How r/WallStreetBets gamed the stock of GameStop | Hacker News Reader

How r/WallStreetBets gamed the stock of GameStop

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111 pointsedward116 comments

This narrative needs to stop. This is institutional investor shorts vs intentional investors stockholders. Retail is just along for the ride but the institutional shorts did something crazy so other large funds came in like Michael Burry’s and bought large positions. This happens every once in awhile where other institutional investors see an opportunity to take out competitors who is over leverage.

So just sit back and watch for the margin calls to go out and GameStop will skyrocket to something ridiculous while the shorts try to unwind their position. Still don’t get how this mess is going to get cleaned up since it’s impossible for the shorts to cover.

Shorting a stock 140%+ is absurd. If anything, time and technology (in this case) caught up with the old game on Wall St.

It's not any one group shorting that much. It's just that the aggregate has shorted that much.

And I'm not sure that it really matters that the shorts exceed the total stock available. Because it's not like everyone will have to cover their shorts at the exact same moment. An entity can buy stock to cover their shorts, then the entity that received the stock to cover the "uncovered" position would then be free to turn around and sell that stock again.

The real risk would be having a super large short position for a stock that has very low volume since it would be very difficult to cover lots of shorts if there aren't many people selling stock.

> Still don’t get how this mess is going to get cleaned up since it’s impossible for the shorts to cover.

A deep pocketed long term large fund can buy the short position at a discount, a bit like distressed debt, and then just wait it out. It's a guaranteed win if you have deep pockets.

Note that when they buy the position, they don't also inherit the current mark to market loss, only a part of it (the price they pay).

What is a fair price for this position? I would love to know if someone has any insight on this.

> A deep pocketed long term large fund can buy the short position at a discount, a bit like distressed debt, and then just wait it out.

They can't. Contrary to the memes peddled on reddit Illuminati aren't running the world.

But this isn't a narrative any of those institutional investors seem to believe. Michael Burry himself says that the current rally is "unnatural, insane, and dangerous", reports that he's closed his position, and is calling for legal and regulatory fixes to prevent this kind of situation from happening in the future. (https://www.bloomberg.com/news/articles/2021-01-27/michael-b...)

It is unnatural and insane. You shouldn’t be able to short a stock that much to the point to can destabilize the whole financial system. The ripple effects can be really severe because the shorts are going to lose an unbelievable amount of money and will likely be bailed out somehow due to the ripple effects.

Institutional investor and hedge funds aren't the same thing. It's my understanding that the shorts were put on by hedge funds.

As far as I know institutional investors can't short stocks.

Institutional investors are pretty much anyone who manages money on behalf of someone else. I don’t know how the restrictions work but likely has something to do with what the institution’s purpose is.

Institutional investor has become the term to refer to the opposite of retail investors.

I don't see that changing.

> This is institutional investor shorts vs intentional investors stockholders.

Source? Have you seen an update on breadth of long positions vs short positions?

Interesting! What is Burry’s involvement in this kerfuffle?

He bet on it 8 month or a year ago. saying, as always, that the financials were good.

it's not like wsb picked a stock randomly anyway

plus there was the microsoft dea.

At one point he owned around 2% of Gamestop shares so he potentially made a few hundred million dollars

Hard to swallow pill: wsb just merely launched a fashion. Other funds rallied to tank Melvin Capital.

Retail is still not that influent. The fact that hedge fund follow wsb is.

>wsb just merely launched a fashion

Seems like launching a fashion is a significant ability.

This emergent behavior seems a lot like DDOS, but in the stock market.

They aren't trying to kill GME though, they are boosting it, essentially saving it and shareholders from short seller pressure. I see it as a bizarre, but ultimately positive behavior. Wallstreet no longer holds all the keys.

A few thoughts here.

First, the short sellers getting taken to the wood shed absolutely deserve it for placing such an idiotic bet. The short positions outstanding are 150% of the available shares even today. Its a short squeeze even more than its WSB pumping it. And apparently the short sellers just keep coming back for more. They can play that game if they want and I dont feel bad that they lose all their money.

Second, theres no such thing as "short seller pressure". The act of shorting does not lower the price of a stock mechanically. You could argue they are forming a negative narrative but I would call that fair game. You're allowed to say a business is crappy.

Third, WSB pumping and dumping stocks is scammy and definitely not good for the markets. Thats just a mechanism where the early pumpers clean out all the idiots who follow their trade.

Agreed on all but the second point. Short-selling definitely does push prices downward in the short-term.

Suppose you own a share that you don't want to sell and are willing to loan it to me for a month. I'll have to give it back to you, as well as interest payments in the interim. I can sell that share today, which will push the price down. My entire bet is that I can buy your share back in less-than-a-month for substantially less than that for which I sold it.

If I am wrong, I will have to repurchase the share at or before the end of the month at market-price, restoring the number of outstanding shares to where they were at the beginning.

I agree with your points but it should be noted for the second point: they are doing more than just saying a business is crappy. They are betting billions on that business being perceived negatively. In essence, they are throwing their weight behind suggesting that the financials of GameStop are poor. They are betting that the average investor will see those negative signals and that, on average, the stock will do poorly.

> First, the short sellers getting taken to the wood shed absolutely deserve it for placing such an idiotic bet.

The bet was good. A lot of companies are doomed to contract drastically. The problem is that someone found out about this specific bet and rallied others around it.

There is nothing positive in it.

90% of those redditors (maybe 99%) will loose a lot of money.

Sure some Wall Street hedge funds are loosing a ton of money, but most of this money is just going to other hedge funds, that were on the other side of the trade.

The stock will go back to around 10$ when this is all over (soon) - and only a few redditors will be able to actually realize their gains.

That being said, I like this situation. It's a gentle reminder that the stock market is a risky and (way too) complex thing.

> 90% of those redditors (maybe 99%) will loose a lot of money.

I really don't think that's the case. I would agree with you on this point in most cases but this is a very unique situation in which everyone will make money once the people on the short end capitulate.

I suppose it comes down to the question of whether people can stomach the ups and downs up until that capitulation. I think once you screen for all the spam and memes on WSB the explanations are very simple to understand. As someone who does not invest in individual stocks(I have done so maybe 3 times in my life, the rest is in index funds), I was able to understand the situation quite clearly.

You don't even need to wager a large amount to make a large amount. The way it was explained makes sense that you could be up 10,000%, so invest $100 and you could end up with $10,000. This allows even small frys to put a little in and let the mechanics of the market do its job and at the worst case you lose money you wouldn't have minded to lose anyways.

At this point, if anyone is thinking about getting in, i would proceed with caution. The stock has already blown up quite a bit so you probably wont be getting those big 10,000% paydays. I am not a financial analyst blah blah blah please dont sue me

The fundamental issue is that, to realize those 10,000% gains, you have to sell to some greater fool for a 10,000% inflated price. And there's a good chance that greater fool will be another retail investor just like you. (Leveraged trades which don't require a 10,000% price gain are possible, but what "leverage" means is that you can lose more than your initial $100 investment.)

It's a different story if the stock is legitimately undervalued, of course. But there's no coherent argument to be made that GME's current price - up 110% since yesterday! - is rational or sustainable. And indeed, if you look on WSB today, you see a lot of people explaining that you'll ruin the bubble if you don't keep buying lots of GME.

If the play here were a simple pump and dump, that would all be accurate. Your ability to sell at 10,000% relies on there being a greater fool and that greater fool that ends up holding the bag could often be just a regular person investing unwisely.

The social media hype here is about this being a short squeeze. Large institutional investors have taken short positions and will likely be compelled to purchase to purchase shares at whatever price when margin calls come in on Friday. The current share price does not reflect the potential to profit off Gamestop as a company, it reflects the potential to profit off of the institutions that have taken incredibly risky short positions.

Here, the greater fool is already committed to buying your shares, and the timeline for that purchase is known with enough certainty to make this a fairly low-risk play.

Large institutional investors aren't compelled to wait for Friday to exit; they can decide (and largely seem to have already decided) that the market isn't acting rationally and they'd better get out early. I suppose that's not an entirely impossible theory - in principle even the losses they've already closed out are wealth transfers from them to WSB buyers - but I'm very skeptical that it won't ultimately end up being retail traders holding the bag.

yes, and today those greater fools are the hedge funds. Look up what a "short squeeze" is.

There is indeed a coherent argument for why GME's current price is so high. It doesn't have to do with the company itself but rather the current conditions of the stock.

There are 69.75 million gamestop stocks. Short sellers have borrowed roughly 97.65 million stocks. There are literally fewer stocks available than are needed. Supply is low, demand will be high when short sellers are forced to cover their losses. Think of the stock as an item you are purchasing as opposed to something the correlates to the value of a business and it'll make more sense.

I don't think this is what the intention of the stock market is, but the system allows for it to happen. The system needs to be fixed. You shouldn't be able to short more stock than exists.

>The system needs to be fixed. You shouldn't be able to short more stock than exists

why? the margin calls will materialize losses when theres no more demand for shorts. what does that have to do with the magnitude of aggregate short position relative to stock?

> you have to sell to some greater fool for a 10,000% inflated price.

I thought the whole point is you have guaranteed buyers because the groups shorting the stock need to buy eventually.

True enough, but it appears that in this case a lot of the "greater fools" are hedge funds that shorted the stock, essentially pledging to buy it back no matter how high it goes.

>90% of those redditors (maybe 99%) will loose a lot of money.

Hatred and spite for "traditional" (and patronizing) investor opinions like this is what is driving WSB.

It's just a fact, sorry if it sounded patronizing. Also - this things happen periodically in the market (check the short squeeze on Volkswagen)

Yes - there is a short squeeze, but those redditors gains are only on paper. The stock may even go to 10,000$ from here - nobody knows. But at some point, those short sellers will cover or go bankrupt and the stock will be back to its 'fundamental' price - whatever it is, but certainly not 330$ that we see right now.

Considering all the shorts that need covering, I'd say there is a lot of room for the retail investors to sell and take profit as the shorts close out their positions.

I mean, maybe, but I'm not sure where you're going with this. If WSB members find it patronizing to be told "this is a bad trade and you'll almost surely lose money", and spitefully resolve to make the trade more and more in response, that seems like a problem with WSB and not with the investor opinions.

If I'm not mistaken, that's kind of the point. People are willing to throw money away to punish Wall Street.

Yeah, that seems to be the case.

I'm not sure they realize, that they are throwing money away - I'm pretty sure they do not. But it may well kill some hedge funds and even cause some market ripples.

But in the end, it will be it - throwing money away. And once the dust settle, and they find themselves with big losses, I bet they will blame ... Wall Street.

Just to be clear - there is already plenty to blame on Wall Street, no need blame them for something they didn't do.

So you shorted it?

How are they saving it?

They're not really "saving it". This is more like a hearty f-u to the people doing the hyper-aggressive shorting. It might make some redditors a nice bundle of money at the expense of some hedge funds in the short term.

GameStop, AFAIK, is a dead-end strip-mall based retailer who, much like Blockbuster, has failed to adapt to changes in the last few years. They've lost something like a billion dollars and nothing is looking up for them as far as their actual business goes. Gamestop likely doesn't have a plan for revitalization unless that involves liquidation or getting bought out. I expect they're utterly blindsided by these recent events-- they've been very quiet about it. Gamestop surely knows this won't end well for them.

Is there a place for GameStop-like retail in dying suburban strip-malls? Sure. Are they a growth industry? nope! The Hedge-fund guys are ultimately "correct" that GameStop has no future. I just hope that all the reddit kids who bought this stock are fully aware that the last ones holding the bag are going to lose money, but I feel nothing but elation at the hedge funds losing a ton of money over something so ridiculous.

WallStreetBet's consensus on buying Gamestop was born from an understanding of its share price being undervalued, based on basic profit and loss analysis, as well as a promising board member joining who has the background to grow the company's digital business. Brick and mortar business has also run successful experiments with positioning as local e-sports hubs, which could be an interesting evolution for that side of the business.

The insane stock price we're seeing now is in anticipation of a short squeeze, but folks who took the bet before January seemed to mostly agree that the share price belonged somewhere around $30 regardless of the insane shorts. There was hope of a short squeeze being possible, but the downside was considered minimal with the thesis that GME was fundamentally undervalued regardless.

Is this f-u actually costing them any money? There are paper losses in the short term, but unless they're forced to actually cover those shorts, they don't materialize as real losses.

Are those losses occurring? Or is WSB just being self-congratulatory about how much of their own money they're throwing away, and being ignored by the people they're supposedly hurting?

(I genuinely don't know; it's hard to tell from the reporting. Nor am I an expert. I could imagine that some hedge fund is getting margin calls forcing them to cover shorts that would seem to be shaky. If that's the case, I could imagine those rules getting rewritten.)

Ryan Cohen from Chewy just joined GameStop, so it's probably not true that they're going to continue their current strategy.

https://www.forbes.com/sites/joanverdon/2021/01/11/can-ryan-...

GameStop can issue shares at the higher price and use the cash to revitalise their business. Note I'm not familiar with the company so I can't assess whether the company is salvageable.

There is so much going against them it's hard to see how they can make it work. Gamestop is a mall/strip mall operation which already means they are suffering from the massive over buildout of retail that ran wild until the crash of '08. They have a huge shopping mall presence, which means even for retail they are suffering more than most due to the cratering value of mall space in the US.

A large portion of their profit came from buying used game discs and reselling at a healthy markup. Digital distribution was already hurting that in a major way and COVID is only accelerating the decline of physical media.

Their plan has been the same as several other desperate mall-based stores like barnes and noble: keep the core product to draw people in, but pack the shelves with cheap high-margin "lifestyle" items like t-shirts and toys. I predict in 5 years they will be a corpse that's been picked clean by venture capital, existing as nothing more than a brand that can be slapped on some online game store.

Not "saving it" but "saving it from short seller pressure". The stock was previously heavily shorted, to the point GME was reaching bankruptcy. That is no longer the case.

Gme is approaching bankruptcy because they have an unprofitable business, not because of the price of the stock

Deflated stock price due to shorts speeds it up. This buys them time to figure something out, which I am doubtful of.

It really doesn't unless you mean that it makes it harder for GME to aquire equity funding.

Having a high stock price solves the issue of bankruptcy, because gamestop can issue more shares, and have a large capital infusion.

WSBers have an inflated sense of self-importance from what i've seen

As of when I'm writing this comment, GME is up about 1,800% since the beginning of the year. I am extraordinarily skeptical that this is a good thing, for Gamestop or the investors or really anyone at all.

It's incredibly good for GameStop. This gives them an excellent opportunity to issue new stock and raise a huge war-chest to pivot and become a 21st century business.

Would that actually work? It takes time to issue new stock, and at that point, this may have passed.

The thesis that many Bulls are approaching Gamestop stock with is that the company was fundamentally undervalued prior to the current short-squeeze event. Even after the current spike resolves, a return to a $30 or so share price (up from $5 or so most of this year) gives them plenty of market cap and plenty of time to capture it for a major re-positioning in the market.

>It takes time to issue new stock

Curious how long it would take. Are there regulatory hurdles that take time? If not, I could see that the potential for large profits might make an otherwise slow process suddenly get completed in a short amount of time if needed.

That's because it's a new phenomenon. We'll get used to it.

If it's sincerely a new phenomenon perhaps you're right, but cynically this looks a lot like pump and dump and frankly that's been around forever.

What's new here is that the sales pitch about shorts needing to be covered has more truth to it (I think, not an expert) than the usual vague promises about a huge turnaround being right around the corner. Usually the argument that other buyers will follow you is based purely on their supposed FOMO

Impossible pump and dump bubbles are a very old and well-trafficked phenomenon. This particular case is a bit interesting, because it appears that the pumping may be a fully distributed phenomenon - but even then, it shouldn't surprise anyone if news eventually breaks that there was some organized group behind it.

Exactly! It's coordination on a scale never seen. But yes, traditional P+D been around forever.

It's not pump and dump, though, it's a short squeeze. It's happened before, many times, with the most famous prior case being VW (https://en.wikipedia.org/wiki/Short_squeeze#Examples_of_shor...)

What makes you think WS wasn’t profiting on the long side? These are professionals who live to exploit anomalies day in day out. Sure, retails made money but most of the pot went to...Wall Street.

Yes, definitely some on the long side as well. How do you know most of the "wins" went to wallstreet?

Citadel made the most money from this debacle by a huge margin. From earlier last Friday, algos basically ran the stock. Retail and r/wsb make for entertaining headlines. But most people in the business knew this squeeze (perhaps not to this extent) was coming this week.

A MM expects to make pennies for selling an option.

If there is a sufficient squeeze, and GME doesn't issue new shares, each of those options (especially those purchased earlier) will result in tens or hundreds of dollars of profit to the holder.

What's your math for asserting that Citadel is making "the most money" "by a huge margin"?

Interesting to see this comparison being made on hacker news, it was also made on my economics RSS feed where Tyler Cowen[0] linked to a tweet[1] with this exact same comparison.

[0]: https://marginalrevolution.com/marginalrevolution/2021/01/we...

[1]: https://twitter.com/zerohedge/status/1354412717231251459?s=2...

That implies that they are the bad guys and not the people who were irresponsibly shorting the stock to such a great extent.

... with a dash of flash mob and viral marketing.

While giving financial institutions their own medicine.

Exactly -- reducing the barriers to market entry while increasing widespread market understanding reduces the _unique_ opportunity for arbitrage that Wall Street has enjoyed.

Are we totally sure there isn't an element of astroturfing?

Short sellers participate in this all the time.

Indeed. Hedge funds by nature skim from volatility. When they hold short positions they have "partners" that short and distort.

Everything is astroturfing/selling pretty much nowadays.

Social media is not reality, though astroturfing/distorting can become reality for better or for worse, depends on your position/tribe. What is on the surface is rarely what is the driving force underneath.

More like a political disinformation campaign for stocks. Same formula different goals.

It's naive to imagine there aren't funds on both sides of this behavior.

Not sure why you're getting down voted, when the article makes clear to mention that Citadel does have the order flow information, and actually insinuates the same thing...

Yes. https://twitter.com/toxic/status/1353890766800621569

No Citadel can't just 'choose to front run' some RH trades. They are obligated to always execute at NBBO

https://en.wikipedia.org/wiki/National_best_bid_and_offer

They don't need to frontrun they'll clean up just from providing liquidity with the huge volatility in the symbol.

Citadel is split into Citadel Securities (the market making org which pays for orderflow) and the Citadel the hedge fund. The two halves of the business can't coordinate/share position info (or order flow info like others have implied). If they did they'd get absolutely demolished by the SEC. There is really no reason for them to do that though since they're already printing money from MMing.

TIL, thank you!

Hedge funds don't need to use NLP to gauge retail interest in certain stocks, Robinhood just sells their order books directly to the highest bidder.

Someone educate me but why are hedge funds not limiting the loss by covering the short and closing their short position. Wouldn't that stop pumping from WSB crowd?

The only exceptions I could think of is :

- There isn't enough volume to cover shorts due to incessant buying spree from retail side

- Lending freeze initiated by brokers on client request

They can't cover their position because their position is 140% of the available shares...

I think this wording may be a bit misleading. I think the challenge is more subtle, let me walk through a scenario.

100 shares exist, all owned by person A. They lend all the shares to a short-seller, who sells them to B. Then B lends 40 of those shares back to the short seller, who sells them to C.

Now 140% of existing shares are shorted. But 240 shares are "owned" in some sense. A "owns" 100 shares and B "owns" 100 shares and C "owns" 40 shares.

What's not clear to me is which of these shares are available to be bought by the short seller. I assume you can't sell your shares if they're loaned out. So the short seller can first buy 40 shares from C and deliver to B. Then he has to buy 100 from B, including the shares he just delivered, and give them all to A.

What happens in the case where the short reaches it due date and neither B nor C want to sell?

Intuitively I would say that the short seller goes bankrupt, A doesn't get any of the stuff he loaned out back, B ends with 60 stocks while C has 40. Is that what happens in reality?

I don't know!

My understanding is not enough volume. So many shares are sold short that attempting to buy a significant portion back would drive up prices and initiate the short squeeze (vicious cycle of price going up and shorts forced to buy more shares to cover).

They're too stubborn to take a loss and theres not even enough shares for them to all cover. Its also not really the case that none of them have covered. People close out and then new short sellers come in at the same time taking their place, thinking this is their time and surely it will go down, which keeps the short to available shares high.

But couldn't they just settle with the original lenders without buying back the stock from the actual holders? Or is that forbidden? To me this would seem a logical decision for any lender (the business was not dead, so selling was a little bit too risky, but now taking a 100% profit and being done with that instead of having a stupidly inflated stock and 10% profits in the, seems reasonable)

The only way you can settle is to buy back the stock. You borrowed the shares from someone who lent them to you and now you need to return them.

yes, but this someone probably would like to turn a profit as well and not be sitting on a pennystock?

The big pumping has only happened over the last few days. Hedge funds are starting to close their short positions (two of the most noted ones Melvin and Citron announced they had just this morning), and many commentators do expect that this will cause the stock to crash soon as people move on.

Not to tinfoil this too much, but it seems pretty likely from volume that that was a lie by Melvin and Citron, with the explicit goal of tanking the stock (so they can then cover at a lower price).

Agreed. The timing is also rather suspect. I am not sure why they wouldn't have announced it last night if they closed out yesterday. Instead, they waited until this morning after a ~100% jump in price. I find it hard to believe that news organizations haven't been reaching out to them pretty consistently over the last few days since they appear to be the explicit target of the WSB crowd.

Would lying not be a crime here? Maybe not if the position was all from their personal accounts. But wouldn't it be a problem if you were trading other people's money, and you ended up on the losing end, wouldn't you have problems with lawsuits from your clients, saying they were duped, and they would have pulled their money out, if not for this lie? (Or something similar)

Lying is a crime, but as we all know the punishment from the SEC and other regulatory agencies is usually a small "fine" that actually never prevents bad behavior. For many Wall street types, paying fines is literally part of the cost of doing business.

Its better for a business to be in court and pay fines then to be broke and bankrupt.

They announced they closed outside of trading hours, which makes me think they didn't actually close. Why wouldn't they announce at the close yesterday to prevent the run up to 300?

Am I correct in saying that if someone can forecast approximately when that will happen, they can short the stock and make money off of the mass selloff? Essentially putting the short sellers back where they started (in a sense)?

In principle, but it's fundamentally challenging to forecast this kind of thing. For example, Kodak is still up almost 300% (down from like 1,000% in July) on the news of a government loan they haven't received and a pivot to pharmaceuticals manufacturing they haven't started.

If you think you can outsmart both the hedge funds and WSB, go right ahead. I for one will simply regret my lack of faith causing me to miss out on 4000% returns (so far) and move on.

they arent closing their short position because they think the price is going to go back down and they wont get massacred as badly.

so WSB keeps buying to screw them for having so little faith :)

This has to be a terribly naive question, but where does the information about a fund "short selling" a stock come from?

Is this information just in the wind, because the fund is talking about their trades in an effort to further drive stock down and improve their buy back cost?

Or, are there some kind of disclosures which must be made while they hold this position?

What information was WSB community going on?

Since short sellers often provide liquidity to the market, if this happens at a large enough scale, it could push hedge fund shorts out of the market and then we could have a return of liquidity problems like during 2008.

Though some of these short operations do target companies with the intention of taking them over at a bargain, it's fair to say that due to the pandemic and the lockdowns that a short on mall related companies is a reasonable move. I guess WSB is ultimately taking advantage of the lack of updating the short position with the emergence of a vaccine.

Wallstreetbets user activity is very similar to the_donald and weekendgunnit. Personally I think hordes of chat bots are instigating this. I fully suspect reddit to come in with a heavy hand and shutdown this game. Next you will see something spin up at either wallstreetbets.win or wsb.win. The party will continue but not nearly as hard as it has been over the past week.

> Wallstreetbets user activity is very similar to the_donald and weekendgunnit.

What?! I mean sure the culture at both is very meme focused but the similarities pretty much end there

Look at the type of conversations, not the content. It’s not organic

What makes you compare WSB users to far right facists?

The content is different but the intent of the comments are to incite the hive mind.

Because anyone who actually does damage to the system and the elites is a far right fascist.

its interesting how they got that to become the prevailing narrative now

The user activity I refer to led to exactly that narrative. The user activity created the narrative.

the trollishness. also another hard pill to swallow but most people who voted trump were not "fascist" :roll-eyes:

Any evidence to back up the bot speculation? Normal social media memey exuberance seems sufficient to explain this to me.

Memey exuberance is not distinguishable from bots with poor grammar

Possibly. But the chat bots are not purchasing call options that actually have an impact on the stock price.

No and bots were not driving to the nations capitol on Jan 6, but they sure encouraged people who wouldn’t have picked up keys to start that drive. Same with GME, none of you would have bought it if it hadn’t turned into a meme stock

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