Trolling Wall Street

[cellio]

This is oddly fascinating, even though I don't understand all of it. If I understand correctly:

A "short" is a bet that a stock price will fall: you promise to sell it on a certain date at a certain price, but you don't actually own the shares. On that day, the idea goes, you'll buy the shares at the lower price you expect and then turn around and fulfill your contract, pocketing the difference. I don't know if regular folks like you and me can do that, or if only investment funds and professional stock-market people can. There are some rules that are different for the big players and the little folks; I don't know if this is one of them.

So... some big Wall Street hedge funds (one often mentioned is Melvin Capital) placed vast quantities of shorts on a gaming-gear company that isn't doing well (GameStop). A bunch of people on Reddit observed this and said to Wall Street: hold my beer.

They bought the stock. Hundreds of thousands of people on Reddit bought the stock. At that scale, any individual participant doesn't have to buy a lot; you could play this game for $20 back when it started. And it's not like you can spend that $20 going out to a movie right now, so there was probably an untapped market of bored people looking for fun.

Did I mention that this subreddit bills itself as "like 4Chan for investers"? And did I mention that Elon Musk tweeted about it to his 42 million followers? That subreddit has way more than "hundreds of thousands" of subscribers now.

What happens when lots of shares of a stock start getting bought? The price goes up. The price for GameStop shot up from less than $20 to, at one point, $347. And I think it was higher; I was only able to find daily closing prices, and the hour-by-hour swings have reportedly been wild. There's some background information on CNet.

The stock price, of course, won't stay high. It's a ridiculous price for that company, and eventually the market will bring it back down. But in the meantime, those hedge funds holding shorts have lost billions of dollars -- remember, they still have to buy the stock on "short day", at whatever price is then current, and then sell it for $10 or whatever the bet was.

The Redditors and crew, meanwhile, have turned their sights to other stocks; Blackberry and AMC have been mentioned as other companies in trouble that investors have considered prime candidates for shorts. Stock exchanges and Robinhood have stopped trading at times or restricted purchases.

By the way, the people rallying against Wall Street have a song -- a sea shanty:

Watch on YouTube

I don't know what a "tendieman" is (Google has been unhelpful), though I assume it has to do with tendering, in this case selling at the right time. Ryan Cohen is a major investor in GameStop who's recently been investing more and trying to change the company's business strategy, though I can't tell if he has an actual position there. (The song implies he's on the board.)

As far as I know, the people organizing on Reddit and wherever else aren't doing anything illegal. They're not insider traders with privileged information -- quite the opposite. They're just...massively trolling big investors who traditionally make a lot of money with these kinds of bets. Some of them seem to be in it for the laughs; some are trying to make money riding this (but a lot of them will probably lose money, including anybody who tries to join in now). The line between a movement and a mob can be fuzzy; I'm not sure which this is. I wonder what the other damages are going to be. They're pitching this as little people versus big investors, but will little people with modest retirement funds end up taking some of that damage in those funds too? Or are hedge funds more esoteric and not usually part of IRAs and suchlike?

Bizarre, fascinating, and unsettling.

Comments

[siderea]

I have been following this intensely. Full disclosure: I am on a side here, and while I am as of yet not financially biased, it is not for want of trying.

I am given to understand that mere mortals don't have access to the hedge funds. Nobody's 401k is involved, this is strictly rich people's money. I don't know this for certain, and would certainly like to hear to the contrary if anybody knows better.

This isn't just trolling, this is turned into big-game hunting. For a whole lot of participants, this is some flavor of personal. Grudges at stake are:

• The sorts of folks who hang out in the relevant forum on Reddit are generally "little guys", and as a class they feel (and probably legitimately are) hard done by by the "big guys", particularly in differential rules and differential enforcement of the rules. They started out that way, and the Robinhood dickery and initial hostile press coverage has converted a lot of other people to their possition.

• Some people have posted basically manifestos in the relevant forum about the poverty they grew up in and the devastation to their family because of the financial crisis of '08, and watching the hedge funds get bailed out. This is apparently for some people, revenge. They don't care if their money burns, if it burns down a hedge fund, too. Apparently huge numbers of people are buying GME in solidarity with this position: tiny amounts, comparatively, but the forum is up to 5 million members.

• This is being compared to Occupy Wall Street: open class war, fought in the stock market. It's being described as "the biggest redistribution of wealth you'll see in our lifetime", and "preserving jobs" (by saving GameStop).

• Quite a lot of the relevant forum on Reddit is gamers, and many are personally nostalgic about GameStop. Little appreciated detail of all of this: shorting a company's stock can bankrupt it. There are Redditors who bought stock in GameStop because they had fond memories of the company, particularly from childhood, and were pissed about it being targeted for liquidation.

• I have no idea if anybody else out there finds this sort of predation on struggling
companies by short-sellers odious, but I remember the 80s, and I just wish somebody would move aside long enough for me to stick my spear in, too.

On top of the above, one of the little discussed positive drivers of the Redditors is that this really all because of one guy, who did amazing due diligence. He figured out back in 2019 that GameStop was undervalued, and would probably go up, not down – if the shorters didn't kill it. So he put his money where his mouth was: $55k on it. And he told the forum; the members laughed him out of it. But he kept talking it up, and when six months later, he lost money on it, and they mocked him, he doubled down. Over the last year, other Redditors became convinced of his analysis – and, hell, it was trading at, what, $9/share? – and bought in. That guy? His stock in GME was worth 50 million dollars on Wednesday.

He is, obviously, being hailed as the greatest hero the Reddit traders have ever seen. And while he's liquidated a little – 13 million – he's holding the rest. So buying in and holding to "ride the rocket" with him, is sort of like cheering on a sports team, and getting to be a part of what he and other early investors are doing.

And people have done things like posting screen shots of themselves paying off their student loans, and leaving tearful grateful messages about being able to pay off their medical debt.

But mostly the Redditors are not selling. The whole point is to hold hostage the stock that the short sellers so desperately need to close their positions. People are speculating aloud that it might break $1000/share. Or more. There's no theoretical limit. All the market will bear, right?

As of right now, at just about 5am, after-hours trading has brought it up to over $400 a share. It was close to $500 on Thursday, then fell when Robinhood.com, a self-serve no-commission no-minimum brokerage cut off buying GME and some of the other "meme stocks". It's been rallying since, and Robinhood just announced it's allowing some buying of GME now. A lot of people seem to think that squeeze day – the day many of the shorts have to close – might be today (Friday). When the squeeze happens, that's when the price truly goes beserk.

Should be interesting today.

P.S. "Tendies" refers to chicken tenders, and means profits, specifically the profits from trades, in the slang of the relevant forum.

[dsrtao]

$DAYJOB runs tools for automating analysis of stock portfolios, issuing trade recommendations to follow strategies you have selected, asking what-if-I-did-this questions. The SEC calls me a "Supervised Person" and so I cannot make recommendations more specific than "everyone is terrible at predicting the stock market, which is why broad index funds have been successful".

Hedge funds: originally this meant a private investment group that specifically used shorts and options as tools to "hedge" their investors possible losses. Like insurance, they took money now to prevent major losses in the future. For the last 10+ years, hedge funds are just private investment groups that use shorts and options and weirder contracts to make as much money as possible. A typical hedge fund wants a minimum investment of 250K or more, and will often charge a fee of "2 and 20" -- 2% of your investment each year, and 20% of the profit that they make on your money.

An institutional investor is a group that manages a really large pile of money -- say, TIAA/CREF, which manages teachers' retirement accounts, or the Sovereign Fund of Norway, which manages the Norwegian government's money from oil revenues. Or Harvard... Up until the 1990s, it was received wisdom that institutional investors bought and held equities for very long terms, and didn't do anything else. But when they saw that private investment groups were making huge profits from shorts and options and synthetics (contracts), some institutions changed their policies.

If anyone's retirement is at stake (en masse), it's because they have a pension managed by an institutional investor who decided to be cool.

All the rest of the things you mention are, as far as I know, correct.

[cellio]

Thanks for explaining where these various players fit in. I thought a hedge fund was a fund, rather than an organization (effectively), so I naturally wondered if those could be finding their way into 401(k)s that start out as "invest in this index fund" or "invest in this large-cap mutual fund" or the like.

(What's "mutual" about mutual funds, by the way? From the outside it just seems like I'm buying into a portfolio that someone else manages. Where's the mutuality?)

[dsrtao]

A mutual fund is any deal where unrelated investors give their money to a manager to purchase stocks or bonds together, so that you are purchasing shares of the overall fund rather than each underlying equity. The theoretical advantage is that you don't have to buy the separate equities yourself, so you don't pay all the transaction costs and you don't care about general availability of any of them -- you buy shares in the fund and sell them back to the fund, with the price set by the underlying market. It's not mutual in the same sense as a mutual insurance company, it's just money pooled together under the same terms for everyone who participates.

An ETF, exchange-traded-fund, is a mutual fund where the shares are directly available on the market, so you don't even have to enter into a contract with the mutual fund managers.

An index fund is a mutual fund with a mechanical manager: "the fund will own largely the same stocks as the S&P 500 list", for example. Since no decisions have to be made, the cost of managing the fund is lower. In theory, an index fund isn't as "good" as an actively managed fund. In practice, most active managers are bad, and all of them are inconsistent.

A direct index is not a fund at all; it's the replication of an index fund by an automated system that generates the purchases and sales for you according to the index model. This comes full circle: now that brokerages offer zero trading costs and fractional share ownership, a direct index can have all the advantages of an index fund, and all the advantages (in taxes, mostly) of owning the individual equities. My $DAYJOB provides management systems for direct indexes.

[ng_moonmoth]

"Mutual", in financial and financial-related jargon, indicates a group of people with a common financial interest. In the case of a mutual fund, the common financial interest is the return the management team can generate on the investors, in which they all share proportionally to their investments. Another place the term frequently shows up is in "mutual insurance company", which is a term that legally requires that policyholders be treated as investors in the company, with a right to vote for board members and share in the profits, typically by means of premium reductions for things like home and auto, or grants of additional coverage for life insurance. The common financial interest of policyholders here is in having the premiums be no more than necessary to cover the awards and keep the company going, without having anything siphoned off the top for someone else's gain.

[cellio]

Ooh. Thank you for this additional information. There is a lot of stuff on that Reddit, and I kind of crumpled when trying to find background information there.

Differential rules (and differential application) is galling, yes -- big traders can make informed decisions to take risk and then be bailed out if -- surprise, risk! -- they didn't win. And they have different access. I don't understand how after-hours trading works, for example, but I'm pretty sure I can't get in on that action. What made me really aware of how screwed up this is was learning, back then, how the high-frequency traders were able to manipulate markets, down to co-locating their servers at stock exchanges to use network latency to their advantage. Regular folks can't compete in that kind of rigged game.

Could you explain a little more about how shorting a company can kill it? Do you mean there's a sort of downward spiral -- rumor has it the price is going down, so they must be in trouble, so better sell, causing that outcome? (I wonder why companies don't weaponize that against their competitors more, instead of buying them or competing. Or do they? Oh, I guess that only works for traded companies, not startups, so probably that.)

The Robinhood fuckery yesterday pushes me toward a side, too. So much for their so-called values (and name).

[siderea]

Could you explain a little more about how shorting a company can kill it? Do you mean there's a sort of downward spiral -- rumor has it the price is going down, so they must be in trouble, so better sell, causing that outcome?

Yep, that. Just the act of shorting a large amount of a company's stock sends the signal that those doing so believe strongly the stock price will tank; and not just tank: shorters make the most money of all if the shorted company goes bankrupt before the shorters have to close their position. Then they got to sell stock they never had to buy at all.

Apparently, the reverse is also true. Apparently wsb has managed to save AMC Theaters ($AMC) by buying their stock (I think maybe it was also being shorted?): https://www.msn.com/en-us/entertainment/gaming/e2-80-98meme-stock-e2-80-99-rally-rescues-amc-theaters-from-24600m-debt/ar-BB1ddxtn I am unclear how this works.

[dsrtao]

AMC had a large debt. The debt-owner exercised an option in the loan contract to convert the debt into AMC stock, which made them more money than the debt was worth, so AMC no longer has that debt.

(AMC still has a large debt, but the majority of it is in relatively low-cost, long-term bonds.)

[loosecanon]

One person I know has just paid off his college, and that of his friends. I told him not to tell anyone else, except a lawyer.

It's been a heck of a week.

[siderea]

Oh, how fabulous! Good on him. (I hope he's also sitting on a pile of GME.)

[cellio]

That's great! Kudos to him. Second the suggestion that he needs to talk with a lawyer (and maybe an accountant, if the lawyer isn't specifically a tax attorney).