Redditors vs the hedge funds

[wayward bob]

this time next year rodders...

 

[Fez909]

And in this case you're borrowing to buy a house that was only worth £15k 2 weeks ago with no real reason to be worth any more other then some tulip madness style hype.

I think I'm missing a big point of what's going on here. What's the end game, lose a load of personal money in order to make some hedge funds lose some of their clients money? Is there some mechanism I'm don't know of where the short sellers will be forced to buy the shares at a higher price in order to fulfil their position? Even then surely people will start to sell at that point bringing the price down.

As far as I can see the only people who will win are those who got in early (and probably the people pumping the stock on WSB). The underlying stock is still a shitty old game store that's running on limited time.

Note - edited the amount as I was out by a factor of 10x in the even crazier direction

The 'mechanism' that forces them to sell is actually a combination of a few things: one problem is that they incur costs every day they are 'short'. If you borrow shares from someone, they don't do it out of the goodness of their hearts - they charge you interest. So every day you can't repay them, you're paying interest. You can also buy a 'put option' - which is a right to be able to short-sell at a certain rate in the future. You are essentially betting that the price will go down, like a short-sell, but you're also covering your back by giving yourself the option to back out if the price didn't fall as you hoped. There is a fixed cost for a put option, which you lose 100% if you don't carry out the short sell. There are potentially unlimited costs for a normal short sell.

The opposite of a put option is a call option, which is a right to be able to buy shares in the future at a specific rate, but with no obligation, if the price didn't rise (why would you buy for £50 from your option when you can buy on the open market for £25). If lots of people buy call options, as WSB did, then the seller of those options will be obliged to provide the shares to them - at whatever cost to themselves. It's the reverse of a short-sell.

So the call option sellers (brokers? I don't know who they are, tbh) will see the price going up and will be looking at the expiration dates of the options they sold - lots are today, apparently - and realising that they're going to have to provide these shares at the price in the call, which are now worth WAY more than they thought.

The problem is, that they don't have them. They have actually sold more than 100% of available shares. This is called naked selling, and is illegal in the UK, but not in USA. They will have to now buy the shares on the open market, at any price, to be able to sell them to the call option holder.

If the people who actually hold shares don't want to sell, then the options traders will have to offer more money to tempt them. The price goes up, then causes a bidding war between all the people who have to buy the shares they claimed to already own, so that they can sell them back at the discounted rate in the option contract. No one wants to start this process off, as once it gets going, it will be a mad scramble of ever-increasing prices.

So they're all holding off hoping for a crash, or even a small dip, to be able to buy some shares cheaply and limit their losses. But as the shareholders don't have to sell - there are no cost/time implications for them - they can just wait it out and eventually the options traders will have to start buying at whatever price to fulfil their contracts.

Hope this makes sense and is correct. I didn't know a thing about any of this until a few days ago and started researching what was going on.

The above is only one aspect, btw, which is called the "gamma squeeze". There is another aspect which is the "short squeeze" itself - basically the same thing, on longer timescales, and potentially much greater numbers involved.

 

[muscovyduck]

I've downloaded one of these apps to see what the deal is... it feels like gambling but 1000% worse. These need restricting or regulating a lot more than they are, it's way too frictionless like it's a game and not real money

 

[Ax^]

 

[two sheds]

Oh dear

Losses on short positions in U.S. firms top $70 billion - Ortex data

Short-sellers are sitting on estimated losses of $70.87 billion from their short positions in U.S. companies so far this year, data from financial data analytics firm Ortex showed on Thursday.

www.reuters.com

Someone should have told them that investments can go up as well as down

 

[ddraig]

GameStop: Meet the amateur traders fighting Wall Street

They're young, they're financially savvy and they're angry at being shut out of GameStop share trading.

www.bbc.co.uk

Eighteen-year-old Myron Sakkas,of Coventry, who is studying at Warwick University, lost £30 on GameStop shares, which he owned for "a couple of hours" and sold when he saw what was happening.
He has had an account on the Trading 212 platform since August last year and is hoping to go into investment banking after he gets his degree.
But for now, he is disillusioned by what he sees as "market manipulation" directed against people like him.
For him, there was a definite target in the GameStop share wars: as he puts it, "the people that were responsible for [the financial crisis of] 2008 and were never held responsible".
"We understand that there are risks, but this wasn't an actual crash. It was caused by people protecting corporate interests and normal people lost again.
"When ordinary people try to make money in a system where only rich traders can make money, that's what happens," he told the BBC.
"They support a capitalist free market only when it works for them. What we saw today was not a free market and it forced an awful lot of people to lose an awful lot of money."
Myron says he has been locked out of his account and is unable to use it while his identity is being checked. But when he gains access again, he plans to take out the £1,000 he has in it and call a halt.

 

[Combustible]

I'd be amazed if their T&C didn't cover them for refusing to accept any trade they didn't want to. I can't think of any online broker that guarantees service in all market conditions, it's quite common for them all to fall over on busy days.

I don't think that there is any question that brokers can refuse trades in general, but if the purpose of refusing certain trades was to manipulate the price of certain assets, then no amount of T&C could make that legal (of course Robin Hood would try and argue that they had legitimate reasons for refusing)

 

[not-bono-ever]

This could be the pin that bursts the bubble you know.these Reddit chappies could have inadvertently started the process. Bunker down and tinned goods time

 

[Flavour]

This could be the pin that bursts the bubble you know.these Reddit chappies could have inadvertently started the process. Bunker down and tinned goods time

how?

 

[not-bono-ever]

Undermining the confidence that is keeping this bubble inflated

 

[Yuwipi Woman]

This could be the pin that bursts the bubble you know.these Reddit chappies could have inadvertently started the process. Bunker down and tinned goods time

I've noticed that right-wingers are using two benchmarks to gauge the success or failure of the Biden administration--the low price of gasoline and the high stock market. In many countries the price of oil has been below the cost of pumping it. For about a day and half, the futures price of oil was into negative territory. Gasoline prices are almost guaranteed to go up once economic activity rises. The stock market has been overvalued for a while now. So basically, these benchmarks are preloaded to make their base angry at the Biden administration when they inevitably change.

 

[salem]

The 'mechanism' that forces them to sell is actually a combination of a few things: one problem is that they incur costs every day they are 'short'. If you borrow shares from someone, they don't do it out of the goodness of their hearts - they charge you interest. So every day you can't repay them, you're paying interest. You can also buy a 'put option' - which is a right to be able to short-sell at a certain rate in the future. You are essentially betting that the price will go down, like a short-sell, but you're also covering your back by giving yourself the option to back out if the price didn't fall as you hoped. There is a fixed cost for a put option, which you lose 100% if you don't carry out the short sell. There are potentially unlimited costs for a normal short sell.

The opposite of a put option is a call option, which is a right to be able to buy shares in the future at a specific rate, but with no obligation, if the price didn't rise (why would you buy for £50 from your option when you can buy on the open market for £25). If lots of people buy call options, as WSB did, then the seller of those options will be obliged to provide the shares to them - at whatever cost to themselves. It's the reverse of a short-sell.

So the call option sellers (brokers? I don't know who they are, tbh) will see the price going up and will be looking at the expiration dates of the options they sold - lots are today, apparently - and realising that they're going to have to provide these shares at the price in the call, which are now worth WAY more than they thought.

The problem is, that they don't have them. They have actually sold more than 100% of available shares. This is called naked selling, and is illegal in the UK, but not in USA. They will have to now buy the shares on the open market, at any price, to be able to sell them to the call option holder.

If the people who actually hold shares don't want to sell, then the options traders will have to offer more money to tempt them. The price goes up, then causes a bidding war between all the people who have to buy the shares they claimed to already own, so that they can sell them back at the discounted rate in the option contract. No one wants to start this process off, as once it gets going, it will be a mad scramble of ever-increasing prices.

So they're all holding off hoping for a crash, or even a small dip, to be able to buy some shares cheaply and limit their losses. But as the shareholders don't have to sell - there are no cost/time implications for them - they can just wait it out and eventually the options traders will have to start buying at whatever price to fulfil their contracts.

Hope this makes sense and is correct. I didn't know a thing about any of this until a few days ago and started researching what was going on.

The above is only one aspect, btw, which is called the "gamma squeeze". There is another aspect which is the "short squeeze" itself - basically the same thing, on longer timescales, and potentially much greater numbers involved.

Cracking write up and makes perfect sense, thanks Fez909 (didn't think a 'like' was enough)!

 

[Idaho]

the futures price of oil was into negative territory

That was a slightly different, and actually pretty hilarious side effect of futures trading. The thing about futures is that at the expiry of the coupon, you actually have to settle - meaning (in that case) that the buyer must part with dollars and the seller must deliver oil. Some foolish trader bought a whole load of seemingly very cheap oil futures without factoring in that, at the time, oil storage capacity was full due to over production and low demand. Nobody would buy them off that trader! They were then faced with the possiblity of having to actually take delivery of millions of gallons of oil from their paper gamble! In the end they were forced to effectively pay to have the contract (and oil storage liability) taken off their hands.

 

[stdP]

As the Graun puts it, "Stocks slump as GameStop trading frenzy spooks investors" but perhaps we'd be better off posting in the "imposion begins thread Big indexes all down at least 1% on the back of people losing confidence, as was entirely predictable.

I've downloaded one of these apps to see what the deal is... it feels like gambling but 1000% worse. These need restricting or regulating a lot more than they are, it's way too frictionless like it's a game and not real money

The tech press has been full of people warning about the dangers of these apps (especially on the US side) for some time now but hey, regulation is bad, apparently. One could argue that Robin Hood's "zero commission" approach was there to snare an increasingly desperate class of small investors. This NYT article gives a good example of what I'd consider to be predatory practices (might be paywalled if you're not using a script blocker so posted the first few paragraphs).

Richard Dobatse, a Navy medic in San Diego, dabbled infrequently in stock trading. But his behavior changed in 2017 when he signed up for Robinhood, a trading app that made buying and selling stocks simple and seemingly free.

Mr. Dobatse, now 32, said he had been charmed by Robinhood’s one-click trading, easy access to complex investment products, and features like falling confetti and emoji-filled phone notifications that made it feel like a game. After funding his account with $15,000 in credit card advances, he began spending more time on the app.

As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts. His account value shot above $1 million this year — but almost all of that recently disappeared. This week, his balance was $6,956.

“When he is doing his trading, he won’t want to eat,” said his wife, Tashika Dobatse, with whom he has three children. “He would have nightmares.”

Millions of young Americans have begun investing in recent years through Robinhood, which was founded in 2013 with a sales pitch of no trading fees or account minimums. The ease of trading has turned it into a cultural phenomenon and a Silicon Valley darling, with the start-up climbing to an $8.3 billion valuation. It has been one of the tech industry’s biggest growth stories in the recent market turmoil.

Hope this makes sense and is correct. I didn't know a thing about any of this until a few days ago and started researching what was going on.

I'll echo salem, excellent write-up.

 

[likesfish]

Robin hood are toast the internet doesn't forgive or forget.
There's a vomit inducing article on the torygraph site how the hedge funds are the real vigilantes nobody is buying it though.

 

[ska invita]

i was wondering how this all started - there has to be a leader or vanguard to get the ball rolling - the bit where the risk is real till critical mass kicks in
this paints a picture of that moment - it was hardly a flashmob, took time to get going

The ‘Roaring Kitty’ Rally: How a Reddit User and His Friends Roiled the Markets (Published 2021)

A Massachusetts man who goes by “Roaring Kitty” on social media helped fuel the frenzy around GameStop. His $53,000 investment in the company briefly reached $48 million in value.

www.nytimes.com

 

[Idaho]

Big indexes all down at least 1% on the back of people losing confidence, as was entirely predictable.

I'd be wary of "painting the tape" - creating a specific narrative of why markets go up or down. Often it's to do with the cyclical nature of investment and divestment.

 

[stdP]

I'd be wary of "painting the tape" - creating a specific narrative of why markets go up or down. Often it's to do with the cyclical nature of investment and divestment.

Oh agree, I'm not trying to create a specific narrative. Just that I feel if I was a small-time player stuck in this it'd certainly make me feel very nervous, and that usually always means a loss of investor confidence, even if just the small fry.

 

[hitmouse]

how?

Has anyone seen the Archduke of Austria-Hungary recently?

 

[BigTom]

This is very interesting actually. They're describing it as 'non-political' but there's definitely a somewhat political goal to their current actions reading through the comments on the subreddit, just not party politicial. I think the 'non political' thing is to make it difficult for outside groups or people to appropriate the action

Yep. Just seen this post:

edit: just come back and seen they've removed the post, I quoted it here then realised it previewed the post so deleted the quote!
anyway the gist of it was that the 2008/9 crash destroyed his dad and uncle's business and his dad was and still is fucked by this - depression and alcoholism - and he still remembers the bankers drinking champagne when occupy wall street was up and sees this as his chance to fuck the bankers and get some revenge for his dad and uncle.

and plenty of similar ones. I see this as political but it's not party political and I can see why some would not see it as political, but for me it is. There is a whole load of people buying a handful of shares and intending to lose a few hundred dollars just to fuck over wall street hedge funds that fucked them back in 2008/9.

 

[Idaho]

Oh agree, I'm not trying to create a specific narrative. Just that I feel if I was a small-time player stuck in this it'd certainly make me feel very nervous, and that usually always means a loss of investor confidence, even if just the small fry.

That's why most people have their default pension options and don't look too closely. The ups and downs are stressful.

 

[ska invita]

Sooo...if they never sell what happen then ??

 

[BigTom]

Sooo...if they never sell what happen then ??

So the most likely thing is that enough people will sell to allow the shorting hedge funds to close their positions and the stock price will crash when that happens.

But what if enough people refuse to sell that the shorting funds can't close their positions? I really don't know. I guess the funds go bankrupt and since they are naked short selling I'm not sure they've ever actually borrowed and sold those shares but if they have then the organisations who lent the shares will lose them and be a creditor of the bankrupt shorting funds and take whatever they can get from the administration process.
Then the share price crashes because the main/only buyer is bankrupt.

 

[dylanredefined]

As the Graun puts it, "Stocks slump as GameStop trading frenzy spooks investors" but perhaps we'd be better off posting in the "imposion begins thread Big indexes all down at least 1% on the back of people losing confidence, as was entirely predictable.



The tech press has been full of people warning about the dangers of these apps (especially on the US side) for some time now but hey, regulation is bad, apparently. One could argue that Robin Hood's "zero commission" approach was there to snare an increasingly desperate class of small investors. This NYT article gives a good example of what I'd consider to be predatory practices (might be paywalled if you're not using a script blocker so posted the first few paragraphs).





I'll echo salem, excellent write-up.

What a fucking fool. All this clever trading fin tech shit. Is just gambling.

 

[hitmouse]

So the most likely thing is that enough people will sell to allow the shorting hedge funds to close their positions and the stock price will crash when that happens.

But what if enough people refuse to sell that the shorting funds can't close their positions? I really don't know. I guess the funds go bankrupt and since they are naked short selling I'm not sure they've ever actually borrowed and sold those shares but if they have then the organisations who lent the shares will lose them and be a creditor of the bankrupt shorting funds and take whatever they can get from the administration process.
Then the share price crashes because the main/only buyer is bankrupt.

Heavy I Am Not A Stockbroker disclaimer here, but according to a conversation I've had with someone who understands this stuff better than I do, it's common practice for trades to have like certain limits built in at which point a trade happens automatically, to stop their losses going over a certain amount. I guess similar to how it'd be good, if unlikely, for regular gambling to offer an option where, if you lost over a certain amount in one session, it would kick you out and stop you gambling any more? Anyway, if my understanding of that is correct then I think it'd be inevitable for the shorting hedge funds to have to close their positions at some point, even if it meant doing so at a massive loss. Although if that is true then I don't understand why that hasn't happened already, because you'd think that if there was some kind of a loss-minimising tripwire built into their trading software then it would have been tripped long ago by now? Does anyone know what I'm on about, and can they confirm if that's correct if so? (eta: this is an explanation of the thing I was talking about from someone who actually understands stonks, dunno if/how they apply in this case though)

Anyway, this made me chuckle, the numbers are a nice touch:

 

[Fez909]

Does anyone know what I'm on about, and can they confirm if that's correct if so?

Yes, it's called a margin call.

 

[BigTom]

Heavy I Am Not A Stockbroker disclaimer here, but according to a conversation I've had with someone who understands this stuff better than I do, it's common practice for trades to have like certain limits built in at which point a trade happens automatically, to stop their losses going over a certain amount. I guess similar to how it'd be good, if unlikely, for regular gambling to offer an option where, if you lost over a certain amount in one session, it would kick you out and stop you gambling any more? Anyway, if my understanding of that is correct then I think it'd be inevitable for the shorting hedge funds to have to close their positions at some point, even if it meant doing so at a massive loss. Although if that is true then I don't understand why that hasn't happened already, because you'd think that if there was some kind of a loss-minimising tripwire built into their trading software then it would have been tripped long ago by now? Does anyone know what I'm on about, and can they confirm if that's correct if so? (eta: this is an explanation of the thing I was talking about from someone who actually understands stonks, dunno if/how they apply in this case though)

Anyway, this made me chuckle, the numbers are a nice touch:

Yep, as Fez said I think this is a Margin Call.
But how can they close their positions if nobody will sell them the shares they need to in order to close those positions? Instead they will have to pay the monetary value of those shares which causes them to go bankrupt if they don't have the capital to cover the margin call. If they can raise the capital to cover that margin call, they can continue onwards.
Yeah I didn't get it right in my post, missed that they could do this.
But the people who are buying to fuck them over still achieve their aims - the fewer sellers there are, the higher the price is, the more money the short sellers will need to pay to cover the margin call.

also as an aside, the film Margin Call is a good one to watch about the 2008/9 financial crash, alongside The Big Short and a documentary, The Inside Job.

 

[cybershot]

So, from a selfish perspective, pensions!

Which essentially play with our money on the stock markets. I haven't checked if any of mine had done any random investments in GameStop before this all happens, would they have? Or are UK ones limited to UK stocks? Or am I just talking complete crap and nothing to worry about?

 

[BigTom]

So, from a selfish perspective, pensions!

Which essentially play with our money on the stock markets. I haven't checked if any of mine had done any random investments in GameStop before this all happens, would they have? Or are UK ones limited to UK stocks? Or am I just talking complete crap and nothing to worry about?

I think kabbes is the person on here who knows best about pension funds but my understanding is that they invest in FTSE 500 index funds and things like that so won't have had GME stock even if they do invest outside of the UK... although possibly this recent craziness has put GME into the equivalent bracket in the US.
Certainly pensions go for low risk, long term investing, pretty much the opposite of what is happening with GME.

 

[strung out]

So, from a selfish perspective, pensions!

Which essentially play with our money on the stock markets. I haven't checked if any of mine had done any random investments in GameStop before this all happens, would they have? Or are UK ones limited to UK stocks? Or am I just talking complete crap and nothing to worry about?

If you've got an HE pension (I think you work at a uni, right?), then you needn't worry, your pension is guaranteed on retirement, barring the end of civilisation as we know it.

If you've got a private pension, then it may well be invested in US companies, it will depend on whether you're invested in a default fund or have chosen it yourself. Either way, if you have got Gamestop in there somewhere, it's likely to be such a small amount as to be irrelevant to the overall value of your pot.