, the market is driven by two forces, greed and fear.
Perhaps I am missing something, but I watched hedge funds and other big investors eat up the profits of lesser investors during the five years I worked as a broker. I saw no government intervention to help the little guys who got eaten alive. In fact we used to talk about how the market turned little fortunes into big fortunes ( your little fortune, my little fortune gets turned into Merrill Lynch’s big fortune or some other big firm, take your pick.) I am not disconcerted seeing some predatory hedge fund manager get eaten by a school of hungry piranhas (small investors).
Breitbart News this morning had a guy on by the name of Charles Mizrahi. What it came down to was, Robin Hood didn’t have enough capital to handle the volatility of the situation. The only choice they had was to shut it down or the firm would break from what I think amounts to margin calls.
#justreporting
Just reporting #2. Definitely read this. It’s not that long.
This makes a good case for short selling, which is that it provides important market signal in a sea of passive investment. But Melvin seems to have had a very risky position in GameStop. Then, when it moved against them, instead of taking their losses, they doubled down. Now, the consequence of Melvin getting blown out should be, not the end of shorting, but more hedge fund shorting caution, which I don’t think would be bad. I don’t think that that will be the outcome given the political and regulatory response.
Another question comes to my mind. If Melvin was so overextended, why didn’t a competing hedge fund make the short squeeze? Maybe a hedge fund war would be too destructive for both of the main funds with other parties jumping in to milk the conflict for their own profit? The psychology of an army of resentful small investors drives a different dynamic. Or maybe big finance is just too chummy? I don’t know.
I’m guessing that the lawsuits against Robinhood will bleed them as well. But it doesn’t matter. Robinhood (and other on-line brokerages) will be made whole (and probably then some) for taking “responsible” action. The alternative is to spend a lot of upcoming time with federal investigators.
Well, unless ‘resident Biden et al think they are too big to fail.
I suspect we could go back to recent historic financial meltdowns to show how effective the SEC is on regulating anything.
Laws in place don’t mean laws are enforced. You did see the rioting last summer, correct? How’d them fancy laws work out, in that instance?
Liz Warren just demanded SEC investigation of the redditors to protect hedge funds. Hahaha. Now, I’m just waiting for Bernie Sanders to give the greed is good speech. They’re all phonies. Holden Caulfield weeps.
It took him about five minutes or something to figure out that Bernie Madoff was lying. Eight hours to prove it. All of the big option houses knew he was lying as well because he didn’t have enough volume.
All regulators are captured. They just want a fat payday someday.
Civil War 2 is going to be so much fun.
LOL
#TheyAreAllDemocrats
Robinhood claims it had to suspend because its systems didn’t have the capacity to handle the trading volume, and it has now resumed trading because it got the financial backing it needed to keep its systems working:
https://www.msn.com/en-gb/money/other/gamestop-shares-surge-again-as-robinhood-restores-trading/ar-BB1dcQZj
Short Squeezers = Little Hitlers
That didn’t take long.
“Our dog ate our homework!”
That’s the same kind of garbage that gets thrown around anytime the regulatory piece pops up. Instead of malice, they replace it with incompetence, and get a gentler slap to the head.
I already posted what the problem is. You have to have a ton of capital to handle a volatile stock like that. Robin Hood didn’t have it. That’s what it comes down to.
Comment #65.
Now Fox News is freaking out because the market is down 600 points. Under 2%.
Unless the stock market changes more than 8% over three days it never amounts to anything.
I took out almost all of this year’s MRD before Biden took office, when the stock market was high. Let it fall.
I think what you’re saying is a real phenomenon, but to be clear this was within the context of Robin Hood. It should never be news unless it’s close to 3% or something.
Anybody whose been following the market over the last coupla years has seen lots of ups and downs. This one is small stuff, but it does seem to be part of a small trend ever since Biden took office. There have been up days, too.
FYI this guy’s service is going behind a pay wall any day now. I don’t know if the old ones will stay out of it, but this should be pretty interesting.
https://ttmygh.podbean.com/e/gwp_003/
Many here are hopeful that short sellers will suffer.
Why?
It seems to me that they are creating value for themselves and others, by renting assets that people have voluntarily agreed to rent because they value the additional rental income more than the opportunity cost of not renting.
Congress needs to figure out what aspects of Big Finance are simply extraction. They need to explain it and stop it.
Goo luck. lol
Are you one of those who are hopeful that short sellers suffer? To clarify, I mean suffer because they do short sales, not because they are short sellers who happen to have done some other act.
If so, why?
I think, if anything, it would be Psaki’s father. He appears to be a portfolio manager.
Did I say that? No.