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.

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  1. Instugator Thatcher
    Instugator
    @Instugator

    Jeff Hawkins (View Comment):

    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

    Which is why the market manipulation that occurred on Thursday 28, Jan at the behest of Melvin is … wrong.

    • #61
  2. Guruforhire Inactive
    Guruforhire
    @Guruforhire

    Skyler (View Comment):
    Some people think that shorting stock is a cheap gimmick. I don’t. I think trading stock with no dividends is the gimmick.

    winner.

    • #62
  3. Instugator Thatcher
    Instugator
    @Instugator

    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.

    Who is involved?
    On one side of the fight are the hedge fund managers. These guys are good-hearted regular folks living out the American dream by manipulating markets so that companies will fail and they can buy another desperately needed yacht.

    On the other side are a bunch of Cheeto-stained Redditors who are dangerously manipulating markets to try to make money. These guys obviously weren’t informed that the stock market was only for rich people to make money. They’re probably Nazis and alt-righters too.

     

     

     

    • #63
  4. Eugene Kriegsmann Member
    Eugene Kriegsmann
    @EugeneKriegsmann

    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).

    • #64
  5. RufusRJones Member
    RufusRJones
    @RufusRJones

    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

    • #65
  6. RufusRJones Member
    RufusRJones
    @RufusRJones

    Just reporting #2. Definitely read this. It’s not that long.

     

     

     

    • #66
  7. ape2ag Member
    ape2ag
    @ape2ag

    RufusRJones (View Comment):

    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.

    • #67
  8. RufusRJones Member
    RufusRJones
    @RufusRJones

     

     

     

    • #68
  9. ape2ag Member
    ape2ag
    @ape2ag

    RufusRJones (View Comment):

     

     

     

    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.

    • #69
  10. Instugator Thatcher
    Instugator
    @Instugator

    ape2ag (View Comment):
    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.

    Well, unless ‘resident Biden et al think they are too big to fail.

     

    • #70
  11. Gazpacho Grande' Coolidge
    Gazpacho Grande'
    @ChrisCampion

    Mark Camp (View Comment):

    DrewInEastHillAutonomousZone (View Comment):

    Mark Camp (View Comment):
    The SEC has regulations to prevent stock market manipulations by individuals or groups acting in concert.

    Unless those individuals are hedge fund managers. Then it’s ok.

    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.

    It’s okay for them to manipulate the stock market.

    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.

     

    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?

    • #71
  12. ape2ag Member
    ape2ag
    @ape2ag

    Instugator (View Comment):

    ape2ag (View Comment):
    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.

    Well, unless ‘resident Biden et al think they are too big to fail.

     

    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. 

    • #72
  13. RufusRJones Member
    RufusRJones
    @RufusRJones

    Gazpacho Grande’ (View Comment):
    I suspect we could go back to recent historic financial meltdowns to show how effective the SEC is on regulating anything.

    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.

    No One Would Listen is the thrilling story of how the Harry Markopolos, a little-known number cruncher from a Boston equity derivatives firm, and his investigative team uncovered Bernie Madoff’s scam years before it made headlines, and how they desperately tried to warn the government, the industry, and the financial press.

    Despite repeated written and verbal warnings to the SEC by Harry Markopolos, Bernie Madoff was allowed to continue his operations. No One Would Listen paints a vivid portrait of Markopolos and his determined team of financial sleuths, and what impact Madoff’s scam will have on financial markets and regulation for decades to come.

     

     

     

     

    • #73
  14. DrewInEastHillAutonomousZone Member
    DrewInEastHillAutonomousZone
    @DrewInWisconsin

    ape2ag (View Comment):

    Liz Warren just demanded SEC investigation of the redditors to protect hedge funds.

    Civil War 2 is going to be so much fun.

    • #74
  15. RufusRJones Member
    RufusRJones
    @RufusRJones

    LOL

     

     

    #TheyAreAllDemocrats 

    • #75
  16. Misthiocracy got drunk and Member
    Misthiocracy got drunk and
    @Misthiocracy

    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

    • #76
  17. Gazpacho Grande' Coolidge
    Gazpacho Grande'
    @ChrisCampion

    RufusRJones (View Comment):

    LOL

     

     

    #TheyAreAllDemocrats

    Short Squeezers = Little Hitlers

    That didn’t take long.

    • #77
  18. Gazpacho Grande' Coolidge
    Gazpacho Grande'
    @ChrisCampion

    Misthiocracy got drunk and (View Comment):

    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

    “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.

    • #78
  19. RufusRJones Member
    RufusRJones
    @RufusRJones

    Misthiocracy got drunk and (View Comment):

    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

    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.

    • #79
  20. RufusRJones Member
    RufusRJones
    @RufusRJones

    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.

    • #80
  21. The Reticulator Member
    The Reticulator
    @TheReticulator

    RufusRJones (View Comment):

    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.  

    • #81
  22. RufusRJones Member
    RufusRJones
    @RufusRJones

    The Reticulator (View Comment):

    RufusRJones (View Comment):

    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. 

    • #82
  23. The Reticulator Member
    The Reticulator
    @TheReticulator

    RufusRJones (View Comment):

    The Reticulator (View Comment):

    RufusRJones (View Comment):

    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. 

    • #83
  24. RufusRJones Member
    RufusRJones
    @RufusRJones

    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.

     

    Grant invites two accomplished shortsellers, Marc Cohodes and Bill Fleckenstein to discuss the wild gyrations in equity markets in recent days as a coordinated move by retail investors to attack ‘shortsellers’ and inflict pain upon Wall Street proves to be, in some ways at least, a roaring success.

    There are, however, nuances to this story which are perhaps not broadly understood and are in need of a little illumination – most notably, the difference between ‘shortsellers’ and ‘highly leveraged hedge fund shorts’.

    Bill, Marc and Grant discuss the important differences between the two, the events that have transpired and the potential path from here as well as some thoughts on why and how the system is broken, where the anger of retail investors ought to perhaps more accurately be directed and why this growing revolution may be an important turning point…

     

    https://ttmygh.podbean.com/e/gwp_003/

    • #84
  25. RufusRJones Member
    RufusRJones
    @RufusRJones

     

     

     

     

    • #85
  26. Mark Camp Member
    Mark Camp
    @MarkCamp

    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.

    • #86
  27. RufusRJones Member
    RufusRJones
    @RufusRJones

    Mark Camp (View Comment):

    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 would 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

     

     

     

    • #87
  28. Mark Camp Member
    Mark Camp
    @MarkCamp

    RufusRJones (View Comment):

    Mark Camp (View Comment):

    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 would 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?

    • #88
  29. Hoyacon Member
    Hoyacon
    @Hoyacon

    RufusRJones (View Comment):

    [Tweet on Citadel and Psaki]

    I think, if anything, it would be Psaki’s father.  He appears to be a portfolio manager.

    • #89
  30. RufusRJones Member
    RufusRJones
    @RufusRJones

    Mark Camp (View Comment):

    RufusRJones (View Comment):

    Mark Camp (View Comment):

    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 would 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?

    Did I say that? No. 

    • #90
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