Gamestop?

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jacob
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Re: Gamestop?

Post by jacob »

Campitor wrote:
Sun Jan 31, 2021 2:38 pm
So seeing how a bunch of internet users easily exploited a short squeeze why haven't private hedge funds done this to one another with any frequency?
Because organizing such a thing would be if not outright then borderline illegal/quite sketchy. The best defense "social media" has against this charge would be that it was "public" and/or "spontaneous/not organized"?!? In general professional traders would or should "know better" thanks to annual readings of the riot act by the compliance department.
Campitor wrote:
Sun Jan 31, 2021 2:38 pm
Perhaps, as Jacob mentioned earlier, there should be caps on short selling.
Huh? I don't think I said that? It's hard to argue pro/con short-selling as well as leverage because both serve some market function that otherwise wouldn't exist.

white belt
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Re: Gamestop?

Post by white belt »

@Campitor

Take a listen to the Grant Williams podcast episode I linked earlier in the thread. They go in depth on the important role of short-sellers in a market and explain how what Melvin Capital and Citron were doing with lots of leverage was different from what a traditional short-seller does.

Campitor
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Re: Gamestop?

Post by Campitor »

jacob wrote:
Sun Jan 31, 2021 3:00 pm
Huh? I don't think I said that? It's hard to argue pro/con short-selling as well as leverage because both serve some market function that otherwise wouldn't exist.
I misunderstood the portion of your post below. Mea culpa.
jacob wrote:
Fri Jan 29, 2021 8:57 am
Maybe the "fix" to this melt up would be something similar to the uptick rule (which was implemented to save the longs in 2008/09), that is, a downtick rule. The uptick rule says that you can only short a stock at a price that is higher than the previous price.

Campitor
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Re: Gamestop?

Post by Campitor »

jacob wrote:
Sun Jan 31, 2021 3:00 pm
Because organizing such a thing would be if not outright then borderline illegal/quite sketchy. The best defense "social media" has against this charge would be that it was "public" and/or "spontaneous/not organized"?!? In general professional traders would or should "know better" thanks to annual readings of the riot act by the compliance department.
Let me elaborate. It appears that short selling is a frequent practice. If my assumption of short selling is correct, the frequency of short squeezes should also be high. However this doesn't seem to happen with any great frequency.

I acknowledge my assumptions are pure speculation since I can't find any information regarding the frequency of short selling and how often short squeezes occur; currently I only find individual articles about short selling. Where is the aggregated data? Ergo I'm left to reasoning by analogy (a poor choice but my only choice absent access/discovery of information).

My current thought process/analogy: There are millions of cars on the road (there a millions of shorts). It's inevitable that cars crashes will occur considering the volume of automobiles on the road (shorts should be colliding with short-squeezes frequently ). Therefor the only way car accidents can be reduced is via stops signs and traffic signals(SEC rules). Despite the plethora of signs/signals, over 4.5 million accidents still occur per year (we should see many short squeezes).

So if my reasoning by analogy holds true (very doubtful), why isn't this happening more frequently? My current assumption is that something beyond SEC rules is keeping hedge funds from competing with each other in regards to shorts vs squeezes. And the only way that can happen, in my current opinion based on zero information that I can't currently find, is that hedge funds must have gentlemen's agreements or are all reading from the same playbook. How is reading from the same playbook not collusion even in a soft sense?

Freedom of association makes insider trading a virtual certainty especially when the quants can reverse engineer the justification for a stock squeeze or short. Quants should be able to easily identify a shorted stock and bet against it by driving up the share price via large volume purchases which sends secondary signals that the stock is "in play" which entices activity that drives up the price. So it seems the legal ramifications may be in regards to how the collusion occurs and not that collusion in and of itself is a bad thing which seems to me like splitting hairs or at the very least unfair to the retail investor who isn't invited to any of the Wall Street dinners or vacation junkets.

Campitor
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Re: Gamestop?

Post by Campitor »

@ white belt - thanks for the podcast link.

suomalainen
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Re: Gamestop?

Post by suomalainen »

If your narrative is "the game is rigged against the little guy", fine. Have that narrative. But Robinhood's board and executives, acting for an individual entity in accordance with its regulatory obligations, contractual obligations and their fiduciary duties, doing something that "looks bad" to its "customer base" (i.e., retail traders) is NOT a story about how "wall street is out to get main street." If anything, it's a story about how joe schmo is too dumb to understand how it all works and yet pisses and moans how it doesn't work in his favor. It's like a guy going into a casino and pissing and moaning that the odds favor the house! Or that craps is too complicated of a game!

I don't have anything against people going long a stock (or stonk :roll:) or going short a stock. If "the market" agrees with you immediately or over the long term, you will make some money and the people on the other side of the trade will lose some money*. What I have a problem with is people coming to a game and then pissing and moaning when other players play within the rules of the game when that pissing and moaning is 100% due to their own ignorance. Learn the rules of the game or don't play.

^^ That is not a comment about government bailouts, which is also generally bullshit. That said, in 2008, when it looked like the entire banking system was at risk and your options are to bail out a bank or to gamble on the aftermath of a collapse... I can't really argue with the choices. Adverse selection, perverse incentives, blah blah blah, I get it, I get it. But again, if you think the system is broken, tell me exactly how it's broken and exactly how you'd fix it or what system you'd replace it with. If you can't do that, you're just as ignorant as I am, but you're also a pisser and a moaner.

* Shorting a stock cannot "drive a company into bankruptcy". A solid business is a solid business regardless of how the claimants on its residual value value that residual. You have two kinds of bankruptcies: liquidity and balance sheet. A liquidity bankruptcy happens when short term obligations outweigh short term assets. A balance sheet insolvency happens when total liabilities > total assets. The value of the equity does not come into play UNLESS that equity valuation somehow prevents access to equity capital markets (duh) and/or debt capital markets (more borrowing). But debt lenders do their own underwriting, so if short sellers drive a company's equity value to zero unfairly, debt lenders will see through it and the equity value won't stay at zero for long. The equity market is self-correcting.
Last edited by suomalainen on Sun Jan 31, 2021 5:19 pm, edited 1 time in total.

jacob
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Re: Gamestop?

Post by jacob »

@Campitor - A "squeeze" happens when short sellers are forced to cover (by buying back the shorted shares) because the price has gone too much against them (they're getting a margin call or they simply have a stop limit on their losses). This requires the price to move significantly against them.

Once the squeeze is ignited, their own buying behavior causes the price to rise further (an unintended side-effect). This is the point where the original buyers sell their longs and take profit.

For an example, see https://en.wikipedia.org/wiki/Trading_Places

Such an operation requires either significant capital (which is why it's rare), useful idiots (as seen now, also momentum traders jumping on the greater fool trade), or collusion (sketchy/illegal).

Since only professional traders generally have the capital required and they're more aware about the rules, this is why squeezes rarely happen.

Add: This is not really a "quant" strategy. It more of a "special case/activist" trade.

Social media organized market herd behavior is a relatively new thing. I'm sure more elegant ways will be found to curb this since turning the stock market into a gambling saloon is not its intended function. There are many ways this could go. One obvious way would be to require brokers to carry revolving credit to cover their own margins. Another will be to "let people suffer the consequences of stupid" (all those longs do at some point have to find some way of exiting)---however, note there are laws protecting people from themselves like accredited investors for high risk investments. Perhaps another tier would be required for "bucket shop gamblers". Another would be for shorted companies to carry a number of their own shares on the books (instead of cancelling them out) so that they may quickly sell them to the "speculative public" once it happens---a quick equity at inflated prices to debt conversion would not be the worst strategy for a troubled company.

Not sure about the car analogy. A better analogy would be the capital riot ... but I think it's too soon for that and "arguing via analogy" for complex issues is rarely a good idea.

suomalainen
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Re: Gamestop?

Post by suomalainen »

jacob wrote:
Sun Jan 31, 2021 5:18 pm
Such an operation requires either significant capital (which is why it's rare), useful idiots (as seen now, also momentum traders jumping on the greater fool trade), or collusion (sketchy/illegal).
Or the shorts being terribly wrong about fundamental value, which is also rare.

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Bankai
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Re: Gamestop?

Post by Bankai »

Is silver going to be the new GME? It's a different beast with 1.4T market cap but already up 15% since Wednesday on rumors. Are you going to 'have a punt' with some fun money, bet big or watch from the sidelines?

Campitor
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Re: Gamestop?

Post by Campitor »

suomalainen wrote:
Sun Jan 31, 2021 5:20 pm
Or the shorts being terribly wrong about fundamental value, which is also rare.
Is it really that rare or maybe just hard to prosecute?

Short & distort? The ugly war between CEOs and activist critics
Yet targeted businesses say many short campaigns waged this decade amount to "short and distort" schemes. They accuse some activists of spreading false or misleading information to drive a stock down and then quickly cash out, a mirror image of "pump and dump," where unscrupulous investors promote speculative stocks before selling out at the top.

Cases against short sellers are rare, though, given free speech protections and companies hesitant to put themselves under the microscope of regulators, lawyers say.
Anyone know if any of the data regarding stock distortions is aggregated/tracked? I’m sure I’ll eventually find it somewhere but I’m hoping to save the research time.

Campitor
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Re: Gamestop?

Post by Campitor »

suomalainen wrote: * Shorting a stock cannot "drive a company into bankruptcy". A solid business is a solid business regardless of how the claimants on its residual value value that residual.
http://www.alaskapacific.edu/wp-content ... Petukh.pdf
This research of the case of Lehman Brothers shows that short sales played a significant role in the demise of the company. The analysis of the theoretical knowledge and its comparison to the research findings indicate that short sales were one of the factors that put enormous pressure on the company and led it to bankruptcy. Short sales contributed to devaluing Lehman Brothers’ stock, which in turn led to the loss of investors’ confidence. The other factors that contributed to the fall of the company were the deterioration of the main line of business, the prime and subprime mortgage crisis, deliquidation of the market, panic among investors, etc. It was not the intent of this research to measure exactly how extensive the damage inflicted by short sales was. Its goal was to find out if there was an impact at all. As a result this study provides proof of the strong influence of extremely high volumes of short sales on the stability of the company.
My area of inquiry is in relation to how shorting can affect a distressed company that may otherwise be able to pull off a turnaround. On the surface it seems shorting doesn’t help and could contribute to a company’s demise. I acknowledge I may be and probably am 100% wrong but the only way to discover the truth is to make a hypothesis and prove it wrong.

Redo
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Re: Gamestop?

Post by Redo »

@Bankai
No, you can't squeeze silver.

suomalainen
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Re: Gamestop?

Post by suomalainen »

Maybe. If perception is reality, then a shaky stock price could cascade to degrade confidence of vendors and customers, sure. But what comes first? Lower sales, stretching accounts payable or high short interest? But Lehman was in a unique position, so I don't know if I'd draw too many parallels to run-of-the-mill companies in run-of-the-mill economic conditions. I don't know. I'm not qualified to argue for or against short-selling. But I do accept that it is part of the game. Perhaps it can be abused ("short and distort") as can long bets ("pump and dump"), but such abuses don't really argue for jettisoning securities markets entirely. Again, if you find there to be a problem and don't like the current solutions to that problem, describe with specificity a better solution. There currently exist laws for many kinds of market abuses. Perhaps the argument is "but selective enforcement", but then all you're really describing is cronyism and corruption. And such things will always exist, cuz humans gonna human. No pollyanna solutions exist for the problem of humanity.

Mister Imperceptible
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Re: Gamestop?

Post by Mister Imperceptible »

While this is going on, Biden has signed 42 Executive Orders.

In President Biden's first week alone, he signed 37 executive orders and actions. That's 33 more than Trump, 32 more than Obama, and 37 more than GW Bush, who signed zero in his first week as president.

Headlines in the news are of GME everyday.

Campitor
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Re: Gamestop?

Post by Campitor »

@suomalainen

I 100% agree that humans will human and crony capitalism will always exist - there are tradeoffs in every economic system and those tradeoffs will create bad and good incentives. My curiosity in exploring this isn't to find a solution per se. I doubt I will be lobbying my congressman on the matter. Rather it seems that this event was unforeseen (supposedly) so it has piqued my curiosity. And part of my instincts, knowing humans will human, is that this strategy is somewhat simplistic (colluding on reddit to drive up stock prices). If it was easy to collude via reddit, how can a hedge fund, full of experienced market analysts and super computers, manipulate the market in a harder to prosecute manner?

The SEC website lists the common violations that lead to SEC investigations; market manipulation is on the list. Therefore these companies who do nothing but trade, and have been trading for decades, probably have ways to make market manipulations look legit or at the very least harder to prosecute; people get good at what they continually practice. The layman investor should therefore know how to spot these market manipulations too so they can survive and perhaps even benefit, legally, from intentional market distortion while limiting their exposure.

The current situation has revealed how Robinhood's fiduciary obligations can conflict with retail investors' ability to profit from market fluctuations. Robinhood stopped GME trades not because what retail investors did was wrong -they did it to limit their exposure and meet their obligations - additional reason may be revealed. Therefore any natural event that disrupts the market can force RH to stop trading while other companies, who have deeper funds, may allow continued trading. This is a valuable piece of information. Retail investors should diversify their trading accounts (don't purchase all your shares via the same financial services company). This strategy is so obvious that you wonder why they didn't do this beforehand. Perhaps some did and are upset they didn't get more of a profit?

So the obvious has been discovered but what other insight or truth is being obfuscated behind the current Main Street vs Wall street mudslinging? That is what I want to find out. Learning about shorting frequency in all its flavors is part of that process. Is there a company that seems unusually successful at shorting? How many investigations were opened on short and distorts versus other types of manipulations? Should shorting be left to the professionals? Should short squeezing be left the professionals? What are the legal implications of riding a short and distort or a pump and dump as an innocent bystander who happened to notice the trend? Blah, blah, blah, yadda, yadda, yadda....

Mister Imperceptible
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Re: Gamestop?

Post by Mister Imperceptible »

People like Jim Chanos and Mark Cohodes are known to do good work exposing frauds like Enron. It is really the unlimited money printing/bailouts that have broken the market and now shorts like Cohodes have gone out of business. I remember hearing Chanos covered his Tesla and GameStop shorts a few months back but I think he was still short IBM.

Cohodes interview by Grant Williams awhile back: https://m.youtube.com/watch?v=cGtR3JX5Aao

Chanos interview by Mike Green:
https://m.youtube.com/watch?v=u1LsVZN6wzg

Chanos interviewed by James Grant:
https://m.youtube.com/watch?v=oNkq6fotkRE



Here is a good Twitter thread explaining how the short squeeze of hedge funds removes liquidity from the market:
https://mobile.twitter.com/UrbanKaoboy/ ... 7011975170

Essentially by not being able to go short in order to hedge, because shorts will get targeted, hedge funds will have to derisk by reducing longs. We saw this happening in real time as broader equity markets fell. To satisfy the demand for liquidity as their shorts were causing huge losses, hedge funds had to liquidate longs. The most common pairing with a GME short was an AMZN long. Of course, if the hedge funds were not idiots and had not shorted over 100% of the available stocks, they would have been able to cover their positions without this happening.

Without the ability to short, hedge funds and institutions will have to hold more cash and put less into equities, bonds, and credit, which will reduce liquidity further. This is consistent with how the US stock market did not really take off until 2013, when the VIX dropped from elevated levels post-2008, and the hedging via put options became more affordable, thus more capital could be allocated into risk assets instead of cash, bonds, and gold. The VIX had still not moved to it’s pre-Covid range and has moved higher recently despite a muted down move because if shorting is untenable, put options must be used to limit risk. Maybe put options will remain even more expensive moving forward.

But again this would not have happened without the central bank put and investor psychology conditioned to buy every dip regardless of fundamentals.

Let us sum up the prerequisites:
1) Infinite money printing/QE causing mostly one way price action, also influencing investor psychology
2) Moral hazard of allowing hedge funds to be too big to fail, Janet Yellen collects speech fees from Citadel and Goldman then is on the phone with Citadel and Goldman when things go sideways for hedge funds after their pay-for-order flow scheme blows up, all brokers move in concert to crush the little guy
3) Hedge funds being jackasses and shorting more than 100% of publicly available stock, making the squeeze technically possible
4) Wealth disparity giving younger people motivation to take desperate measures to get rich quick, or otherwise just to inflict pain on hedge funds. Joker memes circulate, it’s not about the money, it’s about sending a message, everything burns. The GME bubble is as much about anger as greed.
5) People like Elon Musk or Chamath Palihapitiya can pump it on Twitter (no doubt in my mind they either are backers for or are in league with WSB), whether it’s TSLA or BTC or GME or Dogecoin there is an influencer/network effect in place to mobilize the flash mob, it’s just no longer centrally distributed and what is being pumped on WSB and Twitter may not be pumped on CNBC and in fact may be in opposition to it.

I look at all the rich and powerful people it took to build the tottering jenga tower but yes if it can be blamed on a strong gust of wind they will try to do it, but even if arguments are technically and legally correct they will be viewed by WSB and many sympathizers as morally wrong, and the attempt to squelch the volatility will lead to even greater problems.

IlliniDave
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Re: Gamestop?

Post by IlliniDave »

Not being a legal eagle, what's fundamentally different about the reddit group and talking heads that get on cnbc and say buy or sell, or the hedge funds themselves that are pools of investors acting in unison?

suomalainen
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Re: Gamestop?

Post by suomalainen »

@campitor - all great questions, but far beyond my expertise and interest. To me, that seems like next-to-impossible game theory on a market involving thousands of individual participants each trading for their own purposes. How to know what trends or themes will dominate by volume of money? I have no idea. I will leave that to people much smarter than me. @MI seems to have thought about it.

@MI - The only thing I'd say to @MI's post is that "too big to fail" is a phrase that really applies to entities that are likely to receive government, not only private, support due to the cascading systemic effects a failure would cause; such government support is what is considered a "bail out". In 2008, certain entities received government support, but many received purely private support, such as what BofA and Goldman famously received from Berkshire Hathaway (IIRC). No hedge fund is considered "too big to fail". Last I heard, there were some 7,000 hedge funds; I do not recall the total AUM. Melvin Capital did not receive a "bail out". Melvin Capital sold a piece of itself to Citadel and Point72. Private capital raises occur all the time and there is nothing "bail out"-y about that. I don't know that the specific structuring of that sale was reported, but I recall something about Citadel/Point72 will be receiving some of Melvin's management fees and/or carried interest, which all sounds like a normal fund-restructuring transaction (notwithstanding the circumstances that caused the need for one).

@ID - hedge funds are not "pools of investors acting in unison". A hedge fund is structured as a limited partnership. Each investor (pension funds, endowments, sovereign wealth, insurance companies, HNW individuals) is a limited partner in that hedge fund/limited partnership. The controlling entity is the general partner. Limited partners provide capital in exchange for the expectation that the general partner will invest it, make a profit and return said profit, less 2 and 20 (2% annual management fee and 20% of profit as carried interest). Limited partners have ZERO ability to control the capital of the hedge fund. If, instead, you're referring to the "dinner parties" thing, and are comparing that to redditors and cnbcers - you have to be careful. Yes there's freedom of speech, but there's also illegal collusion. Securities laws are notoriously vague and compliance departments have become more robust and conservative over the years since 2008. At some point, speech can cross the line from "just talking" to "price fixing" or other illegal activity. Where exactly is that line? Good question. If you don't want to help the SEC in finding it in your case, stay far away from it. If you think hedge funds always "get away with it", you are wrong. Point72 I believe now is mostly a family office running Steve Cohen's personal money, but it's possible he's opened it up to third party investors. Steve Cohen's fund used to be called SAC Capital (i.e,. Steven A Cohen). That fund was busted for insider trading or some similar violation of securities laws five or maybe more now years ago, was fined a bajillion dollars and had its ability to run third party money stripped for like 2 years or something. He rebranded the fund Point72, but I lost track of the story.

edit: see https://en.wikipedia.org/wiki/S.A.C._Capital_Advisors
Last edited by suomalainen on Mon Feb 01, 2021 9:06 am, edited 1 time in total.

white belt
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Re: Gamestop?

Post by white belt »

Redo wrote:
Sun Jan 31, 2021 10:23 pm
@Bankai
No, you can't squeeze silver.
Can you elaborate on this? My understanding is that it is much more difficult to squeeze silver due to the size of the market, but a squeeze is certainly possible and has happened in the past. Right now we have SLV up 10% pre-market and all bullion dealers are reporting a dramatic increase in the sale of physical silver over the past week.

Edit: One wrinkle I see is that silver and gold usually perform similar roles in a portfolio, so if the silver prices get out of wack many institutions might just substitute gold in the short term.

IlliniDave
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Re: Gamestop?

Post by IlliniDave »

suomalainen wrote:
Mon Feb 01, 2021 9:01 am

@ID - hedge funds are not "pools of investors acting in unison". A hedge fund is structured as a limited partnership. Each investor (pension funds, endowments, sovereign wealth, insurance companies, HNW individuals) is a limited partner in that hedge fund/limited partnership. The controlling entity is the general partner. Limited partners provide capital in exchange for the expectation that the general partner will invest it, make a profit and return said profit, less 2 and 20 (2% annual management fee and 20% of profit as carried interest).
In my mind partnering up with a group of people and all doing the same thing (whether you hire a group leader or not) is acting in unison. Same with mutual funds. I've just seen a lot of assertions that somehow what was done on reddit was illegal (others say what robin hood did was illegal), reddit being a public forum much like bogleheads or ere or morningstar or any number of others. What I'm maybe getting at is in that legal framework, at what point may someone like us become criminal when we suggest investing tactics to each other (absent insider info)? IOW, when does it become collusion (which I take to be secret/illegal conspiracy) versus a shouting from the rooftops. Sounds like just talking about investing is another road to cancellation.

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