This past week I spent significant time on our Tumblr fielding live questions about what in the fresh-baked hell was going on with Reddit and GameStop.
I tried to keep up with the news and do the Explain Like I’m Five in real time, but it was all moving too fast. David and Goliath were fighting, and David wasn’t just winning—he was feeding his fists to Goliath like they was ham sandwiches.
Eventually I decided to hold onto my butt with the rest of you and enjoy the pyrotechnics, committing to waiting for the dust to settle before I tackled #gamestonk from a Bitch-eye-view.
Is… is it over now? Is it safe to come out?
And what the hell just happened and why am I still laughing about it?
Note: be aware that some of the Reddit links in this story have offensive language. And if two women who CHOOSE to go by “the Bitches” are slapping a content warning on something, we mean business! In particular, they really love using the r-word as a term of endearment. So consider that before you click. Additional context in the comments below.
Rules of engagement
Before we dive in, let’s define some key terms. If you’re familiar with how the stock market works and you’ve already read eleven analogies for short selling today, you can skip to the next section.
Stock market
Companies chop their value up into little pieces known as shares (or stocks, for our purposes). They sell these shares to investors. Anyone can become an investor through buying shares—that is, investing—on the stock market, the marketplace through which all investing happens.
In return for investing in a company’s stock, investors earn interest, enriching themselves as the company’s stock goes up in value. The investor gets a portion of all the money the company makes in exchange for their investment.
We are not investing experts. Half the time we confuse a stock for a stalk of rhubarb and try to eat it in a pie. But we have learned a thing or two about how to invest wisely. Here’s what we’ve got:
- Investing Deathmatch: Managed Funds vs. Index Funds
- Investing Deathmatch: Traditional IRA vs. Roth IRA
- Investing Deathmatch: Paying off Debt vs. Investing in the Stock Market
- Investing Deathmatch: Investing in the Stock Market vs. Just… Not
- Investing Deathmatch: Stocks vs. Bonds
Anyway, that’s how the stock market works in its purest form: just companies and individuals investing. Here’s where it gets multitudes more high-stakes and complicated…
Hedge fund
A hedge fund is a group that pools the money of a bunch of investors to employ more aggressive investing strategies. With vastly more sums than the average single investor has at their disposal, the goal of hedge funds is to generate higher than normal returns on investment. We’re all playing the same game; but if the average player is trying to have fun on their school-issued Lenovo, hedge funds are using aimbots and wallhacks on custom PCs that cost more than your parent’s house. They have endless resources to devote to developing financial trick plays to enrich themselves.
Well, almost endless. We’ll get to that.
Typically, you have to be uber wealthy to partner with a hedge fund. The first thing on their entry questionnaire is “Are you a member of the Greenwich Country Club, or do you own it?”
Most investors on the stock market are still normal households. But if you hear “stock market” and picture Leonardo DiCaprio in a room full of coked-out business bros shrieking “BUY! BUY! BUY!” into phones, you’re picturing a hedge fund. Honestly, they’re such classic villains it’s almost boring. They’re already-rich assholes acting selfishly and recklessly just to make themselves even richer.
Short selling
“Shorting” (or short selling) stocks is when you borrow shares in a company, then immediately resell them in the prediction that you can buy them back later at a lower price. You then return the shares to the original lender they were borrowed from and pocket the difference.
For example: Imagine I went to Kitty in January of last year and said “I see that you’re big on the Switch right now, and you’re not using your PS4 much. Could I pay you a little to borrow your PS4 for one year?” She agrees, and I give her a small fee of $5 to borrow her PS4. Sweet.
Now, as soon as it’s in my hands, I turn around and sell it to someone on Craigslist for $300.
I do this because I have really good reason to suspect that the PS4 will be worth less twelve months from now. I’ve heard the PS5 is coming out, and I have a hunch that a lot of people will want to offset the cost of a new one by selling their old consoles.
So I wait until the last week of December and then check Craigslist. Sure enough, I find a PS4 listed for $100. I buy it and return it to Kitty. Then I pocket the $195 difference I made from selling her borrowed PS4. Everybody’s happy! She gets her console back, plus the $5 I paid to borrow it. And I make out like an absolute bandit.
And that’s how short selling works! It’s borrowing something now, selling it immediately, and buying it back later when it’s cheaper.
Let me be clear: It is a stupidly risky way of making money on the stock market. It’s fundamentally speculative—and if you’re wrong, your losses could be infinite (as it may be, in this particular case). Traditionally, it’s only been used by Wall Street Evil Knievels and gaping assholes who thought the housing collapse of 2008 was an “awesome opportunity.”
The big GameStop short
Disclosure: Kitty used to work for GameStop. She owns $GME stock, but she bought it recently as her patriotic duty as a basement-dwelling Redditor, not as an employee. She was a shit employee who forgot that the cases on the floor were empty and let several customers walk away with empty boxes.
GameStop, an American video game retailer, hasn’t fared well in the digital era. Gamers used to have to put on pants to drive to the vidja game store to pick up the newest Children Kill You Within Seconds of Spawning. But now they can just download it directly to their consoles while sitting at home! Which is where you can also get niche indie titles like Dad Simulator: Kingdom of the Nocturnal Children, a lush isometric pixel art deconstruction of the same genre!
This goes double for The Plague Times when social distancing is the mandate of the hour. It’s not a great time to be a brick-and-mortar retailer.
So hedge funds like Melvin Capital Management and Citron (among others), always eager to profit off of turns in the market, bet that GameStop stock was only going to go down in value. They’re gambling that the business is on the brink of failure. And they want to capitalize on this failure (read: get rich off of GameStop’s demise). So they started shorting all the GameStop stock ($GME in investing parlance) they could get their hands on.
r/WallStreetBets
This is all business as usual for the world of high stakes investing. But heeeeeere’s where it gets interesting. Grab your popcorn and molotov cocktails, kids, we’ve got class conflict on the horizon!
There’s tons of Reddits related to money, investing, and finance, where people share stock tips and hot investments. People who know the stock market well enough to play with it on a small scale are called day traders or retail investors. Many of them do their retail investing via investing apps like Robinhood (more on those chucklefucks later).
The one at the center of this is r/WallStreetBets (WSB). WSB is for people who vibe on the corner of Dry Financial Avenue and Wet Meme Road. Crucially, it’s funnier and sillier than most investing forums—the kind of environment where users like to egg each other on and make investments purely for the lulz.
By paying close attention, WSB found out about the plan to short GameStop stock. More accurately: they saw the short happening in real time. And they took evasive maneuvers!
Some genuinely believed the stock was undervalued, and others just wanted to antagonize the hedge funds.
The members of this Reddit forum started buying up GameStop stock en masse. These purchases drove the price of the stock way up, preventing the stock shorters at the hedge funds from fulfilling their scheme and forcing them to lose a ton of money.
The GameStop squeeze begins
This situation is called a short squeeze.
Because if the value of a stock goes up instead of down, then it’s impossible to short. The hedge funders still have to buy back the stocks they borrowed and return them to their lenders. They have no choice. Even if the stock they sold for $40 now costs $460. Instead of making a few dollars on every share, the shorters were losing hundreds.
In a single day last week, the professional hedge fund managers lost $1.6 billion.
By contrast? One of the WallStreetBets dudes turned $50,000 into $11 million in the same amount of time. The username of this brave, capitalism-disrupting hero of the digital age? u/DeepFuckingValue. (He and I are the same age: thirty-four. The values of our portfolios, however, are… not the same number.)
The internet loses its mind
Obviously, this kind of upset turns heads among the investor set. Billionaire rocket ship enthusiasts like Elon “Daddy” Musk were tweeting shit within the hour, further fueling the rush on GameStop stock.
More day traders saw what WSB was doing and got in on it, interrupting short sales left and right. It expanded beyond GameStop to include other shorted stock: AMC Entertainment, Blackberry, Nokia, and Bed Bath & Beyond. Silver shot up in price when major media outlets published rumors that it was “the next GameStop” (more on that in a moment).
Financial media scrambled to keep up with the story as it progressed—present company included!
Baby bitches, somewhere between cackling about Reddit using a meme stock to embarrass the entire system of capitalism and cringing over fake headlines spinning this as an anti-Semitic attack on International Holocaust Remembrance Day… your girl got whiplash!
One thing is clear: hedge funds be shooketh. They’re running scared and using pretty desperate techniques to save themselves from total ruin.
Beware of fake news
As of right now, there’s widespread suspicion that hedge funds are working around the clock to mitigate their losses by manipulating Reddit, the media, and the market itself.
- Nay-saying bots flooded into WSB.
- Obviously fake users appeared, urging redditors to sell or draw focus away to other shorted stocks.
- Major media outlets published hand-wringing articles about how “dangerous” this is, likely at the behest of the hedge funds themselves.
- The run on silver is probably a totally bullshit fake meme that has nothing to do with WSB.
- They put pressure on individual stock trading platforms to freeze trading just to protect themselves—a completely illegal and anti-democratic act of market manipulation and cowardly fuckery.
- They put pressure on all levels of government to intervene, even though they’re so obviously wrong they brought politicians as diverse as AOC and Ted Cruz into agreement.
- There’s evidence they may be using illegal techniques like short ladder attacks to stop the short squeeze. (Wouldn’t surprise me at all. The fines they would face, if caught, are nothing compared to their losses.)
WSB is pretty clearly laser-focused on GME. So I think it’s safe to assume that anything that isn’t GME is a deliberate attempt to distract, disrupt, or discredit this consumer-driven movement. Don’t share or invest in that stuff! IMO they’re the equivalent of scabs in an attempted union-busting.
The meme that birthed a brand new kind of activism
What does any of this literally have to do with GameStop? Almost nothing.
The company itself is not doing anything different. Its value and stock prices are soaring not because of anything GameStop has done to improve itself… only because people who play with money are artificially inflating its value through this weird war.
It’s a goddamn meme. And that shit’s hilarious.
My hat’s off to the day trading cowboys of r/WallStreetBets. By buying and retaining a mostly useless stock, these weirdly principled finance dorks are demonstrating, in real time, how fucking arbitrary the value of something can be. They are calling Wall Street’s bluff and fucking with the people who—for a living—regularly decide to drive an individual company out of business and its employees out of jobs.
Money is fucking fake and GME is king! Now put on some shades to protect your vision from the blast.
Whatever your thoughts on GameStop as a company, this is an abject lesson in how capitalism is not some hallowed, unshakeable law of the universe, but an arbitrary system we made up.
That system can be hacked. It can be broken. And it can be fun!
They can’t do that… can they?
If I know anything about rich people (aside from the fact they taste delicious when beer-battered and dipped in garlic aioli), it’s that they hate it when someone messes with their money. They also, historically speaking, tend to band together for self preservation against us Poors.
Within a few days—not even!—app-based investing brokerages tried to shut the whole thing down.
While there were several brokerages making panic moves to protect the shorted stock, I’m going to focus on Robinhood. For one thing, they were the primary vehicle through which WSB stopped the GameStop short. For another, they made their fucking bed and I’m going to force them to lie in it.
Because here at Bitches Get Riches we have a policy about honesty and ass-kicking: If you ask for it, you’re going to get it.
Enter the inappropriately named Robinhood
Is this situation sounding too clear-cut and/or thrillingly democratic for you? Good news, everyone! Robinhood is here to muddy the waters and fuck over “the little guys” they claim to exist to support!
Last week Robinhood (a stock purchasing platform popular with young and casual investors) meddled in the GameStop short-selling fiasco by allowing their customers to sell the stocks that were being shorted, but preventing them from buying any more of those shorted stocks.
The move was meant to slow down the mad increase in the stock’s value. It was triage. Ostensibly, they did it to help the hedge funds that were screwed when their short-selling scheme was interrupted by the r/WallStreetBets peeps. They claimed it was for their customers’ protection.
Post-publication edit: As you’ll read in the comments, Robinhood did have a legit reason for this questionably legal behavior. In a nutshell: they needed to have enough liquidity to cover themselves in the event all their customers pulled their money out of the app. Cheers to our brilliant commenters for explaining this way better than I have. I suspect this will not be the only update to this article!
Robinhood’s decision to intervene is of questionable legality. It’s unprecedented. And it’s unethical. To know more, we highly recommend checking out Paula Pant’s take over at Afford Anything.
Another way to understand it
Here’s an analogy for Robinhood’s freakout:
For years people with diabetes have been like “Hey could pharmaceutical companies stop inflating the price of insulin like 500% so that we can afford to not die? We have no choice but to buy insulin, and it’s not like we can just go elsewhere for this life-saving substance.”
And The Forces of Capitalism have said “Nope, sorry, that’s the will of the free market at work! Can’t fuck with that, no sir!”
So now hedge funds are saying “Hey could r/WallStreetBets stop inflating the price of these stocks we’re shorting? Because we were in the middle of shorting the stocks in a bet that they would go down in value rather than up, we can’t choose not to buy the stocks back. Now we have to buy them at like 500% of what we sold them for!”
And now The Forces of Capitalism (in the form of Robinhood and the other brokerages preventing their customers from investing) are saying “MON DIEU! This is a catastrophe! Call in the National Guard! We must stop these unwashed day traders from Reddit who don’t even have a civilized MBA from interfering in our hallowed wealth-hoarding schemes! Even though it’s totally legal and also the will of the free market at work! It’s for their own good! They know not what they do! We must protect them and ourselves (but mostly ourselves) from this totally legal thing they’re doing to fuck with the people who literally caused the 2008 Recession!”
It’s not just Robinhood—it’s fucking everything
To be clear, Robinhood isn’t the only platform that caved to hedge fund pressure. Tons of others did too: TD Ameritrade, Charles Schwabb, Webull, eToro, M1 Finance, Public, e-Trade, Interactive Brokers, Trading 212, Freetrade, and Revolut. Are you dying laughing at how many of their names include words that allude to freedom and revolutions, because LORDY LORD KNOWS I AM!
It’s part of a bigger pattern of financial systems pivoting to save the wealthy from the consequences of their egregiously foolish risk-taking. That’s been the theme of governments and markets for my entire adult life: bailouts for the rich, middle fingers for the Poors. It’s been true at every step, from the total lack of accountability in the 2008 crisis to the botched coronavirus response that was basically free money for already-rich businesses.
Robinhood is showing their hand. Their actions prove they’re not actually interested in “robbing from the rich and giving to the poor,” as their namesake would seem to imply. The towering hypocrisy of their words compared to their actions is the latest and greatest wonder of the manmade world.
Is any of this legal?
Short selling stocks is definitely legal. And while it definitely has real-world consequences… it’s considered common practice on Wall Street.
Squeezing a short sale? Also legal! Shorting is basically a gamble. Many times that gamble works out. Sometimes it doesn’t. WSB is simply ensuring that the gamble doesn’t work out. They’re calling the hedge funders’ bluff.
Observing the buying and selling happening on the stock market is totally legal. If, in the course of that observation, you notice that a stock is being shorted, that’s legal. And it’s not insider trading to take advantage of that free and public information to enrich your own portfolio.
So the only legally questionable action here is how Robinhood et al responded to #gamestonk. I honestly cannot come up with a legally defensible reason for them to prevent their customers from buying more of the shorted stocks, let alone sell their customers’ stocks without their consent or control. I’m sure they’ll find a fig leaf in the fine print of their user agreement to justify it.
The WSB gang is holding the line—hanging onto their GameStop investments, watching the value skyrocket. They have every incentive to cash out and collect their millions. But they’re not… because of the principle of the thing! You have to admire their commitment to the bit. They’re playing by the rules and winning.
Why does any of this GameStop stuff matter?
A group of amateur private investors has found a chink in capitalism’s armor. They’ve destroyed Wall Street’s veneer of impenetrability and left a flaming bag of dog poop in its place.
This whole story has made investing in the stock market seem more accessible. If for no other reason, that’s why I’m rooting for WSB. Investing should be for everyone, not just for hedge fund bros!
But what goes up must come down. That’s not economics, that’s motherfucking gravity. And the fallout from #gamestonk will have far-reaching ramifications. You’ve just witnessed the birth of a brand new form of very fast, very effective collective activism. And I can’t wait to see where it goes.
Is my retirement account in danger?
Your retirement fund is not at risk because of #gamestonk. So rest easy, my dears!
As a savvy investor, you have a well-diversified portfolio, right? You’re not in it for the lulz, you’re in it for the safe, long-term tendies! You have a healthy retirement account, maybe even a few of them. You’re probably invested in a diversified portfolio of stocks and bonds, mitigating your risk and maximizing reasonable returns.
On top of that, you haven’t bet your entire life savings on GameStop, AMC, or any of the other shorted stocks involved in this whole thing! (Unless you have.)
The stock market is huge. And this weird scenario is only affecting a handful of stocks. Most people are invested in a far more diverse array of stocks, so that even when one tanks or soars, it doesn’t significantly affect your entire retirement portfolio.
The people “hurt” by this situation are involved in a handful of specific hedge funds. They’re extremely wealthy as it is, and they’re losing money because of a gamble they themselves made. There are no innocent victims in this scenario as far as I can tell.
What should I do if I own GameStop stock?
If you previously owned GameStop stock, or you cannot afford to lose the money you’ve invested, I think you should consider that investment carefully, and sell it if you need to. The intended victims are hedge fund douchebags. We don’t want our readers caught in the crosshairs.
But if you bought GME as part of this three-ring circus? Well… Kitty did, and here’s what she has to say about it:
I made this investment after a lot of consideration. I am financially stable and can afford to lose every penny. What I want from this investment isn’t a monetary return; I don’t expect one. Rather, I want to invest in the destabilization and destruction of an unjust system. Ultimately it’s a personal decision. For me, I feel it’s my moral obligation to retain the stock until the hedge funds dash themselves upon the rocks of my resolution.
So there you have it! Kitty = diamond hands!
So should I get in on buying GameStop stock now?
In a word: FUCK NO.
That’s two words, but to be fair, we Bitches drop F-bombs as often as we draw breath. And we do it specifically because so many critics have asked us not to. ( •̀ᴗ•́ )و ̑̑
As a general rule: if you don’t know enough about day trading, retail investing, or the stock market to be able to judge when buying shares in an individual stock is a good idea… then you shouldn’t be trading in individual stocks. We’re really excited for the principle of this movement, but our readers tend to be poor folks, and you should never gamble money you can’t afford to lose. Leave that shit to the Level 20 Investing Paladins!
More opportunities will come. If you’re not already in, let this one pass you by.
Plus: It’s too late!
Our girl Dumpster Doggy has a brilliant explanation video over on The Financial Diet’s IGTV as to why it would be a real bad idea to “hop on a train that has left the station going a hundred miles an hour.” Because, as she says, “This is the stuff Las Vegas is made of.”
#gamestonk is a meme. It is not a legit get-rich-quick strategy… and definitely not a long-term investing strategy. It’s pranking Wall Street by farting directly in the face of high-powered hedge funders dealing in billions.
There’s a reason #gamestonk made news: it has never happened before. Is it likely to happen again? Fuck if I know! Probably?!
There’s absolutely nothing wrong with leveling up gradually when it comes to investing. In fact, we recommend it! Start by opening up an IRA and allocating the investments to an index fund. It won’t be as badass as screwing over short-selling hedge funders! But it’s way safer, more reliable, and more likely to pay off before the next Mayan Long Count begins.
The problem with gamifying investing
I’ve had a problem with Robinhood and its ilk for a while. Pretty much since I read this New York Times article.
In a nutshell, their app incentivizes the kind of speedy buying and selling of individual stocks that’s risky af and can lead to major losses. It’s not a healthy investing philosophy. They’re encouraging it because of their weird commission structure with Citadel, not because it’s what’s best for their customers.
The stock market was not meant for risky day trading! It’s meant for long-term, slow and steady investing strategies. For most of us it should be tear-jerkingly boring! This whole story is an aberration: a delightful, hilarious aberration fueled by the rare schadenfreude of watching rich people get real butthurt.
But for every #gamestonk, there’s many people you’ll never hear about who ruin themselves day trading. Here’s a gruesome link if you don’t believe me.
That was an intentional mood dampener. Because as much as I’m enjoying the #gamestonk show (and believe you me, I am enjoying it as much as I enjoy watching Mr. Potter celebrate Christmas alone in Bedford Falls), I cannot emphasize enough how nervous it makes me. Not for the hedge fund bros (they can suck it)—I’m nervous that the lesson young investors will take away from this is that they can win the investing game by dumping everything they have into a single meme stock.
Aim your rocket ship for the moon, pray to land among the stars
While this is something hedge funds do all the time, we do not recommend it for the average investor. None of you should try shorting stocks. Our advice is and always has been: Invest in index funds for the long term, keep a nicely diversified portfolio, and go about your business.
Our supremely wise friend over at We Want Guac puts it nicely:
This is only possible because of financial literacy and education being accessible online. Enough regular people now have the understanding needed to extrapolate what shorting a big retail company could possibly lead to, let alone what terms like “short selling” even mean. Imagine if these hedge funds actually succeeded in shorting GameStop and wiping out its entire value. There is no debate here, especially with a company that still sees a profit: this would not have provided a benefit to society as a whole.
WSB has stuck it to the Wall Street insiders specifically because they knew what they were doing. The lesson here shouldn’t be “Pile onto a meme stock because YOLO.” It should be “Get woke about investing STAT.”
This whole David and Goliath narrative was powered by Old Millennials on Reddit figuring out some stock market shit and manipulating it as a team. I guarantee there are hedge fund managers right now taking their staff to task for missing the opportunity to squeeze the GameStop short the way the Redditors did. Their misfortune is our gain… and our entertainment!
There’s more to come
#Gamestonk is a HUGE story. And it isn’t over. There will almost certainly be more developments! I welcome corrections, and we’ll happily write more about this situation as it evolves.
I wish I could wrap it all up in a tidy bow. The proletariat wins! We stuck it to the Man! Yet stock values fall, and economic and financial policy changes constantly. The only thing I’m certain about is that investing will never be the same after #gamestonk. Learn what you can, laugh heartily, and keep trying to use the system to your advantage.
Did you appreciate all the painstaking research and also beer drinking that went into writing this article? Good! Me too! Consider joining our Patreon to keep funding articles like this. We’re 100% donor-funded and steadfastly unwilling to compromise ourselves with sponsors like Robinhood LMAOOOOO.
And in the meantime, help us out! Pin this article, or share it with your most confused friend.
Absolutely love this article! I definitely agree that rich hedge fund bros are the worst. However, I’ve been having this argument with my Baby Boomer parents (who I love and respect despite their sometimes outdated views) for the past few days. It is illegal to get together and intentionally plan to manipulate the price of a stock. But I think that if these were all people who wink wink decided to invest in a company that wasn’t failing and simply stated that to each other without conspiring they should be Gucci.
Fantastic article! I’ve been looking forward to your take because y’all are so good at breaking things down. I would recommend adding a CW for links to r/WSB b/c the r-word is all over the place on that forum. (It’s the r-word for people with mental disabilities… as I typed I realized that American English has two r-words, J.H. Christ.)
OH. Thank you. That is an excellent suggestion and I will definitely add a note in about that!
Y’all, I should’ve made this clear: r/WallStreetBets is kinda 4-chanish! Not as meanspirited and vile as the ‘chans have become—but definitely prone to delighting in offensiveness. That includes liberal use of the r-word. If context would help you gauge your tolerance for it, I will provide it in the next paragraph.
This community uses that word as a sort of self-owning term of endearment for its own users. Kinda similar to how Trump supporters decided they loved being called “deplorables.” The reason is that it has the same letters as the word “trader,” as in a stock trader. I think the community really enjoys the tension between serious financial expertise versus meme-driven buffoonery. They use those words in tandem to emphasize the fact that people who profess to be experts in this area are often foolish, and that fools can become legitimized by sheer good luck. (Not making excuses! It’s a vile word, and unlike the example, it has a long sinister history that’s not theirs to reclaim. But hopefully that context is helpful to anyone who isn’t sure if they want to browse or not.)
Thank you for the context! I did not pick up on the fact that it was an inside joke.
This was so good! This all happened as I was finishing up the “Evil Geniuses” book, so I’m taking it as another sign that capitalist valuations are largely arbitrary. The US is the richest country in the world so we actually and and should do health care for all/paid family leave/basic income. That should all be on the table. I, the lone econ major in my college group chat on Sunday, had pretty much nothing to say about Gamestop because I invest in Vanguard funds. I’m very okay with that. (And thanks for the reassurance that my retirement account is safe.)
I’m left wondering if short selling isn’t something we should make illegal, like share buybacks.
This whole situation with a short squeeze isn’t new. And it happens with large hedge funds and very wealthy individuals betting against each other all the time. One key issue that you had missed was that Melvin Capital had bought way too much of that stock when shorting it. This in tern created an issue with the stock being too undervalued (since when you only have one player shorting like 60% of the stock, you will end up with a situation where the rest of the people go “wait a second. This is too cheap. Something isn’t right here”). This is pretty much a high finance 101 lesson of what you should NOT do when running a hedge fund. It’s almost a guarantee that someone will abuse this mistake against you. Any person who had ever speculated in the stock market knows this or at least should know this. Which is why hedge funds rarely short companies to such extreme. Especially with no other hedges and no other large enough positions to cover it (basically, what I’m trying to say here is that Melvin screwed up. It was objectively speaking a bad trade on their part regardless of the outcome. This was an extremely stupid and reckless idea.) The only weird thing in this whole situation was that the individuals who took advantage of the mistake were retail investors and day traders NOT other institutional investors who usually take advantage of such opportunities. Maybe they were all playing golf on vacation or the meme just spread too quickly. But normally this type of mistakes just get abused by other hedge funds, the fund in question still gets screwed, but the event doesn’t make the news because hedge funds screwing each other over is business as usual. So hats of to the small guys for finding a genuine inefficiency in the market to take advantage of. With this said, these guys ARE NOT revolutionaries who want to bring down capitalism. And they ARE NOT punishing Wall Street. They are simply playing the same game that the pros are playing only better than the pros.
Which is why what Robinhood and the rest of the brokerages are doing is so messed up. They are basically saying “if you are as good as or better than the pros, we don’t want you here. We only want the dumb guys who gamble and lose money”. (Yes. Because if we are being honest, that’s what the majority of people are doing on Robinhood.) “By the virtue of you not being a trust fund baby or not getting a finance MBA from Wharton, you are not allowed to be good enough. We will not allow you to play this game. Because the hedge funds are the ones paying our fees. Not you. So we will worry about their interests. Not yours.”
Another thing to point out is: your hatred for short sellers is a bit misguided. The 2008 financial crash would have happened regardless of short sellers. If you want someone to blame there, blame the greedy idiots who thought making subprime loans was a good idea. The companies that go bankrupt still go bankrupt regardless of the short sellers. Also, not all short sellers are obscenely wealthy individuals. There are plenty of retail investors short selling (I personally know my PE teacher used to do it sometimes). The only 2 things that short sellers do are provide additional liquidity to the market and financially benefit themselves and their families if they are right. A lack of short sellers in these type of situations (assuming they would have been correct) would only result in even more poor people and less liquidity. That’s it. They don’t steal anybody’s money. And the majority of them aren’t excited about bad stuff happening. They don’t cause these bad events to happen. You have I don’t know how many dooms day investors shorting S&P 500 every year yet the financial crisis happens around every 5 to 10 years. They simply want to make the best out of a bad situation. There is a difference between “I want this bad thing to happen” and “this bad thing will happen so I might as well make some money while I can out of it while not hurting anyone in the process”. Not letting them do that isn’t going to make your situation or anyone else’s any better.
Your point about expensive computers was spot on. Kind of funny how accurate you are about it.
One important dimension to add is the posting of collateral.
For the short seller, what can make them have to cover as the price shoots up (becoming a forced buyer, adding to the surge of buying, which is what makes it a squeeze) is that they have to provide collateral for the shares they’ve borrowed. It would be like if there was a pandemic and the price of used PS4s went through the roof as everyone found themselves with time to catch up on gaming, and Kitty wanted you to leave a deposit just in case. The higher the price goes, the more collateral they have to post, until they’re forced to buy back. Otherwise they could have just waited the mania out.
“The move was meant to slow down the mad increase in the stock’s value. It was triage. Ostensibly, they did it to help the hedge funds that were screwed…”
Collateral calls may also explain RobinHood’s actions on restricting trades. They had a huge one-way flow of orders, and over the 2 days after the orders are placed the settlement system is going to deliver shares to them and cash from them to the sellers’ brokers. Robinhood had to post collateral on that transfer, and if they were undercapitalized then they would be in trouble. Stopping their users from making more massive bets may have been to protect their own necks (and indeed, they rapidly raised billions of dollars in capital in the past few days) rather than to help the hedge funds (or it was some combination of scumbaggery and collateral calls).
Yes I think this is an important part of the nuance. My dad has been watching finance news for decades and is definitely a Level 20 Paladin in stonks… He said that Robinhood restricted people from buying more GameStop shares because they literally didn’t have the collateral to back up the trades. Not that it makes what they did any better! But it’s not the same as them restricting people because the hedge funds wanted them to.
I was going to comment this, but you beat me to it! Robinhood literally just raised another $2.4 billion in capital over the last few days, because of this situation – they have to have enough money to actually broker these trades and the short squeeze had them running out of capital. They restricted selling GME because they literally didn’t have the cash to broker the trades. Was it still a shitty thing to do and very open to misinterpretation? Absolutely, but another rule to apply would be “Never attribute to malice what can be attributed to incompetence or pure stupidity.” (I wanna say that’s a Mark Twain quote, but I honestly don’t remember).
Also, as much fun as watching this has been, let’s not turn r/WallStreetBets into something it’s not. These people, as you point out, are Level 20 investing paladins. They’re not the ones that the financial media has been warning are going to get hurt. These are people who HAVE money to lose and understand the risk. The people who are going to get hurt are the people who DON’T understand what’s going on, they just see a stock going up and up and up, fueled by a “Fuck Wall Street” narrative they can feel good about and the false feeling that others will “hold the line.” But Roaring Kitty (the YouTube handle of Deep_F***king_Value) has already sold his original $50,000 investment for about $23 million. The WSJ just did a profile piece about him (and it’s an interesting read watching them say over and over again just how ‘ordinary’ he is!)
My final bit of raining on this parade will be to point out that they hurt ONE hedge fund. Do you know who made BILLIONS off of this short squeeze? Blackrock. They had a 12% stake in Gamestop and they’ve had a GRAND time selling their shares to all of the Reddit investors and making an absolute killing. You have not stuck it to Wall Street when Blackrock just made billions.
This is Wall Street’s game and they know how to play it better than anyone. As you point out, a short squeeze isn’t even a NEW risk for these people, only where the squeeze came from and I’m afraid that risk is part of the price of doing business, as far as they’re concerned.
If someone wants to read a better researched article than what I just wrote, the Atlantic just published an article going over the whole thing as well. https://www.theatlantic.com/ideas/archive/2021/02/gamestop-story-you-think-you-know-wrong/617905/
Best explanation of this whole thing, start to finish. I was hooked. Thank you.
You have nailed this extraordinary Reddit-driven short squeeze of GameStop and company. These companies were losers and could have raised capital with their high stock prices IF they had a new strategy ready.
One thing to add, short selling is not for the faint-hearted, however, experienced short sellers serve a purpose by identifying deteriorating fundamentals or fraud.
Xo, you guys rock. Love Meerkats!
Not much to add to the conversation other than this was a bad ass blog post and one of the most enjoyable I have read in a long time. So many links in there for me to start going through as well. Thanks and you all rock at BGR
Why thank you!!!
Nice article. But realistically, GameStop’s prospects are poor. The company is earnings about half of what it did only several years ago, it has negative earnings, high leverage, and the company is closing its retail stores. This was a crowd sourced short squeeze.
Its not entirely accurate to tell the reader that this will not affect thier retirement accounts. The longer the bubble remains unpopped, the larger the crash that results from impending squeeze. The hedge funds will need to liquidate ALL other positions to cover, which will induce a market crash likely larger than any we have ever seen.