Wednesday, January 27, 2021

GameStop: Wall Street's bloody battle of the shorts

Something is happening on Wall Street that is almost unheard of. A war has broken out between large institutional investors (banks, hedge funds etc.) and small investors. And as of this post, the small investors are crushing the big boys of the financial world. 

Read the story here.

If you don't understand how short selling works, you can read a plain English explanation here

Disclaimer: I do not own or speculatively trade any individual stocks or other financial securities which is very risky. Nor do I encourage speculative investing unless you fully understand what you are doing, the risks involved, and are prepared to lose some or all of the money you are playing with. 


unreconstructed rebel said...

Problem is that the institutional guys own the referees & have been able to get rule changes to mitigate their losses.

This is why the Republican Party got burgled by Trump. The party does absolutely nothing for the man in the street.

John (Ad Orientem) said...

I haven't seen any rule changes to speak of and as far as I can see pretty much all of the shorts in the GameStop trade have covered their positions, taking huge losses in the process. No sympathy here. These often predatory hedge funds that routinely drive down the stock valuation of struggling companies and book huge profits oblivious to the hurt they inflict on small investors have finally gotten a little of their own back.

My concern is that this has created a serious distortion in the market. Irrespective of the emotional satisfaction that may come from giving a bloody nose to a pack of Wall Street sharks, what we have now is a company that is still fundamentally unwell, and whose stock has been inflated by a speculative mania to stratospheric levels. GameStop is now a classic bubble, and those don't end well. Making things even worse is that most of the new stock holders are small investors who likely can't afford the losses they may be about to take.

There is an old saying on Wall Street that dumb money chases hot money. The short squeeze is pretty much over. So where is the upside here? What is the rational for hanging on to the stock of a weak business that has gone up 17x in a little over a month? The smart traders have already left the building and booked their profits. Those who were late to this trade, and especially those still holding the stock could be about to see the value of their investment take a huge hit.

unreconstructed rebel said...

John, it's looking more & more like several retail brokers halted retail trading leaving institutional investors to do what they could do to mitigate their losses. If that is true, somebody(s) need to go to jail.

John (Ad Orientem) said...

If you are talking about the losses inflicted on the hedge funds that were short selling GameStop, those losses are already locked in. Pretty much all of the shorts ran up the white flag over the last few days. They bought back the rented stock shares, at a huge loss, and returned the shares to their legal owners. That's called "covering" their position. In other words the shorts lost, and with a very few exceptions have abandoned this trade.

I have heard that some trading platforms are restricting trading in GameStop. My understanding is that SEC is becoming concerned about collusion. The line between people talking about investing and sharing ideas with one another on one hand, perfectly legal, and large scale collusion to rig or manipulate stock prices on the other hand, which is highly illegal, can be a gray line.

The Anti-Gnostic said...

LOL. If the free market works for the short sale, then it works for the short squeeze. Anybody who wants can log on a forum and see what's being discussed, no different than the parade of "analysts" humping stocks on CNBC. There is literally no "true" price for any security; it's whatever the market will bear.

Imagine talking about a "free market" with the Fed printing money and sitting on interest rates. What century are you living in?

John (Ad Orientem) said...

Imagine talking about a "free market" with the Fed printing money and sitting on interest rates.

I think that's a very fair point.

The Anti-Gnostic said...

I think your point is well taken. But the Fed footprint in everything is so huge at this point I don't think there's any "fundamental value" discernible. So it's every trader for himself. Pure greater-fool theory. Interesting times.