Tag: GameStop

The Reddit Inspired Attack on Shorts Exposed Wall Street Sleaze and Corruption

Mary Pat Campbell

Link: https://www.thestreet.com/mishtalk/economics/the-reddit-inspired-attack-on-shorts-exposed-wall-street-sleaze-and-corruption

Excerpt:

The big players are overleveraged because the Fed encouraged them. The whole thing is propped up by stimulus and bailouts of consumers and companies alike.

This coordinated short squeeze pushed two hedge funds and Robinhood to the brink. It revealed for all to see how broken the stock market has been..

You know it’s serious when the New York Times puts a stock chart at the top of the page in a Saturday morning edition.

Traders who follow prudent strategies are ridiculed and have zero returns. The Fed is the biggest manipulator out there.

Those traders on Reddit have succeeded in showing how completely broken the stock market is.

The Fed is a big proponent of this through its monetary policy for the wealth effect. It is responsible for reckless leverage, crazy trading strategies, and the huge incentive to manipulate.

Author(s): Mish

Publication Date: 1 February 2021

Publication Site: Mish Talk Global Economics Trend Analysis

Naked Shorting is Illegal: So How the Hell was GameStop 140% Short?

Mary Pat Campbell

Link: https://www.thestreet.com/mishtalk/economics/naked-shorting-is-illegal-so-how-was-gamestop-140-short

Graphic:

Excerpt:

It is illegal to be naked short in excess of float except for market makers who have to take the other side of a trade.

It was not the market makers who were naked short. It could be in theory, but not in this case, at least not yet.

Hedge funds wanted to short and they have to borrow stocks to do so.

The hedge funds get those shares from somewhere. Where? The brokerages and the market makers such as Goldman Sachs.

It should be the responsibility of the brokerages and market makes to not let hedge funds get 140% short. But they did, and I believe on purpose.

Since the public cannot be 140% long, except via options, who was effectively long the other 40% of the shares?

The brokerages and the market makers. To get even more shares for themselves, they restricted trading.

So while these Redditt traders did well, the market makers also gained immensely on the meteoric rise. The more the merrier. They screwed the hedge funds big time and purposely so.

A side artifact of points #1 and #2 is when the shorts are all squeezed out the market makers are the only ones who are short.

When that happens, the bids plunge and the market makers cover lower. 

Author(s): Mish

Publication Date: 30 January 2021

Publication Site: Mish Talk Global Economics Trend Analysis

Robinhood, Reddit CEOs to Testify Before Congress on GameStop (GME)

Mary Pat Campbell

Link: https://www.investopedia.com/robinhood-reddit-ceos-to-testify-in-congress-on-gamestop-gme-5112714

Excerpt:

The Committee on Financial Services of the United States House of Representatives has scheduled a hearing on “recent market volatility involving GameStop [Corporation (GME)] stock and other stocks.” The hearing will be held virtually, starting at 12 noon Eastern Time on Thursday, Feb. 18, 2021. Among those called to testify are Vladimir Tenev, CEO of online trading firm Robinhood Markets, Inc., and Steve Huffman, CEO and co-founder of social media community and online forum site Reddit.1

….

In addition to singling out hedge funds for criticism, it is likely that Robinhood CEO Vladimir Tenev will face hostile questioning about his company’s actions in the GameStop affair. In particular, the committee memorandum notes that payment for order flow (PFOF) has been Robinhood’s chief source of revenue since its inception and that its decision to restrict trading in GameStop and other stocks may have been influenced by its business ties to investment firms that were caught in short squeezes on these stocks.4

The committee memorandum also notes: “In December 2020, the SEC charged Robinhood with making misstatements about the firm’s receipt of payment for order flow and for failing to comply with its duty to ensure that customer trades were executed on the best possible terms. Robinhood’s failure to satisfy its best execution obligations resulted in more than $34 million in aggregate customer losses. Robinhood was censured and agreed to pay $65 million to settle the action.”

Author(s): MARK KOLAKOWSKI

Publication Date: 17 February 2021

Publication Site: Investopedia

GameStop frenzy mastermind Roaring Kitty will testify in Congress on Thursday alongside the Reddit and Robinhood CEOs and two hedge fund managers after amateur traders pushed shares up 1,800% and cost Wall Street $19billion

Mary Pat Campbell

Link: https://www.dailymail.co.uk/news/article-9259527/YouTube-streamer-Roaring-Kitty-testify-GameStop-alongside-hedge-fund-managers.html?ito=social-twitter_dailymailus

Excerpt:

The YouTube streamer known as Roaring Kitty, who helped drive a surge of interest in GameStop Corp , will testify before a House panel on Thursday alongside top hedge fund managers.

The House Financial Services Committee is examining how a flood of retail trading drove GameStop and other shares to extreme highs, squeezing hedge funds like Melvin Capital that had bet against it.

The witness list was announced on Friday by Representative Maxine Waters and includes Keith Gill, who also goes by Roaring Kitty, Robinhood Chief Executive Vlad Tenev, Citadel CEO Kenneth Griffin, Melvin CEO Gabriel Plotkin and Reddit CEO Steve Huffman.

Author(s): REUTERS and JOSH BOSWELL

Publication Date: 14 February 2021

Publication Site: Daily Mail UK

GameStop Mania Is Focus of Federal Probes Into Possible Manipulation

Mary Pat Campbell

Link: https://www.wsj.com/articles/gamestop-mania-is-focus-of-federal-probes-into-possible-manipulation-11613066950?mod=djemwhatsnews

Excerpt:

The Justice Department’s fraud section and the San Francisco U.S. attorney’s office have sought information about the activity from brokers and social-media companies that were hubs for the trading frenzy, the people said. Prosecutors have subpoenaed information from brokers such as Robinhood Markets Inc., the popular online brokerage that many individual investors used to trade GameStop and other shares, the people said.

GameStop shares surged from about $20 to $483 over a period of two weeks in January. The stock has since fallen to around $50. It was fueled by an army of bullish individual traders exhorting one another on Reddit to buy the shares and squeeze hedge funds that bet the price would fall. Traders who bet stock prices will decline are known as short sellers.

Author(s): Dave Michaels

Publication Date: 11 February 2021

Publication Site: Wall Street Journal

Elizabeth Warren and the SEC Should Let the GameStop Lulz Go On

Mary Pat Campbell
Elizabeth Warren and the SEC Should Let the GameStop Lulz Go On

Excerpt:

Of course, if there’s one thing America’s national political class does not like or understand, it is lulz. Lulz are inherently chaotic and disorderly, and that tends to cause headaches for most anyone with a bureaucratic bent. But it also produces reactions like one we saw yesterday, in which Sen. Elizabeth Warren (D–Mass.) used the GameStop episode to call for intervention by the Securities and Exchange Commission (SEC). 

It’s not at all clear what the SEC could do to stop what is essentially a financial market flash mob, aside from ensure that no large institutional investors are secretly in on the WallStreetBets side of the trade. If that’s the case (and it may well be, though who knows), then the SEC will probably end up taking some sort of action based on existing rules designed to prohibit fraudulent pump-and-dump schemes, where stocks are artificially boosted and sold off. 

Author(s): Peter Suderman

Publication Date: 28 January 2021

Publication Site: Reason

GameStop Mania Reveals Power Shift on Wall Street—and the Pros Are Reeling

Mary Pat Campbell

Link: https://www.wsj.com/articles/gamestop-mania-reveals-power-shift-on-wall-streetand-the-pros-are-reeling-11611774663?mod=djemwhatsnews

Excerpt:

Long-held strategies such as evaluating company fundamentals have gone out the window in favor of momentum. War has broken out between professionals losing billions and the individual investors jeering at them on social media. Meanwhile, the frenzy of activity is stirring regulatory and legal concerns, as well as the attention of the Biden administration. The White House press secretary said on Wednesday that its economic team, including Treasury Secretary Janet Yellen, is monitoring the situation.

The newbie investors are gathering on platforms such as Reddit, Discord, Facebook and Twitter . They are encouraging each other to pile into stocks, bragging about their gains and, at times, intentionally banding together to intensify losses among professional traders, who protest that social-media hordes are conspiring to move stock prices.

Author(s): Gunjan Banerji, Juliet Chung and Caitlin McCabe

Publication Date: 27 January 2021

Publication Site: Wall Street Journal

GameStop Is a Bubble in Its Purest Form

Mary Pat Campbell

Link: https://www.wsj.com/articles/gamestop-is-a-bubble-in-its-purest-form-11611756239?mod=djemwhatsnews

Graphic:

Excerpt:

The scale of trading in GameStop shares is as extraordinary as the daily gains in price, suggesting widespread disturbance to people’s judgment. On Tuesday, $22 billion of shares changed hands, more than in Apple, the world’s largest company, and double GameStop’s market value. Adam Smith, the founder of economics, called speculative manias “overtrading,” and this is what they look like.

The hope of getting rich is only part of what is inflating the bubble. Mr. Kindleberger argued that speculative manias needed innovative sources of financing, and the private traders on r/WSB have one: the shift last year to make trading in options free on Robinhood and several other platforms.

Author(s): James Mackintosh

Publication Date: 27 January 2021

Publication Site: Wall Street Journal

Should we stop GameStop?

Mary Pat Campbell

Link: https://tinyletter.com/acs171/letters/known-unknowns-41

Excerpt:

But the whole thing is being framed in an odd way—i.e., that the individual retail investor is rising up against the big, bad hedge funds. This is a compelling narrative, and that’s why it’s all anyone is talking about. And I suppose that could be the takeaway after a single day of trading. But making money in markets requires knowing when to get out (or having power friends who will lend you money when you need it), and I worry about some people betting money they don’t have without realizing the risks that they’re taking on. Taking down a hedge fund is only fun when you make money at it, and we don’t know whether these day traders care so much about taking down big whales until they actually lose money while doing so. And these funds have much deeper pockets and access to a lot more capital. It’s sad to say, but the game is rigged in their favor. So, as satisfying as it may be in the short run, I don’t see it ending well.
 
It feels like all of these discussions about risk, class, and fairness are dancing around the real question here, a question few will dare to ask: Should retail investors be able to buy individual stocks? Or should we only be able to buy mutual funds?
 
Investing in individual stocks is risky, and most people would be better off owning an index fund. If they did, they’d make more money on average and face less risk at the same time. Day-trading options are even riskier. So is shorting. My mentor, Robert Merton, has likened owning an individual stock to buying a single piece of car—it’s pretty useless, especially if you don’t know what you are doing. After all, a security’s value is largely about how it contributes to your entire portfolio as a whole.

Author(s): Allison Schrager

Publication Date: 1 February 2021

Publication Site: Known Unknowns

Buy or sell: GameStop frenzy has Washington teasing action on Reddit vs. Wall Street

Mary Pat Campbell

Link: https://www.nbcnews.com/politics/politics-news/buy-or-sell-gamestop-frenzy-has-washington-teasing-action-reddit-n1256142

Excerpt:

A number of Democrats and Republicans united in opposition this week to the strict limits imposed by Robinhood and other online stock brokerages on the purchasing of GameStop and other stocks swept up in a Reddit-fueled trading frenzy.

Disparate members of Congress like Alexandria Ocasio-Cortez, D-N.Y., Ro Khanna, D-Calif., Ted Lieu, D-Calif., Ken Buck, R-Colo., and Sens. Pat Toomey, R-Pa. and Ted Cruz, R-Texas, were among those who criticized the move, with many calling for hearings that Democratic leaders say will soon take place in both the House and Senate as what began as an internet movement continues to roil Wall Street.

Lawmakers trained attention on the volatility surrounding GameStop’s stock as several others this week. The stock climbed from $4 only a few months ago to more than $400 this week, juiced by an online movement not dissimilar to others that have broadly altered the political landscape in recent years. At the same time, hedge funds that made large bets on GameStop’s stock cratering — known as “shorting” — began to pile up big losses. Then the brokerages instituted limits, leading to charges of collusion with the larger financial entities facing big losses.

Author(s): Allan Smith

Publication Date: 29 January 2021

Publication Site: NBC News

No, WallStreetBets isn’t robbing Wall Street to help the little guy

Mary Pat Campbell

Link: https://arstechnica.com/tech-policy/2021/01/the-gamestop-bubble-is-going-to-hurt-a-lot-of-ordinary-investors/

Excerpt:

There’s just one problem: the billions of dollars in new “wealth” people have supposedly gained is mostly in the form of inflated GameStop stock. Before they can actually use that wealth, they need to convert it to cash. And if a lot of people start selling their shares, the stock will crash. Most of that GameStop “wealth” will evaporate, with many shareholders getting a fraction of the value they expected.

Meanwhile, if GameStop’s stock price starts to fall, short sellers will start to make money. Any short sellers who maintained their short positions through the bubble will make back most of what they lost.

Sooner or later, GameStop’s stock is going to return to normal levels. And when it does, we are likely to find that little wealth was actually transferred from wealthy hedge fund investors to the general public. Short losses as the stock appreciated will be largely balanced out by short gains as the stock falls. The gains of GameStop shareholders as the stock appreciates will be balanced by losses as the stock declines.

Author(s): TIMOTHY B. LEE

Publication Date: 29 January 2021

Publication Site: Ars Technica

Why Brokers Had to Restrain Trading in GameStop Shares

Mary Pat Campbell

Link: https://www.wsj.com/articles/why-brokers-had-to-restrain-trading-in-gamestop-shares-11612201242

Excerpt:

When clients trade, especially on margin, they use the broker’s money to play. Imagine a client buys 100 shares of GameStop for $400 a share, using $20,000 of his own money and borrowing $20,000 from Robinhood. If the stock drops from $400 to $120 (as it did on Jan. 28), the client’s position may be sold for $12,000 due to the margin violation, leaving Robinhood trying to collect an unsecured $8,000 debt. Good luck. Multiply this by hundreds or thousands of similar clients. Option trading is worse because the leverage is much greater.

The broker’s risk is asymmetrical: If half its clients are winning big by buying during a short squeeze, while its short clients are suffering losses they can’t pay, the broker can’t offset these gains and losses, but must pay the winning clients while possibly eating the losing trades. It is rare, but brokers go bankrupt during market events like this.

Brokers therefore are subject to strict financial requirements, including that they maintain large security deposits at the clearinghouses. When risk rises, clearinghouses raise their requirements, even intraday. On Jan. 28, when GameStop dropped from $483 to $112, the clearinghouse DTCC raised requirements by an aggregate $7.5 billion. Brokers had to post that money to DTCC whether or not their clients had it.

Author(s): David Battan

Publication Date: 1 February 2021

Publication Site: Wall Street Journal