About the Reddit traders and Game Stop.

[flamin lib]

Last edited Mon Feb 1, 2021, 12:31 AM - Edit history (1)

Edit to add:

Thanks to all for adding to this discussion. This thread is well worth the read, not for the OP but for the education and insight provided by all the respondents. The one basic agreement is that market manipulation not based on a company's value is wrong, not good for either viable or nonviable companies and should not happen. Companies and the people employed by them should have a fair chance without interference. Thank you all.

Everybody likes the David/Goliath aspect of this. But I think there's a problem with how this came to be.

It isn't legal to artificially inflate a stock's price in order to sell it. It's called Pump n Dump. Jim Cramer admitted to it in an interview with Jon Stewart. 'Course he didn't get prosecuted but that's another discussion.

So, the Reddit bunch informally agreed to buy a failing company. The increased number of stock trades got attention and suddenly lots of people are buying that stock and that drives the price up. Then the Reddit bunch sells at the inflated price.

Where did the extra money come from? It wasn't Game Stop's value. It was make believe money generated by Hedge funds promising to buy at a promised (low) price on a specified date but having to pay the inflated price to meet the future's contract. That money came from retirement accounts and other such investors in the Hedge Fund, not Game Stop. These are people.

Without the artificial price support the company's value and the outlook of it's future revert to real world pressures. Inflate, sell, deflate. Who's the winner? This really is one of the few examples of a Zero Sum Game. It could be illegal if proven to be planned by those taking part in what looks like a "Pump n Dump" scheme.

The REAL problem is the derivative market, futures and options. It's all make believe money until cash changes hands.

Futures are best explained like this: Sue buys a dress at Neiman Marcus for $100. Mary borrows the dress and promises to have it back in time for Valentines' day. Mary takes it back to NM, gets a $100 refund. February 13 Mary goes to NM and buys the dress off the clearance rack for $25 and gives it back to Sue. Mary keeps the difference and all contractual agreements are met.

So what's wrong with that? Well, Mary didn't buy a dress so NM got no profit from the sale of this dress. Then Mary gave a much less expensive dress back to Sue. Nothing in the 'future trade' benefited the value of the stock or NM or Sue.

If Mary found that the dress was worth $200 on Feb 13th she would lose money on her promise and get it from Mom and Dad to fulfil her promise. It's a wager, a bet. That's what happened with Game Stop and the Hedge Funds.

Futures are exactly that, a bet with no money up front. I don't think any bookie would make that deal and Hedge Funds shouldn't be able to either.

If a stock shows promise buy it and put your money where your mouth is so the company can benefit from the transaction. If you think the company isn't going to grow don't play games with it, find a pari-mutuel horse track and an honest bookie.

My opinion, YMMV.

[Mr.Bill]

1. I don't know much about the stock market,

but if this episode brings about some new regulations and/or enforcement of current ones, then it's a good thing in the big picture.

[flamin lib]

10. Yeah, what you just said. nt

[Demsrule86]

26. I don't want to see the Hedge Funds protected in at all. They are vultures.

[Mr.Bill]

27. I don't either.

And I think this incident is shining a light on what they do.

[jorgevlorgan]

2. They did not artificially drive up the price to sell it

They did it to screw the short selling hedge funds. As long as the price infinitely goes up, hedge funds cannot short sell it. The goal is to pump infinitely, not dump it. Therefore there is likely no legality issue here.

[flamin lib]

5. Uh, no. Some have already sold at a huge profit.

Any price not based on the value of the company simply can't be sustained 'infinitely'. Whether it's Hedge Funds or Reddit buyers the value of the stock is the value of the company. Not some inflated price based on volume of trading.

They did it to profit off the Hedge Funds' wager. I sympathize but an honest appraisal of either side of this transaction tells me it's just wrong. The opposite of "good people on both sides".

Supply and demand, good product and marketing, competent management should be the basis of a company's value.

The only good that might come of this is a better regulation of futures trading.

[jorgevlorgan]

9. Um no. "some" is not a collective action

If all the people who artifically drove up the price dumped everything, the price would have crashed. "Some selling everything" does not constitute a pump and dump unless there were enough people to sell To drive the price down.

[jorgevlorgan]

15. However

If some indivual hedge funds, executives or insurance companies -to name a few, were to help drive up the price further with substantial shares and then all sold at the same time , causing the millions who helped drive up the price to lose millions of dollars, that would essentially count as a pump and dump for those other individuals making them vulnerable to legal repercussions.

[Drahthaardogs]

31. You're in over your head

And have no real idea what your are talking about. Seriously, you’re playing checkers and these ducks are playing chess with extra queens.

You are very naive. I applaud your Puritan view of the market, but it’s just wrong

[superpatriotman]

3. It's not a pump and dump

It’s a huge buy against naked short selling.

[flamin lib]

12. By all appearances it is.

The increase in price is not derived by any change in Company profits, changes in demand or any other value based judgement.

It is solely derived by an increase in trading volume driven by a group discussing making purchases as a coordinated effort to drive an increase in trading.

Perceived motivation has no bearing.

[Demsrule86]

25. Almost no one here has any sympathy for the Hedge Funds folk...and that is true on righty sites too.

I monitor them and was surprised to find they support the Reddit day traders. I guess the disgusting behavior of Hedge Funds is obvious to most of us.

[The Mouth]

37. As with some animal abuse stories, and sports stories

Sometimes our mutual humanity outweighs our political bias.

It is a great and good thing to see these short seller assholes (a redundancy) and these 'hedge funds' (also exclusively run by and used by assholes who would serve this country better by twisting slowly in the wind under a lamppost) hurt, and badly.

If every hedge fund, currency speculator and short seller dropped dead, the world would be a much better place, all three do noting by make the rich richer and the poor poorer.

[Demsrule86]

38. I agree. They are bottom feeders and give nothing back .

[Dem2]

13. Agreed

These people were inevitably going to lose money buy buying at inflated prices.

I'm not sure the O/P understands what was going on here...

[RANDYWILDMAN]

4. They bought to Expose the Short Hedgers and Hedge funds are like dine and dashers anyways

Let's regulate them and figure out where most of the real money in them comes from.

Finally tax them on these short and long transactions and they be more inclined to not dip and duck out of the market.


The Hedge funds need to take some responsibility for their actions in all this.

It's amazing what happens when you have unregulated players in the markets.

[flamin lib]

6. Thanks, that's a good response. nt

[BootinUp]

7. I've never liked the idea of futures, so k&r.

[fishwax]

11. it isn't a pump and dump, though ... it was a pretty reasonable move against overreaching shorters

I agree with your ultimate point that the underlying issue here has to do with the derivatives market. The hedge funds essentially cornered the market, only they did so without actually controlling the shares. Some folks on reddit just happened to notice that (a) the company wasn't in nearly as bad a shape as the shorters thought it was and (b) they could fairly cheaply purchase a product that would soon be in very high demand.

[flamin lib]

16. Sorry to disagree.

Game Stop is like a Buggy Whip company. Horse drawn carriages don't exist anymore. There is no long term prognosis for the business model.

The increase in stock price is generate only because of increased sales volume, not by any underlying value. The volume was generated by an associated group communicating via Reddit. Whether the goal was to hurt Hedge Funds or to increase value for sale it is definitely a pumping action.

[fishwax]

22. The stock was at about $3-5 dollars when this started back in 2019

And they were in the process of reorganizing their business model both as a brick-and-mortar business and in the online space. They may or may not be successful in that shift, but they had promising enough prospects that they attracted some big names in online retail to come on board in the twelve months after that reorginization started.

I think the "they're just like blockbuster" argument was largely driving the short interests. And while it's understandable, it's not exactly a sophisticated take. It makes some knee-jerk sense on the surface, but there's a lot under the surface that complicates the analogy.

The video game industry is a few times bigger than the film industry, with a lot of pockets and niche pockets to explore and develop. Gamestop is a very recognizable name in that industry, and whereas Blockbuster (a) relied almost entirely on a product that would soon be almost obsolete and (b) had already thoroughly bungled their attempt to compete in the new market realities (with their online subscription model), Gamestop still has opportuniies to pivot and was much better-positioned for such a pivot than Blockbuster was. There was nothing unreasonable about seeing value in the company when it was selling in the single digits.

Don't get me wrong--the underlying value doesn't support anything close to $300/share. But it reached those heights because people thought it was worth 10-20 share and the shorts had strangled the supply with the naked shorts. So once it started climbing it was going to be hard to stop. And at that point it became a pretty good buy based just on that fact alone. If the shorts had just taken their lumps at 10 or 15 bucks a share, it would have settled back into a more natural equilibrium. But instead they doubled down.

[flamin lib]

29. Thank you for your intelligent review of the possibilities of Game Stop's future.

My point in the OP was the manipulation of the price based on other than underlying value. The shorts manipulated the price down as investors look at those evaluations as an indication of that value; if THEY think it's going to tank then THEY must know what THEY are talking about. Same goes for the Redditer's manipulation of trade volume, if SOMEBODY wants it then SOMEBODY must know more than I do. Neither is based on innate value and both should be regulated to allow a company to thrive or suffer based on value.

My issue with the Redditers is that they seem to have agreed to inflate the price. That's market manipulation as is the shorting.

[Drahthaardogs]

32. They manipulate it into bankruptcy

So they owe the brokerage 0$. It’s fucking bullshit

[fishwax]

35. I'm sorry, but the decision to short and the decision to buy aren't remotely comparable

If some redditors saying they like a certain stock and some others agreeing that it might go up in value is "manipulation," then it seems to me that any business journalism that involves stock recommendations (to say nothing of any conversations between friends about hot potential stocks) is potentially manipulation. People buy stocks because they want them to go up in value. People who own a share of a company might speak highly of a company because they want the company to succeed, thus increasing the value of the shares they own.

The redditors didn't "agree to inflate the price." Some argued, convincingly and way back in 2019, that the stock was more valuable than its $3-5 cost (this was after it had steadily declined for a couple of years from the 30s and 40s). Then (especially as the stock started to climb in September), they started arguing (again, convincingly and quite correctly) that the value of the stock would rise because of the very basic law of supply and demand. How are we to restrict people from buying based on the law of supply and demand?

People who buy stocks thinking they will go up in value aren't the problem. For most investors (and certainly for people who aren't exceedingly wealthy or very adept at technical analysis), the best way to make money in the market is to buy stocks where the fundamentals demonstrate good value for the share price. But people also buy for other reasons: they might buy Sony stock because they think the PS5 will be a real game changer, or they might buy Apple stock because they're fans of the product, or they might buy facebook stock because their grandkid got her first job as a coder there and they're proud, or they might buy AMC because they think the stock has bottomed out in the pandemic and is bound to rebound as things open up. Or they might get a hot tip from a friend or see a news story that captures their imagination. These decisions may or may not make them money, but they aren't market manipulation, and they aren't hurting anyone but themselves.

Even in the case of the "reddit rebellion," they bought stocks expecting them to go up because they knew the supply/demand scale had been completely FUBARd by the shorters. But it's the short sellers (and, likely, some shoddy oversight) that created that situation. Not the people who recognized the situation as an opportunity and so suggested that it might provide a buying opportunity.

Now, when somebody tells lies or provides misleading financials or such while promoting the stock--like, say, in the case of Enron--that's a different story. Then you've got a pump and dump.

[Demsrule86]

24. People still play games and there is a market for it... but here is the thing who appointed fucking

Hedge Funds to be Judge, Jury and executioner of companies that employ real people...Game Stop had a plan and maybe it would work or maybe it wouldn't ,but they don't need to be driven out of business by the Hedge Fund vultures...screw them and the next time they short, they will be looking over their shoulders...time to take our market back from the rich vultures...the equity firms and the Hedge funds who provide nothing to this country. You know how many pensions were lost because of these guys...no sympathy at all.

[PoliticAverse]

14. Sorry, but you don't understand this issue at all...

This did not involve "futures" or derivatives but rather shorting of the stock in a company.

[flamin lib]

30. Thanks for you're valuable insight. nt

[PersianStar]

17. I'm cheering for David

Goliath elitists can go to hell.

[RockRaven]

18. It's not pump and dump. It's similar in some ways but quite the opposite in others.

Reddit users and others like them spotted that short sellers were way overexposed on their gamble. They then bought cheap and held. And held. And held. So much that the short sellers faced a comeuppance for being so overexposed.

The two biggest differences are that the reddit people are not talking up the company or its financial fundamentals (they are aware that eventually the price bubble will burst and the stock will go back to being nearly worthless and are totally transparent about that), nor are they all planning on trying to sell all of their shares near the peak to maximize their earnings (a lot of them cashed out enough to cover their initial invest plus a nice profit, and say they intend to hold the rest indefinitely).

Pump and dumps create a frenzy of demand, this was a paucity of supply created by people saying "I bought this stock. It is mine now. I like it. I'm not selling." It is not the fault of non-selling owners that other people created a situation where their own demand was a) fixed and b) far exceeded supply.

[flamin lib]

33. Thank you for this overview of the Game Stop scenario.

I have no sympathy for the Hedge Funds. I wish a Pox on them, but only a Smallpox as it were.

And you are absolutely right about about the Pump and Dump and the differences in this instance.

Still, market manipulation is market manipulation and should be regulated. It's a goose/gander sauce kind of thing.

[Drahthaardogs]

19. No! That's NOT what happened!

The hedgefunders were being vultures and shorted (which should be illegal anyway) GME because all brick and mortar is suffering.

Nasty little secret is if you short massively more than the float (available shares for public trading), and business goes bankrupt, you owe the broker NOTHING!

The fuckers know this so purposely tried to dump and dip the GME into bankruptcy. WSB had been buying the stock since 2019 because it was undervalued, and likely hurting from the pandemic. Lots of them bought GME and AMC because they were undervalued for a reason.

Hege fund assholes were dumping and setting shorts down to zero to purposely drive GME into bankruptcy. WSB said, fuck no, and bought like crazy. Then they HELD so the fucks couldn’t short their way out of it.

Robinhood, who funds Milton starting halting trades to help their buddies.

These guys are FUCKING heroes. They stopped what should be a crime in its tracks and shot the robbers in the process

[Demsrule86]

21. +100000

[uponit7771]

28. "Nasty little secret is if you short massively more than the float " this is the

... real crime of the HFs here.

The trading platforms were allowing the it too !!!!

[Coventina]

34. I wish I could rec your post. n/t

[Demsrule86]

20. What Hedge Funds do is not right...they deserve it.

[MerryBlooms]

23. But that's not what happened, and now Robinhood has instituted unique regulations to punish

their customers for using lawful loopholes. Free and open capitalism, unless big Hedge gets hurt? Free and open capitalism, unless your business model didn't account for people taking advantage of your business model? No. I suspect Robinhood's shady actions will soon be questioned by the likes of Elizabeth Warren up on The Hill.

[Massacure]

36. Robinhood didn't have a choice in the matter

Stock market clearing houses require brokers to deposit and maintain certain amount of funds based on their customers portfolios, the number of buy orders, sell orders, stock volatility, etc. Robinhood ended up having to raise roughly a billion dollars to cover the capital requirements from all the buying going on. They couldn't raise any more money from their lenders or investors; being completely tapped out, their only choice was to restrict buying of stocks that would increase the volatility portion of the formula.