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

[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.