(vanity) Someone please explain the Gamestop / silver market / Redditors thing to me like I'm 5 years old

Even after watching Trading Places for 30+ years, I still don't understand exactly what they were doing at the stock exchange. 🙁

This is about naked short selling, which is illegal. A legal short sell simply mean you borrow a stock from someone, sell it at market value, then wait some short period of time for the price to fall, and then you buy that stock back at the lower price and give it back to whom you borrow it. You keep the profit between when you sold it and when you bought it back at a cheaper price.

Naked shorting is when there actually isn’t a stock borrowed, but someone claims there is. This is fraud, and it happens routinely as the SEC does nothing about it because it involves very large and powerful houses who donate to political parties.

Here is an example of a legal short sell. Short selling is very simple.

1. Person A owns a share of stock.
2. Person B thinks the price of that stock is going to go down.
3. Person B borrows a share of stock from Person A, but only for a defined period of time, say 30 days.
4. Person B also pays Person A a flat fee, say $1, to borrow that stock.

So, Person B has a borrowed share of stock that they have 30 days to return and pay a $1 fee to Person A.

5. Person B then sells that share for say $10 (whatever it is worth on the market at that time).
6. Person B then waits up to 30 days for that stock price to come down from the $10 price they originally paid.

So, Person B has $10 in their pocket, but they must buy a share of stock back within 30 days to give back to Person A. They hope like hell that the stock price is less than the $10 they sold the original stock at.

Two things can happen: Stock price goes down or the stock goes up. Either way, Person B must buy a share to give back to Person A.

Price goes down, say to $6.
7. Person B buys a share of stock at $6.
8. Person B gives Person A their share of stock back, plus the $1 fee.
9. Person B had $10 from originally selling the borrowed share of stock. They paid $6 for another share to return to Person A and they paid Person A the $1 fee. This means Person B kept $3 ($10 - $6 - $1 = $3) for themselves, a nice and tidy profit of $3.

Price goes up, say to $14.
7. At the end of the 30 day period, Person B finds the stock actually went up to, say, $14. They are screwed. They must buy a share of stock at market price of $14 to return to person A.
8. Person B had the original $10 in their pocket from selling the borrowed share of stock, but they must fork out another $4 to have the $14 to buy the share of stock to return to Person A. Plus, there is that $1 fee.
9. Person B must pay out $15 total, and therefore has lost $5 in this transaction.

This shows that shorting a stock can result is significant losses if the stock price goes up and not down. Imagine a $10 stock going to $200! Shorting that stock in this scenario may make up to the $9 for Person B, but it can also result in losses of $191 if the price goes to $200.

Here's a serious reply to your post. I believe it gets to the root cause of what is going on and offers a long-term solution.

Institutional traders, read that as Big Banks, Hedge Funds and similar entities have access to market information that small investors/traders do not. I am not writing about fundamentals or inside information, but the disposition of trades. That is whether trades are long or short. It includes information about the price of stop losses, their quantities and who holds the stop losses.

Briefly, a long trade is what most people understand about investing. You buy low, expect the price to increase, and you sell at a higher price thus making a profit. A short trade, is the opposite. You are betting the price will decrease and you make a profit. Don't concern yourself with the technical details in how that is accomplished. Just understand that it is legal and has gone on for a long time. It is a fundamental part of the market and is a good thing when not abused.

A stop loss is a type of trade that you place with a broker that instructs the broker to get you out of an existing trade. It is a failsafe. If your original trade is long, you would place a stop loss at a lower price to limit how much you lose. If your original trade is short, you would place a stop loss at a higher price to limit how much you lose.

But let's not get into the technical details, even though what I just wrote is very short of detail. The primary thing to understand is that institutional traders have access to more market information than small investors. Information is power and power is consistently misused to profit.

Additionally, institutional traders have more capital than small investors. They use that capital to move price of financial instruments in the direction they want and when they want. There's nothing inherently illegal about this, but it is illegal when they collude. It is inherently unfair and leads to market manipulation at the expense of small traders.

Wall Street has become a place where institutional traders pick winners and losers through manipulation instead of the market picking winners and losers. They do it for profit. Using the Gamestop example, institutional investors decided to short Gamestop. But they did not just place orders that would result in profit from the market naturally choosing a loser, e.g., the price of Gamestop going down because everyone in the market thought it was a loser. Institutional traders manipulated prices. They employ traders for that sole purpose. They use huge capital reserves to move price in one direction temporarily to accumulate positions, only to have trades in the opposite direction to profit from the previously accumulated positions. They actively sell the accumulated positions, driving price down, so they can profit from their shorts. This takes out stop losses of small investors, thus causing a loss for small investors. Institutional traders know the price of those stop losses and view them as mini barriers in the quest to drive price in a direction of their own profitability. When encountering those barriers, they use more capital to take out the barriers, but only enough capital that their other trades will remain profitable.

This is done with many financial securities and often multiple times and in different directions. It is not a done once with one security. It occurs to drive prices up and down in multiple rounds profiting in both directions simply by manipulating prices and knowing the direction (long or short) of the little guy's trades and where the little guy has his stop losses. It has nothing to do with the fundamentals of a security. It has nothing to do with market driven volatility. It is a false volatility, intentionally manipulated by institutional traders under the guise that volatility provides a range of prices for all traders to buy and sell. That would seem to be a good thing, but not when institutional traders actually know ahead of time the direction price will go. They can do this with superior market information to that what small traders can afford or even obtain.

Understanding this is fundamental in correcting the problem. Institutional traders gain superior information in two ways. 1.) The investment banking side of the business and brokerage side of the business collude on market information. The brokerage side of the business knows the disposition of trades it is handling. The larger the brokerage, the great the sampling of the overall market and the high quality the information. 2.) Institutional investors can buy additional information that is too expensive for small investors to afford.

This is not good for capitalism and competition. It has long been held as a tenant of market capitalism that "perfect information" is required for pure competition. "Perfect information" being price, quality, supply, demand and other factors required to make a decision to buy and sell.

The solution to the problem is simple. Make all market data ubiquitous. Perfect information has never been perfect in any type of market mainly because of a lack of information or the speed required to acquire and disseminate that information. Technology has changed that, but establishment oligarchs control access to the technology and the data it provides. It is presently very inexpensive to provide uniform access to the same data for all parties participating in a market. It is good for the market. It is good for investors of all means.

Government has seen fit to regulate markets under the pretense of protecting small investors and reducing the little guys risk. One of the biggest contributors to this is Dodd-Frank. However, it has done quite the opposite because Dodd-Frank was created by financial mental midget politicians and establishment lobbyists from big banks. I could go on for hours about the damage Dodd-Frank has done to little guys and how it benefits the establishment.

Things like shorting, leverage, hedging and derivatives often derided by mainstream media as risky and bad for markets, and particularly risky for small investors/traders. I can tell you that I only trade derivatives. I trade in both directions; long and short. I hedge. I almost always use leverage, because almost all the derivatives I trade are leveraged. The exceptions to that are metals which Dodd-Frank made it illegal to trade with leverage. I can also tell you that my trading is probably less risky than what most people incur by blindly placing their money into 401k's and pensions.

The knowledge to trade in this manner is easy to obtain and does not require extraordinary intelligence. It does require some time and effort. That after all is required to be proficient in most professions. My major barrier to greater profitability is price manipulation based on market data that I do not have access and is used against me. This only occurs due the collusion of people in establishment government with the financial industry.

Make no doubt about it. What small investors are doing to hedge funds over Gamestop and now other securities is a populous rebellion against establishment. The small guy has been abused and is fighting back. In some cases, without regard to their own profitability and solely for the purpose to dealing a blow to the establishment. I am 100% onboard with it.

I got a rather interesting email from APMEX this morning.

To our valued customers,
APMEX Statement On Current Market Conditions:

In the last week, we have seen a dramatic shift in Silver demand from our customers. For example, the ratio of ounces sold per day was running about two times earlier in the week and closer to four times the average demand by the end of the week. Once markets closed on Friday, we saw demand hit as much as six times a typical business day and more than 12 times a normal weekend day. Combined with the extremely high demand levels, we are also seeing a surge in new customers. On Saturday alone, we added as many new customers as we usually add in a week.

Any Precious Metal dealer will take a long position in the futures market to protect against spot price exposure when the markets open. We do this because it is our goal not to take a speculative position on metal. The weekends are unique as we are not able to real-time hedge our position. We took an aggressive position this weekend, but clearly could not have predicted the volumes that were seen. We have partnerships around to world that allowed us to cover these long positions, but only to a point. Once we exceeded our comfort levels, we had little choice but to stop the sale of Silver on our website. This was a difficult decision to make and unprecedented in our history.

As we evaluate the markets, it is difficult to know where Silver's price and demand will go in the coming day and weeks. APMEX is highly capitalized and has more than $150 million in inventory to support demand. We have made strategic decisions to procure additional metal, locking up any metal we can find in the market place. We suspect premiums will rise and rise quickly, as we are seeing significant increases in our costs, when we can even locate the metal. It is also highly likely that we will need an additional day or two to fill orders based on current order counts. The one guarantee we can make to our customers is that you will only be sold metal that is on-site, or we have procured the metal with a firm commitment date from our partners. In markets like this, we feel this is the best approach a retailer can take, as no one can predict product availability.

We want to thank our customers for their patience and understanding during these turbulent times. APMEX prides itself on best in class service and delivering on promises to our customers.

Sincerely,
Ken Lewis
CEO, APMEX

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