GameStop

[Tahlvin]

So thoughts on the whole reddit/GameStop stock thing? I think it is a bit of market manipulation, but no worse (and probably better) than what professional hedge funds have been doing, so I got no problem with what the individual investors have done. In the long run, the stock will ultimately reflect the value of the company, so I think they ultimately will end up losing some money. But I've never been fond of the whole idea of short-selling to begin with. It feels like the ultimate form of greed, figuring out a way to make money off a company decreasing in value.

[Kyle]

It's a pyramid scheme that is bound to fail. The amateur day traders are going to lose a lot of money. The people hurt by this will be the normal folks who think they are fighting a proper cause. They will lose a ton of money. The hedge funds will be fine. It's Don Quixote tilting at windmills. If you want to change the system- change the system. Don't be suckers.

[FlameBlade]

Though, hedge fund was on hook for massive loss, but somehow through pulling of strings, less worse off. I think it really exposed the problems with stock market, and how in a sense, it's for rich people to make money off us instead of truly benefitting the community.

Everytime someone tries to explain what short selling, I get confused and lost because it's so abstract that it's unclear what exactly is the benefit.

[poorpete]

Very few will come out of this feeling it was worthwhile.

Could be wrong.

If things are done right this will lead to needed changes. If not, it's a late stage capitalism tremor.

[Kyle]

But let’s be clear- what the redditors were doing wasn’t for the greater benefit. It was market manipulation to artificially inflate a stock for personal profit- not based on the economic reality of the company. When rich people do this they get criminal charges brought against them by the SEC- and they should. Again, this is a pyramid scheme that was doomed to fail and probably only serves the short sellers purposes by bringing a swifter end to the long declining stock. All the redditors that were putting money in at or near the top (which was most of them) will lose money on this, and for many it’s money they can’t afford to lose. The short sellers will absorb transactional costs from the bridge loans they had to take out to cover this anomaly, but ultimately they’ll be fine.

I’m incensed at the idea that the redditors are fighting a noble cause. They’re not. They created a pyramid scheme that’s going to cost people a lot of money. They did it to try to make money off of market manipulation. It’s terrible.

I agree that our system is clearly broken. But let’s have a discussion about that. This “Merry Pranksters” bullshit has real consequences and is not shining the right light on the right problem. It’s gross.

Also- I’m with Flame. Every time someone tries to explain shortselling to me, it’s like when someone tries to explain the higher level dimensions to me. I really get it until about halfway through and then it all becomes vaporous incomprehension for me.

[Stan]

I sorta get selling short as a form of gambling, betting that a stock will drop within a window of a few days. Commodity markets have similar things where you can put in a bid to buy a commodity future at a fixed price different than the current price. Think of it like roulette where they give you many betting options.

It probably adds to volatility with people trying to do things to raise and lower stocks. Companies who make money per trade don't care as they want people to trade frequently, not make one purchase and hold onto it for years.

[Akiva]

Even though the hedge funs are losing some money, what happened yesterday shows how rigged the market is--Robin Hood and other free/low cost trading apps banned its users from buying or selling GameStop, AMC, and some others. But the hedge funs were still able to trade those stocks. That's just unfair. And it's common in financial markets.

Years ago I had a friend who worked at the Chicago Stock Exchange. He described options, puts, and other things to me. I said it sounded like going to the track and betting on the horses. He agreed.

[Tahlvin]

Not sure it will help Flame or Kyle, but here's my description of short selling:

The general rule with stocks is: buy low, sell high. In normal stock trades, you do it in that order: you buy shares first, when the price is low, and later sell those shares when the price is high, and the difference between the buy and sell price is your profit.

With short selling, you reverse the order of the transactions: you sell the shares first at the higher price, then buy them back later at the lower price. The difference between the buy and sell price is still the profit you get to keep (assuming the price went down as expected). Since you are selling the shares first, before you actually own them, you actually are "borrowing" those shares from a broker. And when you buy the shares back at the end, you give them back to the broker you borrowed them from, usually with some "interest" for the loan of those shares.

During a short sell, if the price of the stock goes up instead of down, you still need to buy the shares back and give them back to the broker that lent them to you. However, since you're buying at a higher price than you sold them at, you end up losing money because you bought high and sold low. Plus you still owe the broker interest from borrowing those shares. If you actually borrowed a very large number of shares, and the stock in question is in high demand, and you end up having to buy back the stock at the higher price, the demand created by you buying back the borrowed shares actually increases the demand even more, resulting in the price being driven even higher, raising the cost of buying back those shares. That phenomenon is called a short squeeze, which is what happened to the hedge funds in the GameStop scenario. At one point, the cost of the one hedge fund to buy back all the GameStop shares they borrowed was more than the total assets of the hedge fund were worth, meaning the hedge fund should have gone bankrupt when it bought back those shares, but somehow it didn't (at least not yet). Hmmmm.

[Kyle]

Not sure it will help Flame or Kyle, but here's my description of short selling:

So I get the effects of short selling. I understand the ramifications of it, so my confusion is really just abstract because I get what the end result is. Here's where I get lost coneptually:

you sell the shares first at the higher price, then buy them back later at the lower price.... Since you are selling the shares first, before you actually own them, you actually are "borrowing" those shares from a broker. And when you buy the shares back at the end, you give them back to the broker you borrowed them from, usually with some "interest" for the loan of those shares.

[Tahlvin]

That's actually an interesting part of it. A not-insignificant revenue source for a number of mutual fund companies involves lending shares of stocks they hold to hedge funds that are shorting stocks. They get paid no matter what. If the price of the stock actually goes up, they get the interest payment for lending the shares to the short speculator PLUS the benefit of the increase in the price of the stock. If the price goes down, like the short speculator suspects, then they lose money on the price decrease of the stock, but get part of that back with the interest payment from the short speculator, and they still own those shares of the stock in case the stock price rises again. So even if they are not shorting investments themselves, they still are involved in and making money off of the practice by lending their shares out.

What I don't like is the whole idea of selling something you don't actually own for profit. For the same reason, I don't like buying investments on margin, where you borrow the money to buy the stock, sell the stock later at a higher price, and pay off the loan interest from the profit you take. They both are just extreme versions of playing with other people's money, and the risk just doesn't seem to be worth it to me. That sort of stuff is market manipulation, just as much as what the reddit speculators are doing.

[Kyle]

That's actually an interesting part of it. A not-insignificant revenue source for a number of mutual fund companies involves lending shares of stocks they hold to hedge funds that are shorting stocks. They get paid no matter what. If the price of the stock actually goes up, they get the interest payment for lending the shares to the short speculator PLUS the benefit of the increase in the price of the stock. If the price goes down, like the short speculator suspects, then they lose money on the price decrease of the stock, but get part of that back with the interest payment from the short speculator, and they still own those shares of the stock in case the stock price rises again. So even if they are not shorting investments themselves, they still are involved in and making money off of the practice by lending their shares out.

Okay, that actually makes sense to me now. Thanks, man.

What I don't like is the whole idea of selling something you don't actually own for profit.

Yeah, I agree. Shorting has always struck me as wrong because it's basically owning a negative interest in a company. But I suppose the counter argument is that shorting serves as a hedge against people artificially inflating stocks.

[WillyGilligan]

This may lead to positive change. At the very least, this should teach hedge funds not to be that dumb and greedy for a while. The stock is currently overvalued by a lot, but the shorts were undervaluing them. Gamestop is hurting, but it's only dying in the form we know it. They've done the things you do when you try to turn a company around: new CEO, other executives with online retail experience, new plans to change direction. They might still go under eventually, but they have a chance without the short sellers sabotaging them. The market follows velocity and direction as much as it looks at fundamentals, meaning that shorting it can be a self-fulfilling prophecy. So which market manipulation is worse?

Is this for a noble cause? I don't know, but it seems like something more than a simple pump and dump. Some of the people joining in seem to understand that they will probably end up holding the bag. I'm also not sure how we talk about what's broken in the market without pressure like this or something like it. Congress is usually gridlocked, and they're bought by the same people that profit off the way things are now.

Edit: To be clear, I have not invested anything in these shenanigans. And this is definitely going to hurt a lot of people. I'm just not sold that it will be all bad.

[Mike]

My guess is that it will result in legislation that prevents small investors from banding together and creating "chaos" in the market like this ever again, while presenting a minor hurdle for hedge funds that only requires them to slightly modify their algorithms.

[poorpete]

Like the idea of taxing all this stuff too.

[FlameBlade]

Definitely tax high frequency trading. Unclear there's a point in high frequency trading other than trying to corner the market so quickly that nobody could react easily.

[WillyGilligan]

I get that the financial sector is necessary to lubricate the engine of the economy. Mediate between people with money but no vital ideas for products or services and people with ideas but no money. But people are openly talking about how the real people that made money off the gold rush were the ones selling pickaxes. What happens if selling pickaxes is so much more profitable than mining that everyone sells pickaxes and nobody mines?

Do we fix this by taxing capital gains the way that we tax income? Or at least bring them closer together? Most of this isn't even really investment - the money is just switching between secondary sellers. As I understand it, unless you buy the share from the company, that money doesn't go towards making the company better, bigger, or more profitable. They just get to use the stock price to justify more debt financing. How long does this last?

[Phoebe]

All these people are f*****s, on all sides, except that one little kid who cashed in his nerd present of GS shares. He's awesome and deserves his reward.