GameStop surge over? What’s next for those WallStreetBets Redditors?
WASHINGTON – Everyone in the media, financial or otherwise, continues to buzz, cluck, cuss and generally speculate about the wild trading action in once-dying stocks like GameStop (NYSE: GME). Madcap millennial traders seemingly discovered how to play the Wall Street slots via the Robinhood brokerage platform (and others). Together with the wild and crazy WallStreetBets Redditors who allegedly started it all, relative newbies ganged up in force. Their aim for their big GameStop surge: To nuke heavy short positions taken by hedge funds and other Big Shorts in select battered stocks. Like GameStop.
Silver — both the metal and the ETFs that follow it — was supposed to be their next target. The idea was to torpedo the financial system itself, given that big banks allegedly have manipulated silver to remain relatively stable, price-wise, as a way of protecting their interests. This allegation may very well be true, at least in part. But, after an initial surge in the price of silver late last week, the opening gambit of this Second American Revolution operation isn’t working too well at all.
Let’s try to unpack this mess, an aggressive action that as of today, Wednesday, it’s certainly looking like Wall Street’s Redcoats have the rebels on the run.
About those Evil Hedge Funds…
Hedge funds don’t only short stocks. They buy stocks as well. The whole idea of taking both sides of a trade, often emphasizing the short side, is how they got their name. A collection of long and short positions effectively “hedge” an investment portfolio, which is structured to make money in both bull and bear markets. The “hedgies” as I like to call them, will go mostly long or mostly short depending on how they view the likely direction of markets a quarter or three from now. This description is a bit simplistic, granted. But for my purposes here, it’s good enough.
The massive short positions the Redditors chose to attack were carefully developed over time by the usual hedge fund suspects. Namely, the hedge funds that take huge short positions in companies already under noticeable stress. This is a game that’s been played for a long time before most of us (including this writer) were born. It primarily emphasizes short selling, a process that reverses the kind of investing that most Americans are familiar with.
A brief review of the short sale
Normally, you invest in a stock if you think it will make lots of money, boosting its stock price. At which point, you sell the shares and pocket your profit. But in short sales, you “invest” in a stock that you think will lose money, or worse, be forced to file for bankruptcy at some point. But in this case, you “invest” on the downside. You borrow x number of shares from someone else at your brokerage. You then “sell” those shares, and temporarily pocket the cash. If and when the stock you shorted collapses, you close the transaction by buying those shares back at the lower price and deliver the shares back to the original owner or another owner. You get to keep (hopefully) most of the cash you took in on the original short sale.
This transaction can go the other way, of course. (Ask the GME short sellers how that worked out for them.) But when it works, you can make a lot of money, but for quit a bit of risk.
(For more details on short sale mechanics, see my previous article detailing the art of the short sale.)
How did the GameStop surge begin?
Like all hedgies, institutional and otherwise, the already-rich elite dudes who play the short sale game with big money smelled disaster in GME’s fast-sinking, mall-based business. Perhaps they figured that the coronavirus crisis would finish GME off fairly soon. (No mall traffic, indefinitely. And the company was already in trouble for their retail based approach to gaming, which as largely gone online.) Of course, a subsequent GME collapse would enable all the GME shorts to buy their borrowed shares back at a bargain basement price and with a fat profit. That’s because short sellers make a profit when a stock goes down. In this case, short sellers had begun their move early in 2020, well before the Redditors were spurred into action.
Over the last 20 years or so, this game has become more and more fun for these amoral, well-heeled Negative Nellies. They think nothing of slamming their unfortunate target companies down, consigning them – and their hapless employees – to oblivion. Hence, the proletarian fury against their job-killing tactics. But in truth, GameStop, AMC (NYSE AMC), Nokia (NYSE: NOK) and a few others were already in trouble for various reasons.
This kind of predatory activity is all part of the “creative destruction” of capitalism, the short sellers say. But they never bother to think that their destruction of the target company’s stock caused the death of the company before it had the chance to mount a comeback attempt. Too bad. After all, their employees can always find other jobs. Really? In the already job-destroying Biden economy?
Enter the bagholders…
Big short sellers, perma-bears and assorted hedge funds specializing in Big Shorts often wangle tactical interviews on CNBC or Fox Business after they’ve established huge short positions. Then, they appear on the networks’ cable news financial shows and savagely badmouth their target company of the month. In colorful language, they spew out horrifying gloom and doom scenarios aimed at any investors holding those shares and hoping for a their recovery. The hedgies and big short sellers use these interviews to advertise their short positions. Their known financial influence and bespoke suits terrorize small investors (and even some large ones) to force them out of their positions. This only benefits drops the target stock’s price lower and lower, benefiting those already on the short side.
Almost immediately after these interviews, those same hapless, mostly retail investors head for the exits, dumping their shares by the tens of thousands at any price, just to get the hell out. This panic selling, flogged on by those negative short seller interviews, drives the price of the target stock down, down, down. And the rich guys, including the cable TV braggarts, cheerfully wait, with all the cash they’d raked in via their short sales, to buy out all those discouraged bagholders at ever lower prices. In the process, they gradually close out their short positions resulting in huge profits for themselves, and huge losses for the bagholders. Rinse, repeat.
To the best of my knowledge, this big game, enabled by cable news networks who provide a ready pulpit for the hedgies’ reverse pump-and-dump schemes, equals blatant manipulation in the price of stocks they massively short. This, I believe, violates investing laws as I understand them. But to the best of my knowledge, none of these short charlatans have ever been prosecuted for this.
Why can’t everybody play this game?
If you and I pulled these shenanigans, we’d probably be in jail right now. Sense any unfairness here?
The Redditors showed us that this game works two ways. In general, the short sellers were confident you and I will never figure this out because
- We don’t know what’s going on; and perhaps more importantly
- We don’t have enough $$$ to overcome the Big Shorts
- That said, one way that hedgies and other short sellers can get screwed is if people like you and I start piling into a heavily shorted stock like GameStop – with an avalanche of “buy” orders, driving the stock price rapidly to the upside.
Now, the short sellers can see that their easy game can work both ways as well.
How the GameStop surge worked for the Redditors. Thus far…
Which gets us back to the big GameStop surge. Either pissed off investors and / or playful trolls looking to stick it to “the man” got worked up about hugely damaging short positions in the stock of wounded companies. They particularly looked at companies they knew, like GameStop or the AMC theater chain. This armada of mostly millennial malcontents influenced even more malcontents to attack the Big Shorts. They wanted to screw “the man” who arguably screws us all. Because, Injustice.
Pretty soon, we saw the human equivalent of army ants on the march. The March of Redditors. They began to buy the target stock – initially, GME – hand over fist. Accounts large and small bid the price of the stock up at breathtaking speed.
Next, these investors, acting as influencers, told their friends, often via social message boards. They told their friends. Who told their friends, ad infinitum. The GameStop surge began.
All by their individual selves, small investors can’t overpower the Big Shorts. But they can put a substantial amount of a community’s cash behind their individual purchase power. That enables them to collectively kick the price of targeted shares into the stratosphere. A previously hated, widely shorted stock begins to soar, virtually without warning. Result: Big Shorts get screwed.
In a short period of time, the surprise buying frenzy can force the Big Shorts, often hedge funds and wealthy individual investors, to terminate their short positions. They do so by buying back mass quantities of the stock the borrowed and sold short. That closes their position for a tremendous loss. Or, alternatively, their brokerage firms sell their other positions out (which is legal). They keep doing so until those accounts achieve those magic equity numbers I discussed in my previous article.
None of this GameStop surge craziness is actually illegal, at least on its face
There’s nothing illegal about this, at least on the surface. (A directed conspiracy might be another story, and that’s still a possibility.) But the big short-sellers and hedge funds are hopping mad that the unwashed (including former #OccupyWallStreet vets and pissed off MAGA Deplorables) are spoiling their reverse pump-and-dump game.
That is, the usual game the wealthy elites used to take advantage of the unwashed. The latter still own these dying stocks and are afraid to exit them for a tremendous loss. So the unwashed end up forced out for a loss anyway, courtesy of the panic set by the Big Shorts who routinely shill their short positions on cable TV business shows.
The more flamboyant Big Shorts love this stuff. It’s how they continue to make a lot of easy money. So, logically, neither they nor increasingly alarmed Federal officials are very happy about a new, purportedly dangerous element getting into the game. That’s why they, and perhaps the Feds, have put pressure on certain brokerage firm that court newbie millennial investors, like Robinhood – a firm whose excesses I warned about fairly recently – to halt the lay traders’ access to, for them, a fun new game.
Robinhood: A new villain for the Redditors?
Robinhood recently instituted a policy whereby current holders of GameStop shares, including the Redditors, can’t buy more.*
They can only sell the shares they have. The Redditors are furious. The GameStop surge continues to leak Wednesday like a punctured balloon.
On the flip side, Robinhood had little choice. Wall Street bigwigs and by Federal securities rules and regulations forced Robinhood to rein in their Reddittors. The reason? Trading action in at-risk accounts risked bringing Robinhood down due to capital requirements I won’t try to describe here. But, just think: Real Estate and the Great Recession.
This article is already long enough, so let’s break for now. I’ll be back soon with the final article in this series, in which we move beyond the GameStop surge and into Silver Madness. And watch as the Redditors’ game begins to unravel.
*Note. Robinhood’s policies seem to change day-by-day, so double-check their site or current news reports
for their latest position.
– Headline image: Cartoon by Garrison. Reproduced with permission and by arrangement with Grrrgraphics.com.
Resized to fit CDN format.