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Redditors vs the hedge funds

Yes I did wonder that. And it's a danger with loads of people piling into a system with no real financial knowledge. A lot of the late arrivals are likely to get fleeced.
 
two sheds said:
Strange decision if they're now buying into silver though. A fair danger of them getting played in the future I'd have thought.
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Redditers overall insist it was a false flag perpetuated by big banks, and it fizzled out overnight. Actively advising NOT to go into Silver
FT report " A rally in the price of silver fuelled by a sudden burst of interest from retail traders rapidly unwound on Tuesday, with many veteran investors left scratching their heads over the episode. "
because it was a ruse

This matched what I saw:
Screenshot_2021-02-02 Silver prices retreat fast in blow to new retail buyers.png

But who knows if its group think or what. ITs all so murky
 
ska invita said:
I have to admit I do find it a funny forum that wallstreetbets thing. At the mo and for the foreseeable its all about talking themselves into collectively holding the Gamestock line. Presenting facts to convince one another about a positive outcome to support their ultimately unknowable fate. <snip>
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This is probably obvious, but all of this stuff, better illustrated by the Reddit post you put up further back, is absolute bollocks. Sometimes it masquerades as a sort of science, e.g. taking the name 'technical analysis', but is still just a high tech version of reading tea leaves. It exists in various different forms in all of these trading/investment forums, for any investment, serving as a conduit for confirmation bias, groupthink and every other behavioural fuck up. I mean, economics is basically just astrology for men anyway, but this is like a concentrated, short term version. Analysis of patterns probably has some conditional merit but not when the situation is dominated by unusual events rather than regular activity.
 
two sheds said:
Strange decision if they're now buying into silver though. A fair danger of them getting played in the future I'd have thought.

I'd be tempted to take a look at the subforum but I have no idea what most of the words mean.
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It was impressive how coordinated the media reports of the new silver craze were, within hours of each other on all the major news sites in the US, UK and EU -- yet actually if you looked at WSB there was nobody promoting silver and everyone calling it out as fake news. But it did spike silver prices for a short period -- it's down again today, along with gold, as the same old boring tech giants lift the indices. It's remarkable what an ENORMOUS percentage of the NASDAQ is made up of just 6 companies: Amazon, FB, Microsoft, Google, Apple and Netflix
 
There’s a möbius loop going on where the science of tech analysis isn’t tracking whatever the stock is really up to but trying to anticipate what other people are trying to guess using the same process and tools as you
 
www.theverge.com

Reddit bought a five-second Super Bowl spot celebrating GameStock

You might have missed it
www.theverge.com www.theverge.com

You could have been forgiven for missing Reddit’s Super Bowl ad tonight — it was only five seconds long. The ad mostly consisted of a text message that would’ve been pretty difficult to read in the moment, claiming that the company spent its “entire marketing budget on five seconds of airtime.”

“One thing we learned from our communities last week is that underdogs can accomplish anything when they come together around a common idea,” Reddit says by way of explanation, in a clear nod to the GameStop stocks saga that was driven by posters on the r/WallStreetBets subreddit. “Who knows, maybe you’ll be the reason finance textbooks have to add a chapter on ‘tendies.’”
Click to expand...



This is their ad.

Wow, this actually worked.

If you’re reading this, it means our bet paid off.

Big game spots are expensive, so we couldn’t buy a full one. But we were inspired and decided to spend our entire marketing budget on 5 seconds of airtime. One thing we learned from our communities last week is that underdogs can accomplish anything when they come together around a common idea.

Who knows, maybe you’ll be the reason finance textbooks have to add a chapter on “tendies.” Maybe you’ll help r/SuperbOwl teach the world about the majesty of owls. Maybe you’ll even pause this 5-second ad.

Powerful things happen when people rally around something they really care about. And there’s a place for that. It’s called Reddit.
Click to expand...
 
ek8cd4mwo9i61.png


The cat, the headband, "I like the stock".
Peak boomer wooshing.
 
two sheds said:
good luck to them - I understand <nothing> about all of it :(
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Somewhat simplified explanation...

Firstly it's important to understand what "short selling" is.
Normally with shares you think that people buy low and sell high to make money - you find a share that you think is going to go up in price, you buy it and sell it later at the higher price to make a profit.
"short selling" is what you do when you think that the price of a share is going to fall. How this works is pretty simple really. What you do is you find someone who owns some of those shares and you rent them from them. You sell those shares and then at a later date you buy them back and return them to the owners, paying the rental fee as you do.
So if you rent and sell the shares at £10/share and then buy them back at £5/share you make £5 per share, minus the fees you pay to rent those shares.

If you rent shares then at some point you must give them back, which ultimately means you have to pay whatever the share price is when the owners demand those shares back. This means you can lose theoretically infinite amounts of money. Imagine renting and selling shares at £10/share and then having to buy them back at £1,000/share... plus paying the rental fees on top of that.

So short selling makes sense but things get crazy when "naked short selling" is allowed - this is illegal in the UK, but not in the US afaik. "Naked short selling" lets you sell shares you haven't borrowed and then buy them back. It makes no sense to me at all, like not at all but there is some mechanism in the stock market that makes it possible. Alongside this you can have a chain of short sellers - I rent shares from you and sell them to Ska, who rents them to someone else.
Both of these things allow a situation where there are more shares being shorted than there are shares in existence.

This is what happened with GameStop. The number of shares being shorted was at over 100% of the shares in the company.
So when the hedge funds that were shorting gamestop need to return the shares they've rented, they will need to find lots of people willing to sell, and let the short selling chains unravel or the naked short selling mechanisms work their magic. Either way you need a substantial number of share owners willing to sell to unwind the position.

GameStop has a substantial insider holding - people who took over the company last year (iirc) and own a big chunk of it, that cannot be sold without prior notice. This further reduces the available shares to buy and makes things more difficult for the short sellers.

If the owners of the shares refuse to sell, the short sellers must keep offering higher and higher prices for the shares. They have to buy them back and return them or face a "margin call" which is where the markets make them prove that they have the funds to cover their position (ie: repay the people the rented the shares from, not with shares but with cash to the value of those shares). The big hedge fund that was shorting the shares (Melvin) had to get a capital injection of $3.5bn to cover their position in the earlier spike on that graph, which they got from another hedge fund (Citadel)

So what Redditors are trying to do is buy enough of the available shares to hold onto them and refuse to sell until the prices goes "to the moon" as they say. There are also some massive hedge funds doing the same. As long as they control enough of the available shares and refuse to sell, the price will keep rising... this is known as a "short squeeze" or if it really goes far enough an "infinite short squeeze" (because in theory the share price could go to infinity).

Of course it'll reach a price where the big hedge funds sell off, and the likely hood is that they hold enough to start the reddit lot and other holders to sell off as the price starts to fall and then crashes. That price may or may not be high enough to bankrupt the hedge funds that have been short selling gamestop.
Just remember, at some point the hedge funds that are short selling must buy those shares at whatever price the market offers them at. This is what makes the short squeeze possible.

Hope that helps, please ask for clarification on anything I've said :)
 
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Just to add to Tom’s excellent explanation:

One reason that the redditors are so pissed off is that once you have naked shorted a stock — ie rented it with the promise to buy it later at market price and immediately sell it for a given price — you have an incentive to try to actively drive down the price of that stock. This isn’t illegal.

So if I short the GameStop share, I then start loads of rumours about how GameStop are useless and failures and about to go out of business. This lowers the price of the share and I win. It also, however, can kill GameStop, even though they’ve done nothing. If there is enough perception that you are unviable as a business, you become unviable.

That’s the source of the anger— hedge funds shorting stock and then actively trying to destroy the shorted companies in order to yield profit.
 
Ta BigTom and kabbes - one other thing I read was that you get lots of trades of the nonexistent shares so there appear to be a lot more shares than are actually in existence which also forces down the price.

I think :)
 
Bear in mind that a transfer of stocks isn’t a market trade, it’s purely a temporary book reallocation in reality. What you see being published isn’t the full picture- the stock leading desks are lending what may not be their own holdings but something that they have custody of as part of a separate agreement with the actual owner. A client may lodge equities with a bank for say collateral against another independent transaction. The lenders are squeezing out a bit of profit fit from something they have in their books anyway . The chains are not usually as straightforward as they may initially appear in a textbook short selling scenario
 
One thing I don't understand is what's in it for the lenders? They get a hire fee, but if the shorting is successful they also get back a load of worthless shares - how does that side work?
 
killer b said:
One thing I don't understand is what's in it for the lenders? They get a hire fee, but if the shorting is successful they also get back a load of worthless shares - how does that side work?
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It doesn’t matter as they have them anyway. Remember that although people think that banks hold massive amounts of shares ( they do) , they are not held for no reason and are not just lying around after being bought by the bank for a non specific purpose. At this level, banks will be using other peoples stuff - they don’t have naked holdings that someone in their company has bought for a punt
 
HF will assign their business to a bank as they don’t need the admin expense of the day to day shite so outsource it. These may be the holdings that the bank are playing with to snarf some extra profit . Of course and HF may not allow this to occur but it provides the bank the ability to offer a better deal to the HF
 
And last thing - it is possible for a bank to go to market and purchase the stocks fir the express purpose of lending out but this would be hedged at the onset to lock in an exit price but would incur physical settlement for the value of the purchase- this would be usually frowned upon as it tied up money and Fucks with the capital adequacy demands of the institution .
 
So if the people doing the lending don't actually own the shares, what happens if the people who do own the shares want to sell because they're tanking?
 
Covered in agreement documentation. Bank should not lend in excess of any agreed notice period. This is why the lending period is usually tiny and resulted in the HF needing to get extra funding very shortly after they took the position. The paperwork to may well have trigger and a ratchet mechanism that kicks in if price volatility starts to impact the risk profile of the deal.the banks will always have ultimate custody of the assets. ETA maybe better to use commitment to fulfill rather than lending iykwim
 
One aside of this specific manipulation is the the DTCC / centrally run clearing institution in the US is now looking at revising settlement timing because it takes a few days to process but this is a hangover from the old pre computer days. They want to move it to daily settlement to slice out the few days of risk - massive impact fir those in the game
 
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