Reddit vs. Wall Street

By Shamus Posted Thursday Feb 4, 2021

Filed under: Column 135 comments

Someone asked me to explain this nonsense with GameStop and this Reddit vs. Some Hedge Fund stuff. There are a ton of explanations in the form of facecam YouTube videos, but if you’d rather read than watch a person talk for fifteen minutes then answers have been hard to come by.

The media is baffled and can’t seem to break it down for the non-experts. You can jump over to Reddit and try to follow the chaos, but the explanations are lacking in context, dense with technical jargon, and filled with in-jokes. There really isn’t a newbie-friendly way to get a handle on things. 

I absorbed some financial knowledge during my time serving on the front lines of the Dot-Com bubble. I am nowhere near an expert and there are still details of this story that are beyond me, but I have a rough grasp of the basics and I think I can break it down for the uninitiated. So that’s what I’m going to do. Here is a short, jargon-free overview of what this mess is.

Disclaimer: This is not financial advice. I am not an expert. I’m a programmer who didn’t get rich in the Dot-com bubble.

I have no personal stake in this. I own no stocks, and if I did I’d have tissue paper hands”Paper hands” means you’re risk averse and will sell shares at the first hint of trouble. This is in contrast to “diamond hands”, which means you’ll hold a stock you believe in and ignore scary fluctuations that might make others sell.. I don’t have the composure or capital to participate in the market, but I really enjoy reading about it. I’m not a speculator, I’m a spectator.

Also, if any experts read this: Feel free to correct me where I’m wrong. I did quite a bit of research and tried my best to simplify things without bruising the truth, but this thing is fractally complex.

First off, we need explain what it means when people talk about “shorting” stock.

Short Selling

I imagine that per-pound, this is some of the most expensive cardboard on earth.
I imagine that per-pound, this is some of the most expensive cardboard on earth.

Let’s say I have some financial insight that nobody else has. Maybe I’ve just realized that over the next week, the bulk of Magic The Gathering playing cards are going to nosedive in value. There was a public preview of some new upcoming cards. Everyone is excited about how cool they look and how powerful they are, but I’m (somehow) the only one that realizes this means the old cards are about to become worthless.

I enjoy this feeling of smug superiority thanks to my prescience, but wouldn’t it be cool if there was some way I could use this knowledge to MAKE MONEY? 

As it turns out, I can. Here is how it goes:

I go to Bob and I ask if I can borrow his collection of MTG cards. He doesn’t play anymore, but he’s been holding onto them as a sort of investment. His collection is just sitting in a great big box in the garage. I offer him $10 for the use of his cards. He’s not using them right now, so he’s happy to accept the money. I hand him the tenner and stagger out of the garage with the box after agreeing to return the collection in one week.

Then I drive directly to the game store and sell the whole thing.

Let’s say I get $1,000 for Bob’s collection. A few days later the new MTG cards come out. As I predicted, the old cards drop in value. With the new cards in play, the old cards are useless so nobody is using them. Worse, people are taking these now-cheap cards to the game store and unloading them to help pay for the new cards. The market is flooded with these old cards and the price drops even more.

The end of the week rolls around. I swing by the game store and buy all the cards needed to replace Bob’s collection. It costs me just $90. Then I drop the cards off in Bob’s garage. All done.

I paid $10 to rent the collection for a week, I sold the collection for $1,000, and it cost me $90 to re-buy it at the end. Which means I made $900. 

If you’ve ever heard the term “short sell”, this is what they’re talking about. Only instead of Magic Cards, we’re dealing with shares of stock. You borrow the shares, sell them, wait for them to go down, then buy them back at a (hopefully) lower price and return them to the person you originally borrowed them from.

This is the most common form of short sell, and it’s the system I’m most familiar with.

However, in this story there’s a bit of a wrinkle, which is that someone (I’ll talk about who in a minute) was supposedly using naked shorting. That’s where you somehow sell an asset without making sure that there are shares available to borrow. I realize this sounds like nonsense. How can I sell Bob’s (or anyone else’s) cards without buying or borrowing them first?

According to Investopedia, Naked shorting is illegal. As far as I can tell, it’s possible due to some weird loopholes with how transactions are processed.

In terms of legality, you can imagine a situation where you’re broke, so you sneak into a movie theater to meet your friend, who gives you money. Then you go back out to the ticket counter and pay for a ticket. At the end of the transaction you’re all good, but for a short time you were breaking the law and you only made it legit after the fact. This creates one of those weird situations where people think, “It’s only illegal if you get caught!”

I think naked shorting is a bit like this, where you (somehow) sell the stock first, and down the road you’ll make it legit when you find someone to lend you the shares.


The important thing to remember is that when you’re shorting, you begin by MAKING money, and then at the end of some time period you are obligated to buy a particular stock, regardless of price. You enter into the deal with the expectation that the stock will go down, which is how you make your money.

Just remember that shorting means you make money today, but you’re forced to buy the stock in the future.

Infinite Risk

Noob. Laptops are outdated in this business. Everyone knows that if you REALLY want you stocks to go up, you need to check them on your phone every 3 minutes.
Noob. Laptops are outdated in this business. Everyone knows that if you REALLY want you stocks to go up, you need to check them on your phone every 3 minutes.

Short selling is (usually) just another form of speculation. If you think something is about to go up then you buy it, and if you think it’s about to go down then you short it. 

But before you make an evil grin and start shorting stocks, I should warn you that shorting stocks is stupidly dangerous

Let’s compare the risk of buying with the risk of shorting:


When buying stocks, your losses are limited: You can’t lose more than you put in.  Let’s say you pay $1,000 for 1,000 shares of DotCom Inc. And then the next morning the earth opens up and swallows the entire company: Assets, facilities, employees, executives, everything. All gone. The company stock is now worthless. As a result, you lose your entire $1,000. But no matter what happens, you can’t lose more than that.

On the other hand, there’s no theoretical limit on how much you can make. If the stocks go up to a LoLgillion dollars, then you make a LoLgillion dollars per share.


In the world of shorting, this is reversed. Your possible gains are capped. No matter what happens to Magic Cards, I can never make more than the original $1,000 I got paid at the hobby shop. On the other hand, there’s no limit on how much you can lose. If I’m wrong and it turns out Magic Cards go up to a LoLgillion dollars, then I’ll need a LoLgillion dollars to settle my accounts with Bob.

Human Chaos

Some men just want to watch the world news burn.
Some men just want to watch the world news burn.

In a perfect world, the market would be completely rational. The price of a stock would simply be a reflection of the value of a company. Investors would have perfect access to accurate data and make perfectly pragmatic decisions about when to buy or sell stocks. The stock market would run like a very boring and predictable clockwork machine. It would essentially be a really big calculator.

But our world is populated by human beings, and human beings can be messy, vain, superstitious, arrogant, greedy, dishonest, forgetful, foolish, vindictive, reckless, misinformed, and unpredictable. 

The world of securities exchange is fiendishly complicated, and most people don’t want to study for years before they buy some stocks. So they figure they can just find someone successful and imitate them. But what they don’t know is that the successful person they’re following is following an even more successful person, who is in turn following someone bigger, and so on, until huge sections of the market are behaving like a herd of very skittish buffalo. At any given time they might be standing around doing nothing or rocketing off in a random direction as part of a massive stampede. If you ask any one of them why they’re doing what they’re doing, they’ll just point to the buffalo in front of them.

We don’t trade stocks based on what they’re worth now. Humans spend a lot of time thinking about the future, and so we don’t want to buy things that are valuable, we want to buy things that are about to become valuable. So you buy stock based on what you think other people will think of it in the future. It doesn’t matter if the company is valuable or not. If people think it’s going to be valuable, then it is. If they don’t, then it isn’t. So you end up in this double psych-out situation where everyone is trying to out-guess everyone else on what people today think the people of tomorrow will think of the market the day after tomorrow.

The Game

Why run a hedge fund? If you just want to debase yourself for money, there are a lot of more fun options.
Why run a hedge fund? If you just want to debase yourself for money, there are a lot of more fun options.

This ugly mix of finance with mob psychology creates the opportunity for… let’s call them “shenanigans”.

Let’s say you don’t have any special knowledge of the future. You don’t have any insight you can leverage to make money. But you do have a lot of cash. Is there a way you can… I dunno… make something happen?

The naive way:

You find a small, weak company. You short a lot of shares. The price will naturally move downward as you do this. (Selling stocks pushes them down.) The week goes byThe time interval is arbitrary. I’m just using “a week” because it’s easy to think about., and then you buy the shares back. But when you buy the shares you’re also driving the price back up, so you end up back where you started. Which means you didn’t really make any money. Once you take into account the cost of setting up the short, you probably lost a little. That’s no good.

The shenanigans:

What you need is a shitload of cash, and a willingness to engage in a certain degree of dishonesty. 

You short the stock, and you do so on a massive scale. You borrow the shares and dump them as fast as you can. This wil shove the price downward very quickly. This will create the impression that the stock is in trouble. What you’re trying to do is spook other investors so they get scared and they also begin selling shares, which forms a feedback loop where more and more people dump the stock because it’s going down, not because anything has changed with the fundamentals with how the company is doing. Once you scare everyone away, the price will stay low, which makes your short very profitable.

If you’re really unscrupulous, you can take this scheme to the next level by creating some FUD. You want to make it seem like you have some insight or foreknowledge that this stock is about to go down. Essentially, you’re bluffingAlso known as “lying”.. In the past Jim Cramer has talked about calling brokers to plant rumors that the company is in a bad situation.

PROTIP: This is illegal, so you probably shouldn’t do it.

Remember what I said earlier about the herd behavior. If you’re a huge hedge fund then people are very likely to believe your claims because you’re a rich successful firm. If you’re not, then people will just ignore you as a random crank. So not only do wealthy people have the ability to move prices simply by trading at a massive scale, they also have a lot more power when it comes to engaging in general skullduggery and rumor-mongering.

You’ll generally hear one of two claims regarding rumor-based price manipulation.

  1. That sort of business is illegal, so no serious well-respected firm would EVER so something like that.
  2. Are you kidding? They do it all the fucking time. It’s an open secret!

In any case, those doom-and-gloom rumors will become a “hot tip” that gets whispered across the herd. People will see the falling share price and assume the rumors / guesses are true. Maybe someone knows something the rest of us don’t? Maybe this company is just about to deliver some really devastating news? 

None of those things are true, of course. But it doesn’t matter. You’ve spooked the herd. Other people start dumping their stock and the thing drops like a rock.

This is a very dangerous game, of course. Shorting is already a cruel and unforgiving game, but this version is even moreso. If you fail to generate enough panic, then the stock won’t drop and you’ll lose money. You need the stock to go down.

This is obviously a very vulture-ish thing to do. You’re finding a weak company and further wounding them for personal gain. With the stock price depressed, the company will have a much harder time raising more capital if they’re struggling to weather a difficult timeLike say, survive a severe but temporary drop in retail revenue due to a pandemic.. That company probably employs a lot of people, and it’s possible that you (a billionaire) could kill a company and put thousands of regular folks out of work with your little stunt. 

Note that when you make money like this, you’re not directly taking anything from the company in question. You’re actually tricking other investors. You spook them so they dump a stock, then scoop it up to finish your short. The money you make comes from other people playing the market. The stuff about crippling a struggling company is just a side-effect of this process.

Before You Explain Your Brilliant Solution to Us…

I'm gonna need to stop you right there...
I'm gonna need to stop you right there...

As an aside: Stock newbies like to jump in here and demand to know why this is legal and why can’t we “do something” to stop these people. 

1) It is technically illegal, but it’s very hard PROVE that someone is doing this. Without the ability to read someone’s mind, you can’t tell if they’re deliberately trying to manipulate the market, or if they’re just a maniac acting on impulse, paranoia, or foolishness. 

2) Remember that you’re reading the super dumbed-down version of the system. Yes, I’m sure you can come up with some rule to stop this behavior, but that rule is only applicable to the ultrasimple scenario I’ve laid out. In the real world, things are messy and complicated and there are hundreds of thousands of people trading, holding, and shorting stocks at any given time, for reasons that make sense only to them. 

I’m not saying you should just blindly accept the system as it exists now. If you feel strongly about it, then feel free to jump in, spend a few years learning the subtleties of finance and securities exchange, and then advocate for an informed solution. I’m just asking you to not blurt out the first simple thing that jumps into your mind when you hear about hedge fund shorting, because that’s how you get bad policies that make things worse. 

You’re up against some very clever and hard-working rules lawyers, and you need to be able to design rules that they won’t turn into fresh exploits. This isn’t as simple as “outlaw short selling” because short selling comes in many forms and all of them involve multiple separate transactions over time. 

I’m saying this because I’ve read about a million variants of the “Why is this even legal!?!” comment over the past week and I’m starting to go a little crazy. It’s like someone hears about a high-speed car crash and says, “I don’t understand why cars are allowed to go that fast! They should just limit all cars to 20 miles per hour!” And to explain to them why they’re wrong you’d have to explain everything about how automobile travel works. (And they won’t want to listen anyway, since you’re obviously a shill covering up for all of these people engaging in vehicular homicide.)

I’m not saying our current system is perfect, I’m just saying the world does not need the obvious and naïve solution that you cooked up in two minutes while reading an “intro to shorting” post on some random idiot’s blog.

Okay? Thanks.

So now we have enough knowledge to talk about what happened in the Hedge Fund vs. Reddit war of 2021.


Man, I really enjoyed shopping here. 20 years ago. Last I checked, they don't even carry PC games at my local stores.
Man, I really enjoyed shopping here. 20 years ago. Last I checked, they don't even carry PC games at my local stores.

It’s early January and some folks on the r/WallStreetBets subreddit (WSB) notice that some hedge fund guys are shorting the crap out of GameStop.

There are actually multiple parties involved on the hedge fund side, but to avoid getting too deep into the weeds I’m going to pretend we’re just dealing with a single organization, which I will refer to as Melvin the HedgeHog. 

Also, there are a few other stocks in this story, but for the sake of brevity we’re going to ignore them and focus on GameStop.

Also also, I’m simplifying the timeline a bit here.

WSB also notices that GameStop isn’t doing that bad. Sure, GameStop is a retail pawn shop in a world dominated by digital sales, it’s been run poorly for years and now the pandemic is tightening the noose. Sure, the future might look bleak for GameStop in the long term, but right now they’re basically fine. They have a lot of cash at the moment. The new PlayStation launched in time for Christmas and a few hot games are keeping everyone excited. 

So the WSB crowd decides to take on this billion-dollar hedge fund. They begin buying shares. They keep buying shares. This negates the shorting that Melvin HedgeHog is trying to do. The herd isn’t spooked and the stock starts climbing instead of falling.

Now, if Melvin were smart he would just take this small loss and leave. But instead he decides to double down. He keeps shorting a stock, while the stock is going up. That’s suicide. I guess Melvin figures he has deeper pockets than a bunch of plebs on Reddit, so he just needs to overpower this “small” group. I guess he figures if he can out-spend them, then he can push the price down faster than they’re making it go up?

Melvin is being very foolish. As someone running a hedge fund, he should really know better than this.

Tuesday – Doubling Down

The fact that Melvin never considered folding on a weak hand suggests that the hedge fund types have gone unchallenged for too long.
The fact that Melvin never considered folding on a weak hand suggests that the hedge fund types have gone unchallenged for too long.

It turns out that WSB isn’t that small and some of them have quite a bit of disposable income. Moreover, they really want to give the finger to these bigshot Wall Street types, and Melvin the HedgeHog in particular. This seemed like an act of hubris on the part of HedgeHog, and WSB wants to punish them for it. 

The battle has been going on for a few days at this point. HedgeHog is creating obligations that will force him to buy GameStop stock in the near future, and WSB keeps buying the stock to push it higher. 

Somewhere in all of this, someone runs the numbers and realizes that HedgeHog has been shorting the stock so hard that they have overcommitted. They have created agreements to provide investors with X number of shares, where X is larger than the number of shares available to the public! They are committed 125%!

Not only does HedgeHog need to buy all available shares (and then some) to settle their accounts by the end of the week, but they need to buy those shares from WSB. They are catastrophically screwed.

This spat over a few million bucks has resulted in these two poker players upping the bet over and over. And remember, the person trying to short the market is the one with the riskier position. Melvin the HedgeHog is now on the hook for billions.

Before all of this, GameStop stock had been sitting at $20. Now it’s over $150!

The shorts are due on Saturday. At this point HedgeHog has three days to get the price down to manageable levels or the costs will kill him. This would be tough enough in a normal market, but right now WSB has a bunch of shares and they’re not willing to sell.

Melvin keeps doubling down, pouring more and more money into this, trying to somehow rescue the money he already put into it.

Wednesday – The Hackers!

Yes. As a technology expert, I can confirm that this is EXACTLY what hackers look like.
Yes. As a technology expert, I can confirm that this is EXACTLY what hackers look like.

Wednesday morning. A DDoS attack takes out parts of the internet, including the CDN used by Reddit. Effectively, Reddit is down for several hours for people on the east coast and a few other urban centers. Who was behind this attack? What was their goal?

  1. Perhaps it was instigated by Melvin the HedgeHog, in an effort to blackout r/WallStreetBets so the mob couldn’t coordinate? Using illegal botnets doesn’t sound like the kind of thing a Wall Street type would do, but you could argue that having billions on the line made them willing to take some crazy chances. It’s not like this group is averse to risk.
  2. Perhaps it was instigated by WSB, in an effort to frame HedgeHog? It’s a pretty weird move to nuke your own forum in an effort to frame people who are already viewed as vultures, but it’s not outside the realm of possibility. Something like this could sell the notion that WSB is under siege, which might really rally the masses. (Spoiler: This happens.)
  3. Maybe it was a third-party spectator, because some men just want to watch the world burn.

Ultimately we can’t know who instigated the attack. For me the worst part was the news reporting at the time. I didn’t catch the news report myself – I prefer to read the news rather than watch it – but a lot of the older folks in my family circles had it in their heads that “people on Reddit were hacking Wall Street”. This is inaccurate regardless of who initiated the attack. The attack was AIMED at Reddit, not Wall Street, and the “hack” wasn’t responsible for the price fluctuations. It was… bad

GameStop stock closes just short of $350! Melvin probably doesn’t get a lot of sleep on Wednesday night.

Thursday – Robinhood

Time Bandits isn't as well-remembered as a lot of 80s movies, but I consider it to be a classic. If nothing else, you should at least watch the Robin Hood scene.
Time Bandits isn't as well-remembered as a lot of 80s movies, but I consider it to be a classic. If nothing else, you should at least watch the Robin Hood scene.

A lot of WSB folks have been buying their GameStop shares through the app Robinhood. On Thursday they discover the app would allow them to sell their shares, but not buy more. The app cautions them that the stock is closed due to “volatility”, as if Robinhood is saying, “Sorry! This stock is too dangerous for you to buy!”

This isn’t just a red flag, this is a wailing klaxon and a flashing red light that tells everyone that something is deeply fucked. The peasants finally have one over on Wall Street and suddenly the rules change to stop them?

Robinhood, like any brokerage, is supposed to be an independent entity. It shouldn’t – and legally can’t – take sides. It’s just supposed to take bids and trade shares on behalf of their clients. But here this supposed brokerage is creating a situation where the GameStop stock can only go down, because nobody in the general public can buy it. This is exactly what HedgeHog needs to save his ass and defeat WSB.

This creates instant outrage across the board. If it’s “okay” for Melvin the HedgeHog to destroy GameStop’s stock for personal profit, then it should also be okay for WSB to destroy HedgeHog’s hedge fund for personal profit and memes. 

Also, everyone noticed the irony that in a battle between the ultra-rich and the common peasants, a company named ROBINHOOD seems to be changing the rules to favor the rich.

The thing is, Robinhood had a perfectly good excuse for why this was happening. See, for most brokerage houses, it takes a day or two to send them money from your bank account. You set up the transfer on your side, and then the money arrives in your brokerage account a few days later. But Robinhood allows you to begin using the money as soon as you start the transfer, without waiting for the bank to actually move the funds. Essentially, Robinhood floats you the money, giving you an interest-free loan for a couple of days. 

Robinhood is a pre-IPO startup, meaning they’re a young company that’s still tarting themselves up so they can go public and sell shares of their ownThat is, they want to sell shares of the Robinhood company.. It’s very easy to believe that a company in this position wouldn’t have the cash on hand to handle a giant rush like the one coming from WSB. 

Imagine a high-stakes poker game where two players keep raising the bet. It started out at $1,000 a hand, but now things have gotten out of control and there’s ten million bucks in chips in the middle of the table. One of the players tries to get more chips to cover his end. As the house, it would be really embarrassing to have to step in and admit you don’t have the cash to front the player more chips. You’re supposed to be the bank, and the players expect you to have enough cash to run the game. But if you’re out of money, you need to be open about that because otherwise you’ll just make things worse.

I would be totally willing to believe that Robinhood was caught short and couldn’t handle this much volume. However, a representative from Robinhood goes public and makes it very clear that the company does not have a liquidity problem.

From the perspective of the general public, one of two things must be true:

1) You’re out of money and can’t cover this game.

2) You’re helping one of the players to cheat the other.

When presented with the opportunity, Robinhood decided to deny #1 as hard as they could, leaving everyone to conclude that #2 must be the case. Even if #1 was the problem, they would rather people believe #2. You can’t sugar-coat that. That shows a profound lack of integrity.

But wait! It’s worse! Other online brokers are pulling the same stunt and not allowing users to buy GameStop. It turns out they all use a company called Apex to process their trades, and Apex is the one blocking these buy orders. However, none of the apps are open about this. They just offer a generic message about “volatility” without explaining the problem.

So Robinhood isn’t actually blocking the trades, they’re just… covering for the company that is? Any way you look at it, it shows a lack of integrity and an alarming double standard.

If you’re lucky, liquidity problems can be solved overnight with an infusion of cash. But there’s no way to get an infusion of integrity. If you’re out, then there’s nothing you can do about it. And nobody wants to play poker at a rigged table. 

This ban on buying GameStop works. The stock dips to around $200. That’s still 10x its starting value and Melvin is still screwed, but he’s in significantly less trouble than the day before.

Update from the future: The next week there was a livestream event where Elon Musk (yes really) grilled the Robinhood CEO about the restrictions on buying, and he admitted that it was a liquidity problem. So he basically admitted they lied about it the week before.

A couple of days later, Robinhood wrote a post that explained all of the mechanics of how a brokerage like theirs operates, and why they were unable to take orders for GameStop stock. They even took out ads on RedditWhich is how I found it. First time I’ve clicked on an ad in years. so the WSB crowd would see it. The explanation looks reasonable enough to my non-expert eyeballs, but if the explanation is this straightforward then why did it take a week to reach us? Given the backlash and outrage, and given how the whole situation made it look like the entire market was corrupt, why didn’t we get this during the controversy?

This story is so weird.

Friday – The Reckoning

You already reckoned it? Well reckon it AGAIN, and make sure you reckon it properly this time!
You already reckoned it? Well reckon it AGAIN, and make sure you reckon it properly this time!

The response to Robinhood’s behavior is swift and intense. Everyone across the political spectrum condemns it. Free-market types are offended by the flagrant bending of rules to play favoritesAs Louis Rossman put it, “(the hedge fund guys) are getting fisted by the Invisible Hand of the market.”, and people on the Bernie end of the spectrum are outraged that the rich are being helped at the expense of the poorActually, I think both groups are offended by both things, but I dunno. I didn’t take a survey or anything.

This outrage drove more people to the side of WSB and added more gasoline to the fire. The ban on buying GameStop is lifted, and people start buying like crazy. THE SYSTEM had told people they weren’t allowed to buy GameStop, and that made the masses really want some GameStop stock.

Note that this whole thing is only working because the people at WSB are holding the line. At any time, these folks could sell their shares and enjoy a really nice profit. But instead everyone seems to be holding onto their shares in solidarity. Some of these people will ultimately make less money as a resultI’m assuming GameStop will go back down to pre-insanity levels at some point., but they have made it clear they weren’t in this for the money. They are in this to punish Melvin.

During the no-buying blackout on Thursday, we had this surreal situation where the bid (what someone is willing to pay for a stock) was around $320, and the ask (the lowest price a current holder is willing to sell for) was over $5,000! Normally the bid and ask are within a few pennies of each other. Without getting too technical, this means that nobody was currently willing to sellI’m sure a few stragglers sold. And that’s FINE. I don’t condemn ANYONE for blinking in this massive game of chicken. But the vast majority of WSB people seem to have held.. Among those thousands of anonymous Redditors, anyone can cash out at any time without the others knowing. No shame. No risk. All profit. And yet they were holding anyway.

GameStop stock ends the day at $325. Melvin is in serious trouble, although it could actually be a lot worse. (During the day the stock had risen to nearly $500.)


I hate when that happens.
I hate when that happens.

As of this writing, it’s not totally clear to me what happened. Melvin needed to buy all the available stock (and then some) to close out his disastrous attempted short. Did he do that on Friday, and that’s what drove the price up to $500 during the day? 

There’s another group of players in this game. I haven’t mentioned them yet, because they haven’t done much so far. There are several very large firms that have been holding GameStop stock for years. These are long-term investors. If you read the WSB subreddit and you see someone talking about “the Longs”, this is who they’re talking about. 

Melvin needed to buy all of the available GameStop shares. A lot (most?) of those shares were in the hands of WSB types that were flat-out unwilling to sell, or had a ludicrous asking price of $5,000 a share. If Melvin had tried to satisfy all of his obligations on the open market, then the price should have spiked to (even more) insane levels. Since it didn’t, the assumption is that one of the Longs stepped in and sold Melvin the shares he needed. Melvin still lost his shirt, but he was saved from the unthinkable fate of needing to buy shares from vengeful Reddit stock nerds who wanted blood instead of money.

I don’t want to leave you with the impression that this is a happy ending for Melvin. Melvin lost 53% of his total value in the month of January. The money nerds on Reddit managed to crush this billion-dollar behemoth and erase over half its value in a month. 

People called this a “David versus Goliath” type situation, which for me conjures up the image of a middle schooler vs. a linebacker. But in terms of weight class, this is more like a regular-sized dude versus Godzilla. Maybe David didn’t totally kill Goliath today, but given the extreme size differential I think cutting Goliath in half is pretty damned impressive.

What Fun

People called them 'Wall Street', but Melvin Capital is actually situated on Madison Ave.
People called them 'Wall Street', but Melvin Capital is actually situated on Madison Ave.

What an amazing story. This was like reading an early-period Tom Clancy novelBack when Tom Clancy was writing them himself, before the ghostwriters came in and ruined the universe with fanservice and power creep. mixed with a late-period Neal Stephenson style story. As a fan of both authors, this one had me on the edge of my seat.

The other thing I liked about this story is that there weren’t a lot of casualties. Everyone in the fight was in the fight of their own volition. Real-world riots often inflict a bunch of unfortunate collateral damage, but this fight didn’t have that. Lots of people lost money, but they were people making extremely high-risk bets and as professionals they presumably knew what they were getting into. The only people who got dragged into this against their will was the leadership of GameStop, and as far as I can tell they haven’t suffered because of this. (I mean, the stock shot up, which usually makes company executives happy.)

Also, a residual effect is that WSB helped raise the value of several struggling companies. GameStop wasn’t the only company watching the hedge fund vultures circle overheadNow that I think about it, I think hyenas are a better analogy than vultures. Everyone calls these guys “vultures”, but a vulture waits for you to die and then eats your corpse. A pack of hyenas will run you down and eat you alive if they think you’re weak, which is much closer to the sort of hunting that Melvin does.. Now that the hedge funds have been scared off, the stocks are up and the companies are on safer footing. It’s possible that WSB made a buck for themselves by giving the hedge fund guys a taste of their own medicine, and in the process maybe they even saved a few jobs. 

The plucky underdogs win, the bullies lose, and maybe some blue-collar jobs are saved during a pandemic? If this was a techno-thriller novel, I’d say the ending was kinda unbelievable for how well everything turned out. 

So What Now?

I imagine that losses on this scale will leave a lasting impression on Wall Street types. In the future, hedge fund types will probably be a little less aggressive about attacking weak companies with short sales.  Or at least, they won’t double down when the market pushes back.

Sadly, I think this is a singular moment for WSB. This was a focused group of like-minded people who came together and risked a lot of personal loss for a cause they believed in. However, as a result of this story the masses will have heard the rumor that “People on Reddit made tons of money.” I imagine the subreddit will inevitably suffer from a massive influx of skittish buffalo, looking to follow the next hot tip. Effectively, the group will experience their own Eternal September. This will naturally dilute the group and increase the noise-to-signal ratio. The original group members held in solidarity because they wanted to “send a message” to Wall Street. A lot of new members will be randos looking for the next get-rich-quick hot tip.

Also, the subreddit has been getting pounded by bots and snake oil salesmen since last week. Idiots show up and try to harness the group to make some random stock go up. The group doesn’t bite, of course. The interlopers are mostly amateur dimwits that can’t even mimic the distinct culture and language of the group. They join, pull a How do You Do, Fellow Kids?, and get banned. These dipshits are easy to spot, but there are a lot of them.

This avalanche of garbage / spam is overwhelming, and so the subreddit keeps going private at intervals so the mods can catch up.

And if that’s not bad enough, there’s this bullshit to worry about:

Victory has a thousand fathers, but defeat is an orphan.
Victory has a thousand fathers, but defeat is an orphan.

Like I said, this was probably a singular moment for WSB. Something like this can’t last, because everyone wants a piece of it.

Wrapping Up

So that’s the story. If you want to know more, then your best bet is to head for r/wallstreetbets and start reading. It’s messy and a lot more complicated than I made it seem in this write-up, but you should be able to follow things once you get a feel for the lingo. Again, I apologize if I got any details wrong. Feel free to post corrections in the comments. If I messed up anything serious, I’ll amend the post to avoid adding to the confusion.

Reminder: My Patreon and Tip Jar. Thanks for reading!



[1] ”Paper hands” means you’re risk averse and will sell shares at the first hint of trouble. This is in contrast to “diamond hands”, which means you’ll hold a stock you believe in and ignore scary fluctuations that might make others sell.

[2] The time interval is arbitrary. I’m just using “a week” because it’s easy to think about.

[3] Also known as “lying”.

[4] Like say, survive a severe but temporary drop in retail revenue due to a pandemic.

[5] That is, they want to sell shares of the Robinhood company.

[6] Which is how I found it. First time I’ve clicked on an ad in years.

[7] As Louis Rossman put it, “(the hedge fund guys) are getting fisted by the Invisible Hand of the market.”

[8] Actually, I think both groups are offended by both things, but I dunno. I didn’t take a survey or anything.

[9] I’m assuming GameStop will go back down to pre-insanity levels at some point.

[10] I’m sure a few stragglers sold. And that’s FINE. I don’t condemn ANYONE for blinking in this massive game of chicken. But the vast majority of WSB people seem to have held.

[11] Back when Tom Clancy was writing them himself, before the ghostwriters came in and ruined the universe with fanservice and power creep.

[12] Now that I think about it, I think hyenas are a better analogy than vultures. Everyone calls these guys “vultures”, but a vulture waits for you to die and then eats your corpse. A pack of hyenas will run you down and eat you alive if they think you’re weak, which is much closer to the sort of hunting that Melvin does.

From The Archives:

135 thoughts on “Reddit vs. Wall Street

  1. MerryWeathers says:

    Last I checked, they don’t even carry PC games at my local stores.

    Physical PC game copies are non-existent at this point. If you buy one, you don’t even get a physical disc, just a memo with a redeemable code that essentially just redirects you to digital stores like Steam.

    1. Chris says:

      I actually got steam because i bought a gamedisc that would set up an install of steam and then in some way tell steam to give me my game. Like they printed an activation code on it. While it wasnt a big problem for me, i can imagine if you have a datacap or slow internet you want data on a disc instead so you can download less/nothing at all.

      1. Ander says:

        That was me with Portal back in the day.

  2. Grimwear says:

    I’m not saying our current system is perfect, I’m just saying the world does not need the obvious and naïve solution that you cooked up in two minutes while reading an “intro to shorting” post on some random idiot’s blog.

    Pretty bold of you to assume I spent 2 minutes thinking up my fix.

    1. Asdasd says:

      What if we banned the stock market? I’m pretty sure that would solve the problem of shorting!

      1. Dreadjaws says:

        No one here seems to be thinking of the simplest answer: just burn it. Burn it all down.

        1. Asdasd says:

          Thanks, voice inside my head. You always have the best solutions.

          1. Crokus Younghand says:

            The real Senua’s Sacrifice was the friends we made along the way.

        2. Chris says:

          I hope they renovate the ruins and build a megacasino in its place. Just to drive the point home

      2. Blue Painted says:

        This is the ONLY correct response.

        1. Daniil Adamov says:

          What about voluntary human extinction?

  3. ivan says:

    Neat. Didn’t know that bit about Naked shorting until now, and so was confused by unqualified statements about the Hedge funds having shorted to 140% somehow, but I guess that explains it. All in all, good article ty ty.

    1. Rho says:

      I may disagree with Shamus here(*) : it is possible that Melvin did do something illegal but I don’t think there’s any evidence right now, or at least I haven’t seen any. There’s a difference between shorting shares you didn’t properly borrow (Naked Short) and shorting more shares than the company has outstanding. The former is unlawful, but the latter is not. Think of it this way. Alan goes and borrows a share from Beth, and sells it to Charlie. Charlie now has a share. But Charlie wants to make some money risk-free, so he lends it to Alan, who sells it to Donna. Donna now has a share, but she wants some risk-free income so she also loans the share to Alan, who now sells it to Eddie, and so on. This is normal for shorting, although the scale that Melvin got up to was dangerously risky. He now has to buy back 4 shares instead of 1 – but he could also make 4 times the profit. However, also note that on balance, Alan’s actions haven’t *necessarily* moved the market. There were just as many buyers as sellers; the market will still move based on the balance of the two and their respective opinions about the things being bought and sold. [And if you think that’s weird – this can have some hilarious effects on corporate votes. There are cases where somehow 125% of the stock got voted, or other crazy results.]

      One other thing: Hedge funds may be good, or they may be bad(**), but they aren’t just “vultures”(***) of the financial market. I don’t agree that Melvin was attacking poor Gamestop. if they thought its stock was overvalued, and there is good evidence that it legitimately was, then it’s sensible to trade on that. They may have been wrong in judging the stock price, but that’s life. Their actions don’t harm the company except in some really, really indirect ways, and there were other Hedge Funds sitting on the other side of the table disagreeing with their own money. The money that .

      *Sorry Shamus! I don’t mean any insult. I think you only misread the situation but there could always be information I missed.
      **Most hedge Funds are not the best choice for their investors in the long run as they traditionally demand too much overhead. They probably have a significant impact on the market as a whole, but not in any specific direction. IMHO, Hedge Funds probably help keep market pricing accurate but (ironically) are wildly overpriced for their value. They probably are given undeserved respect on Wall Street, partly because many financial professionals want to run one.
      ***Vulture funds are a real thing, they’re also not necessarily bad for society, and that’s another long story.

      1. Shamus says:

        To be clear: I have NO idea if Melvin did anything illegal or not. I’m just reflecting the prevailing attitude of general suspicion towards hedge funds.

        1. Leeward says:

          For what it’s worth, that’s not clear from my reading of the post.

          “However, in this story there’s a bit of a wrinkle, which is that someone (I’ll talk about who in a minute) was using naked shorting.”

          That, combined with the bit about Melvin owing more than the float, implied to me that you thought Melvin had been doing the naked shorts. I came down here to say what Rho said, but less clearly.

          1. Shamus says:

            Oh yeah, that does sound pretty definitive, when it’s really speculation.

            I’ve edited the sentence and added a weasel-word to make it less definitive.

  4. MerryWeathers says:

    Like I said, this was probably a singular moment for WSB. Something like this can’t last, because everyone wants a piece of it.

    Ah, so we’re currently now at the “Battle of the Five Armies” part of the story where the big bad is defeated so everyone starts turning on each other.

    1. ContribuTor says:

      It’s much less that the people involved are turning on each other. It’s more that a group which has never had a strict definition of membership or leadership is suddenly seen to be powerful. And now people who want that power are signing up, bringing nothing to the table, and trying to push that power in a direction that suits them.

      Consider the Anonymous hacker collective (disclaimer – I am not a member of Anonymous as far as you know). They’re a bunch of skilled and powerful computer vigilantes who can do a lot of damage to folks who they think deserve it. They don’t have a “leader” – they make decisions by consensus. And they don’t have a hard definition of membership – if you’re good enough, join in.

      Now assume Anonymous had a public forum anyone could see and join, which was the primary way they chose targets. A bunch of randos would likely show up and suggests targets that are personally convenient for them. Some might even enlist a few script kiddies to start a basic attack on a target while pushing a media narrative “Anonymous is attacking X” and hope others join in. Some people with low skills might join in an attack and then try to blackmail the target – I’m running 10,000 bots at you. Pay me and I’ll leave.

      The original Anonymous group would likely be horrified and angry about this. These new folks are trying to co-opt the power without respecting the cause. The original group will likely abandon the forum, taking themselves somewhere more private on an “invite” basis, leaving the randos to thrash around the corpse not realizing the power is gone.

      1. Joshua says:

        As I posted elsewhere here, that was my thought about the leadership of this action. What if some of those involved actually owned shares in GameStop? Of course they would want a crowd sourced purchase of the shares to counter the short sellers and raise the price! If not this time, then maybe the next!

        1. baud says:

          I think some r/wsb notorious members are/were long (as in owning stock and waiting for the value to go up) on GameStop, with the idea that the stock will go up. And at first it was more sharing a good investment opportunity than doing a concerted action against the HedgeHogs.

        2. AdamS says:

          DeepFuckingValue, the guy who started this whole thing, said he had started investing in $GME back in *2019*. And he cashed out with MILLIONS, IIRC. I don’t remember seeing the stick-it-to-the-man fervor in WSB until days after he posted those returns.

          1. Chris says:

            he cashed some out but he did stick with reddit, even past the 450 peak

      2. Moridin says:

        I mean… the original Anonymous is just a bunch of people from 4chan’s /b/ who decided that it would be fun to troll scientologists and a few other groups using low-tech “hacking” tools like LOIC(low-orbital ion cannon: essentially, it just sends a bunch of http-requests. By itself, it doesn’t do much. When you have thousands(tens of thousands?) of people who simultaneously point it at a target, it turns into a quite effective DDOS attack). That’s pretty much the opposite of being “skilled and powerful” hackers.

  5. Gargamel Le Noir says:

    That’s a crystal clear explanation and recap, thanks Shamus!

    1. Wolf says:

      Seconded. Some of these explanations of the mechanics give clearer analogues than I have ever seen.
      Yes simplification carries dangers and all that, but this post at the very least conveys a sense of the shape of the beast.

      1. Binks says:

        Thirded. Great analogies, and great job explaining how they’re just analogies and not perfect analogs. Way better than 99% of the discussion I’ve seen on this.

        1. Zaxares says:

          Fourthed. :) You have a real talent for explaining complex things in language a layman can reasonably understand, Shamus, and in an entertaining way too.

          1. SidheKnight says:


            What the other previous posters said.

    2. aitrus says:

      Yeah, seriously. I understand the world of stonks a little better now in general, too. Thanks Shamus.

    3. Christopher Wolf says:

      Fourthed. I had a good sense of this from the various media I had consumed on it, but you clearly and concisely explained it.

      You would have done well as professional educator, which if you make money off this, in some ways you are.

    4. Lars says:

      The one thing I’m missing – for stock exchange in generel – is how buying and selling works. In the real worldTM, you can only buy from someone who sells and you can only sell to someone who buys. That happens at the same time, so the value of the traded item does not change.
      By doing stock market shortening you’re selling stock to no one and get money out of thin air. Then WSB bought the stock from noone and filled that void with cash.
      That reminds me of Odysseus and Cyclopse, where noone was to blame for loosing an eye.

  6. MerryWeathers says:

    Can’t believe you forgot to include the theme music for the post Shamus.

  7. Parkhorse says:

    “a late-period Neal Stephenson style story.”

    Not even late period. This would be right on theme for Interface. Heck, the general tone of WSB would be even more on theme for characters in The Big U than any of his later works. Admittedly, this is also in line with Fall; or, Dodge in Hell’s Twitter spam bots and the like. I guess mid-period Stephenson is the only time where this nonsense wouldn’t be perfectly at home?

  8. Matt` says:

    For anyone seeking more to read on the subject, Matt Levine’s newsletter has been mostly about GameStop for the last several entries, and is lucidly/entertainingly written.

    In particular, this post from last Friday somewhat calls into doubt the idea that WSB (or small retail traders in general) were all doing a diamond-hands refusal to sell at any price.

    Retail investors were net buyers on Monday but net sellers for the rest of the week (through yesterday), and all in all quite balanced: About 49.8% of retail orders (that Citadel Securities saw) were to buy, and 50.2% were to sell.

    That, and also the part where the impact of everyone blocking retail traders from buying was actually more limited than you’d think, might be suggestive that there was also institutional money (rival hedge funds?) on the “punish these hedge funds for over-extending” side of the trade.

    1. RFS-81 says:

      On the morning of Jan. 7, Elon Musk tweeted “Use Signal.” He was talking about the encrypted messaging app Signal, which has nothing to do with Signal Advance. The stock of Signal Advance nonetheless shot up, closing at $3.76 that day on volume of 273,998 shares.

      Shamus, I think you owe the buffaloes an apology. Buffaloes are smarter than that.

      1. Joe Informatico says:

        I don’t really get this stuff, but my understanding is that a lot of moment-to-moment stock trading is done by algorithms and bots that really are coded to “follow the herd” as it were.

  9. Dreadjaws says:

    And now WSB is buying Nintendo Switches for sick kids. The story has all the markings of a Tom Clancy novel, but the ending has all the subtlety of a Disney channel TV movie. And that’s how I like real life to be.

  10. Ninety-Three says:

    When presented with the opportunity, Robinhood decided to deny #1 as hard as they could, leaving everyone to conclude that #2 must be the case.

    Do you have a link for this? I was following the story fairly closely and this is the one part I didn’t see: as far as I could tell it was just “Something something volatility” until the next day when they put out that blogpost with the real explanation you linked further down.

    The explanation looks reasonable enough to my non-expert eyeballs, but if the explanation is this straightforward then why did it take a week to reach us?

    That blog post went up on Friday. With the Robinhood shutdown starting Thursday, It took one day to reach us, maybe two if you round up Thursday morning to Friday afternoon.

    As weird as the PR mistake is, their explanation is almost certainly honest, because late last week the SEC announced they were investigating Robinhood for, well, duh, and you really don’t want to publish lies while their baleful eye is on you.

    I have two guesses. The first is that the decision was made by beancounters who just aren’t used to doing PR and so hit the “shut it down” button without realizing that the public would want to know what was going on, and then when they noticed everyone was mad, the bureaucrats got involved and delayed the “publish an explanation” part by a day.

    The more conspiratorial guess is that in the course of brokering all those volatile stock buys for WSB, Robinhood didn’t just run out of money and have to shut it all down. Financial regulation is extremely complicated and there are rules about how much cash you have to have on hand: it’s possible that the unprecedented GameStop bubble caused them to end up in violation of one of those rules, at which point their lawyers ran into the server room and took a fire axe to the trading computer to shut it down before they got in any more trouble, then told everyone in the company that they were not to say a word about this until they got the cash sorted out and did everything they possibly could to prevent Robinhood getting in trouble for technically going a little over the line.

    1. James says:

      Essentially the CEO was talking out of both sides of his mouth at the same time. He insisted they didn’t have a liquidity problem, which was *technically* true… but it was only true because they halted GameStop buys.

      Imagine owing $500 for rent and having exactly $500 in the bank, but you have other bills you’ll need to pay before your next paycheck. Your landlord says “Where’s the rent?” and you say “I can’t pay it.” The landlord says “Do you not have the money?” and you say “No, I have enough money.” Technically you aren’t lying… you have enough to pay all your bills. But that’s only because you didn’t pay your rent yet.

    2. Sabrdance (MatthewH) says:

      I heard the capital requirements explanation the day of on twitter -no I almost certainly can’t find it now, but it was within hours of the announcement. So the explanation was out there -but it got drowned out in everything else.

      I suspect the CEO was not lying -the problem was not liquidity, the problem was the volatility. But that’s a very nuanced distinction.

  11. Joshua says:

    Thanks for a lot of the recap. CPA here, so I’ve taken a couple of Finance classes, but it definitely isn’t my specialty. A lot of the fundamentals stated early on in the essay are what would be repeated in those classes though: “Shorting bears UNLIMITED risk with LIMITED gains”.

    Some of these people will ultimately make less money as a result[9], but they have made it clear they weren’t in this for the money. They are in this to punish Melvin.

    This however, is one of my first impressions upon reading these stories. Although there is a lot of room for speculation (or stock prices would be very boring as you said), there are still basic pricing fundamentals.* Many of these Reddit users have vastly overpriced stocks, and they WILL take a loss. In addition, they probably bailed out a lot of institutional investors who had long positions, which they may or may not be ok with (less predatory than short sellers I guess?). I’m also wondering if they indirectly rewarded any executives who would have bonuses related to the stock price, the same executives who, in my opinion, have been mismanaging the company.

    As far as the relation of stock price to the company performance, I’m very curious about that. As I said, Finance isn’t my specialty, but the price of shares is what’s being sold on the secondary market. Stock price doesn’t tend to have any immediate effect on the company by itself, but could influence things like raising additional capital like you said (plus the company will almost assuredly NOT be buying back shares of stock right now). Removing the shorter sellers might stop any hurdles GameStop would have with raising additional capital if they didn’t exist, but on the other hand, investors would likely know that the current price is way overpriced so it still might not be exactly easy for the company.

    * You get into not only what the current profitability and dividend results are, but also predictions of future profitability as well, which tends to result in Price/Earnings ratios that initially seem insane. My last Finance class was in 2018, and I thin Amazon had something like a 150 ratio, which would mean that if the company went stagnant, you’d have to hold the stock for 150 years go break even, which does not even include the time value of money, a VERY important calculation in the finance world. Ironically, this price might have been justified if the 2018 holders would have known about the 2020 effects upon Amazon.

    1. Shamus says:

      “Many of these Reddit users have vastly overpriced stocks, and they WILL take a loss.”

      I didn’t update the post before publishing, but you’re right. This is already happening. It seems like half the posts on /WSB are people posting “loss porn”, with a graph showing how much they lost. I think it’s sort of like bragging about how dedicated you are, or how much faith you have in the future on the stock?

      1. Ninety-Three says:

        Partly that, partly “Look at my misfortune, this is hilarious”. The “this is a hilarious mess and we’re all in it for the memes” energy was clearer last Tuesday before the “Sticking it to Melvin” narrative became quite so dominant.

        1. stratigo says:

          Cept those people in it to manipulate others into throwing away their money so that they can make a whole lot of money.

      2. stratigo says:

        But a number of the people pushing this in WSB made a killing.

        WSB isn’t a hive mind, and a lot of the people pushing buying ‘meme’ stocks had a lot of skin in the game. DeepFuckingValue had massively invested in GME stocks shortly before he started drumming up people to buy. So much so that he’s personally under investigation for maybe possibly trying to run a pump and dump.

        1. etheric42 says:

          I don’t think “shortly” Is the right word. Word is that he had been posting his portfolio for at least a year if not longer and he was deep in Gamestop the entire time.

          1. Liessa says:

            I’ve been browsing r/wallstreetbets on and off since this whole thing blew up, and it looks like he wasn’t ‘drumming up people’, just posting his stock position each day. Since he bought a large amount last year when the price was much lower, his gains obviously started to look AMAZING when the price jumped up – and encouraged a lot of other people to jump on the train. My impression is that he bought GME based on the idea that it was a reasonable long-term prospect, and just got incredibly lucky.

      3. Retsam says:

        Yeah, from my understanding this is sort of the norm of how WSB operates. It is called “WallstreetBets” not “WallstreetSoundFinancialDecisions” – I’m told it’s always been a community that would make weird meme plays and then equally brag about either the success or the failure.

        They’re like a community that buys a ton of lottery tickets; then they win big and everyone in the world hears about it jumps in and starts buying lotto tickets themselves without realizing exactly how risky the game they’re playing is.

        The charitable interpretation is that WSB really couldn’t have done anything about this and that people really need to know better than to make risky financial decisions without understanding what they’re doing.

        The less charitable interpretation is that a number of WSB users definitely played up the “stick it to the rich evil people” narrative, and encouraged a lot of people to jump in on the cause, specifically because they knew it’d drive the price up long enough for them to exit at the top, counting on the people who think holding the stock is “fighting the power” to hold long enough for them to get out.

    2. King Marth says:

      One of the fundamental origin points for stock price is in dividends, where you get a share of company profits in proportion to how much stock you own – you literally own a piece of the company and its money-making potential. It’s like buying a house in order to charge rent, or putting money in an interest-paying savings account (which is basically where the interest comes from, with a large amount withheld from you as insurance to insulate you against value ever dropping). If a company is making more money, then the right to own part of its earnings is more valuable; if you expect to receive less dividends per unit money (stock is overvalued) then you sell in order to allocate your money in a higher dividends per unit money asset (something undervalued), or to otherwise spend the least efficient parts of your money first. This is then why stock price is taken as such an important predictor of how well the company is doing, as it’s the money-where-their-mouth-is prediction of a large group of people as to how much of a return they expect.

      Not as many companies pay dividends now, though. In the absence of direct earning potential, stock becomes valued on its own terms, and looking for meaning there leads you into the philosophical question of why we value money at all.

      1. Asdasd says:

        In the absence of direct earning potential, stock becomes valued on its own terms, and looking for meaning there leads you into the philosophical question of why we value money at all.

        Or indeed, why so many of our resources in terms of time, energy and educated minds are expended on labour which has arbitrary, rather than intrinsic value. What really makes me weep with the stock market is how much more productive we could be with a better incentive structure.

      2. Sabrdance (MatthewH) says:

        One of the proposals I’ve seen -which I imagine did take longer than 2 minutes to cook up -was to restrict the proportion of non-dividend paying Class C stock to dividend paying Class A stock companies were allowed to issue. Some of the people discussing wanted to ban Class C altogether, others just thought it needed to be a low multiple of Class A so that the share of stock was enough Class A that buyers of stock would get a signal of company health (the dividend) for price-setting. Too much Class C and the price for Class A is getting set by the speculators, not the dividend.

        This is a bit over my head, but it seemed plausible.

      3. RFS-81 says:

        Not as many companies pay dividends now, though. In the absence of direct earning potential, stock becomes valued on its own terms, and looking for meaning there leads you into the philosophical question of why we value money at all.

        That’s how you say “buying stonks for the memes” while wearing a suit :P

        1. RFS-81 says:

          I don’t know if anyone is going to read this, but I thought about it some more and I don’t think the analogy with money really works that well.

          You don’t have to value shares yourself, it’s enough that others value them. That works as long as everyone believes that there are some people out there who want to own shares in successful companies, just for the hell of it.* I can believe that there are people like that, but how do we know that those stocks don’t turn out to be Beanie Babies?

          The difference with money is that we all know that you can’t eat money. We all “agree” to act like money has value because it’s convenient. With those shares, we act like there’s someone else who inherently values them and that may or may not be true. Assigning no value to money is difficult if you want to eat. Assigning no value to shares is easy.

          Or maybe those people are just playing an extremely long game? Tesla isn’t paying dividends in the “foreseeable future”, but maybe they think that when they do, they’ll pay $Lolgillion.

          *Sure, sometimes people will want to buy a pile of shares to take control of a company, but not all shares are voting shares.

    3. The Puzzler says:

      It was predictable that after the shorting was over, GameStop would start to return to its ‘real’ value, and anyone who was bought high and didn’t sell early would lose a lot of money. This probably includes a lot of small investors who didn’t really understand what they were getting into and risked too much.

      And the logical thing for us all to do in this situation is to short the stock, thus making a profit when (if?) the price goes back to where it was originally. Anyone feeling lucky? (I am not.)

      1. Sabrdance (MatthewH) says:

        One of the reports I read was that this was why several other hedge funds were willing to loan Melvin the money to keep shorting.

        “We can stay crazy longer than they can stay solvent” may technically be true, but it is not guaranteed in this case.

        My own guess is that Melvin will probably make back most of the damage fairly soon.

        1. Fizban says:

          This seems to be a common refrain, but- Will Melvin make back most of the damage that fast? Presumably it takes time to accrue that value. When was the last time Melvin was valued at what they are right now? Presumably, without a lucky break, it will take around the same amount of time to get there again.

          And with that, the vindictive streak makes sense: if Melvin assigns their personal feeling of worth to that money, and is going to take years to get that money back, then they should feel the hurt for years. The part where I drop out is that I expect they won’t actually feel the hurt, and after say a month of continuing to live at the ridiculous level of comfort they already were, won’t even care any more, except to watch a little more closely for when the market pushes back

          1. Thomas says:

            I heard Melvin closed out their position anyway. So Melvin won’t profit, but Melbin will come along short the position and make all the money Melvin lost. And of course the organisations who owned Melvin money are happy enough too.

            The media frenzy probably introduced enough amateur money into the stock market that the affair was a net plus for Wall Street. And a big boon for the organisations running the trading apps.

      2. guy says:

        Well, the thing I didn’t know about shorting until this all happened is that you need to rebuy the stock within a certain timeframe. That’s why Melvin couldn’t just hold onto the short positions until WSB wandered off. Thus it’s pretty risky to try to short at the top or on the way down because it’s not clear when it will hit bottom.

        That said, I’m pretty sure a number of short sellers made a killing.

  12. RamblePak64 says:

    Thank you for the write-up. I’d watched some videos on it, but none of them explained the situation in as satisfying or informative manner.

    It does leave me to question why the stock market even is what it is to be gamed like this. Every so often my naive brain wonders why anyone would bother going public at all. Wouldn’t it be better to be private? But I suppose going public means you’re distributing the risk so that, should everything collapse, all that cost and failure isn’t on just one (or a few) heads. But I feel like this is a system that was originally designed with good intentions in mind, and has only become more and more gamed by people that don’t actually care about the products these companies represent. Just that they are a way to earn money.

    And man, I hate that. I hate that so much. But if you were to completely get rid of the system, I’m sure that there’d be a lot of companies that wouldn’t be able to survive without it. Would the world be better? Would it be a net gain? Or would it be worse? I dunno. I just… can’t stand this side of business, because it’s about nothing but money.

    1. Thomas says:

      The stock market doesn’t have much of an effect on a companies day to day running. Share prices only really matter in that a companies board care about share price and will sack the CEO of it goes down.

      Going public is a way of getting a massive influx of cash to help get your business running, or a payday for having started the business, and then after the initial influx it’s just a game with very hazy rules.

      Nowadays it’s not even the initial launch – private investors give money to the company in anticipation of getting it back from the launch. So the stock market is sort of just an incentive to reward those investors for good investments.

      People debate whether GameStop should be worth $5 or $10 but both those figures are kind of arbitrary. Without this freak accidents, neither figure would have changed how GameStop did their business

      1. LadyTL says:

        Funnily enough the WSB thing caused someone from a company to do an AMA and talked about how a short push from a shady hedgefund nearly caused their company to go under. (Axon Enterprise) Basically from what he talked about the hedgefund put a short on their company and then orchestrated alot of bad press to make it seem like the company was struggling and about to go under. This made people not want to order products from them, they had a bunch of bad lawsuits because the news made it seem their products were bad and they only survived because they had more capital on hand then most companies. They had been absolutely clear it was only by a narrow margin that their company pulled through. All because of shady short selling practices.

        It makes sense though, if you see a stock drop people might come to a conclusion that the company is doing bad even if in reality the stock is only dropping because of market manipulation and not the company actually doing poorly.

        1. DerJungerLudendorff says:

          But that seems less about stock price and more about some headgefund spreading massive lies about the company?
          Yeah, they did it to drive down the stock price, but it was the collateral damage from the lying that almost killed the company.

          1. Joe Informatico says:

            But isn’t the whole system built on mythology and fairy tales anyway? Bezos convinced his investors to stick with him through the Dot-Com bubble and the Great Recession even though Amazon didn’t officially make any profits for two decades!

            1. Chad Miller says:

              Amazon wasn’t turning a profit because they were reinvesting their revenue. General consensus was that there was a long period where they could turn a profit any time they wanted just by choosing to not grow as quickly.

    2. BlueHorus says:

      I hate that so much. But if you were to completely get rid of the system, I’m sure that there’d be a lot of companies that wouldn’t be able to survive without it.

      There’s a similar argument to be had over the idea of a LLC (Limited Liability Company). If the company does really badly, they get bailed out (usually be a country’s government), but if they do well, they keep all the profit. So, naturally LLCs are able to take bigger risks and make bigger investments, by (in a way) gambling with other people’s money.

      So there’s been some terrible ideas (and people) bailed out at the taxpayers’ expense, but there’s also been a lot of companies and industries that never would have got started without the security offered by an LLC.

      1. Ninety-Three says:

        LLC does not imply bailouts. Their defining characteristic is that if they take a big risk and go broke, their people who loaned them money can’t go after the company’s owners to try to claw back their debts. Usually the creditors are just out of luck and lose however much money they loaned to the LLC. Naturally, people take this into account when some shiny new LLC approaches them asking for a loan, and they give much stricter terms than for a regular company.

        1. BlueHorus says:

          Fair enough. So not quite as risk-free as I first thought, but they’re still insulated from failure in a way. Has it always worked like that?

          1. Joshua says:

            LLCs are very much like a corporation with lower tax rates. The classic main difference between a Partnership and Corporation that you would learn in Accounting 101 is that a Corporation pays taxes on its income on its own right, and when it issues dividends, those owners have to pay (reduced) taxes on those, resulting in double taxation. On the flip side, the worst you can lose is the value of your shares. Imagine if a Coca-Cola plant explodes and takes out Manhattan. Coca-Cola will be liquidated out of existence, but the owners *only* suffer the consequence that their shares are now worthless.

            In a Partnership, by contrast, the company is a Pass-Through entity where the income of the company gets passed on directly to the owners, so is only taxed once. Given the nature of marginal tax brackets, that could also result in less taxes assessed overall: Ten partners reporting income of $100k each will pay less taxes than one Corporation with $1 million in net income. However, in the Coca-Cola Takes Manhattan example above, not only do the partners have a worthless interest in the now-defunct Coca-Cola, the government is coming after all of their houses and other assets as well, leaving them literally penniless.

            LLCs attempt to have this both ways, by treating the income typically as a Partnership, but having Limited Liability (it’s in the name) for the owners.

    3. Lino says:

      Roughly speaking, the main reasons for going public is to reward the initial investors who took a risk in backing the company. Let’s take a hypothetical video game company. Its life cycle goes like this:

      Two friends have an idea for a game. They make a rough prototype, and sell that idea to a Business Angel. He invests in the company, and becomes a partial owner. This is a HUGE risk. He’s investing in a company no one’s ever heard of, and which has never produced anything. But if things work out, he’s in for one heck of a payday.
      With his funding they hash out the prototype, and release the game. It makes a ton of money, and catches the attention of a Venture Capital Fund. VC Funds usually look for companies that have an established customer base, but aren’t as big as the industry’s household names. So they buy out the shares of the Business Angel, and start investing in the company. After a couple of more games, the company has gotten really big and successful.

      But up until this point, the VC Fund has been reinvesting all of the profit back into the company. Roughly speaking, the VC Fund hasn’t gotten any money back from its investment – they’ve only made expenses to help the company grow.

      Now, they have two choices.
      1. They can let the company coast. Instead of reinvesting everything, they can start pocketing part of the profit for themselves. In 5 or 10 years, they’ll have gotten their money back.
      2. They can offer the company on the stock market.

      Generally speaking, Option No 2 is their ultimate goal. It’s arguably the best way to cash out their investment. The problem with Option 1 is that, somewhere along the line, the company might stop making money. And you’ve already taken a big enough risk as it is – you’ve held the company for however manh years, and you’ve invested a lot to make it grow.

      Now it’s the stock market’s turn to take the risk, and take the company to the next level (i.e. lootboxes and microtransactions!).

      1. Lino says:

        Gah! I just saw Thomas’s reply! It’s both shorter AND faster than mine! Sometimes I wonder why I even bother, when the comments section is full of so many smart (and fast!) people :D

        1. RamblePak64 says:

          I actually appreciated your response as well, so thanks for it!

    4. Fizban says:

      {A layman’s interpretation , based on what seems to happen):

      You own a company, maybe you actually made it yourself, maybe you bought it off someone else just when it got big enough to be worth the effort. You can increase that company’s value by selling “shares” of it- you put the company on the market, get paid a bunch for the shares, and then use that cash to improve the value of the company by upgrading and expanding and whatnot (a normal person would think “Isn’t that what loans are for?, literally business loans?”). Improving the value of the company also tends to include raising the pay for everyone at the top, such as you and your friends while you’re there.

      You now own a company that is worth more than it was before. You sell the company to someone else, making a profit, and getting yourself out of any responsibility for fuckups you may have made that haven’t manifested yet. If your company was reliable enough to have got that money through a flat loan, then you could have done that- but then you’d have to stick around. And sticking around means accepting responsibility. But stock of a newly traded company, well that never seems to not sell, the whole point is that if you’re allowed to sell shares, it’s worth it for someone to take the gamble.

      And loans have a known debt value which will reduce what you can get for selling the company. But stocks don’t have to be paid back- and you can even do a version where you never pay “interest” (the dividends mentioned above), literally all upside, a one-time cash infusion you get to reap just by reaching the “tradeable” threshold.

      Essentially the stock market is an evolution of a sort of shared loan system, where instead of relying on a particular wealthy investor/bank/whatever to decide whether you’re allowed to take a loan for expansion (with the company as collateral), you can instead divide it up into “shares,” which can be bought by anyone, so rather than one person making a careful decision, it’s basically guaranteed. What happens after that, you don’t actually care about. The people buying the shares either expect dividends on their investment, or are trying to gamble their way into more money by knowing or guessing just a little bit better than the guy next to them.

      It is not a system designed for any coherent, benevolent purpose.

      If you could magically get rid of the system, well companies wouldn’t be able to sell themselves into stocks for that one-time chunk of captial. So they would always have to prove to a more more specific someone that they’re worth the investment (whether bank or priviate). And since “normal people” couldn’t own stocks to make their savings increase in value, their money would stagnate (because inflation), the magic of “owning” things generating money out of “nowhere” would be limited only to people with the most money, rather than how it is now where it’s limited only to people with a very large amount of money.

      But aside from retirement accounts, what does a normal person actually care? Pretty sure the vast majority of people are only connected to stocks via retirement accounts, and those only because they come with the job or they were told to get one.

      (Edit: amusingly, Lino’s explanation goes the other way, where the stocks are how the initial investors cash out. Either way, the point is that there are some amount of investors, someone is going to want to cash out, and the stock market means there’s always some idiot to take the fall. Be it cashing out the initial investors, or making an investment that the “owner” can use to inflate their position before bailing.

  13. Thomas says:

    Personally I’ve long felt that WSB was garbage subreddit full of people trying to convince other people to be pawns in their get rich quick scheme, so I have real doubts that the original people were so noble about holding out as they claimed (especially as some of them are legitimate investment bankers using their IRL voice).

    I suspect a bunch of people sold stock to people attracted by the news stories and those people have been left holding the bill now the stock is coming down.

    And sure Melvin is hurt, but BlackRock made over $2 billion from this scheme and other hedge funds made money from Melvin’s troubles. They’re not going to be worried by this

    For me personally it was just irritating after years of studiously ignoring WSB they leaked over into all my other subreddits giving people advice like ‘Buy GME at $300’

    1. zackoid says:

      I think you’re dead on, the wsb was just as much market manipulation as anything hedge funds do. The good vs evil narratives were all tacked on later.

      1. BlueHorus says:

        Thirded. While I can imagine SOME people bought GameStop stock in order to Stick It To The Man, unltimately, what happened (it seems to me) is that the people hoping to short GameStop got outplayed.

        Plus, I will not be surprised if GameStop ends up exactly where they started before this all began. I mean, it’s not like the nature of the company has changed…

        1. Joshua says:

          Another thought I had upon first reading about this is what if any of the people leading this drive on Reddit (for this issue or in the future) had existing shares in GameStop/future company? All of a sudden you have people cheering on the “sticking it to the man” when it’s really just naked self interest.

        2. Lino says:

          I mean, it’s not like the nature of the company has changed…

          Well, the CEO of Chewy became an owner, and he seems to want to make some changes. If he manages to transition Gamestop into a more online business (which he seems to be starting to do), I think it would be good for everyone.

          Still, I’m not very hopeful.

    2. Retsam says:

      Yeah, I think this is the best post I’ve seen expressing cynicism of the motives of the WSB regulars:

      Redditors never seem to stop and think about why the WSB guys know so much about derivatives trading. Or how they seem to know how to access and read from a Bloomberg terminal. Or why there are so many users there that can seemingly drop tens or hundreds of thousands of dollars on complicated meme plays.

      How do you think that WSB knew that GME was open to a short squeeze and a gamma squeeze play?

      WSB’s power users are younger finance bros. It’s 30-something investment bankers and portfolio managers memeing with each other and cosplaying as “autists.”

      If you didn’t know what a gamma squeeze was 48 hours ago, you are their exit strategy and the down payment on their next Porsche.

      1. Thomas says:

        That’s a great post. I’m going to keep this link handy, because I suspect there’s going to be some use for it down the road

  14. Steve C says:

    There’s another problem. No information can be trusted.
    The WSJ *reported* that Melvin lost 53% of his total value in the month of January. Maybe that’s true. But that could also be a planted story just as easily as any other. It falls into the same info trap like the reference to the Jim Cramer video.

  15. BlueHorus says:

    Ah, the Stock Market. People trading in intangible nothing and predictions about the future. What surprises (and slightly impresses) me, really, is how any of it is illegal at all, given how open to abuse and manipulation it seems.

    I mean, reading around after hearing this story a few day ago, I learn that it’s actually legal in some countries for a company to buy its own stock with the intention of driving up the price. And for some companies, that’s what they funnel vast amounts of their profits into doing!

    (Incidentally, isn’t this a bit self-defeating in the long run? Firstly the obvious: because investing in stock is NOT investing in infrastructure or something that will bost the company long-term, but also secondly: because any investment firm or hedge fund worth its salt will be able to see the company doing it, and adjust their expectations accordingly.)

    1. Shamus says:

      Buying your own stock makes a ton of sense. When you issue stock, you’re giving up some chunk of ownership in exchange for money right now.

      For example, maybe I want to sell you some shares of TwentySided Inc. That gives me some up-front money to hire a team of engineers to help me stop posting an entire article to the front page. That chunk of money is a huge help, but now you own half my company.

      So down the road I’m really making money. Not having entire posts on the front page has profits through the roof. At the same time, shareholders are always bothering me with stuff like:

      “Hey, you get lots of views when you write about Dark Souls. Do that. Just make a Dark Souls blog to maximize profits!”

      I don’t want that pressure from shareholders, so I buy those shares back. Now I own all of the company by myself and I’m free to write about whatever I want, without needing to appease shareholders.

      It would be strange if the price DIDN’T go up. When a company buys its own shares it shows that the leadership is:

      A) Doing a good job of bringing in money.
      B) Very confident in the future.

      1. BlueHorus says:

        Or they want to create that impression…companies are, of course, run by humans and humans can lie.

        Not that I’m really disagreeing with you. I entirely get why a company might want to buy back stock held by someone like a demanding shareholder (let’s call him Mr Darksouls).

        But buying stock back just to inflate the price? That…
        …can actually be a sound investment, if it convinces other people to buy stock…
        …or could backfire, and now you’ve wasted a load of money trying to shore up a failing company…
        …or means you keep more of your own profit from an upgrade your shareholder missed or underestimated…
        …or dozens of other things…

        GHAH. This is what gets me about stock markets, and probably why I’ll never go near it.

        1. etheric42 says:

          I think Shamus’s comment is incorrect, but yours is as well.

          When a company makes a million dollars they have generally have a choice to make.

          1) Reinvest the money in the company. Hire new staff, buy productive equipment, open a new office, buy another company, etc. This is the dominant strategy of GROWTH companies. Ones who want to continue to grow so they can make even more money next year. The investors (owners) are happy with this because that means in the future the company will able to make more money which makes the company worth more money. People guess the company will use these profits well and factor potential future earnings in the company when deciding how much they think the company is worth. People who aren’t in it for the long haul can cash out early by selling stock now because by reinvesting in the company and showing good stewardship the stock price has gone up.

          So they’re reinvesting in the company will inflate the stock price.

          2) You can return that money to the investors (owners). This is the dominant strategy of VALUE companies. Maybe the company doesn’t have a great way to spend it, maybe because they are so big there’s too much inertia to find a great new project. One way of doing this is by paying dividends. Everyone gets paid out according to the rules of their stock. Another way is buy buying stock back, decreasing the amount or shares in circulation. It’s the same amount of money spent, and generally has the same effect for the investors (owners). The people who randomly didn’t get their stock bought can always sell it now that the value of the stock is up because the company now has a track record of paying out profits. Either way, the value of the stock rises because the company is doing well. The choice between them usually comes down to regulation and taxes.

          So paying out profits will inflate the price.

          Basically, the company doing well inflates the price. The exception to this is if the company made a profit, but it was less than the investors (owners) thought it was going to make, so a company can still do “well” and even do stock buybacks and have the price decrease.

          This isn’t a scam.

          EDIT: I think Shamus’ comment is more about a large shareholder buying out small shareholders to solidify control even if he does not have to, as opposed to the company itself buying the stock back.

          1. BlueHorus says:

            Oh, I never thought buying back stock was a scam.
            I just thought it was a very good way for an unscrupulous company to misrepresent or artificially inflate its own stock prices. The action itself is not bad; some of its potential uses is.

            But that is true of many, many, things.

            1. Joshua says:

              Keep in mind that a company’s market cap is usually significantly higher than its Net Assets (because it is taking future revenue into account), much less its actual cash. It likely couldn’t buy back enough of its stock to move the market very much if it was really doing so poorly, i.e. a company announcing stock buybacks and then only purchases $50,000 worth of stock would be laughed at, and the price might plummet.

              Imagining some set of circumstances where the execs could get access to enough cash to make a sizeable buyback while bluffing (right before declaring bankruptcy? I dunno) seems like a scenario where the bluff would soon be discovered and those same execs arrested. I would think that there are easier ways to run scams.

            2. etheric42 says:

              I don’t understand how they could misrepresent it. I mean, their earnings are public information, so either they made 1 mil in profits or they didn’t. They’re going to use it to issue profits or they are going to reinvest it.

              Can you help me understand by what mechanism the stock buyback would artificially inflate the stock prices?

              What is the thing that they would be doing? And how is this different than issuing a dividend?

              1. BlueHorus says:

                This seems like a language issue (amongst other things).
                I initially said the stock prices would be ‘artificially’ inflated because, well, a company increasing its own stock price via buyback seems like a short-term boost that isn’t actually adding value, to me. But stocks aren’t tangible things, so the increase maybe isn’t ‘artificial’.

                And you’re right, a company can’t lie about their profits – or rather they can, but that would be illegal in its own way, unrelated to any buybacks.
                As Joshua said, there are probably easier ways to mislead investors – though I guess you could use buybacks as part of some greater plan?

                (‘Our new product line is a stinker! But maybe if we hide the flaws and buyback some stock as a ‘show of confidence’ before the launch, we can get a load of investors interested and lessen the damage…)

                1. etheric42 says:

                  And again: how is this different from dividends?

                  And if it isn’t different from dividends, how are companies supposed to issue profit back to their owners?

      2. The Puzzler says:

        It’s not the original owner of the company buying back the shares, it’s the company itself buying back the shares, using its own profits. You don’t own all the company afterwards. (Well, I suppose the company could in theory buy all the shares you don’t own, but that’s not what normally happens.)

        I get the impression stock buy-back is often used to game the system.

        Say the boss has a contract saying he gets a huge bonus if the share price goes up. Rather than improve the company, he arranges to use company funds for a buyback. This is guaranteed to make the share price go up, so he gets the money even if the company itself isn’t doing any better.

        1. Sabrdance (MatthewH) says:

          My last class in stock market regulation has been over a decade -and it isn’t my specialty -but I remember one of the case studies was Microsoft buying back its stock and issuing a larger dividend to its Class A holders after a surprise change to the tax laws during the Clinton administration. Natural experiments! We’re excited. The case study argued it was done for tax reasons. Basically, it converted a bunch of highly taxed capital gains into a lower taxed dividend, and this is why we should equalize tax treatments, et cetera.

          The professor teaching the class then said he’d called up Microsoft a few years later while doing some related research, and asked about the buyback, and they said that they had no idea about the tax law change, and the actual reason was to reduce their cash on hand because they were losing the Netscape anti-trust case and didn’t want Scrooge McDuck levels of money lying around for the Department of Justice to reference during the trial.

          And this is why natural experiments aren’t actually experiments.

          I still find that story hilarious.

      3. Joshua says:

        Yes, but I would posit that most buybacks are less about solidifying authority* and more about profit. A company that has ten shareholders will have a higher earnings per share than one with twenty. The company is footing cash now to increase the returns that individual shareholders will receive in the future, which are theorized to be higher.

        *Seriously, there are a number of people here who think that shareholders are providing a lot more annoying input than happens in reality, especially with the topic of DRM. If shareholders are being really fussy, it’s usually because the management is doing something the shareholders really don’t like, and there may be a good reason for it.

    2. Joshua says:

      Stock buybacks are used to reduce the amount of owners so each individual owner left gets a higher amount of earnings in the future. It’s just the opposite of issuing shares, which is obtaining money by watering down the existing ownership. There’s nothing unethical about the concept, much like a company trying to buy up it’s shares to go private again. It’s also signalling that it thinks it’s shares are undervalued, because better to pay the price now to earn better profits for the owners later. Yeah, it could be a bluff, but that’s an expensive and risky bluff to make if the market doesn’t go along with it.

      Most of the legitimate outrage comes from when a company does buybacks *after* getting a bailout or tax break of some kind. The larger public just gave them funding to support the business, its employees, etc., and they used it to completely benefit the owners.

  16. Lino says:


    There are actually multiple multiple parties

    One extra “multiple”.

    hedge fund types have gone unchallenged to too long.

    Should be “for”.

    Regarding the story, I think this is a great summary. Although, it’s very unfortunate for the people who bought when the price was in the 300’s. A lot of them got burned. But that’s the way bubbles go, after all. Those who buy at the top are left holding the bag…

    And it’s still very weird why RobinHood and the other brokers just didn’t increase the margin requirements, instead of outright banning buying. They could have just made it so you could only buy whole shares, instead of parts/fractions of a share like they usually do. They could have done that in the beginning of the week. No one would have objected, and their whole liquidity issue could have been averted. And even if they couldn’t do that, they should have told people about the liquidity problems instead of… whatever it was they were trying to pass it off as.

    Now, with the backlash and the bad press around the class action lawsuit (which probably won’t go anywhere), I don’t see how they can recover. And it’s such a shame too, given that one of their founders is a fellow Bulgarian.

    1. Henson says:

      If you have multiple multiples, doesn’t that just increase the degree of the multiple? Kind of like writing ‘very very’; it’s not just very, it’s uber very.

      How will I be able to tell the degree of the hyperbole otherwise? I must know!

  17. Tohron says:

    Just FYI, there is another, less risky way to short stocks using something called options trading. The idea is, if you want to short a stock, you pay a financial entity that sells “options” for the option to sell a specified amount of that stock at a certain price and a certain time (let’s say you buy an option to sell it for slightly less than its current value, since the cost of the option rises if the option’s sell price is higher).

    If the stock goes down, then when the option comes due, you exercise it, buying stock at the current price and selling it at price specified in the option, profiting from the difference (minus the original cost of the option). If you’re wrong and the stock didn’t go down, you only lose the cost of the option, rather than the theoretically infinite potential loss if you’d done a regular short-sell.

    The short-selling described in The Big Short (about people who profited from the 2008 crash) was this type of short selling: since they didn’t know when the crash would happen, it would have bad idea to actually borrow and sell stock – instead they just kept regularly buying options until the crash happened, at which point they exercised them.

    1. Thomas says:

      I’m really glad you mentioned this! After all the talk about shorting I was wondering how the people in The Big Short survived so long without going bust.

  18. RFS-81 says:

    A lot of WSB folks have been buying their GameStop shares through the app Robinhood. On Thursday they discover the app would allow them to sell their shares, but not buy more. The app cautions them that the stock is closed due to “volatility”, as if Robinhood is saying, “Sorry! This stock is too dangerous for you to buy!”

    This is the best part! They’ve turned stonks into a mobile game, but now they’re worried about their users taking stupid risks. Sure.

    1. Thomas says:

      They advertise these apps like they’re gambling too. The ads are all about big payouts and getting rich fast. Not diverse portfolios and sensible financial planning.

      They know what they’re doing and they’re hypocrites if they pretend otherwise. I ended up buying YouTube Premium last year because I couldn’t take the sleeziness of the trading app ads anymore.

      1. RFS-81 says:

        Does everyone get these? I thought all those Magic: The Gathering videos got me sorted into the “people with questionable spending habits” bin and that’s why I got them all the time.

        1. Nimrandir says:

          Good luck using my watch history to explain how Google decided my greatest desire is to go to Gold’s Gym and get swole!!

  19. beleester says:

    I’m no more of a finance expert than you are, but I believe there’s a way to sell more stock than exists, without “naked shorting.”

    Suppose there are 100 shares of stock in circulation. Alice lends 100 shares of stock to Bob for a short. Bob sells those stocks to Carol. Carol lends those shares to David for another short. There are still only 100 shares of stock in circulation, but there are two shorts of 100 shares each, so more shares have been shorted than actually exist. This isn’t actually a “naked short,” because Bob and David did in fact possess the shares they were selling. When it’s time to settle up, the sequence will go in reverse – David buys back his shares, gives them to Carol, who sells them to Bob, who gives them to Alice.

    The problem happens when Carol realizes what’s going on and that Bob needs her 100 shares to settle up, so she can demand $5,000 per share if she wants. Then Bob is in trouble.

  20. Vladius says:

    I know you don’t discuss politics, but the other angle of this is that the news media/Twitter complex is framing this with Wall Street as the good (or neutral) guy and WSB as extremist GamerGate Trump nazis, and comparing the event to storming the capitol building.

    1. Daimbert says:

      I was puzzled by how positive this was towards WSB for that very reason. From what I had heard only half paying attention, it seemed that a lot of people and even politicians were saying that what WSB did was wrong and the thing that needed to be fixed.

      And to be fair, deliberately manipulating the market to tweak someone’s nose or hurt a specific company IS actually illegal. That’s why in the cases that Shamus mentions they actually work pretty hard to at least have plausible deniability that that’s what they’re doing.

      1. Alberek says:

        How is buying stocks and not selling them illegal?
        I’m not surprised the WSB are seen as “the bad” guys here, just for the crime of “playing in the giants playground” so to speak.

        1. AncientSpark says:

          From what I understand, it largely has to do with trust and intention.

          For example, just because they aren’t selling now does not mean that they don’t have the intention to sell them later. Thus, if you don’t look at intention and justification, then there’s basically no difference from the outside from a viewer’s point of view between a true buy-and-hold vs just an extremely long term pump-and-dump (where you buy stocks with no justification to initiate a buying frenzy, driving up the price which allows you to sell, then it’s later revealed that the justification was not there and the price plummets. That’s a market manipulation tactic that is very illegal). Thus, it’s all about what you THINK the buyer is going to do; likewise, the buyer needs to largely justify why they believe the way they do when they buy stocks.

          So, from, say, the establishment’s point of view, these upstarts are screwing over the public (i.e., them), and are complete amateurs in market sharing. They cannot be trusted one bit. But, for a lot of more internet literate people, they are familiar with Reddit, and at least somewhat within their sphere of publicity, so they are likely to be a lot more lenient towards WSB.

        2. Daimbert says:

          It’s the intention behind it. Take the short-selling case in and of itself. If you legitimately think that based on publicly available information that a stock’s price will fall, then shorting is indeed a valid way to make money on that. But if you try to short-sell in order TO drive that price down, or else release information in a way, as Shamus notes, that WILL cause the stock to fall, then you’re deliberately manipulating the market and while I’m not a lawyer I do think that it’s against the rules of the security commission.

          So imagine that WSB notes that either a specific broker or the system itself is short-selling a stock and so leaves themselves vulnerable to this sort of action, and so they start buying stock and encourage others through Reddit to buy that stock specifically to stick it to those brokers. That’s ALSO manipulating the market and so would be against the rules. So, in general, those who ARE trying to manipulate the market do so in ways where there’s plausible deniability that that’s what they’re doing. Talking about doing precisely that in a public forum doesn’t really manage that, and so opens WSB up to the mainstream media’s criticisms that they are, well, manipulating the market for invalid ends.

  21. Alberek says:

    Damn, THANKS Shamus, I really wanted to know about this, it wasn’t that much covered in my local news (other country).
    What it’s really interesting was that Reddit was hacked during all this shit…
    No doubt Hollywood is going to take a crack at this story give it one or two years…

  22. bobbert says:

    Always love ‘Business School with Shamus Young’. You should start tagging such posts so we can archive binge on them.

    1. Lino says:

      Seconded. I still re-read his Dot-Com Bubble series from time to time.

  23. Philadelphus says:

    But here this supposed brokerage is creating a situation where the GameStop stock can only go down, because nobody in the general public can buy it.

    So one thing I didn’t understand about the sudden government interest in investigating Robinhood—admittedly, I know next to nothing about the stock market, but surely in this day and age Robinhood can’t have been the only option for the general public to buy GameStop stock? If there are other options then it sounds to me like, say, Steam banning buying strategy games. Sure that’s annoying to me because I only use Steam currently, but there are several other online game stores out there that I can go to get my strategy game fix (even as a Linux gamer!). I can get people being annoyed if the app they use suddenly doesn’t let them do something (that IS incredibly annoying), but surely that doesn’t warrant government investigation as long as other options exist?

    Or maybe I’m wrong and Robinhood is literally the ONLY app the general public can use to buy stocks with a 100% monopoly, in which case…I guess there’s a golden market opportunity out there, after all this? What am I missing here?

    1. Lino says:

      There are very few apps that allow you to trade stocks using a small amount of money. This is why Robinhood became so popular so quickly – it didn’t require you to have thousands of dollars in order to trade. On top of that, it was very simple to use, which very quickly made it the market leader among retail investors.

      But you’re right – there are a few other brokers like that: Interactive Brokers, eToro, and WeBull, to name a few. All of them put similar restrictions at the same time Robinhood did. There were a few brokers that did allow trading (e.g. Revolut, although they also later put restrictions), but then you have a second problem.

      See, opening a trading account takes time. You need to send documents, and deposit cash in it. Nowadays, processing documents takes a few hours or so. But processing the deposit can take up to two days (for technical reasons). Also, initially people didn’t know which brokers allowed buying and which didn’t.

      Also, bear in mind that a lot of people had their entire investment account with Robinhood. Now, as far as I know, Robinhood allow account transfer to another broker, but again – that process takes time – around two days, I think.

      And as you can imagine with a volatile stock such as this, two days can be the difference between life and death (or the Moon and Bear’s Canyon, as was the case here :D).

      1. Philadelphus says:

        Ah, I see! Thanks. That helps contextualize it a lot. I hadn’t thought the time aspect of it, but I can see how that would indeed be a big consideration.

    2. Shamus says:

      Okay, here’s some additional complexity that I left out of the article:

      There are indeed several apps. Most of the apps use a service called Apex or something to process the trades. The apps themselves aren’t plugged into the super-exclusive system that lets you initiate trades. They’re basically just a front end and they rely on this other company to participate in the market.

      Apex was the source of this problem. Apex normally doesn’t mind handling the small-potatoes trades coming from these phone apps, because for the most part:

      1) You’re dealing with stocks that move slowly. (They go up or down by a few bucks a day. Big deal.)
      2) You’re dealing with a small number of shares being traded. (Some pleb buying 10 shares, not a major company buying 100,000.)
      3) You’re dealing with a small number of parties doing trades. (The apps weren’t THAT popular until recently.)

      But with GME (GameStop) you’ve got extreme moves (over half of its value in a day) large volume (lots of activity) and lots of individual trades (because its a million people buying 5 shares each instead of something like five companies buying a million shares each.)

      So Apex suddenly told all these phone apps: “Look, if you want us to process buy orders for GME, we need you to put up some more collateral to cover all this chaos.” For Robinhood, that meant they need like 2 or 3 $billion, and they didn’t have it.

      So most of the phone apps had this same problem where they couldn’t carry GME until they could get a their hands on a ton of cash.

      There were indeed a few apps that you could still use to buy GME. I THINK the problem here is that they operated more like traditional brokerage houses. None of this instant-trade, instant-money nonsense. They don’t float you any money. Which means it takes a few days to set up your account with them. That’s fine under normal circumstances, but in this case that’s just too long. Two or three days of no buying was all Melvin needed to close out his positions and get away.

      This all sounds reasonable to me, but now we have a situation where a massive bookkeeping problem JUST HAPPENED to save some billionaires and screw a bunch of plebs. Even if that’s what happened, there’s always going to be suspicion that there was some sort of nefarious collusion

      So that’s why the government is suspicious.

      1. Philadelphus says:

        Thanks, that also helps explain it. Very interesting with that extra context! I realize my original comment might’ve come off as directed against you and that really wasn’t my intent—my apologies if it did. I’ve learned several things today, so it’s a good day. :D

    3. Chad Miller says:

      In addition to what others have said, some people also reported being told by the app that their shares were being automatically sold without their consent. I don’t know all the details there but it made for some screenshots that definitely fueled the “big finance is colluding against us!” narrative.

      1. psychicprogrammer says:

        From what I have seen, those were margin investments, (effectively borrowing money to buy a share) and the fall in price lead to a margin call, (we don’t have enough collateral so we are selling your part), which happens all the time.

  24. SkySC says:

    What most versions of this story seem to leave out are the countless naive people who heard about this in the news, bought GameStop shares when the price was already inflated, and got completely screwed. Also the major institutional investors that had been holding GameStop for months and made fortunes, or the hedge funds that saw GameStop jump in value and decided to short at that point and are making a killing.

    I’m sure that once the dust has settled, the ones who benefit most from this event won’t be scrappy retail traders, but rather big funds and investors not so different from the few funds that got blown up. It’s an interesting story, but I really don’t think it fits the “David vs Goliath” mold.

    1. Drathnoxis says:

      Sure it does. Only when David killed Goliath he fell over and crushed an apartment complex that a hundred people were living in.

      1. Daniil Adamov says:

        Well, more like he fell over and crushed some of David’s less nimble followers. They did join this voluntarily. That does put a damper on things for me somewhat, but for the most part I think that Shamus’ conclusion about no collateral damage holds (which is one of the big things about this story for me as well). Most people this hurts either can take it or are fools (as we all are sometimes, of course), rather than people suffering for no fault of their own.

        1. SkySC says:

          Well, yes, I think it’s safe to say that anyone who bought GameStop should’ve known that it was a great way to lose money. But not everyone did know that. “A bunch of retail traders on Reddit banded together to push up a stock, and they made tons of money off the hedge funds who shorted it, plus they fleeced all the rubes who joined in after seeing the story in the news” isn’t really a celebratory story, but it’s certainly part of what happened.

          And again, the ones who really make a killing will be the usual suspects, the brokerages, funds, and banks positioned to profit off this situation either directly or indirectly.

          I’m not super familiar with the story of David and Goliath, but I don’t think it ended with David stealing from his own followers while Goliath’s even bigger buddies came in to eat his corpse.

          1. Ander says:

            I’m reminded of the casino position on movies and documentaries about card counters. “They’re good business. Bunch of idiots think they count cards now.”

  25. chukg says:

    “And they won’t want to listen anyway, since you’re obviously a shill covering up for all of these people engaging in vehicular homicide.”
    Yes, definitely sounds like someone in the pocket of Big Deathrace.

  26. EmmEnnEff says:

    RobinHood wasn’t actually out of liquidity (That would be an *incredibly* serious financial situation for a stock broker to be, because that would mean that they couldn’t let their users close out their positions).

    What it was out of was collateral in the settlement houses.

    The reason it was out of collateral, overnight, the settlement houses vastly increased broker collateral requirements for GME. They do this, because their collateral requirements are based on the volatility of the stock. RobinHood had to borrow a few billion dollars, in order to meet those collateral requirements, which they did. (And, as wire transfers to RobinHood, from their users, cleared, those requirements could also be met by customer funds.)

    They were correct in that they didn’t have a liquidity problem, but they, and the financial press did an incredibly poor job of explaining *what* kind of problem they were actually having.

    And yes, not having enough collateral makes them quite bad at doing their job. You get what you pay for with brokers – and if your get-rich-quick scheme consists of having millions of retail investors participate in a pump-and-dump, you should probably suggest that they use a Serious Business Brokerage, as opposed to one that is down due to technical issues for 2 weeks out of every year.

    Given the… Financial savvy of WSB (Or the lack thereof), I’m afraid that they have not learned their lesson. The entire subreddit has turned into a cult of ‘hold gme’, now. It’s absolutely insane.

  27. Nimrandir says:

    I don’t really have anything to add to the main discussion; my financial advice hews to the ‘get in early and leave it the heck alone’ approach that makes for poor headlines. Instead, I want to talk about Time Bandits.

    A few months ago, someone in my tabletop RPG circle recommended Disney’s Onward. I asked what it was about, and I got a brief description of ‘surreal fantasy.’ My response was that any description which gets a movie compared to Time Bandits is setting the standards unfairly high for the other film. At this point, I really wanted to watch Time Bandits again. Unfortunately, despite having subscriptions to two different video streaming services, I could not watch it without buying up into a premium package — for Cinemax, no less!

    I still haven’t gotten to watch Time Bandits, and now I’m aggravated over it again.

  28. ngthagg says:

    Something that I think gets missed in these discussions is that short selling is not an inherently bad thing. Is actually a good thing that can be used to do bad things.

    To understand why, you have to think of the stock market as a way to discover an accurate price for a company. This is important for making investments, loans, mergers, etc. Determining a good price for a company is hard for one person to do, but if you get a million people to do it, you can get a pretty good result.

    The mechanics of this are pretty simple: if you think a company is worth more than it’s currently priced, you buy the stock. You get rewarded if you’re correct, but you also send a signal to everyone else that you think it’s worth more. If other people after with you, the price will move up, until it reaches a point where as many people think it is worth less add there are people who think it’s worth more. Likewise, if you think a company should be worth less, you sell the stock, again sending a signal.

    There’s one problem: if you want to buy the stock, you can always find shares to buy. But you can only sell the stock if you bought it in the past. That means that people who have negative view of a company cannot communicate that view, and so the market price no longer reflects the views of all participants, but only those who happened to think well enough of the company to buy it earlier.

    Short selling is the solution, by allowing those who don’t own the stock to still sell it. That’s the justification, why it’s necessary to keep prices as accurate as possible.

    Of course, there are a million caveats to this. The most important is that short selling can be abused, as we have seen with Gamestop. I think the best country to that is that long positions can be abused too, as we saw back in 2008. It can work both ways.

  29. just a random internet commenter says:

    I think the “Before You Explain Your Brilliant Solution to Us…” is sort of aimed at the wrong people.

    Even if random commenters online were better educated about the financial system it wouldn’t solve anything. Same goes for other issues like poverty, healthcare, war, etc.

    These issues don’t get solved because those who wield power don’t want to solve them. They actually benefit from them. There are already highly intelligent individuals who have proposed rational solutions to many problems with society. But they don’t wield the power necessary to implement those solutions so it’s irrelevant.

    1. Retsam says:

      These issues don’t get solved because those who wield power don’t want to solve them. They actually benefit from them. There are already highly intelligent individuals who have proposed rational solutions to many problems with society. But they don’t wield the power necessary to implement those solutions so it’s irrelevant.

      A really useful dichotomy that I saw pointed out recently is the divide between people like this – who believe that the problems that exist only exist because those in charge refuse to solve them, (“Conflict theorists”) and that the fundamental issue with society is basically class struggle, and “Mistake theorists” who just believe that these problems are actually really hard and persist despite many earnest attempts to solve them.

      Personally, I’m solidly in the latter camp. I think a lot of problems that look easy on the surface are often much more complicated when you deal with it. As the saying goes, for every complex problem, there is an answer that is simple, obvious, and wrong.

      1. Shamus says:

        I’ve never seen that distinction before, and I really like it! Like you, I lean towards “Mistake theorists”. I sort of can’t help it. As an engineer, I’m used to the sensation of taking on an obvious, simple problem and discovering it’s actually terrifyingly complex once you dig into the details.

        1. Syal says:

          I guess I’ll link Slatestarcodex’s article, where I first saw it. (Ironically, I think that article was a mistake for Scott.)

      2. This is exactly why the first part of the Hippocratic Oath is “First, do no harm”. It is way, way easier to make things worse than it is to improve them.

      3. ElevatorEleven says:

        It’s probably both at once. Some problems are perpetrated by someone in power, and some problems are just really complicated and genuinely intractable. Neither possibility should be discounted out of hand. In what ratio and which problems are which, though, who the hell knows.

  30. If you’re curious, there’s a semi-similar story to this when the New York Legislature (yes, the LEGISLATURE) tried to short Commodore Vanderbilt’s railroad. What happened was, he petitioned to merge two of his railroads (why do you need permission for this, exactly?) and the legislature originally allowed the merger . . . and then they issued a special denial so that the members of the legislature could short his stock.

    Vanderbilt retaliated by buying his OWN STOCK as fast as it went on the market, preventing the short from going through and ruining many members of the legislature when the bills came due.

    And for doing this Vanderbilt was condemned as some sort of evil Wall Street manipulator in the press.

  31. GoStu says:

    My impression of the whole saga was that Melvin The Hedgehog (to borrow your own terms) managed to get his finger caught in a metaphorical mousetrap through short-selling, and that he was caught in this compromising position by “””outsider””” guy on Reddit who I’ll abbreviate to DFV.

    Once exposed to this, Melvin decided to go double-or-nothing a few times, trying to spook off other buyers. They deepened their short positions to try and drive that price back down, and escape unscathed. Thanks to more buyers moving in Melvin managed to go from “one finger in mousetrap” to “whole hand in rat trap” and then all the way up to “nuts in bear trap”. They were exposed to absolutely mind-boggling amounts of exposure and when the stock was soaring things were looking horrible for them.

    The /r/WSB hivemind then decided that Melvin’s position was utterly inescapable, and decided to go all-in, thinking there’d be no recourse but for the HedgeHog to fork over billions. However, they failed to account for a lot of things:

    1) The “Longs” just selling their shares for massive profit – easing Melvin’s position, and costing less than trying to buy off Reddit.

    2) When literal billions are on the line, even what’s legal or not stops mattering so much. What’s the SEC going to do, slap you with a fine for 1% of what you would have otherwise lost? I don’t doubt that some of the shady things that happened were someone buying favors: the inexplicable narrative that appeared about “Reddit buying Silver” or something was unbelievably sketchy.

    3) I expect a lot of the Reddit crowd sold their shares quietly. Bought in at 150, left at 225? Cool, enjoy your 50% gain and zip yer lips.

    I do see optimists talking about big revelations for the 9th, but I will be firmly in the ‘spectator’ camp. I never bought in on the first run because I couldn’t believe in the stock at those prices. It was undervalued at $5/share but it was never actually worth $100+ either; meaning that everyone with some financial savvy had to realize that this bubble would pop and someone would be left holding expensive stock that will never rise to 3 digits again.

  32. Brian says:

    Looking back on it from a few months distance I am still of the view (that I posted elswhere) that the reddit guys were largely a bunch of cats paws in a very hostile game being played by two major hedge funds. Even if they did have some money behind them, they didn’t have the billions needed to keep the stock high, and quite a few of them would have been burnt pretty badly themselves (by going in at the $1,000 mark). There was money behind this push, more of it than Melvin had (that’s why he lost, he couldn’t stay in long enough), and that money could have only come from another hedge or from an extremely wealthy investor who wanted to punish Melvin.

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