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Comment by jug | Hacker News Reader

It does feel like a watershed moment regarding hedge funds. This is the first time netizens capitalize on hedge fund short favorites and it has been surprisingly easy to cause an absolute catastrophy in the order of billion losses for them. I heard Melvin Capital may even have gone bankrupt?

And how to do it? You get people to invest in a stock that is expected by the industry to go belly up. Seriously. It's that easy. It's not illegal. It's so easy that even semiprofessionals can understand exactly which stock are hedge fund favorites. It's not hard information to come by. And, here's the kicker: There is a potential monetary reward if you enter and exit a stock at the right moment.

So it's simple to discover and execute, and there is a financial incentive, and it's not against the law. This is a trifecta of properties that makes this very interesting to follow indeed.

I just saw this article too: As hedge funds try to cover losses, the rings are now spreading over the market: https://www.bloomberg.com/news/articles/2021-01-26/hedge-fun...

The author speculates that this might even ultimately trigger a market correction.

View on HN

> And how to do it? You get people to invest in a stock that is expected by the industry to go belly up.

A lot of the people involved aren't just buying and holding. They're specifically buying/selling short dated out of the money options in order to move the price. Some understand the market microstructure and the various levers they have to make the price move using what is effectively leverage.

> Seriously. It's that easy. It's not illegal.

Finance is highly regulated and arbitrarily so. If you think the lawmakers and regulators will throw their hands up and say geez, it's technically legal, carry on, you're sorely mistaken.

Ideally finance is meant to be about allocation of capital. If a market is allocating capital to a dying company just because meme, then the market isn't serving its purpose. I don't see how this is different than what is constantly being criticized such as flash crashes, contagion and large moves based on rumors, other than the group benefiting (fiscally irresponsible internet strangers vs fiscally irresponsible professionals)

I know, hedge funds bad, and they do this crap all the time. That may be true, but this isn't going to end well for the average consumer. My prediction is reddit will shutdown wsb because that's what reddit does. And there will be more laws made targeting individuals engaging in this sort of activity (basically coordinating with groups of people). This may hurt newsletters and other financial venues. The large hedge funds will be fine, we might see a few bailouts, and life will go on.

> ... this isn't going to end well for the average consumer. My prediction is reddit will shutdown wsb because that's what reddit does. And there will be more laws made targeting individuals engaging in this sort of activity (basically coordinating with groups of people). This may hurt newsletters and other financial venues. The large hedge funds will be fine, we might see a few bailouts, and life will go on.

I totally agree, but it's not like there's a level playing field now. If the new regs enshrine the current reality in law then maybe there'll be more hope for fundamental reform.

Basically what we probably have now is a behavior that is legal so long as no one engages in it. Losing a fake option is not losing anything.

> I don't see how this is different than what is constantly being criticized such as flash crashes, contagion and large moves based on rumors, other than the group benefiting (fiscally irresponsible internet strangers vs fiscally irresponsible professionals)

Isn't that the whole point WSB is making? This is not different and the media treating it as something crazy or new is disingenuous.

> If the new regs enshrine the current reality in law then maybe there'll be more hope for fundamental reform.

This is a sideshow. Feds or regulatory body will crack down, we'll just accept another banned community that is "a threat to our democracy" and we'll move on. I don't think what is essentially financial de-regulation is a movement that's going to pick up steam some time soon. There's vagueness in securities laws and this will continue. Meanwhile banks will periodically be sued for tens of billions that will fill the coffers of attorney generals, justice departments and various state regulators [0]

> Isn't that the whole point WSB is making?

Yes, partly. I think much of it is about having some fun and having a sense of community.

[0] https://www.wsj.com/articles/big-banks-paid-110-billionin-mo...

Regulators and prosecutors do as industry tells them. In this case it's not clear that industry wants anything changed. The smarter hedge reptiles made some money riding the momentum of this thing, and will make more riding it back down when it collapses. Being reptiles, they won't cry because one or two of their number didn't make it out alive. Smart money is never going to outlaw dumb money.

>Regulators and prosecutors do as industry tells them

Then why would any company ever get sued?

> a market is allocating capital to a dying company just because meme, then the market isn't serving its purpose. I don't see how this is different than what is constantly being criticized such as flash crashes, contagion and large moves based

It’s not your job to decide what is an efficient place for capital. The market is serving its purpose exactly right now by allowing the free trade of shares in GME. If people want to spend their money on a GME share to be a part of something, that’s their prerogative.

You know what else the market allocates capital to? Gold funds, who do nothing but sit on giant vaults of gold. It’s about the stupidest allocation of capital possible but nobody is clutching their pearls about that.

Telling people what is inappropriate to do with their money is a great way to get them to do it more. The whole reason we have a free market is because historically the big people in charge can’t allocate capital more efficiently than free-for-alls.

> Finance is highly regulated and arbitrarily so.

But how can you regulate that people get together and buy stock? They need... 1) Internet bulletin board. That's it. The barrier of entry is just so damn low, and that's in part also why this has happened. In hindsight I'm surprised it hasn't happened before but I suppose Covid-19 brought this on.

I think it would be easier to regulate something that at least takes a certain amount of investment in terms of insight or knowledge, but here you can just take any random heavily shorted company and like... get people on a popular board to buy stocks over a day.

This time, sure, it was Reddit and the subreddit may be suspended. Next time it'll be a Discord or Telegram board or something. It's just... so easy

> This time, sure, it was Reddit and the subreddit may be suspended. Next time it'll be a Discord or Telegram board or something. It's just... so easy

It's not so easy. There are concentrated tech players. There's decentralized systems but they aren't there yet in terms of usability for millions of people to just log on and use seamlessly like they do w/ Reddit. It may get there eventually, but its nowhere close to being available.

And then you have different layers of protocol that are all more or less centralized. AWS, gcp, Azure isn't going to host illegal or risky content. And even if you get around that, you'll have to contend w/ the ISPs that can just block arbitrarily if they so choose.

Yes, you can get around all those, but not on the scale to make a meaningful impact and the barriers will deter all but the most fervent supporters, and they likely wouldn't have enough money or influence to cause the havoc they're causing today.

> There's decentralized systems but they aren't there yet in terms of usability for millions of people to just log on and use seamlessly like they do w/ Reddit.

https://mastodon.online

I recently tried mastodon, but I found it kind of confusing. I wanted to get some reasonable people to follow based on my interests (programming, tech, philosophy, etc), but I couldn't really find how to find these people. I tried googling top mastodon people to follow to no avail. No beginners guides apart from the mundane how to create an account. If anyone has any tips, let me know

There's discussion of WIN setting up a wallstreetbets.win site, like /r/thedonald did after they were banned.

Why is the solution always to either shut something down or to regulate? Why is educating people to act more responsibly never ever considered an option?

We require regulation, just as we require the police, because education doesn't matter to people willing to disregard ethics and harm others for their own gains.

Perhaps I'm misunderstanding you, are you implying that what wsb is doing is unethical?

There are two kinds of people involved: those trying to make a point and those trying to make a buck.

Some people trying to make a point are going to make a lot of bucks as well.

And some people trying to make a buck are going to lose a lot of money. Not everyone can get out of an inflated stock with gains, pretty much by definition. And those least likely to understand the point are also probably the ones buying into the stock late (and at an inflated price).

The mix of who makes and loses money is going to affect how society sees this. It will look somewhere between an egalitarian social movement, or a few now-wealthy loudmouths who took everyone else for a ride.

Making money in a bubble is all about timing... and it gets ethically complicated when some traders have control of the timing (in this case by declaring whether the vendetta against Melvin is over or not).

Note that I have made no ethical considerations for Melvin; they knew what game they were playing and are not victims here IMO.

No, I was broadly commenting on why education cannot trump regulation.

For the sake of argument, one can say that actions of forums like WSB should also be regulated to protect them, just like laws for compulsory wearing of helmet (while riding two-wheelers) or putting seatbelts (while riding cars) exist, even though one would think that education and common sense would make them do this automatically out of self-preservation instincts.

But since I am not an expert in finance or stock markets, I really am not in any sound position to comment on the specifics here.

My broader general argument (not at all related to WSB or the financial industry) is just that education alone is insufficient, and regulation is often required too for maximum efficacy.

We require...

This seems too authoritarian.

Not in a functioning democracy. :)

Have you seen one of those?

We can't let pessimism or apathy depress us into not striving for the ideal. If we give in, it would be even worse than what it is now.

Pessimism and apathy are the primary things holding decent Americans in thrall to the racist war state called USA. If our votes meant something, that state could change though it has been around for 231 years. Since they don't, it must instead be replaced. In the meantime, let's be less totalitarian, not more.

See that's the thing here - people have dumbed down democracy to voting. That's just one aspect of it. The other is the right to speak, advocate and protest freely. I've heard many people advocate for compulsory military service for a few years for every citizen to "instil discipline and patriotism and understand brotherhood, hardship and sacrifice etc. etc.". I have a different take on it - I say youngsters should be encouraged to join political parties instead to really understand and appreciate democracy. (Note that I used the word "encouraged" and not "compulsory" - democracy means more choice and less compulsions).

In Greece it's very widespread for young people (higher ed people 18-25) to join political parties. The corruption that this has led to, is unfathomable. The problem is that the political parties have no interest in democracy, just power and self perpetuation.

...more choice and less compulsions.

On this, we agree.

If you believe what is happening is wrong, it needs to be regulated so that it doesn't happen. If you believe it's not wrong, it shouldn't be either regulated nor educated against.

Now, if you do believe it's wrong and it should be educated against, how would this work? Do you think that this is wrong beacsue people are going to lose money? Maybe then it makes some sense to give better education, but this is obviously a special moment and it's hard to educate people so that they don't engage in a social phenomenon. Not to mention, a lot of educated people may be making some pretty educated bets and winning a lot of money; other educated people may just be 'paying' money for a cause that they believe in.

I'm not arguing that shutting down or regulating is the best solution, but it is the most likely outcome.

How would one go about educating people? There's been a lot of ink spilled on this story and it seems to have captured the public's imagination. Not all of the reporting is accurate, but all the major media outlets get out the point that this is essentially reckless market manipulation by a group of loosely banded individuals coordinating online.

I doubt anyone participating in this will cut it out if just told to by some authoritative body.

How is borrowing then selling 140% of the available shares legal? How is that not market manipulation?

This is the market at work. This was taken too far and the market has a method for correcting this behavior and we're seeing it now. The difference is retail is going to win AND there's no backroom deal to be made to stop the bleeding.

We NEED financial reform but we need to look at what allowed this situation in the first place, not ways to silence what are effectively the whistle blowers.

> How is borrowing then selling 140% of the available shares legal? How is that not market manipulation?

Why wouldn't someone be allowed to lend out a security they own to someone else?

If not allowed, why wouldn't I be allowed to make an agreement where I pay you the difference between a future stock price and some fixed value?

> The difference is retail is going to win AND there's no backroom deal to be made to stop the bleeding.

The backroom deal will be a phone call to the CEO of reddit, discord, disqus and similar and tell them to cut it out. Simple as that. No coordinating mechanism, this will die.

> Why wouldn't someone be allowed to lend out a security they own to someone else?

Can you explain what individual or company can own 140% of available shares?

You seem to be hinting at the idea that naked short selling should be illegal, which it has been for over a decade. So here’s a minor clarification for you: The short interest (140% or more for GME) is calculated on the public float. There is a significant chunk of GameStop shares that are not publicly accessible, but could be borrowed against (the shares do exist). If you consider the total outstanding shares of GME, then only 99% or so of the company was shorted. So it’s a crazy high amount, but there is no proof that any (actually illegal) naked short selling was occurring. So long as the people holding the non-public portion allowed their shares to be borrowed, then nothing illegal is going on. If, in the unlikely situation that EVERYONE needed to close their short positions at once, these non-public shares could actually be sold if the owner wanted to. Of course, they could dictate a really high price if the public market volume isn’t enough to close out the short positions in the standard three day period.

The reason that short interest is calculated on public float is because that makes the most sense for normal situations. We just happen to have stumbled into one of those unusual situations.

GME stock has been on nasdaq's "failed to deliver" list for about a month now. That means someone sold a GME share they didn't own (short) and failed to give it to the new owner within the correct timeframe (3 business days I believe.)

Guess what the SEC has done about this blatant naked short selling. Nothing.

So while in theory naked short selling is illegal, in reality it is tolerate and allowed.

Can you explain how it's possible that 99% of shares were held by owners that were willing to loan their share? Surely at least 2% of GME was owned by "regular people" whose shares just sit in their brokerage accounts?

Those brokerage accounts loan the shares out and collect some interest %%% while waiting.

The shares don't have your name on it. It has like Robinhood's name on it, holding on behalf of the customer.

I was completely unaware this was a thing: that means there can be a "run on the bank" if all of the customers wanted to sell on a short time period, and they don't actually have the shares to cover the sales?

> ... essentially reckless market manipulation by a group of loosely banded individuals coordinating online.

You're talking about the hedge funds, right?

Despite the fact that there are widely repeated accusations of market manipulation by specific hedge funds on reddit, there is no actual evidence for it.

I'm not saying reddit is manipulating the market either (maybe! I dunno). Just clarifying this point.

Arguably, because we don't put people into office who are able and/or willing to require people to act responsibly. If we chose our politicians more carefully, we'd see better results. But we don't, so we get what we choose.

For everyone willing to talk about "key leverage points in the social graph" it's weird how they won't call those people leaders.

For Americans, talking about "leadership" as if it exists is like believing in the Tooth Fairy.

> And there will be more laws made targeting individuals engaging in this sort of activity (basically coordinating with groups of people).

These laws will not be legal under US law, because US congress is not permitted to make a law abridging an act of speaking, or expressing an idea, or opinion.

> Finance is highly regulated and arbitrarily so.

The level of arbitrariness of legal process in legal systems of ex-UK colonies is in league of its own in the world, and USA is particularly prominent at that.

In US, financial regulations are some of the most vaguely defined of laws, in the rest of the world, they are usually are the most verbose, and formal in definition.

A law whose execution is wholly arbitrary is not a law at all, and a country allowing arbitrary interpretation of laws is lawless.

This is why what is "technically legal" is legal. What is defined in the law as legal, or not defined as illegal is what is legal. This is why no smarty pants bureaucrat should be allowed to wiggle out arbitrary powers by coming with "interpretations," "extended definitions," or "legal theories."

> If you think the lawmakers and regulators will throw their hands up and say geez, it's technically legal, carry on, you're sorely mistaken.

> These laws will not be legal under US law, because US congress is not permitted to make a law abridging an act of speaking, or expressing an idea, or opinion.

It can probably be written in such a way that this style of speech can be argued through the new law to fall under some of the exceptions, perhaps incitement or fraud.

> These laws will not be legal under US law, because US congress is not permitted to make a law abridging an act of speaking, or expressing an idea, or opinion.

They may just decide instead of policing the speech, to police the practice, and make being an investor even more arbitrarily difficult.

I can easily imagine a law getting passed that in order to invest in a brokerage account where you have autonomy over the investments requires you to be an accredited investor, and it will be worded so that it is for the benefit of the people who were taken for a ride on massive "pump-and-dump" schemes that originated on misinformation platforms and social media, regardless of whether they were truly pump-and-dump or just tom-fuckery against "big hedge".

> The level of arbitrariness of legal process in legal systems of ex-UK colonies is in league of its own in the world, and USA is particularly prominent at that.

Can you post a link to some comparison of arbitrariness of ex-UK legal systems and other systems?

> Ideally finance is meant to be about allocation of capital. If a market is allocating capital to a dying company just because meme, then the market isn't serving its purpose.

Do you believe in it's right to give power to somebody, whether it will be a government, private party, or a class to rule over allocation of capital, and decide whose capital allocation is good, and whose capital allocation is bad?

There is a country that tried, they name to it was USSR.

An internet community is "somebody" with a selfish interest that might go against the interest of the wider public.

So is any group of people, including hedge funds and the government as we've seen over and over and over again.

yes, we don't want stock manipulation from anyone. A small group of retail investors can't manipulate stock so they can be exempt. This group however just proved that they can.

> And there will be more laws made targeting individuals engaging in this sort of activity (basically coordinating with groups of people).

They don't make laws for this any more, it will be stopped by some obscure regulatory agency.

> They're specifically buying/selling short dated out of the money options in order to move the price.

This exactly what stock market speculation is about, is it?

Not when moving the price is the goal. If you trade specifically to create an unfair impression of the supply and demand of a stock that's market manipulation.

Thing is no one is going to prosecute a randomer on the internet for throwing $5k at an option especially when there's no proof that it was done in bad faith.

I just don't get how WSB is engaging in market manipulation more than the 136% shorts were.

Shorting a stock because you genuinely believe the company is crap is not market manipulation.

To be clear, market manipulation is very vague and very broad, and from what I've read the SEC is only going after you if there was fraud or lying involved. Most of WSB's activity is not illegal market manipulation.

Trading (or posting) to cause impact and affect other positions you have is manipulation too. But it's not really provable in the case of WSB so they're safe.

P.S. not legal advice

It is not market manipulation for short interest to rise above 100%. It doesn't require anything nefarious. No collusion between institutional investors required either.

I agree that neither group manipulated the market.

I referenced the % just as a convenient label for that group of market participants.

> If you trade specifically to create an unfair impression

What is a "fair impression," it's all up to owners of the paper to decide on selling price, nobody else can.

> Not when moving the price is the goal.

Market transactions don't move the price, its people doing them do.

No, almost all personal trading is buying stocks. Options are derivatives that give you the right, but not the obligation, to buy or sell a security based on some predetermined price at or before some predetermined time. They essentially provide leverage such that $1 out of the money option has a much larger market impact than a $1 purchase of a stock.

> Ideally finance is meant to be about allocation of capital

What does it matter what it is "ideally", if it was never that in practice? Ideally communism is a stateless moneyless classless society, let's get working on dissolving the state then?

That means the market works to that end to some degree. "Not ideal" is very different from "let's allocate capital randomly"

As a former fund manager, I think it mainly illuminates bad risk management practices at one specific fund. Why would you ever paint yourself in a corner where you lose 30% on a single name? It just makes me think all their other bets are also huge and simply lucky they haven't collapsed.

Funds are also diverse, though. There will be a load of funds who have taken the other side to Melvin, based either on various fundamental insights, or technical, whatever.

30% has not been lost on a single name. It's publicly available information that every known short by the fund (particularly those with high short interest) is now being targeted, and is up tens to hundreds of percent in the past couple of days.

Fair enough, I hadn't considered I might be reading a skewed view of what the PnL distribution was. However it's still not a great look that the firm can be put in such a position. It's not actually an excuse that events are unprecedented.

Thanks for your input. I've worked during such crises myself and it's stressful.

Yeah I'd like to caution that approximately everything reported about this is basically incorrect, even from reputable media. That includes PnL stuff but equally applies to...well, all the other stuff. I can't even count the number of conspiracies I've seen repeated.

I get that hedge funds are categorically unsympathetic characters in this play. But people are so angry that fact checking doesn't seem to matter. It doesn't help that a lot of things financial mechanics are esoteric and not commonly known, or that most people don't know the difference between hedge funds, banks, market makers and brokers.

Do you think the move is actually powered by the WSB soccer moms, or is it other funds pushing?

I think it's moved on to incorporate substantial institutional weight at this point as well. Without going into specifics, that becomes clear if you compare stocks which rocketed up in the past few days with stock tickers mentioned in WSB posts, and select for those in the former group which don't appear in the latter.

Success often comes down to execution of the play. If your building something it's about quality. If your making a bet, then it's about risks.

This fund has/had bad risk managers.

Or they had ordinary risk managers whose ordinary schemes got attention from an internet forum with just enough ability to counter one of them.

It's not quite that easy. You have to find a stock that's overshorted (>100% of shares here) irresponsibly (if they used e.g puts they'd be fine), buy a lot and hold it long enough. Also quite likely WSB money wasnt enough and it's only because other hedge funds jumped in that we got here.

What Melvin did was risky and avoidable.

The stock doesn’t actually need to be shorted that much. We’re seeing the same thing happen with Koss, BB, and AMC right now. The infamous VW short squeeze was also caused by significantly less short interest: https://www.autoweek.com/news/industry-news/a35340727/heres-...

Very true, but the less shorted or at least the bigger the difference between available shares and the short position the harder it is.

VW in particular was shorted much less but something like 90+% of the shares were accounted for between Porsche and Germany to reach the accounted for shares + shorts position of over 100%.

We are seeing them become the next meme stock that people are trying to pump. Unlike GameStop their pumps have very little to do with short squeezes because these stocks were not being shorted anywhere near as much as GameStop was.

Short squeezes can occur with significantly less short interest than 100% if others want to maintain controlling interest in a stock or are otherwise unwilling to sell except for over market value. Even a small change in a stock's liquidity can result in a large impact on available price.

Sure that is possible. I have not seen anything indicating that is the case being made with AMC etc.

It looks more like a coordinated pump than a squeeze. Tons of new accounts are spamming these tickers everywhere.

> It does feel like a watershed moment regarding hedge funds

Let's wait six months. This story is being badly reported all over. I suspect the hedge funds will mostly be fine.

>You get people to invest in a stock that is expected by the industry to go belly up. Seriously. It's that easy. It's not illegal.

Yes, it is, it's an abusive short squeeze, which is market manipulation.

If anything is market manipulation, its shorting over 100% of a company to push down it's share price even lower and destroy the company

That's just building a large position. I don't think they expected to run the company into the ground by merely shorting it, that's not how market impact works. These firms generally try to minimise market impact as opposed to r/wsb who try to maximise it

Intent is very important and this keeps being lost on the layman crowd. If I go to a widely publicized open forum and say: "Let's go and squeeze the shorts so that they go bankrupt, oh and here's a picture of me doing just that." that's market manipulation and in many corners of the world, that's illegal. As in, you go to jail illegal. If I short a stock because I genuinely believe it's overpriced, that's perfectly legal.

Beyond this, I'm sure there are many funds who try and successfully manipulate the markets, but they try to do it quietly. To do in blatantly in the open is basically rubbing it in the regulators face and giving them no choice but to crack down.

Nobody would notice a bunch of idiots doing this quietly. A 1 million strong mob hivemind will get noticed and will leave no choice for regulators but to come down hard on them.

This is not rocket science. It's the same sort of crowd who planned to storm the capitol, meticulously documented the evidence, posted it online (including confirmation of identity through driving licenses) and then went ahead and did the deed. They basically handed all the evidence to the feds on a silver platter.

What is the difference between your argument and a saying "the big boys know how to benefit from the corruption inherent in the system and the regulators would rather persecute a bunch of powerless people than confront the corruption in their own industry"?

This is not about knowing how to benefit from corruption. This is like basic common sense. I'm not engaging in whataboutism or trying to excuse bad behavior. Market abuse, including market manipulation should be punished irrespective of who is doing it.

I was pointing out the fact that if you go and do it and then brag about it in a public forum, don't be surprised that you get dinged.

It's literally like robbing a bank and then going to the police to hand in the video evidence, only to be surprised when the policemen are not impressed. Yes the big guys should be prosecuted. But perhaps if you didn't explicitly stand on the corner shouting "I'm going to rob a bank and all you guys should also rob banks", the authorities wouldn't be on to you.

I really don't see how taking advantage of an excessively-shorted stock is market manipulation.

I've been on the right side of two short squeezes last year purely by accident, and I'd certainly like to repeat the experience if I could. What exactly would be illegal if I was on the right side of a short squeeze on purpose? Predicting it? holding stocks until it happened? Explaining to people less experienced than myself how a short squeeze works?

You say 'intent' but what intent is discussed on these message boards that is so nefarious people with better Lawyers don't discuss it openly?

It is obvious from your comment you are the laymen, it is very tiring hearing accusations of criminality from you when you get lost in the basics. You seem to be the kind of folks that the headlines 'Nazis and white supremasists are buying gamestop' are designed for.

Stock can be bough for reasons that have nothing to do with it's market value.

I can buy a stock because i want to own it, maybe i want the voting rights, maybe i want to have standing so that i can file a lawsuit for securities fraud. Maybe i am planning hostile takeover. Maybe I want to proudly hang it at my door.

What the hell are you on about? For once, you know nothing about me and second, you are attacking a strawman. I said nothing about there being only one legitimate reason to trade a stock.

I am fully aware that you can buy or sell stocks for a myriad reasons, including meming. What is against the rules is trading stocks with the express intent of manipulating the market and deliberately squeezing other participants. This is exactly what was being pushed by WSB.

If you want to engage in adult debate, please refrain from personal accusations and strawmen.

Perhaps I was a bit unfair, but I do believe that your accusations of criminality are unfunded. Noone credible has yet called it fraud, and if indeed it was, authorities would have stepped in long time ago.

https://www.bloomberg.com/news/videos/2021-01-28/gamestop-fr...

No single fund deliberately pushed short interest over 100%. Short interest increasing over 100% is something that happens organically when many firms want to short the same thing. No collusion required. Someone buys a stock from a short seller and sells it short themselves.

I will add that short interest > 100% is a very common risk measure that firms with a short position actively track.

I don't know how to verify this, but I've heard one source claim that firms continued to short once it was already over 100%. Even if that's not strictly collusion, it sounds — to my admittedly untrained ear — like a position that the system should want to avoid.

I think it's reasonable for people to want to limit that. The trouble is that you would need to require brokers to prevent short selling stocks that have been already been borrowed and short sold. Aside from tracking a tree of stock ownership changes at the brokerage level, this would de facto create two similar but different assets for every equity: those which are "clean" (have never been sold short, or the short position is closed) wnd those which are "dirty" (have been sold short at some point and the position is not closed).

This is trickier than it might sound, because you are in some sense restricting the rights and capabilities of some subset of the shares. That has valuation implications.

I am not saying it can't be done or even that it's undesirable; just that the mechanics of this are nontrivial to enforce.

There's nothing mechanically wrong with short interest being over 100%. It just means that some shares will have to change hands more than once to close the shorts. This is a very widespread misunderstanding.

How does a low share price "destroy the company"?

by limiting financial opportunity for the devaluing company to the point that it inhibits normal every day business, creating a feedback loop that the company may be unable to recover from.

This occurred to Lehman Brothers. Different industry, but they got shorted to the point that their clients withdrew their funds and they were left in a position that was ineligible/undesired for most loans.

https://slate.com/news-and-politics/2011/08/does-it-matter-t...

> by limiting financial opportunity

Financial opportunity to what? Be specific.

None of the examples there really makes a lot of sense in this case. You think this pump (and coming dump) happening with GameStop would convince lenders to lend to GameStop at better rates? Maybe if they had no clue what was happening and did no due diligence, but that is not the case. And I doubt share price is the only consideration made by lenders, if their share P/E ratio was very low (which shorting would cause) then this would also affect their lending opportunities positively.

You think they were planning to issue new shares? It would have been an amazingly stupid idea which likely would not have been approved by existing shareholders anyway and would have had much the same effect as shorting.

Considerations for an investment bank is quite different from the considerations for a game retailer.

EDIT: The claim that short selling contributed significantly to the demise of Lehman Brothers is also disputed: https://en.wikipedia.org/wiki/Lehman_Brothers#Short-selling_...

No, that is absolutely not market manipulation. That is the market working exactly as designed.

> Let's wait six months. This story is being badly reported all over. I suspect the hedge funds will mostly be fine.

Right. All of a sudden the WSJ is publishing an article about the founder getting kicked out where he claims the subreddit is full of white supremacists. Really? Give me a break. FT is claiming many are “alt-right” all of a sudden. Bad reporting all around.

> Yes, it is, it's an abusive short squeeze, which is market manipulation.

I’m not sure I buy it, and I’m not sure there is a fundamental difference between dinner club (as Matt Levine wrote) where hedge fund managers talk about their favorite stock picks and people on an open forum openly talking about companies that they think should be purchased or sold. Is it not market manipulation when a short seller publishes a scathing report, or when a CEO goes on CNBC or Bloomberg and gives a good opinion of their company or a different one? Which has more reach?

I think the most sensible and straightforward thing is further regulation of hedge funds and large financial institutions. If they are going to act irresponsibly and then cry about it, well, maybe they need adult supervision? The positions of hedge funds versus, uh, retail traders on an Internet forum is an unequal one from the start, anyway.

Not to mention the ridiculous media blitz coming from institutions. Jeez what a way to really create a lack of trust and further erode our democracy. If I find a drug dealer working for the FT can I write an article about how some people who work there are drug dealers? It’s obvious what they’re doing.

I'd argue that the last year or so of Tesla was the first major incarnation of this gamma squeeze + memes to burn short sellers but yeah GME is a while other level.

There is kind of a continuum between cases that are pure squeeze 'n memes and ones that are more based on non-linear long term value propositions. Three years ago, I think you could make a case for Tesla that it was either going to go bankrupt or grow many times over, but not stay in between. It may even be that bankruptcy was the more likely outcome. But if you gather enough support in the belief that a successful outcome is possible, then it can become self-fulfilling, especially if capital is one of the main obstacles. The company can use capital raised from the boom in the share price to lower debt and invest.

In the extreme case this could be true of almost any company. Imagine if GME were just a shell and a brand. Then they raise money, get a great board, hire industry experts, and go... whatever.. compete with Steam, turn the physical stores into e-sports venues, pivot to game development, whatever. Use the money to get the expertise, and you already have the brand and attention, which is now worth a lot more. That is kind of what happened with Tesla to some extent, although they already had a great brand a genius owner.

It's not just Tesla, either. There are a number of stocks that are grossly overvalued right now when you look at fundamentals. Lots of people have been talking here & everywhere else for the better part of the past year about how the Fed is printing money and it's all going into a stock bubble. Oh yeah, and cryptocurrencies.

This GME thing is just one little piece of an overall new zeitgeist. I'm not about to even try to predict the next crash/bubble-pop, though. I just don't have the stomach for this kind of market. When a change comes, it may not happen in a predictable way. I think there's at least a chance we could somewhat be in uncharted territory here.

I'm sorry but this is a possibly irresponsible take for at least a few reasons.

The populism on this issue is completely out of touch with reality.

1) As the stock pops due to irrational upwards pressure - the hedges funds might lose a bit, but in reality a lot of 'regular people' will be left holding the bag.

When the stock inevitably crashes, those 'regular people' will lose a lot and it will probably be a more meaningful loss to them.

2) There is no easy way to make money doing this - you're literally promoting a collective ponzi scheme (!) whereby the only money made is by people putting more money in.

3) Bankers have a role to play in markets and that's by properly valuing them. Obviously there are tons of shenanigans, but otherwise, it's an essential role. 'Pumping and dumping stocks' is not value creating it's actually quite destructive. While Game Stop may appreciate being helped in some way, they are not going to appreciate their stock going insanely volatile. Why do you think they would actually want this?

The populism on this issue is really out of hand.

"So it's simple to discover and execute, and there is a financial incentive, " - please - no, this is completely irresponsible.

With regards to number one, what will happen is exactly the reverse of what you’re saying. Hedge funds have shorted more of the stock than exists. That means that when they decide to buy back the stock to close their shorts, they will need to buy every single stock of the company, return it to the people who lent them their stock, and those people will have to now sell it, so they can buy it again to return it to other people.

It won’t happen in minutes either, it will take days for this to happen. That’s why everybody is going crazy about this. WSB saw a perfect situation and exploited it. This isn’t a case where the stock will drop in mere minutes.

No, the funds will take a haircut and move on, they likely already have.

The crash will be worse, and it will affect people personally - the plebes are going to lose a lot of money on this one in a few days when the market moves on.

That it will take days to unwind doesn't really matter - it will top out at some point, and it will go down. The timeframe is less relevant.

What about retail investors who looked at Gamestop before all this and thought it seemed like a reasonable investment, only to get wiped out by "irrational downward pressure" from hedge funds conspiring to short the stock 136%?

We'll have to wait and see a bit, but the huge pop in Gamestock was likely more the result of funds covering shorts, not retail investors continuing to buy at these prices. So it feels really disingenuous to blame retail for these wild swings when they would not have been possible without the irresponsible hedge fund trading that came before.

Hedge funds don't need to conspire for short interest to go over 100%. If a business is widely considered a viable short target, it usually just happens through regular market mechanics. Everyone wants to borrow it to sell it short, and they may end up borrowing it from someone who already bought it from a short seller.

> "So it's simple to discover and execute, and there is a financial incentive, " - please - no, this is completely irresponsible.

Do you refute my claim that it's simple to discover and execute? They're essentially just banding together on public information here. GameStop, Blackberry, Nokia, AMC, they're all affected and I'm just counting days of developments here.

As for the financial incentive, it is _absolutely_ driving this behavior. The taste of cash. Most will of course lose money on this, but this is not my point. My point? There is a financial incentive! I'm not talking about morale or ethics, I'm talking about why I think this might be a watershed moment. The masses realizing this is at all possible.

Hell, throwing away cash on lotteries is also a terrible way to build fortunes, yet it's a massive industry and lives are ruined over this as well.

What about all the people who lost jobs at GameStop when the board got pissed the stock was in the toilet? You have a case of a hedge fund that was playing games to manipulate the price of a stock downward for a quick 400% profit the last few years with what appears to be no hedge on the other side of the bet. They could've bough calls to offset potential losses but they didn't because that wouldn't have meant such impressive gains.

People who should've known better got caught with their pants down and I have absolutely no sympathy for hedge funds.

I'm not defending shenanigans.

I'm saying populist shenanigans don't really defeat banker shenanigans.

Short squeeze are nothing new, so it doesn't feel like a "watershed moment" to me. Big investors also do it to each other, e.g. the Herbalife short squeeze.

https://money.cnn.com/2018/03/01/investing/herbalife-bill-ac...

Now Robinhood has stopped allowing purchases of those securities. While I suppose Robinhood would like to have good relations with hedge funds leading up to an IPO, they just pissed off a significant fraction of their actual customers -- and boy are they ever gonna get an earful about it.

Why do you separate users of /r/wsb from traders and hedge funds, as if those are different people? My guess is that majority of users there are traders and employees of such funds, simply using yet another talking space.

WSB is an open space[1], accessible to ordinary retail investors. The majority of the money may be from large funds, but the majority of discussion is from working schmos who day trade as a hobby. That's very different from the closed environment we associate with high finance.

[1]theoretically, in practise I'll predict it's about to be Septembered into oblivion

edit: formatting

> Why do you separate users of /r/wsb from traders and hedge funds, as if those are different people? My guess is that majority of users there are traders and employees of such funds, simply using yet another talking space.

Because the subreddit is famous for just losing money and lots of people just not knowing what they're doing. I'm sure there are a few traders on that reddit but I suspect it's like a professional programmer joining a dev bootcamp community. A whole bunch of people who are just learning and are doing crazy things. (I did crazy things when I was learning, hell, I sometimes do crazy things now)

> It does feel like a watershed moment regarding hedge funds. This is the first time netizens capitalize on hedge fund short favorites and it has been surprisingly easy to cause an absolute catastrophy in the order of billion losses for them. I heard Melvin Capital may even have gone bankrupt?

I spent all night going through many of those threads, and I have to say they are ready to join Bitcoin once the SEC cracks down on them and freezes their Robinhood accounts and possibly even their bank accounts linked to Robinhood.

If Melvin does go down it will be its own success, but now they're going full vigilante investor mode, and putting money in BB, AMC etc... this won't stop unless the State intervenes and could set a precedent and as you say create a 'watershed moment.'

It won't be long until they realize what the long con really is: central bank based fiat currency that created these boom-bust cycles in the first place.

I initially mocked them when I heard about them taking GME to its recent rise, and still kind of do as WSB is a joke even by their own admission; but that doesn't mean it cannot create positive change. After all comedians just use humour in their jokes to highlight and poke fun of some of Society's most absurd aspects with varying levels of success in reforming it.

Dave Chappelle's latest monolouge at SNL after the election highlighted this very well.

>It does feel like a watershed moment regarding hedge funds.

Agree. I think we're all seeing that hedge success for many is more about market influence than actual market prediction.

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