Shorting and Indian capital markets
zerodha.com
zerodha.com
This is the only passage anyone with too much at stake (than they can afford) in this short needs to read.
Other than that, I believe industry insiders / traders are missing the mark in that the current dynamic is also fueled in part by a million-strong (if not more?) rejecting the fundamentals and pumping cash in to businesses that Wall Street's hive mind has decided has no job being in existence.
AMC made a billion dollars during the rally [0] (and it is not lost on me that this capital would be dumped into parachute payments and bonuses to c-suite and nothing's going to trickle-down). In the off-chance AMC makes the capital work, then, that'd have vindicated retail, but it kind of seems too optimistic but that's the whole point.
[0] https://movieweb.com/amc-theatres-raises-one-billion-dollars...
I think what is missing in many people's analysis is that there is a new fundamental value in this situation. Buying GME shares is now linked to destroying a hedge fund and ruining some billionaire's days. For many people, and I include myself in this group, that has a real tangible value that outweighs the actual dollar amount it costs to buy a few GME shares.
When the leaders of these brokerages and hedge funds ponder as to why people are throwing money at something that is likely to crash and burn when it will likely not make money and is just hurting the billionaires, they are staring the answer in the face
"They didn’t exit any of their short positions! You can look it up!!! The fund sold their shares to other funds, which made the stock algorithm think the stock is being sold —> price goes down —> the found that bought sells those shares again to the fund that sold them in the first place —> price drops even more —> they keep doing that —> price drops lower every time —> but as long as we hold they weren’t able to exit any positions!!! Shorts are still up 120% percent. As long as we hold the squeeze is inevitable!! And if you don’t believe me, look at the GME after hour stock price!"
https://old.reddit.com/r/wallstreetbets/comments/l7oobr/4206...
Whether that's true or are they just driving themselves off a cliff? I don't know.
This doesn't mean that the original funds didn't exit the positions. It's likely that there are many new participants who are taking short positions in the last few days because the stock is obviously overvalued.
They’ll keep pumping while they have an incentive to do so, and the gullible will follow after, but many of the original ‘hold’ advocates must be planning to exit before the inevitable end, leaving the bag in the hands of a greater fool.
The comment you pasted is incoherent rambling. It's honestly like something from a qanon forum. Even ignoring that prices don't work how they seem to think the mechanism they suggest for manipulating them doesn't make sense (it would also be very illegal and again trivial to verify for the SEC).
That's most of WSB, though (after you exclude all the "+1" comments). I agree it's incoherent rambling, that's why gave up on trying to paraphrase it. I'm quoting it because this is the kind of stuff that gets reposted in every single thread there, and is indicative of the general atmosphere there.
Saying “but that would be against the rules!” means almost nothing for the rich. This is one of the downsides of not having a strong rule of law and the rule of law has been degrading steadily in the US
I don't know if you're implying the SEC is in cahoots with the hedge funds, and not just any hedge fund but one associated with SAC/Cohen whom the SEC went to war with. I'm sympathetic to your general point but as someone who has spent his whole career in the financial markets that seems vanishingly unlikely to be the case here.
disclosure: I have no investment in GME, but am hoping to see some hedge funds suffer
I'm by no means a finance guy and if I've misunderstood this, I'm happy to be corrected.
I posted a chain analogy elsewhere[0]. My understanding is that short interest being > 100% just means that the average length of the "short-lend" chain is greater than 1 "short-lend" pair. I don't think that such a chain is anything special - just that getting rid of the earlier short in the chain requires getting rid of the latter short in the chain first.
--
Most stocks are head by the broker who combines them all into one listing of total number of stocks owned. This is all electronic, nobody ever worries about the actual stock behind it. When the company sends out a shareholder mailing they just give the company all the addresses, not how many shares anyone has. (I'm not sure how voting is handled!)
Note that there is a loophole above. It is possible to get the physical stocks personally instead of letting your broker handle it. This can force a short squeeze as your broker will be forced to unwind everything far enough to find real shares for you, and if required will force one of the shorts to buy back shares on the market. This has happened a few times in history, but few people have the means or inclination to pull it off (and it isn't what is happening here).
Further shorting is completely possible - nothing stops shares continuing to be lent, but doing so just makes the likely supply shortfall worse.
Short squeezes are usually not about supply constraints, they are about forced buying caused by margin requirements. High short interest just indicates a lot of potential forced buyers in the event of a price spike. Except in special cases there is particular magic to having 100% of the float on loan except that this is a high number which suggests many potential forced buyers under the right circumstances.
A lends to B who sells to C who lends to D who sells to E who lends to F who sells to G.
The reverse of the process will unwind it:
G sells to F who returns to E who sells to D who returns to C who sells to B who returns to A
It's a mistake to see "the billionaires" or "Wall Street" as a single homogenous group. 99% of them don't mind Melvin capital going under at all.
An event like this, while not being a be-all-and-end-all, can give commoners a taste of blood -- that maybe they are just as smart as those elites, that maybe they can use the systems for their own benefit too, that maybe they don't HAVE to live under the boot.
It's the hope that matters, because there are always more opportunities.
Who do you think is making money off all the trades you're losing on? Doh!
Some billionaires will lose money - actually they already did a few days ago when they exited. Some others will make a few millions or billions. Robinhood looks like they've got some explaining to do. Just another day on Wall Street.
When the choice is status quo vs actually hurting some of them even if the rest get the status quote, it’s an easy choice.
>Just another day on Wall Street
If this was true then none of the current events this thread is discussing would be occurring. You don’t need to destroy all of your enemies, you just need to prove you’re a credible threat to make the rest be wary
Now, as for whether there are enough of these crazy types to actually push the price of GME up this much - i'm skeptical. I suspect that it's a battle between different hedge funds who first caught on to this small group of crazies on wsb, and saw an opportunity.
That probably is not a verifiable truth, but the fact that this impression prevails for enough people to do this is probably where the real corrective actions should be directed at.
Even if it turns out that GME can be short squeezed until there is not a single share shorted anymore, the retail investors will then collectively be HODLing a ton of stock in a company losing hundreds of millions per year. Buying pressure for such stocks is typically low. There is no way everyone can get out at the top, so a lot of people will have to sell at very low prices. This is even true if the original thesis of "we can pump this stock to $1000" is true.
So the first few people will get an extremely high price because like you said, the shorts are forced to buy, but as the sell off begins the price will plummet.
I think the parties would just be exchanging money in lieu of stock and whoever bought the actual stock will have Gamestop stock, so after the utility for screwing the naked shorts goes away, people who bought in the rush will probably lose just like any other pyramid scheme.
but stocks are marked to market - the lender of the stock will ask back the market value, which if it was being pumped, is going to be high. If the shorts are settled by cash, it's not only not going to make a difference to the bottom line of those shorting, it will also not change the price of the stock.
It should all be convoluted by policy, settle dates, brokers selling and later replacing stock in margin accounts, etc. But basically anyone involved in buying GameStop stock itself is playing in the options market with insufficient evidence of understanding, and brokers are supposed to interfere with that.
If you want to be a conspiracy theorist, the smart thing for the insiders (those who control the board) to do would be to sell all their shares at this price, then declare bankruptcy. This would be illegal of courses, but there are lots of variations on this theme that make financial sense if you can get away with it.
Alternatively, I think a lot of people believed a chunk of put options were expiring soon which would cause a lot of contracts to be executed (I.e. forced stock buying).
1) Shorts all come due and hedge funds pay all the retail investors big gains
2) hedge fund dies and defaults so retail get screwed
I’m pretty sure WSB would collectively declare victory. It’s a suicide mission for them.
Could you explain this? Doesn't increased demand drive the price upwards?
For a retail business that earns single digit profit margins with no moat, no employed talent, and no real assets, I can only assume once the supply curve starts moving, it will move fast as everyone tries to exit.
This is what I've been thinking about the whole time. They can definitely pump the stock if they keep HODLing, since sellers effectively set the price when the short positions have to be closed.
Someone still has to be the bagholder and end up holding near worthless stock at the end of this though.
$GME will come crashing down once the short squeeze is over, and there's only going to be a small minority of retail traders who get out at the top.
People who have bought in later at hundreds of dollars are likely to lose a lot of money IMO. Possibly to the tune of over half their initial investment.
The thing that boggled my mind was plenty of people openly asking "Hey, I don't know anything about trading, but I want to join this and buy stock." and other people straight up telling them "Get the app from a broker (not RH!), open an account and buy $GME" (followed by a flurry of rocket and diamond hand emojis)
It is one thing to be told that markets can be irrational and emotional. It's a completely different thing to see it that playing out in real time on social media.
The hedgefunds are filling this niche. Trading slowed yesterday because brokers were afraid of going bankrupt.
There's no guarantee hedge funds will be the ones who end up holding stock at the end of this.
Note that fundamentals include things like bonds and government manipulation.
The market prediction doesn't mean it's going to happen - but it's likely. If the market prediction turns out to be wrong, then there'd be a correction in price (aka, another crash).
I think there's a lesson here for people making massive short bets, and for hedge funds and anybody making a bet instead of an investment: that someone else might take the other side and have more power than you might think. This is all just betting at this point, with WSB still betting they can trigger even more of a short squeeze. If this has somehow crossed the line from "bet" to "investment" that starts affecting the rest of the economy, then the consequences should be interesting to watch. Trading on exchanges shouldn't be able to be restricted by someone like Robinhood, though they have other problems too.
I have more confidence in our equities markets because of the existence of short sellers. I’m glad to know there are people researching companies that are not being honest about their financials.
If there were another way to incentivize finding these types of companies without short selling, I would be interested.
Put options can’t be written at scale without shorting.
- Me, a long time wheel runner
In ye olde times before the invention and institutionalization of short selling and other financial instruments, this kind of research was the responsibility of the media (to raise the alarm) and the SEC/police (to investigate claims with the authority of the government, and prosecute offenders).
Unfortunately, most newsrooms have been "consolidated" or shut down entirely as the market for quality journalism has declined over the last decades, and there is an unhealthy "revolving door" between banks, hedge funds and other market players on one side, and regulatory agencies on the other side.
Journalists are better spent digging into political situations that aren’t directly tradable.
Even if you think journalists should do the research and make results public instead of funds doing the research and keeping it private (until they reveal their conclusions through trading), I think you want shorting available as a RESPONSE to the reporting. Why would the companies change their behavior in response to negative press if they aren’t subjected to economic pain for ignoring it?
[1] https://www.thestreet.com/opinion/a-brief-history-of-stock-o...
All of the ingredients are there.
1) Use social media to organize motivated groups of people
2) Align the mob to a target that is inherently disliked. Hedge funds and wall street more generally.
3) Cause world wide market volatility. In this case, it's moving institutional investors out of the market, eventually causing a lack of liquidity that reveals structural problems. In other words, How many Lehman Brothers does it take to cause a 2008 type crash?
This type of risk taking behavior must have the associated consequences, otherwise there is no reason to stop behaving this way at larger and larger scales. Moral hazard - again a finance / trading 101 concept - just like shorting can result in infinite loss.
If a foreign adversary was using bots or social media manipulation to drive up this behavior, perhaps they could target the right companies in the market to reveal structural weakness. Similar to how the 2016 election interference happened. Though that is getting much more on the conspiratorial side.
Basically, astroturf these campaigns to target specific companies in the market. You only need a small dedicated core then the herd follows. As we have seen time and again with social media manipulation.
This was happening since early December. It looked suspicious and was reported to the SEC. Read comments for receipts.
https://www.reddit.com/r/wallstreetbets/comments/kr98ym/gme_...
https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga...
This situation sounds like a hideous volatile time bomb of complex exponential effects.
"Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. So naked shorting refers to short pressure on a stock that may be larger than the tradable shares in the market"
For example, its easy to understand utility of food, cloths, car, house, money. But I am not able to find a reason about stock market existence for day-to-day trading, where secondary stocks are traded daily after IPO. It seems none of the day-to-day trading money/profit ever goes back to business to help them to improve that business.
The answer is that the casino-like activity of the secondary market provides a great incentive to companies to primary-list. This engine drives business formation through the valuations it can provide to companies. And companies can issue more shares to raise more capital from the very liquid casino. So it's helpful in that way.
The lack of any mechanism for payment for order flow is quite interesting - how do market makers get incentivized to provide liquidity in such situations? Or asked another way, are American market makers being subsidized by retail traders?
I'm not sure this still happens, but Marketmakers (and broker dealers) also used to earn rebates from new venues to incentivise them to trade on MTFs (multilateral trading facilities or alternative execution venues).
You'll hear a lot of people talking about market makers (eg Citadel) paying for flow. The common opinion is that this is because that flow contains information that the marketmaker can profit from. This is almost never the case, and in fact if the flow has alpha (positive or negative) or is overly directional that's not great for the marketmaker as they are forced to temporarily take the other side of that trade and try to find unwinds. Marketmakers want more flow because that makes it easier for them to do their job of hedging their inventory and unwinding positions with minimal impact. They are betting on the underlying math that if the flow gets large enough it becomes zero alpha by definition and they can just earn the spread.
So, profitability depends on the ratio of the nice "random crossing" to the nasty "toxic flow". The toxic flow tends to come from large, well-informed market participants who can act very quickly. That means institutional players with colocated trading machines and so on. There are none of those on retail brokerages, so retail flow has a great ratio of random crossing to toxic flow, and so market makers are happy to pay for it. Meanwhile, the exchange itself is crowded with players like that, and there's a worse ratio, so market makers are a lot more wary.
This is why market makers invest a lot in low-latency trading. If you can find out about an impending market move, and cancel your resting orders before other participants cross into you, you can dodge the toxic flow, and have a better chance of making money.
Longer explanation: https://insights.deribit.com/market-research/toxic-flow-its-...
Unrelatedly, another source of revenue for market makers is maker-taker pricing, where the person crossing the market pays a little fee to the person who rested the order they crossed into:
https://www.investopedia.com/articles/active-trading/042414/...
But i'm not sure how common this is these days.
Buy low, sell high.
PS: By the way, I'm not sure I understand the question. Market makers are the ones who pay for the order flow.
So, they short more stocks that exist. OK, I will not ask why this is allowed, but how is this done?
There's one stock, but when people count shorts, they're counting the [shorts to] edges. That 140% ratio is essentially the (amount of [shorts to] edges) / (amount of stock in circulation).
Since there are a lot of people with stock at the broker there is no problem to shuffle around, it is all the same stock and an entry in the computer.
This of course leads to the real issue: you can buy stock and not leave it with your broker. This has been done, but only rarely (and not in this case)
Basically it would allow credit worthy institutions to meet demand by creating synthetic shares out of thin air. As long as they pay all the associated dividends and maintain enough capital to buy back the shares.
That would remove the entire long and convoluted process of locating borrow, and remove much of the market disruptions associated with “short squeezes”
Why wouldn't it be? It sounds pretty straightforward mechanically. A short means I borrow a share from you and sell it to someone else today, buy it back some time later and give it back to you. That someone else has a bona fide stock, which they can lend to another shorter.
If you mean why the metric of "how many [shorts to] edges are active" is being tracked? I'm guessing it's the best proxy for how confident market is the stock is about to tank. Also, shorting as an abstraction is its own thing, so counting how many shorts there are is as useful as counting any other distinct market activity.
There are a few different ways to be short of a stock but the most common are to sell short in which case you have a few days to buy the stock or locate a borrow before the trade settles. Other ways to be short are to write call options which you can just do by selling that option to someone, or buy put options. In certain cases you can short a contract for difference or single stock future or short the return on the stock in an equity swap. For all of these you'll need your broker to facilitate.
Brokers don't work together which is how the aggregate position of all shorts can get larger than the total number of stocks in issue. This is obviously not a healthy situation but the brokers are relying on the collateral to enable them to make good any losses.
Finally some people may have a short as a partial hedge for an overall long position (eg "Crash put protection") so may be net long overall.
In those examples the price of the stock is just a reference point used to calculate the quantity of the cash payment between the two parties so although the short will lose money if the stock rises they are not "squeezed" in the sense they are not desperately searching for stock to buy at any price.
Selling leased stuff is not allowed for a reason.
But houses are non- distinguishable. You don't need to give him back exactly that house, just an identical one.
Also, there is a difference between 100% of the stock and 100% of the float. Because in theory the institutions holding could alter their positions or lend their shares as well.
With GME both of these are abnormally high. Either of them is enough to explain the short squeeze.
Madness?
(Anyway, my actual knowledge of the stock market is limited, but is my scenario a realistic one?)