Please help me understand GME controversy better

[Bigbank]

Hi, I’ve been interested in investing for a while now so I am not a complete newbie to some concepts however I have a few questions regarding the GME controversy.

1: WHY did Wall Street banks close their shorts?? The stock is already declining in value, why not wait until it goes back to what it was weeks ago instead of lose millions?

2: HOW did they lose so much money? These are billion dollar hedge funds and yet some lost 30% of their capital from 1 stock? Did they not realize what WSB was planning? Furthermore is there not automated processes in case of unusual fluctuations of the value? (i.e. stock is showing signs of a possible surge so buy back all shares)

3. HOW do you get over 100% short float I DONT UNDERSTAND??

4. Lastly, why does Robinhood care about market manipulation? They’re profiting either way... considering most platforms are allowing meme bets, why not just allow it on Robinhood too?

Thanks

 

[peter2]

@Bigbank Welcome to ASF.

1. The hedge funds that held the short positions sold to prevent their losses from getting much bigger. The stock prices were not declining and that was the problem. Holders of all positions have to provide cash (margin) to their brokers. The amounts are calculated on each days closing prices and as the prices were going up each day they had to provide more and more money to keep their positions open.

2. They lost money because the stock prices went in the wrong direction. Their bet size was huge because they had a strong conviction that their analysis was right. The WSB action was spontaneous. We can speculate whether DFV who held a large long position, stirred the forum addicts to action or not. Hedge funds would snort at the trading activity of retail traders.

There are auto processes in the market that stops trading for 5 min intervals when price become too volatile. These levels were triggered many times during the days with increased volatility.

I won't comment on the risk control of the hedge funds in question. Clearly they didn't have an effective process.

3. 140% shorts. Allowed by the current regulations. Yes, this is something the SEC will have to look at. Don't hold your breathe hoping for any changes.

4. Market manipulation is illegal. It's also very hard to prove in court.
RH should care about their public perception like all public companies. After preventing their customers from buying GME et al yesterday they quickly reversed that decision after public backlash.

 

[satanoperca]

@Bigbank
RH should care about their public perception like all public companies. After preventing their customers from buying GME et al yesterday they quickly reversed that decision after public backlash.

Peter, I understand it was not just the issue of RH preventing buying but also selling, the second part being of more importance to retail investors, as they would have also gotten squeezed in to loosing position.

@Bigbank, short selling is not buying a stock, it is simply an agreement between someone who owns the stock to borrow it for a period of time and give it back. ie I borrow it from you at the agreed price of $20, pay you a commission for borrowing, you still own the stock, but I can trade it. I am betting on the stock going to $10, if it goes to $10, I buy it back, return it to you, for a $10 profile.

And there lies one issue, as Peter has pointed out, as it is an agreement, the owners of XXXX stock can loan out more they actually own.
That is in simple terms, as generally the agreement between the 2 parties is not between the owner and the shorter, but rather owner - broker (middle man) - shorter.

So what happened with GME.
Only a few in the grand scheme of things have the ability (funds) to place very large bets to move a market (hedge funds). They believed that the business of GME was dying and the stock was overvalued so they build short positions. Hedge funds have controlled price action due to the access to large amounts of capital. So lets say in the US market their are 100 such funds that can place wagers of $10M. They generally do not bet against each other, I say generally.

So they started taking the short positions at say $30, allowing for price movement, they may have then taken further positions if the stock price moved up, but we are talking in the $millions.

So far so good, they believe they have full control of the price action and they all go to lunch together and spend up big, as they are smarter than the market, or so they thought.

This next bit is the crunch of the situation.

Along comes a group of retail investors, individually they have very small amounts of capital to effect price movement, but collectively they have the same of even more money than the hedge funds. 1000,000 retail investors going long on GME with $3000 wagers, is $3B deloyed long.

The hedge funds being arrogant, maybe to much coke up the nose during lunch, don't think anything of it, they also have their algos runnings, all is good, based on their belief that the stock is overvalued, as the stock starts to climb, their algos take out more short positions, as they are firm in their belief that the control the market, unaware that 1,000,000 small investors have deployed similar capital to them but in the other direction long.

As the price increase, more retail investors jump on the train in the long postion.

As the hedge funds have large amount of funds available to deploy, they grow their short positions (in the 100's of millions if not $B), believing 100% that they are right and eventually the price will fall and they will make even more money.

But it doesn't!

Some hedge funds then realise that they are in the shiiiiiit (they may have borrowed the money themselves) and close out their shorts, but in doing so they have to buy back the shares, further increasing the price which results in more closing their short postions and increase of the price action.

The retail investors, seeing the price climb, pile in long, again increasing the price - simply supply and demand stuff, but over a very short time frame.

This is a rinse and repeat process, the hedge funds algos are broken and cannot be changed as fast as this new environment is being created as the programmers never anticipated such evens, you could call this a black swan event for hedge funds.

So then all hell breaks loose, fingers start getting pointed, as the whales are no longer in control, and that is not fair, they have been gamed by a new system (environment) which they believed they owned and control.

Now the interesting thing is, can this happen again?

Yes it can, as now you an army of retail investors who believe that they can make huge profits ( as a percentage of the capital deployed) and will follow the herd next time, when the reddit guys/girls suggest the next position to be taken.

Note : GME was targeted because it meets the dynamics that are required to create this event, a massive amount of capital that has gone short.