Posted on 01/31/2021 4:47:46 AM PST by Kaslin
Like the mighty Gulliver pinned down by the Lilliputians, the Reddit Raiders have had the giant hedge fund boys tied up in knots. The suits were executing a classic short squeeze where they collectively shorted GameStop shares. It’s a time tested strategy where their shorts alone were virtually guaranteed to drive the stock price down. They consistently made hefty profits while the small shareholders lost big.
But a funny thing happened to the wolves on the way to this kill.
They ran into an army of small day traders, armed with laptops. A few did the research and shared it online with the rest. They discovered that the hedge fund hogs had gotten greedy. The pigs had apparently managed to short more shares than GameStop actually had outstanding. As we in the Midwest say, the pigs get fat and the hogs get butchered.
The hedge hogs were caught with their shorts down. About a week ago, the butchering began. You don’t have to appreciate a good pork tenderloin to find this all quite tasty.
When someone shorts a stock they are effectively selling the stock today with a promise to deliver those shares at some point in the future. They aren’t really investing. They are simply betting, betting the shares will go down in value. To ensure that they will be able to deliver those shares, they must borrow shares from someone who holds them. Brokerage firms loan the shares to cover these shorts for a fee or interest. The raiders knew that eventually the hedge funds would need to buy shares to square their short positions. Since there weren’t enough shares outstanding, they began to buy heavily. This drove the price up and up, creating huge losses for the hedge funds.
By one estimate those potential losses reached over $70 billion on paper.
You may ask, do the brokers loan shares of current shareholders who have accounts with them? Do they collect fees for this? And do they inform current shareholders that they are lending their shares to the hedge funds with the clear intent of driving the value of their shares down? An even better question, how could these guys possibly short more shares than those outstanding? That sounds like naked shorts, which are illegal.
Everything the day trader raiders did was legal. All of the information they used was public information. They didn’t create the oversold situation. They simply exploited it. The hedge hogs and their broker enablers finally went too far. And they got caught…big time.
For reasons we do not yet know, stock trading platforms intervened. They began to limit the ability to trade stocks like GameStop. Chief among them was Robinhood, the very app used by many of the day traders. Robinhood’s motto was, Democratizing Finance for All. Comedy became farce. They would allow clients to sell the stock but they couldn’t buy. The only beneficiaries of this were the hedge hogs. Robinhood wasn’t alone, even vaunted Charles Schwab posted a bizarre statement on their portal which read:
In the interest of helping to reduce risk…we've put in place restrictions on certain securities. These restrictions may include increasing margin requirements or limiting certain types of transactions.
Schwab didn’t protect us when the COVID correction hit. So who are they protecting now, from whom and why? They have every right to raise margin requirements. But, do they have the right to limit certain types of transactions?
NASDAQ CEO, Adena Friedman suggested that her exchange might halt trading of certain stocks to allow investors to “recalibrate.” In plain English, she would intervene to allow the big hedge funds to close out their positions, cutting their losses at the expense of small investors.
Did the big banks and brokerage firms lean on people like Friedman and perhaps new Treasury Secretary Yellen?
The stench of this is strong enough to offend noses on the right and the left. It demands Congressional hearings. Some people may go to jail. Maybe the SEC will finally put some serious restrictions on these short squeezes as well as the way the brokerage houses cover their shorts. In any event, these Reddit Raiders have struck a serious blow for the small investor.
Bfl
Robin Hood should rename itself the sheriff of Nottingham.
How do you sell a stock when there is no one buying it?
Or Robbin Hoods.
You don’t. But if the price goes down far enough someone will.
It’s a classic bear trap. Rare and fun to watch. Hedge funds have lost $75 billion so far on GME. Some have exited their positions (like Melvin Capital) others have joined. Short shares are still >100% outstanding. I guess $300 for a $10 stock is too tempting to pass up. Live and learn.
Perhaps, lenders will be revisiting their lending policies. /s
For later.
> “How do you sell a stock when there is no one buying it?”
If you’re a short, you buy back shares you sold to return them to where you borrowed them. You are both seller of someone else’s shares and then buyer of those shares to close out your position. You want to sell high and buy back low.
If you are a naked short (illegal), you put in a sell order of shares you don’t own and you haven’t borrowed. How is this done? This is done in several ways but one way is by abusing hypothecation agreements. In any case, you sell phantom shares but you must have some way of faking out the trading system, maybe special access or maybe you had shares but loaned them out for trading to multiple parties who don’t know they are borrowing shares that are also loaned to many others.
The way to make money in the stock market is to buy a stock. Then, when it goes up, sell it. If it’s not going to go up, don’t buy it!( Will Rogers)
Ha ha ha ....that's a real knee slapper. The SEC is now run by the wife of the disgraced FBI criminal, peter stzrok.
The sec ra. For the hills on this.
I have to agree here, I’m in the market, and I recognize companies in trouble yet morally just won’t tale a short position agast them as I do not wallow or want to benefit from someone else demise.
There are too many great companies and ways to invest out there! Short sellers are just paper and digital information pushers and gamblers and actually create nothing from these actions. Its time we take ea look at betting against companies for profit.
A number of years back, my company used Schwab, so I did too. On several occasions I used them to sell a few shares of company stock "at market". I noticed my sale just happened to hit at the lowest price of the day. Thinking it was a coincidence, a while later I sold some again. Again, I just "happened" to hit the low price of the day. Selling at the low point of the day (to the seller), and buying at the high point of the day (to the buyer), reaps a tidy profit to Schwab.
Did they always do this? I don't know. I took my shares out, and left them for good.
The elites have many vulnerabilities. It would be a pity if an invisible army of deplorables began to reveal them in tangible ways.
So, I assume you will not sell a stock that you have already purchased even if you realize that the company management is destroying the company and you expect the stock to go down.
Do I have this right?
“Schwab didn’t protect us when the COVID correction hit. So who are they protecting now, from whom and why?”
Profound questions that warrant answers.
If the SEC were to actually do the job with which it is charged, we would get some type of legitimate answers to these questions. Without answers the SEC, vis-à-vis the federal government, is just as crooked as the short traders, robinhood, charles schwab, etc.
My biggest concern here is the company Game Stop. What will happen to them now?
Despite all of the descriptions of short selling, I still do not understand the process. I think the only way for me to understand would be to go through a short sale process (preferably simulated) so that I can see exactly what takes place.
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