GameStop Stock surges due to meme traders

[tippy2k2]

Okay so I've seen this all over the place the last few days, I need someone to explain it to me. I don't understand the stock market at all, but from what I can gather a bunch of dudes on a subreddit decided to buy Gamestop stock...and that's a problem for like a hedge fund company that bet Gamestop stock wouldn't go up?

Super Simplified Version as explained to me by Discord buddy...

Reddit group saw Gamestop at a low price and thought it was undervalued so they bought a bunch. Hedge Fund Guy comes in, thinks Gamestop is going to tank so he short sales it (basically betting the opposite; saying it's going to drop in value rather than rise). But Hedge Fund Guy has a huge network of ways to get that message out so he basically starts trashing Gamestop in efforts to get it to just tank and crater so that he can make a bunch of money. Reddit guys are like "Oi, stop trying to tank our stock you jerkface". Hedge Fund Guy says no. Reddit now out of spite are buying a fuckton of Gamestop stock, making it rise in value exponentially (it went from $4 or so last year to $370 or so I think at around the highest).

Hedge Fund Guy is losing his ass because now he has to cover a lot more money with his short sale (so billions with a B kind of losses) while Reddit guys are sticking to boosting the price up.

TLDR; Wall Street bet that the stock would fall. Reddit out of spite is making it rise greatly, which is costing Wall Street a fuckton of money.

 

[crimson5pheonix]

Okay so I've seen this all over the place the last few days, I need someone to explain it to me. I don't understand the stock market at all, but from what I can gather a bunch of dudes on a subreddit decided to buy Gamestop stock...and that's a problem for like a hedge fund company that bet Gamestop stock wouldn't go up?

Accurate. Certain hedge funds, Melvin Capital specifically, took a short out on Gamestop. A short is somewhat complicated but amounts to betting the stock will go down instead of up, if it goes down you get money and if it goes up you lose money. There was 2 problems with this. First was that the WSB group had invested in GS because they struck some deal with Microsoft and WSB thought that would turn GS around. The second is that all the shorts on GS amounted to ~140% of it's stock volume. In other words, they ran so hard on shorting GS that they were selling more stocks than what actually existed.

This is fair and legal.

Now, Melvin capital owned a fair chunk of GS stocks as well, so they started selling them off in chunks to make the price drop a bit and hopefully trigger a massive sell off to collapse the price, which would make them stupid money with their shorts.

This is also fair and legal.

WSB saw what they were doing and saw what risk they put themselves in by pulling this manipulation gambit, so they bought up GS stocks, told everyone what Melvin was doing, and everyone started buying up GS stocks. Doing so caused the price to spike.

This is apparently where it stops being fair and legal.

Now the reason why this hurts Melvin directly instead of them just letting WSB tantrum and wait for the stock to fail later because it absolutely is going to, GS is dying, is the specifics of what shorts are, in that they aren't just a bet. Namely it's a loan that you're hoping the principal on will be lower than the amount loaned, and as the principal climbs with the stock price, the hedge fund has to immediately cover the loan with more collateral.

 

[Dwarvenhobble]

You're going to have to show me where this is about 'providing services to the general people.'

Finance isn't for people. It's for the rich

Banks are for the people they're for whom the banks choose to be for. Same with phone shops. Same with any other private company according to some.

 

[Gordon_4]

Funny where are the ever lovely "Private companies can do what they like" crowd?

Because you'd think they'd really want to come out to support private companies all blocking private citizens being able to do things.

I mean I think it's bullshit to do that but what do I know?

Robinhood can absolutely do that; and they can suffer the consequences of loss of customer trust, reputation damage and financial ruin that may follow.

I am less certain however they they’re allowed to do THAT. Unless there’s a section of the EULA or signup that gives them the right to act as a broker on your behalf if they see solid financially positive reason to do so.

 

[crimson5pheonix]

 

[SilentPony]

Accurate. Certain hedge funds, Melvin Capital specifically took a short out on Gamestop. A short is somewhat complicated but amounts to betting the stock will go down instead of up, if it goes down you get money and if it goes up you lose money. There was 2 problems with this. First was that the WSB group had invested in GS because they struck some deal with Microsoft and WSB thought that would turn GS around. The second is that all the shorts on GS amounted to ~140% of it's stock volume. In other words, they ran so hard on shorting GS that they were selling more stocks than what actually existed.

This is fair and legal.

Now, Melvin capital owned a fair chunk of GS stocks as well, so they started selling them off in chunks to make the price drop a bit and hopefully trigger a massive sell off to collapse the price, which would make them stupid money with their shorts.

This is also fair and legal.

WSB saw what they were doing and saw what risk they put themselves in by pulling this manipulation gambit, so they bought up GS stocks, told everyone what Melvin was doing, and everyone started buying up GS stocks. Doing so caused the price to spike.

This is apparently where it stops being fair and legal.

Now the reason why this hurts Melvin directly instead of them just letting WSB tantrum and wait for the stock to fail later because it absolutely is going to, GS is dying, is the specifics of what shorts are, in that they aren't just a bet. Namely it's a loan that you're hoping the principal on will be lower than the amount loaned, and as the principal climbs with the stock price, the hedge fund has to immediately cover the loan with more collateral.

Okay I understand all that, but what I don't get is why is what the reddit dudes are doing is illegal? They got together and decided to buy stock. Isn't that what a hedge fund is, a group of people buying stock together? Like I'm not following why what they're doing is illegal or even wrong, outside of Melvin Capital is losing money.

 

[Gordon_4]

I had no idea that was a thing and now that I know I must join it in some way.

 

[Trunkage]

Banks are for the people they're for whom the banks choose to be for. Same with phone shops. Same with any other private company according to some.

Hedge funds aren't banks

 

[crimson5pheonix]

Okay I understand all that, but what I don't get is why is what the reddit dudes are doing is illegal? They got together and decided to buy stock. Isn't that what a hedge fund is, a group of people buying stock together? Like I'm not following why what they're doing is illegal or even wrong, outside of Melvin Capital is losing money.

So one could argue it's market manipulation, in that they are specifically rallying to buy stocks and drive the price up.

It is hard to argue this however since there's no association between the buyers other than appearing on a social media site, and with the meme force that's happening that's not even true either. There's a greater argument for what Melvin was doing to be market manipulation, especially when they got bailed out by another hedge fund company and used the bailout to try and crash the stocks again to stop losing money.

So the reason why this is illegal and dangerous is really because the people doing it don't have MBAs and thousand dollar suits.

 

[Agema]

FYI, part of the joke here is that Nottingham (a few years ago at least) had one of the highest gun crime rates in the UK.

 

[Gordon_4]

View attachment 2738

FYI, part of the joke here is that Nottingham (a few years ago at least) had one of the highest gun crime rates in the UK.

Is another part of the joke the fact that the bottom half of the longbow is missing? Presumably due to some cheeky little sod?

 

[Agema]

Is another part of the joke the fact that the bottom half of the longbow is missing? Presumably due to some cheeky little sod?

I wish. I am not particularly familiar with Nottingham, but arseholes who have nothing better to do but amuse themselves by breaking stuff are ubiquitous.

 

[Lykosia]

Accurate. Certain hedge funds, Melvin Capital specifically, took a short out on Gamestop. A short is somewhat complicated but amounts to betting the stock will go down instead of up, if it goes down you get money and if it goes up you lose money. There was 2 problems with this. First was that the WSB group had invested in GS because they struck some deal with Microsoft and WSB thought that would turn GS around. The second is that all the shorts on GS amounted to ~140% of it's stock volume. In other words, they ran so hard on shorting GS that they were selling more stocks than what actually existed.

This is fair and legal.

Actually it isn't legal. Naked short selling, where you sell stock that don't even exist is illegal, but no one cares.

 

[SilentPony]

So one could argue it's market manipulation, in that they are specifically rallying to buy stocks and drive the price up.

It is hard to argue this however since there's no association between the buyers other than appearing on a social media site, and with the meme force that's happening that's not even true either. There's a greater argument for what Melvin was doing to be market manipulation, especially when they got bailed out by another hedge fund company and used the bailout to try and crash the stocks again to stop losing money.

So the reason why this is illegal and dangerous is really because the people doing it don't have MBAs and thousand dollar suits.

Okay so wait, if the purpose of trading stocks is to make money by buying low and selling high, and buying a stock increases the stock's value because its value it based on its demand and how many people are buying, then what's the difference between 'market manipulation' and just 'buying stock'?
Like if I buy a million dollars worth of any random company's stock, am I buying stock or manipulating the market?

 

[crimson5pheonix]

Okay so wait, if the purpose of trading stocks is to make money by buying low and selling high, and buying a stock increases the stock's value but its value it based on its demand and how many people are buying, then what's the difference between 'market manipulation' and just 'buying stock'?
Like if I buy a million dollars worth of any random company's stock, am I buying stock or manipulating the market?

Usually it's not just buying stock that is deemed as manipulation, but using external methods to convince others who wouldn't normally trade a stock to trade a stock. For example going on MSNBC business to hawk a stock you're in, telling your billionaire friends to help you pump and dump a stock, selling stocks in bundles to trick people into a sell off, saying you're buying a stock on Reddit.

Edit:

Actually it isn't legal. Naked short selling, where you sell stock that don't even exist is illegal, but no one cares.

While you are correct, I am too because something is only illegal if it's enforced.

 

[crimson5pheonix]

 

[Dwarvenhobble]

Welp, all the stuff RobinHood has done was laid out in their EULA and probably isn't illegal, so yeah, private companies will continue to do what they like. You seem to think that an observation of how things are constitutes endorsement.

Plenty of stuff isn't illegal. Doesn't mean on some level it's not immoral.

Also EULA aren't legally binding outside of the USA lol.

As for observation = endorsement, people were more than happy when it was people they didn't like getting denied service.

Okay so I've seen this all over the place the last few days, I need someone to explain it to me. I don't understand the stock market at all, but from what I can gather a bunch of dudes on a subreddit decided to buy Gamestop stock...and that's a problem for like a hedge fund company that bet Gamestop stock wouldn't go up?

Hedge funds aren't banks

Not but trading apps are a service.

 

[Dwarvenhobble]

Pretty much. It's kind of financial trolling.

It's funny, but you have to bear in mind eventually the stock in GameStop will crash and a lot of these Reddit guys will lose money. I hope they're ready for that.

The other thing is that the hedge funds will win in the end. These funds are huge, and a brief embarrassment on a short that is a tiny fraction of their business won't really hurt them much. And bear in mind other major financial traders will have made money buying into the craze, and they'll cash out before the crash. And they'll all learn from this too: they'll learn to keep an eye on Reddit, Facebook, wherever to spot these trends in case anyone every tries it again. Or, because they will be exactly the sort of petty, get-one-over-the-other-guy pricks you'd assume, I wouldn't be surprised if it will become of their armoury to screw each other over.

A lot of the reddit lot started buying in at $4 a share.
Tomorrow is judgement day for most short seller contracts.
In terms of lose money the expected share price for Gamestop shares is $20-$40 and they were only down to $3-$4 due to short selling pushes.

The only one who will lose money are those who jumped in as the price was going up

Okay I understand all that, but what I don't get is why is what the reddit dudes are doing is illegal? They got together and decided to buy stock. Isn't that what a hedge fund is, a group of people buying stock together? Like I'm not following why what they're doing is illegal or even wrong, outside of Melvin Capital is losing money.

Nothing the reddit dudes are doing is illegal as such.
What the WallStreet Hedge funds were doing had illegal elements to it as the total shares of Gamestop for sale were 112% of the total companies shares. While the company themselves owns 27% of the market shares. So 39% of the total shares being sold don't exist and were being sold essentially as IOUs. The idea being person buys the share then the trader can get a share at a lower price to the buyer before there's any checks to validate the shares exist. It's abusing the systems set up to allow faster trading for "trusted" seller who sell and buy a lot of shares as validating they all exist takes time so trusted people can sell shared based on their word they have those share to sell or are allowed to sell them.

 

[Agema]

Okay so wait, if the purpose of trading stocks is to make money by buying low and selling high, and buying a stock increases the stock's value because its value it based on its demand and how many people are buying, then what's the difference between 'market manipulation' and just 'buying stock'?
Like if I buy a million dollars worth of any random company's stock, am I buying stock or manipulating the market?

You buy and sell stock, you're just not supposed to tell people and make a big song and dance that could be perceived as an attempt to trick other people to buying or selling in ways advantageous to yourself. Of course, people watching carefully will be scrutinising what other players are doing to make their own plans and gain insights.

I think there is this saying that you usually know when the bubble is about to burst when all the little players start buying. Reason being that the major players notice and buy in very quickly, and then the not-so-big players, and finally the minnows are miles behind, see this stock that's been going up and up and delude themselves they can make a killing too, not realising it's already way too late. Then the big players cut and run with big profits, then the not-so-big flee, and between them off they run with the money of the minnows.

 

[Agema]

The only one who will lose money are those who jumped in as the price was going up

Which will overwhelmingly be a load of other small investors. I don't know how much of a win that really is.