If only. This has no signs of being "classic". People on WSB realize that if many people purchase and hold on to GME stock for long periods of time, there will be an increase in stock price. If/when this occurs, this increases the annual cost for GME short sellers through increases in both Margin Interest and Stock Borrowing Costs, which is a direct percentage of the GME stock price. This depends on the short type, but either by a certain timeframe or if the lender desires, short sellers will be forced to buy back their GME stocks. Buying back GME can also be forced through a Margin Call. When this happens, you will see a short squeeze.
You have a lot of faith in a bunch of people not wanting to realize their profits on a stock that everyone knows is going to tank sooner or later. I'm sure some of them who got in on the run early won't make a dime because they'll hold on too long and then not give up even on the way back down, but some will want to make sure it's real money for them and then this thing is going to go down fast.
Having lived through a number of cryptocurrency boom/bust cycles I’ve seen first hand how everyone is coordinated and holding the line...until those who have profit in their sights decide to find a bunch of bag holders to cover their exit. Poof.
Strange statement. Everyone here has lived through the same, you aren't some special snowflake in this regard. Paying more attention than others to the daily price or memes means absolutely nothing in the end.
All the talk of short squeezing and sticking it to the hedge funds and Wall Street aside, they are really basing it on the belief that someone will buy it at a higher price than it is now which will be true until it's not.
Unlike Tesla or Bitcoin which many think are bubbles, this is a case where absolutely no one believes in Gamestop (being a $24 billion company, at least). There's not anyone who thinks holding it forever is a good idea at this price (or even at a fraction of the current price). In these cases when the stock stops going up it implodes very very quickly.
I'll walk through an example and maybe someone can point out what I missed.
Let's say we have a market for some stock. There are only 5 traders (Alice, Bob, Chuck, Dave, Eli) and 100 shares that are all owned by Alice. Bob borrows all 100 shares from Alice and sells them to Chuck. Dave borrows the 100 shares from Chuck and sells them to Eli. Thus, Alice and Chuck are each owed 100 shares, Bob and Dave are in debt for 100 shares, and Eli owns the 100 shares.
Thus, Bob and Dave must now compete for the 100 shares owned by Eli, which then drives up the price.
I don't know how the synthetic long shares mentioned fit into this.
In reality their shares are actually on loan, but they're probably not even aware of it. If and when they go to sell their positions, it will instantly execute, and the broker will recall the shares before settlement (which occurs three days after the trade's executed.)
So, in fact Bob and Dave now have their pick of the litter and can buy back from either Alice, Chuck, or Eli.
I have no doubt this will end in tears for investors on both sides.
GME's management would be wise to issue 1-200% of new equity at a substantial discount to present market value to short holders (this lets them cover at a lower loss) and sit on the cash to transform their businesses strategic outlook.
All that said you do need to understand that if your impulse is to short or buy puts you’re almost certainly early as bubbles always go much further than anyone thinks possible and the extraordinary IV of the options makes it very difficult to profit from.
What I think people are missing is that in about a month we'll find that "Wallstreetbets" and "retail" were also other fund managers like Ackman.
This is not the first time one fund manager messed up with their short and got absolutely eaten up by other fund managers (see, famously, Herbalife where Ackman and Icahn were direct adversaries). Melvin Capital clearly messed up - their losses exceed any reasonable risk-managed short position and it's clear there was some naked shorting in there because you cannot lost 30% of your fund in a week unless you're being reckless.
The media - in classic post-Trumpian mentality - is just fabricating a reality about market insurrections, how male traders are incels, or how Trumpism has spread into the market. The reality is we're witnessing another classic short squeeze between fund managers - and sure - retail got in on this one too, but they are at best a spark, rather than the gun powder.
There's a couple guys that are fucked, but most of that money is going back into the pockets of 'the big bad fund managers'
Same with Tesla, I don't think the institutions that profited handsomely in that run up think it's worth the price, but they think that the real gains are good for their funds.
Also note, retail guys are still probably pretty close to the one percent. Who else has 50k lying around for something like this. Sure he might not be a hedge fund, but he's probably not working a minimum wage job and fixing inequality with his trades.
But, when you get mass hysteria around a certain asset class and frenzied buying with the expectation said asset will just keep going up without regard for the fair value (in this case heavily shorted stocks), that’s a bubble. Just because you’re a large institutional buyer doesn’t make you immune from participation.
I looked into "fails" data, and I'm a bit lost [0].
Is Alice's IOU sellable as a security with voting rights? Who gets to vote on those 100 shares? There are now 200 votes? That's very strange.
I've heard of synthetic longs before but in options [1]
[0] https://www.sec.gov/data/foiadocsfailsdatahtm
[1] https://www.theoptionsguide.com/synthetic-long-stock.aspx
There are 100 shares, Alice owns all of them, but loans them all to Bob so Bob can short them. Bob sells all of them to Charlie.
So Alice owns 100 shares and Charlie owns 100 shares even though only 100 real shares exist. (Bob owns -100 shares.) But Alice can't use her shares for voting because she loaned them out, only Charlie can vote.
There are 2 steps involved:
1) shares borrowing
2) shares selling
Shares borrowing: Bob will borrow 100 shares from Alice. Bob will have to give Alice a collateral, valued at 100% value of the shares + a percentage. Bob also has to pay a borrowing fee to Alice, daily.
At this point, Bob owns the shares, not Alice. Alice does not receive dividends directly from the company that issued the shares and Alice does not have any voting rights.
If those shares produce dividends, then Bob has to pay those dividends to Alice. If Alice invests the collateral and that produces profit, Alice needs to pay some of it to Bob.
When Bob thinks all is said and done, he has to return 100 shares (not particularly the same shares, but the same type and amount). At that point, Alice will return the collateral. Alice regains the voting rights and will get dividends.
Shares selling: Bob sells 100 shares to Chuck. Chuck owns 100 shares (the ones previously owned by Alice), has the voting rights associated with the shares and will receive dividends (if the shares generate that).
There are no extra shares generated by this process.
Alice is not a person, but a financial institution, most likely a bank.
Bob sees the name go up, and instead of buying the 100 shares to close the position, he goes back to Alice. Alice says, 'sure, I'll lend you another 100 shares.' But Alice doesn't have any at the moment, so she buys the 100 from Chuck (from Bob, from Alice), and now....
200 shares short on the original 100 shares?
If Bob wants to close out (or must close out)... there must be many more people with shares for this to work out nicely.
However, if it's all through puts, none of this matters!
> So Alice owns 100 shares and Charlie owns 100 shares even though only 100 real shares exist.
which is wrong, Alice does not own any more shares.
Imagine there’s a near-squeeze situation, and someone shorts more shares. This drives the price down, which makes it less expensive for squeezers to buy shares, which exacerbates the problem.
This is complicated by margin calls and their institutional equivalents. This cuts both ways. Enough downward price pressure could cause some longs to get margin called. But more shorting also means more danger.
If I were the SEC, I would consider restricting the total short interest to a fixed fraction of total outstanding shares to improve market stability. I don’t know whether this would be a good policy overall.
What I am interested in is how far this can get twisted. Are there more mechanisms at the hedge funds disposal? Will the financial institutions step in at all?
Retail is a liability, and they're retail that's ESPECIALLY being eaten alive by online.
I personally don't buy it, particularly at $300 a share, but GME is not entirely bricks & mortar.
https://m.youtube.com/watch?v=alntJzg0Um4
I don’t fully buy it either but it’s not irrational. GameStop still sells a lot of games. Online is gradually taking over but it has been for what 20 years now and people still go to the store and consoles still have disk drives. B&M is not going away any time soon, and in some ways I think the hardest hits have already come and gone, what’s left now is likely to stay.
I think it's pretty clear that the days of physically buying games are quickly coming to an end. Years ago there were chains of computer software stores, and long after that, stores like Best Buy had huge computer software sections. The same thing will happen to games now that every console is connected to high speed internet.
Gamestop has lost money for the past two years, and it only shows signs of getting worse.
Retail may be a liability. But real estate is not.
GameStop has small stores that should shut down. However, they also a not insignifcant number bigger stores that can become "gaming places" once we get Covid under control.
Being a "Safe place for Mom to drop the kids to play Pokemon" has real value.
Not everything must be online.
Every GS I’ve ever seen is in a strip mall, where they are surely renting.
A cursory look at /r/WallStreetBets suggests this is statement is mostly wrong. You're suggesting the price is rising due to speculation/hype, but this phenomenon is fundamentally different. The reason for this rally is clearly activistic in nature, an attempt to bankrupt the hedge funds who engage in vulture capitalism.
Some might be greedy, but many aren't trying to make money and greed wasn't the cause of the rally. At the end of all this, there will absolutely be a redistribution of money, but even if the "diamond hands" investors walk home with a loss, they (hopefully) will have strangled a few hedge funds far greedier than the speculators who are taking advantage of this market dynamic.
This is far from a "classic bubble", driven by over exuberance, or a classic squeeze, driven by greed. This is an example of a new phenomenon that will change how hedge funds operate in the future.
That's a fun rally cry that happens to be true, but even if it wasn't true and the conditions existed naturally, these WSB folks just spotted an opportunity to make money and jumped on it like anyone else. Activism is just trash talk like much of this subreddit has always been.
In the US, stock loan markets are extremely deep and liquid. Finding borrow is rarely a problem. Borrow fees may be relatively high, about 0.1% per day right now for GME. But considering that short sellers are targeting an 80%+ profit within a few weeks, that's not a real deterrent
Virtually 100% of shares held at retail brokers are available to borrow. This is especially true at discount brokers like Robinhood, where borrow fees are a primary revenue stream. Ironically the more WSB people that buy GME, the easier it becomes to borrow.
> If the stock goes up too much, the short seller needs to buy it back no matter what, for lack of margin.
This is incorrect in the vast majority of cases. Virtually every prime broker (i.e. the brokers used by hedge funds), uses portfolio margining. The prime broker calculates an aggregate "value-at-risk" for the entire portfolio, then requires the fund to post that collateral. As long as they have over that threshold, they won't trigger any margin calls. But even if they do, there's no reason they have to buy back GME specifically. They could just as easily liquidate any other position to bring down VaR in another less lucrative position.
Remember a major multistrat fund like Citadel or SAC will have something like $30 billion AUM, then lever that up by 500% or more. One of these players could short 30% of the float in GME, and it'd still only be 2% of their portfolio.
That would be true if it wasn't for leverage. When using portfolio margining, the leverage is huge. So a relatively small change in the stock will result in large losses. Now, you're right that this is not going to break a fund like Citadel, but not all hedge funds are that huge.
Assume that her broker doesn't have a bunch of extra shares lying around, due to squeeze or bubble event.
Sincere question, I don't know how this works in practice.
> When a security is sold, the seller is contractually obliged to deliver it to the buyer. If a seller sells a security short without owning it first, the seller must borrow the security from a third party to fulfill its obligation.
To actually answer your question, is worth noting that Bob has to provide a collateral to Alice at 100% + some margin (from wiki) the value of the borrowed stock. So, in short (ha!), Alice sells Bob a bunch of shares with the idea that they will revert the transaction at a later date.
That is not quite true. If after Bob has borrowed and sold 100 shares to Chuck, and then David comes along and makes an offer to Alice to buy 100 shares, Alice can only sell her shares once they are recalled. Which means Bob now has to scramble to return those shares, specially if Chuck does not want to sell (or if Chuck has lent out those shares and they need to be recalled in turn).
If so, seems like a loophole a truck could be driven through that I'd imagine is abused frequently.
I've seen synthetic positions like this for options, but never heard about them for stocks.
https://money.stackexchange.com/questions/126685/can-a-singl...
https://money.stackexchange.com/questions/98418/does-short-s...
So let's imagine there is one share of a stock and person A owns it... they lend it to person B, who sells it to person C, who lends it to person D who sells it to person E....
Now, person E is the only person who currently holds an actual 'share', and is the only person who can lend it out. Person A and C will have an IOU saying they will be given back their share at date x... they can sell the IOU, since it has the same value as a share, but they can't lend out an IOU.
While conceivably what you are suggesting could happen, I don’t know if it ever has.
If Alice shorts 100 cows on Monday, and then Bob shorts 100 cows on Tuesday, and both are due at close of market on Friday, it’s gonna be a bloodbath.
(Granted, they were some pretty illiquid stocks so I suspect that the broker had managed to get into a naked short situation when they allowed the trade to execute before actually trying to go out and borrow them. Of course, their mistake was made my problem.)
Your short position may have been called, but (I am assuming) you didn't take out a short position with an explicit expiration date. Ie, it wasn't "due" on Friday, and you likely didn't know days/weeks in advance of when it was going to be called.
The share has been lent twice.
There is one share, and Ellen owns it for real.
Everyone else has these agreements involving collateral and promises to get/give a share back.
The parent to your comment describes someone buying a stock from someone who sold it short, and turning around and it selling it short themselves. This happens organically and is not "naked."
Beware the incredible amount of false and misleading information about this situation online. Things catch on in the zeitgeist and don't really get fact checked.
So to unwind this, the one existing share has to get bought (by someone who short-sold it), and returned (to the owner who lent it out), twice.
This is a common misconception, but fundamentally wrong. Every short sell has an equal but opposite buy. Therefore every share shorted creates a new synthetic long share. Alice owns 100 shares. Bob borrows 100 shares from Alice, then short sells them to Chuck. There are now 200 shares long available to buy back- 100 owned by Alice and 100 by Chuck.
Therefore it's easily possible for short interest to be well over 100% of the float. There's no upper limit, it could literally be 10,000% of float. Shares sold short, can then be re-borrowed for new short sellers in an arbitrarily long chain. It's the same way that fractional reserve banking creates money out of thin air. It starts with a small set of "hard assets", then lends, say 90%, of them out to other banks. Those banks then lend out 90% to other banks. And so on, until the system has 10 times the money supply it started with.
Now, the reason that high short interest may result in a short squeeze is because usually some percent of longs at any given time tend to be long-term investors who are unlikely to sell. If, say 66% of investors are long-term holders, then short-interest above 50% could create a squeeze. If float's a million shares, then they'll be 1.5 million shares long and 500 thousand shares held short. But 1 million of those shares will be held by long-term investors. Therefore there won't be enough immediate buyers if all 500 thousand short sellers liquidate in a short period.
But... With Gamestop this logic makes no sense. At $300 per share, no one is a long-term investor. Nobody is buying or even holding at that price because they think the company is worth $10 billion (more than five times higher than its 2007 peak). Since there are always more shares held long than short, and since every share held long is held in anticipation of a short squeeze event, then even in the event of a massive unwind there will still be more sellers than buyers, and the price will fall, not rise. In fact during this whole price runup, short interest has actually increased. So clearly it's not short squeeze driving the melt-up.
The only reason Gamestop is going up is because of Tulip-mania. It's a classic bubble. Some early people on the hype train reaped eye-popping gains as more jumped on and bid up the price. That attracted even more attention, more buyers, and higher price. Like any classic bubble it requires an ever-widening net of greedy but foolish patsies to jump in at the bottom of the pyramid.