{"id":51672,"date":"2021-02-04T06:00:02","date_gmt":"2021-02-04T11:00:02","guid":{"rendered":"https:\/\/www.shamusyoung.com\/twentysidedtale\/?p=51672"},"modified":"2021-02-05T00:53:33","modified_gmt":"2021-02-05T05:53:33","slug":"reddit-vs-wall-street","status":"publish","type":"post","link":"https:\/\/www.shamusyoung.com\/twentysidedtale\/?p=51672","title":{"rendered":"Reddit vs. Wall Street"},"content":{"rendered":"

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

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<\/a> 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.\u00a0<\/p>\n

I absorbed some financial knowledge during my time serving on the front lines of the Dot-Com bubble<\/a>. 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.<\/p>\n

Disclaimer: This is not financial advice.\u00a0I am not an expert. I’m a programmer who didn’t<\/strong> get rich in the Dot-com bubble.<\/p>\n

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.<\/span>. 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. <\/p>\n

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.<\/p><\/div>\n

First off, we need explain what it means when people talk about “shorting” stock.<\/p>\n

<\/p>\n

Short Selling<\/h3>\n

I imagine that per-pound, this is some of the most expensive cardboard on earth.<\/div>
I imagine that per-pound, this is some of the most expensive cardboard on earth.<\/div><\/p>\n

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<\/i> 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.<\/p>\n

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?\u00a0<\/p>\n

As it turns out, I can. Here is how it goes:<\/p>\n

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.<\/p>\n

Then I drive directly to the game store and sell the whole thing.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.\u00a0<\/p>\n

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.<\/p>\n

This is the most common form of short sell, and it’s the system I’m most familiar with. <\/p>\n

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<\/a>. 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?<\/em><\/p>\n

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

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!” <\/p>\n

I think<\/strong> 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. <\/div>\n

Anyway.<\/p>\n

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<\/strong> 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.<\/p>\n

Just remember that shorting means you make money today, but you’re forced to buy the stock in the future.<\/p>\n

Infinite Risk<\/h3>\n

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.<\/div>
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.<\/div><\/p>\n

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.\u00a0<\/p>\n

But before you make an evil grin and start shorting stocks, I should warn you that shorting stocks is stupidly dangerous<\/b>.\u00a0<\/p>\n

Let’s compare the risk of buying with the risk of shorting:<\/p>\n

Buying:<\/b><\/p>\n

When buying stocks, your losses are limited: You can’t lose more than you put in.\u00a0 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.<\/p>\n

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.<\/p>\n

Shorting:<\/b><\/p>\n

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.<\/p>\n

Human Chaos<\/h3>\n

Some men just want to watch the world news burn.<\/div>
Some men just want to watch the world news burn.<\/div><\/p>\n

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.<\/p>\n

But our world is populated by human beings, and human beings can be messy, vain, superstitious, arrogant, greedy,\u00a0dishonest, forgetful, foolish, vindictive, reckless, misinformed, and unpredictable.\u00a0<\/p>\n

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.<\/p>\n

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<\/b> valuable, we want to buy things that are about to become<\/b> 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<\/b> 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.<\/p>\n

The Game<\/h3>\n

Why run a hedge fund? If you just want to debase yourself for money, there are a lot of more fun options.<\/div>
Why run a hedge fund? If you just want to debase yourself for money, there are a lot of more fun options.<\/div><\/p>\n

This ugly mix of finance with mob psychology creates the opportunity for… let’s call them “shenanigans”.<\/p>\n

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<\/b> something happen?<\/p>\n

The naive way:<\/b><\/p>\n

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.<\/span>, 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.<\/p>\n

The shenanigans:<\/b><\/p>\n

What you need is a shitload of cash, and a willingness to engage in a certain degree of dishonesty.\u00a0<\/p>\n

You short the stock, and you do so on a massive<\/strong> 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.<\/p>\n

If you’re really<\/strong> unscrupulous, you can take this scheme to the next level by creating some FUD<\/a>. 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”.<\/span>. In the past Jim Cramer has talked about calling brokers to plant rumors that the company is in a bad situation<\/a>.<\/p>\n

PROTIP: This is illegal, so you probably shouldn’t do it.<\/p>\n

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. <\/p>\n

You’ll generally hear one of two claims regarding rumor-based price manipulation.<\/p>\n

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

    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?\u00a0<\/p>\n

    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. <\/p>\n

    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<\/b> the stock to go down.<\/p>\n

    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.<\/span>. 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.\u00a0<\/p>\n

    Note that when you make money like this, you’re not directly<\/strong> 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.<\/p>\n

    Before You Explain Your Brilliant Solution to Us…<\/h3>\n

    I'm gonna need to stop you right there...<\/div>
    I'm gonna need to stop you right there...<\/div><\/p>\n

    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.\u00a0<\/p>\n

    1) It is<\/b> 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.\u00a0<\/p>\n

    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.\u00a0<\/p>\n

    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.\u00a0<\/p>\n

    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.\u00a0<\/p>\n

    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.)<\/p>\n

    I’m not saying our current system is perfect, I’m just saying the world does not need the obvious and na\u00efve solution that you cooked up in two minutes while reading an “intro to shorting” post on some random idiot’s blog.<\/p>\n

    Okay? Thanks.<\/p>\n

    So now we have enough knowledge to talk about what happened in the Hedge Fund vs. Reddit war of 2021.<\/p>\n

    GameStop<\/h3>\n

    Man, I really enjoyed shopping here. 20 years ago. Last I checked, they don't even carry PC games at my local stores.<\/div>
    Man, I really enjoyed shopping here. 20 years ago. Last I checked, they don't even carry PC games at my local stores.<\/div><\/p>\n

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

    There are actually multiple<\/a> parties<\/a> 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.\u00a0<\/p>\n

    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.<\/p>\n

    Also also, I’m simplifying the timeline a bit here.<\/p>\n

    WSB also notices that GameStop isn’t doing that<\/b> bad. Sure, GameStop is a retail pawn shop in a world dominated by digital sales, it’s been run poorly for years<\/a> 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<\/a> games<\/a> are keeping everyone excited.\u00a0<\/p>\n

    So the WSB crowd decides to take on this billion-dollar hedge fund. They begin buying shares. They keep<\/b> 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.<\/p>\n

    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<\/b>. 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?<\/p>\n

    Melvin is being very foolish. As someone running a hedge fund, he should really<\/strong> know better than this.<\/p>\n

    Tuesday – Doubling Down<\/h3>\n

    The fact that Melvin never considered folding on a weak hand suggests that the hedge fund types have gone unchallenged for too long.<\/div>
    The fact that Melvin never considered folding on a weak hand suggests that the hedge fund types have gone unchallenged for too long.<\/div><\/p>\n

    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.\u00a0<\/p>\n

    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.\u00a0<\/p>\n

    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%!<\/p>\n

    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<\/b>. They are catastrophically<\/i> screwed.<\/p>\n

    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 bil<\/b>lions.<\/p>\n

    Before all of this, GameStop stock had been sitting at $20. Now it’s over $150!<\/p>\n

    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.<\/p>\n

    Melvin keeps doubling down, pouring more and more money into this, trying to somehow rescue the money he already<\/strong> put into it. <\/p>\n

    Wednesday – The Hackers!<\/h3>\n

    Yes. As a technology expert, I can confirm that this is EXACTLY what hackers look like.<\/div>
    Yes. As a technology expert, I can confirm that this is EXACTLY what hackers look like.<\/div><\/p>\n

    Wednesday morning. A DDoS attack<\/a> takes out parts of the internet, including the CDN<\/a> 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?<\/p>\n

      \n
    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.<\/li>\n
    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.)<\/li>\n
    3. Maybe it was a third-party spectator, because some men just want to watch the world burn.<\/li>\n<\/ol>\n

      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<\/a>.\u00a0<\/p>\n

      GameStop stock closes just short of $350! Melvin probably doesn’t get a lot of sleep on Wednesday night.<\/p>\n

      Thursday – Robinhood<\/h3>\n

      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.<\/div>
      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.<\/div><\/p>\n

      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!”<\/p>\n

      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.\u00a0The peasants finally have one over on Wall Street and suddenly the rules change to stop them?<\/p>\n

      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<\/b>, because nobody in the general public can buy it. This is exactly what HedgeHog needs to save his ass and defeat WSB.<\/p>\n

      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.\u00a0<\/p>\n

      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.<\/p>\n

      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.\u00a0<\/p>\n

      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.<\/span>. 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.\u00a0<\/p>\n

      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.<\/p>\n

      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<\/b> have a liquidity problem.<\/p>\n

      From the perspective of the general public, one of two things must be true:<\/p>\n

      1) You’re out of money and can’t cover this game.<\/p>\n

      2) You’re helping one of the players to cheat the other.<\/p>\n

      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.<\/p>\n

      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.<\/p>\n

      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.<\/p>\n

      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.\u00a0<\/p>\n

      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.<\/p>\n

      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<\/a>, and he admitted that it was a liquidity problem. So he basically admitted they lied about it the week before. <\/p>\n

      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<\/a>. They even took out ads on RedditWhich is how I found it. First time I’ve clicked on an ad in years.<\/span> 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? <\/p>\n

      This story is so weird.<\/p><\/div>\n

      Friday – The Reckoning<\/h3>\n

      You already reckoned it? Well reckon it AGAIN, and make sure you reckon it properly this time!<\/div>
      You already reckoned it? Well reckon it AGAIN, and make sure you reckon it properly this time!<\/div><\/p>\n

      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<\/a>, “(the hedge fund guys) are getting fisted by the Invisible Hand of the market.”<\/span>, 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.<\/span>.\u00a0<\/p>\n

      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<\/b> want some GameStop stock.<\/p>\n

      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.<\/span>, but they have made it clear they weren’t in this for the money. They are in this to punish Melvin.<\/p>\n

      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.<\/span>. 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. <\/p>\n

      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.)<\/p>\n

      Aftermath<\/h3>\n

      I hate when that happens.<\/div>
      I hate when that happens.<\/div><\/p>\n

      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?\u00a0<\/p>\n

      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.\u00a0<\/p>\n

      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.<\/p>\n

      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<\/a>. The money nerds on Reddit managed to crush this billion-dollar behemoth and erase over half its value in a month.\u00a0<\/p>\n

      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.<\/p>\n

      What Fun<\/h3>\n

      People called them 'Wall Street', but Melvin Capital is actually situated on Madison Ave.<\/div>
      People called them 'Wall Street', but Melvin Capital is actually situated on Madison Ave.<\/div><\/p>\n

      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.<\/span> mixed with a late-period Neal Stephenson<\/a> style story. As a fan of both authors, this one had me on the edge of my seat.<\/p>\n

      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.)<\/p>\n

      Also, a residual effect is that WSB helped raise the value of several struggling companies<\/a>. 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.<\/span>. 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.\u00a0<\/p>\n

      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.\u00a0<\/p>\n

      So What Now?<\/h3>\n

      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.\u00a0\u00a0Or at least, they won’t double down when the market pushes back. <\/p>\n

      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<\/a>. 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. <\/p>\n

      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?<\/a>, and get banned. These dipshits are easy to spot, but there are a lot of them.<\/p>\n

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

      And if that’s not bad enough, there’s this bullshit<\/a> to worry about:<\/p>\n

      Victory has a thousand fathers, but defeat is an orphan.<\/div>
      Victory has a thousand fathers, but defeat is an orphan.<\/div><\/p>\n

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

      Wrapping Up<\/h3>\n

      So that’s the story. If you want to know more, then your best bet is to head for r\/wallstreetbets<\/a> 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.<\/p>\n

      Reminder: My Patreon<\/a> and Tip Jar<\/a>. Thanks for reading!<\/p>\n","protected":false},"excerpt":{"rendered":"

      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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[102],"tags":[],"class_list":["post-51672","post","type-post","status-publish","format-standard","hentry","category-weekly-column"],"_links":{"self":[{"href":"https:\/\/www.shamusyoung.com\/twentysidedtale\/index.php?rest_route=\/wp\/v2\/posts\/51672","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.shamusyoung.com\/twentysidedtale\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.shamusyoung.com\/twentysidedtale\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.shamusyoung.com\/twentysidedtale\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.shamusyoung.com\/twentysidedtale\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=51672"}],"version-history":[{"count":75,"href":"https:\/\/www.shamusyoung.com\/twentysidedtale\/index.php?rest_route=\/wp\/v2\/posts\/51672\/revisions"}],"predecessor-version":[{"id":51763,"href":"https:\/\/www.shamusyoung.com\/twentysidedtale\/index.php?rest_route=\/wp\/v2\/posts\/51672\/revisions\/51763"}],"wp:attachment":[{"href":"https:\/\/www.shamusyoung.com\/twentysidedtale\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=51672"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.shamusyoung.com\/twentysidedtale\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=51672"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.shamusyoung.com\/twentysidedtale\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=51672"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}