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.
The hedge hoppers are not going to loose $70 Billion without uncle sugar and auntie yellin, giving them our money to save their asses.
BTW, did anyone see how many years in prison that scumbag fbi agent that committed fraud on the fisa court got last week?
What? 12 months probation.
OK, someone from Robinhood is going to jail, and is going to get the same punishment as the crooked fbi pimp.
4 major topics:
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The hedge funds are boy scouts?
Shorting can have infinite losses. Many (all?) online brokerages popup this warning when you attempt to short a stock.
You cannot short stock that you are unable to deliver (this is naked shorting, and illegal).
Somehow, the hedge funds shorted GME 140% of outstanding shares. IE, they somehow "borrowed" shares with the intent to sell those at a lower price for a profit.
As an aside, massive short interest against a company, makes it harder for the company to release stock/bond offerings and gain access to capital and reorganize the business in more profitable manner. Essentially, massive short interest can be a race to the bottom.
John Q. Public on social media sees this scenario playing out, and through discussion (since ~Aug 2020) realizes that if the price of GME goes up, there are more shares shorted than available to purchase, which could mean significant gains for "retail investors." All retail has to do is buy and "hold."
The hedge funds double down on their shorts even though the price of GME rises. Flash forward to mid/late January 2021, and the price of GME skyrockets. The hedge funds along with CNBC start shilling the potential massive losses for retail investors.
Simultaneously, CNBC advertises Melvin Capital covered all of their shorts; the math shows GME still shorted at ~120% of outstanding shares.
Within days, retail wipes out ~$5 billion from some of the hedge funds, including Melvin Capital. In response, Citadel, provides Melvin with a $2.75 billion bailout.
The next day, RobinHood, an online brokerage, which runs ~60% of its trades through Citadel, stopped their users from buying GME and other heavily shorted stock, and only allowed selling, which relieves pressure from the hedge funds at the expense of retail investors (i.e. the average public using RH to trade)..........and the hedge funds are boy scouts?
The only thing some of these hedge funds have in common with boy scouts, is they made stupid decisions and then went bankrupt.
Many hedge fund boys went bust flaw in shell game noted.
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.
Complex simplicity😊
Lots of words but a very simple process. Borrow a share, return a share.
RH gamblers and late arrivals, are gonna take a hit, if there is continued liquidity. There is still massive volume and exchange, even in the face of hold the line. I don't have a stake in the gme, amc, etc, but I'll gladly admit I'm wrong.
It is possible to have 140% short. Brokers borrows to cover shorts, then delivers the shares to the buyer, whose broker then lends out the share to short again. Not uncommon. Naked short selling, that is different. Continue watching volume, if volume drops and prices increase, that would be a sign of a larger problem.
Yep- years ago I played forex. No more!
I did forex, but found the markets were moving far too fast with microtransactions to make a reliable profit.
I guess they were SO sure their tactics were foolproof, they never thought to buy way-out-of-the money calls as a CYA.
YEARs ago, that was my tactic when shorting a stock. A tad less profit but no sleepless nights.
“It demands Congressional hearings.”
If I had a dollar for every time someone has said this over the last couple of years and nothing came of it, I would be rich myself. Nobody in charge seems to care about what is right.
Sell it to a “market maker”.
https://www.thebalance.com/what-is-a-market-maker-and-how-do-they-make-money-4053753
Short explanation:
“Buy low, sell high. Not necessarily in that order”.
Nice! Love it!
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