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Comment by raxxorrax | Hacker News Reader

I think it should started a discussion about some excesses of the stock market. Rich people can look for battered companies and severely profit from their accelerated demise which some people wanted to fight against for once. Out of their own motives for profit or just for fun to be able to at least once stick it to speculators looking for easy profit. That trading was halted and "corrected" proved they had an impact.

I don't think the stock market serves a public function with these mechanisms in place and needs further regulation.

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> people can look for battered companies and severely profit from their accelerated demise

Gamestop is one of those companies where the demise has been severely delayed IMO; they could've seen the future years ago but chose to stay with their legacy business of selling games in physical stores. Online game stores do what they do but with much lower costs and a much better business model.

There are two ways forward for Gamestop IMO but neither is very positive:

- They try to compete with the giants in the online gaming market, like Steam. I can't see them bootstrap their way into that, Steam and the others have too much network effect going on and GME has not shown any real talent in the online/tech domain.

- They try to revitalize their offline presence. I don't see this happening either. There has been a decades long trend of everything moving from off- to on-line and I don't see that changing anytime soon.

For anyone who agrees with the above assessment, the conclusion would be that the future for Gamestop is not very bright. Depending on the timescale you think it is going to play out, being short is an entirely valid position to be in. Personally, I think the sentimental memories of the ~25-~45 years old generation will keep it alive for a decade or so more.

GameStop has pivoted to some extent. It's incredibly rare that I go into one of their stores, but the last time I did it was less of a games store and more of a gaming merchandise store. Their acquisition of ThinkGeek and subsequent selling of those products in stores is satisfying a niche that nobody else (apart from maybe the mom & pop comic book store) seems interested in.

>it was less of a games store and more of a gaming merchandise store. Their acquisition of ThinkGeek and subsequent selling of those products in stores is satisfying a niche that nobody else (apart from maybe the mom & pop comic book store) seems interested in.

Maybe it's just my personal preferences, but I can't imagine myself or anyone I know buying enough "gaming merchandise" in significant numbers. If I need a game, it's either digital, or physical through amazon with same day delivery. It's the same with other gaming-related merchandise. I go for whatever's cheaper/on sale, which is usually bestbuy or amazon.

It's not an amazing idea but its believably a sustainable business. Not a valuable a business though.

I’m always surprised how much random gaming merch Target displays.

They are also opening a nft store, no?

Maybe they will offer a simoler api to nfts and transactions?

Agreed. But I don't really believe that accelerating their demise is a large benefit to anyone aside the capital "investor" getting more money. The company has to do a reorientation, but that could be cut short by the stock market. Don't kid yourself that you are providing anything substantially important to further development.

The stock market can't cut a company short. Even if the stock price goes to $0, the company still exists with all of it's assets, contracts, and employees. The stock price only matters if they do a secondary offering, and to a lesser extent for equity based employee compensation.

There is this thing called a "hostile takeover," where you buy voting shares and then liquidate the company, which becomes very easy when the share price is $0.

I mean look at Citigroup.

C was $564.10 at the end of 2006. By early 2009 it was $10.20 - that's about a 98.2% reduction in the stock price. That's a much larger destruction of capital than GME ever was.

Do you imply that it was excessive short selling between 2006 and 2009 that lowered the price of Citigroup? It seems much more likely that the 2008 financial crisis had a lot to do with it and that Citigroup (which famously only escaped bankruptcy due to a government bailout) indeed lost 98.2% of its equity value.

So it wasn't the stock price falling that brought the company low, it was the company failing that brought the stock price low.

No; not suggesting this has to with excessive short selling. I’m just supplying a data point to support the point that a large decrease in stock price needn’t have a material affect on the ability of a firm to operate.

Didn't they make a 1 for 10 split in between? Still a reduction of course.

The purpose of stock markets is to find the "correct" price for a stock. To that end, it needs to be possible to express both bullish and bearish views. However, doing the latter is already more difficult because in order to short the stock, you need to borrow it first, and you need to pay for those borrowed shares for as long as you keep holding them. Furthermore, those borrows can be pulled at any time, forcing you to cover at the most inopportune of times. There are also things like Reg SHO Rule 201(b) ("Uptick rule") that further complicate shorting a stock. Regulators have even been known to ban short sales in certain names outright like they they did for financial stocks during the 2008 financial crisis.

If anything, selling short needs to be made easier as it represents an essential corrective. And this ultimately serves the greater good too as it ensures that the price of a stock is correct and investors don't overpay, which will inevitably lead to losses for them. A good recent example of what happens otherwise is Wirecard. In 2019 the German BaFin enacted a ban on short sales in the stock of the company after reports had been published that were essentially accusing them of fraud. In the end, those reports turned out to be true, and the company collapsed less than 18 months later. The stock fell from over EUR 150 to virtually zero and investors lost pretty much everything. They should have listened to the short sellers rather than fight them.

There are also no "easy profits" in short selling. They only make money if they are right. There are people who have been calling for the immediate collapse of Tesla for the last decade or so. Others have been trying to short Amazon, Google, Apple, Microsoft, because they think that these companies are completely overvalues. Most of these people are probably bankrupt by now.

But GME isn't any of those companies. They are a failing brick and mortar retailer that is boxed in by Steam on one side and Amazon on the other. They have repeatedly attempted to transform the company over the last decade without success. The fact that their plan is to launch some NFT market place, a field in which they have no experience and that is already crowded by established players like OpenSea, demonstrates how much their management is completely out of ideas. And if the shorts make money from the GME stock, it just means they were right.

You don't need short selling for a stock's price to drop. Markets for everything else use the normal mechanism of "if no-one is going to buy this at this price, I need to drop my price if I want to sell it".

For example: you can't go to the bakery, borrow a loaf of bread, sell it to a passing punter, and then pay the baker at 5pm when they drop the price to get rid of their stock before it goes stale.

The rest of the economy manages to find the "correct" price for things without shorts. So could the stock market.

You could absolutely do that bread trade (if you could convince a baker to lend you a loaf of bread), but then a smart baker wouldn't drop their prices at the end of day because they know a short seller needs to buy a bread to cover their position. The example is also wrong because stocks don't go off like bread does. For commodities that keep better like frozen orange juice or steel you can definitely borrow (for a price) a few hundred tons of most commodities if you want to short it.

For some reason people think borrowing a stock and selling it is some super nefarious plot to kill companies, but apart from some special circumstances like secondary offerings or employee equity compensation there is really no reason a company should worry overly much about their stock price. If the company keeps making a profit, no amount of short selling can make it go bankrupt.

But one of the GME points was (is?) that stock is sold without being borrowed first. Or being borrowed without permission and multiple times...

If you sell empty bags on the street, promising the buyers there is bread inside, only to collect those empty bags back when the buyers throw the (supposed) bread away because it became worthless, is not good business. You're the only one profiting, both the bakers and the buyers are loosing money.

I don't understand why you seem to be so sure that there is indeed "no bread inside"? If an investor buys a share of GME on the stock market, it does not matter at all if they buy it from a shorter, a retail investor or even from GME itself. A share is a share, there are no "empty bags" being sold. Shares also don't go off like bread, so if you get your share back at the end it is like nothing happened: you still own one share and it is of exactly the same quality as before. Unless you are a VERY large investor, having your broker lend out shares also has zero impact on being able to sell it at any time.

A short seller making a bet that a stock goes down by selling the stock is simply the same (but in reverse) as someone betting the stock will go up by buying a stock. The underlying business is not affected at all.

The parent's point was that it does matter if it was sold by someone who had never secured a share of their own to sell in the first place, which puts artificial pressure on prices.

(And before someone jumps in to give me the speech about how the future of civilization depends on market makers being able to fabricate shares long enough to cover: Yes, I know about the exception that permits this. The purpose of my comment was just to clarify what the argument was and that the parent of this comment was not replying to it.)

It does put (a little) pressure on prices, sure. Borrowing money to buy stocks puts a little extra upward pressure on prices. But neither is illegal, neither brings guaranteed profits (naked shorting is regulated so much exactly because of the risks to unrelated market participants if the stock goes up) and neither has the capability to directly harm the underlying company.

Again, the parent was talking about fabricating non-existent shares, not borrowing existing ones.

>> The purpose of stock markets is to find the "correct" price for a stock.

Is it? Who's purpose?

The main purpose of an IPO is (was?) financing. IE, raising money for the company operations... like a bank loan, VC investment, etc. In practice, many of today's IPOs are companies that don't need to raise money (anymore). For those companies, their main purpose when doing an IPO is usually liquidity. IE, letting founders, investors and such cash their shares... or continue owning them with the added benefit of market prices to validate the value of their wealth.

Your argument is quite mainstream, but I can't see how anyone would make it except to justify short selling. It seems to me there's a lot of "you sure about that?" in the whole thing.

Are you sure "finding the correct price" is an actual need? Who needs this, and why? Are you sure short selling makes for better prices?

Liquidity is a similar argument made in favour of derivative HFT and such. I also think its (probably/usually) quite bogus. Do stock markets even have liquidity problems? Stocks are insanely liquid. That's what they're for.

> Who needs this, and why?

Investors (as opposed to speculators) and anyone interested in general economic efficiency.

After the IPO, a stock ultimately represents a claim on a future revenue stream, and as such the "proper value" would be the (proportional) NPV of the company's future income. To the extent the market price doesn't reflect this, it represents inefficient allocation of investment resources.

Unlike bonds, an equity's future income is very hard to predict, so providing that pricing information, along with liquidity, is what ostensibly distinguishes Wall Street from a casino.

Personally, I don't care about short selling. I trace the root of the problem to the fact that dividends are taxed much more harshly than capital gains because capital gains don't incur taxes until sale, so they compound better. This incentivizes mature companies to retain earnings and grow through M&A (including of competitors), leading to this glorious present of megaconglomerates and oligopolies we are now living in. My prescription would be to incentivize dividends and discourage retained earnings so that some connection to reality is re-established in the market.

Another of the many problems with megaconglomerates, aside from them being anticompetitive, is that it is much harder to accurately predict the combined future income of 100 aggregated businesses than just one, so their very existence distorts prices all the more.

Is it crazy to think dividends should be a requirement for companies after so many years or face delisting? Along with flipping the taxes of capital gains vs dividends.

I don't think it would be quite as simple as that, but that would be better than nothing, definitely.

Loosely, I think corporations should have a progressive income tax based on net income (defined in such a way as to prevent Hollywood-style games) or maybe market cap, to disincentivize getting huge and to encourage divestment. Dividends, I believe, usually already have a nominally lower tax rate than capital gains, but the fundamental problem is related to compounding. I therefore think the capital gains rate should be much, much higher and the dividends rate probably somewhat lower.

> If anything, selling short needs to be made easier as it represents an essential corrective

I disagree since that would give people decision making capabilities who are the least qualified to do so.

> And this ultimately serves the greater good too

You can believe that but you also don't have to.

We don't have to lie to ourselves. Stocks are highly emotional and investors regularly overpay when they buy into hype. I am not against short selling, it is a trade like any other. But let's keep things honest.

>I disagree since that would give people decision making capabilities who are the least qualified to do so.

It's unclear why investing in the belief something is overvalued demands a different or larger set of decision making capabilities than the belief is it undervalued.

Selling short carries much, much more risk than a simple purchase-and-sale. Put simply: if I buy a stock, the most money I can lose is the principal I put in (a stock can’t drop past zero), and any losses I take don’t damage others. In the case of a short sale, my potential losses are limitless (while a stock can’t drop past zero, there’s no potential ceiling), and the party lending their stock may lose out if I’m unable to cover a call.

> Rich people can look for battered companies and severely profit from their accelerated demise which some people wanted to fight against for once

You’re describing accelerating creative destruction. It’s painful but good. Prevent it entirely and you cause stagnation.

We can make the human impact more compassionate. But trying to stop it is folly.

Perhaps, but honestly, I think Schumpeterian creative destruction is... at this point, more of an idealistic take.

It exists, but it isn't a permanent feature of the big fish economy that stock markets represent. There are processes like online travel retail overtaking travel agenting. That's a sort of creative destruction. Mostly though, travel agents were an SME sector. Like the proverbial (and literal) restaurant trade, they're subject to market forces in this way and the theory often plays out in practice. Heavy price competition. Creative destruction. Etc.

Banking OTOH, doesn't really have a creative destruction dynamic to speak of. Most auto manufacturers are what and who they were 20 or 50 years ago. Big tech, also, doesn't compete like restaurants do. It's more about holding control via network effects, platforms or whatnot. Avoiding head to head competition and market price dynamics entirely.

GME fell somewhere in the middle. They're kind of restaurant like, but also relatively big and publicly traded.

In any case, the financial meta game can often be more relevant and determinant of reality than market dynamics as per Schumpeter, JS Mill and the like.

> Schumpeterian creative destruction is... at this point, more of an idealistic take

Schumpeterian creative destruction is an ideal. But the process of innovation it describes is well documented in the study of entrepreneurship, venture capital, new firm formation and the industrial dynamic of new entrance.

> isn't a permanent feature of the big fish economy that stock markets represent

Most of the stock market isn’t Goliaths. Formation and destruction still reigns in most of the economy. There, short sellers add value. (I’m more sceptical of private equity and its leverage tactics.)

> Banking OTOH, doesn't really have a creative destruction dynamic to speak of. Most auto manufacturers are what and who they were 20 or 50 years ago

Banking and auto manufacturers share a history in being bailed out. Big Tech looks like a classic market failure, though Facebook’s stumbling gives me pause on that conclusion.

>> Schumpeterian creative destruction is an ideal. But the process of innovation it describes is well documented in the study of entrepreneurship, venture capital, new firm formation and the industrial dynamic of new entrance

I'm not sure we disagree, at least not much.

What I meant is that descriptions/theories/models/takes^ such as these are an ideal, I agree. The extent to which this ideal describes what appears to be a dominant process in the part of the world we're describing varies.

What I'm (halfheartedly) arguing is that the Schumpeterian description currently, isn't so dominant. At least, it's not dominant enough to be the basis for understanding short selling... I don't believe. In fact, the share price of a company isn't necessarily very important to the operation of the company... in theory. Short selling is, also in theory, not necessarily all that impactful on share prices.

>>Banking and auto manufacturers share a history in being bailed out.

True, but again, this is markets in practice. The long term, perfect free market ideals are not something that generally exist in reality for a lot of reasons... both good and bad depending on your perspectives.

I don't think Schumpeter meant for his ideas to apply only in hypothetical markets. Creative destruction was as a powerful force, for example, in the early decades of auto manufacturing. Banking has always been somewhat perplexing to economists, who can't really agree on whether or not they should be considered "firms."

We might disagree about short sellers vs leveraged buyouts. I'm more skeptical of short selling and derivatives value add, more willing to entertain the idea that leveraged buyouts have a useful role. At least leveraged buyouts relate directly to financing business activities.

^Economists, atm, seem to like the term "story."

You propose certainty where there is none and I am not talking about preventing it outright. I also do believe that it a profitable endeavour with very little general advantages as it is right now. That is more parasitic than constructive, so in that regard it fails to justify itself and regulation is required. Little would stagnate if modern fintech would be scraped almost entirely. Human impact should be secondary here.

Additionally creative destruction can also mean that I destroy the wealth of those that currently do profit from canceling companies prematurely. It is applicable to economies rebuilding after a war, not applicable to Gamestop. That is an excuse for exploitation.

>I also do believe that it a profitable endeavour with very little general advantages as it is right now.

the "advantage" here is that the true value of the company is reflected in the market, so that capital is allocated to the best companies rather than the most hyped ones.

>That is more parasitic than constructive

Can you explain how it's "parasitic"?

>Additionally creative destruction can also mean that I destroy the wealth of those that currently do profit from canceling companies prematurely

Isn't that what happens if someone thinks a stock will go down, shorts it, and gets it wrong?

> You’re describing accelerating creative destruction. It’s painful but good.

There is this aspect, true - and necessary. An equal folly is to believe this is the only thing, or even the only significant thing, going on.

> I don't think the stock market serves a public function with these mechanisms in place

The purpose is precisely to zoom in on the correct value of a stock (via crowdsourcing and putting your money where your mouth is), and thereby allow investment to flow to the most advantageous opportunities.

Sufficient volatility will cause automatically triggered halts. It's required by regnms.

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