Gamestop


I'm not overly familiar with Robinhood's business model but it seems to me more likely that it was just run on minimum capital and hit a wall. It's most likely that taking a tech start up approach where they thought they could shave costs by not having "unnecessary" capital cost was the problem - a lack of knowledge / experience around why having excess capital is important.

I don't read too much into Citadel - though will wait to see what comes out in the wash. But there is just a credible story that Citadel is a huge financing firm as well as a broker. They have a speciality in distressed loans. So one of their large customers has an urgent cash flow requriement and they jump in at, I'm pretty sure, good rates. I'm not surprised. You see this happen. This is what Citadel Partners does.

And I don't buy that Citadel pressured Robinhood because they invested in Melvin. Again, they are distressed specialists. And the damage had already been done to Melvin when they jumped in. So there was little marginal benefit in shutting down trading on Robinhood. The horse had already bolted and Melvin had been called on their positions and had closed the bulk of it.

I thought Robinhood couldn't increase margin requirements to regulate the flow. As far as I know (open to correction) these were long fully paid positions - there is no way to increase margin because there is no margin. Maybe they could have pushed their collateral cost to their customer base by charging them for holding positions. But if the basis of their contracts is "no fee" trading, did they have the scope to do this?
 

I think initially that was true - the initial wave pushed the price over a level which triggered significant margin calls and stops. That drove the larger orders which really moved the price.

I think the problem is that the story then drove another wave of retail. So more demand and lower supply. And there seems to be a big message of "hold" in the reddit groups. Have heard quite a lot of people buying in the $200's (including on here I think). The price closed yesterday at $225 and is $160 on early trading. There might come a point where the smaller guys who are looking at 50% losses start closing out - and then you see the price move to equilibrium which (as I've said) isn't anywhere near this level. And that's where I worry about smaller traders taking pretty significant losses

But maybe it works out for folk and nobody gets hurt too badly - which would be a good outcome
 
Without any proof, my take is that a lot of savvy investors got in last summer and autumn, patiently stoked the fire until it was raging, got out and are now sitting on the sidelines watching the flames die away - they may even now be shorting the stock and waiting for a further profit to roll their way.
 
dereko1969 said:
What alternative should the Govt have taken if it heeded the hedge funds?
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I am not a banker, so I could be wrong, but could it not have intervened earlier? There was more than a six-month gap between the hedge funds targeting the banks and the authorities acting decisively (i.e., putting taxpayers on the hook). My recollection is that, during that six-month period Anglo Irish flogged high interest deposits onshore and offshore at a rate of knots. Surely taxpayers would at least have been saved having to bail out those depositors if government had acted in March 2008 rather than at the end of September?
 
Looks like people are getting burned today

GameStop trading at $110 now with lots of brokers not allowing purchases. Bit of a sinking ship
 
cremeegg said:
Agreed, but short selling and telling everyone that you have done so, 'cause you are a smart investor has the effect (usually) of driving the price down. Not just betting on the race but effecting the outcome.
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Once you reach a large enough short position, it's a regulatory requirement to declare it. That's why the position was known about initially, and what allowed punters to push up the price, knowing that the hedge funds would have to buy the stock to make good their sale.
 
EmmDee said:
It's not
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I take your word for it. Certainly the apparent lack of any urgency by authorities to arrest anyone would seem to support that.
However, from what I understand of the practice (admittedly I'm gauging it from public news outlets) of selling shares that don't actually exist, it sounds like a practice that should be illegal.
 
WolfeTone said:
I take your word for it.
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Are we sure about this? There's no doubt but that it's going on all the time with little sanction against it but my understanding is that it's still illegal. JP Morgan was fined for naked shorting silver back in the day. Of course, they just paid cents on the dollar - which is validation for them and the likes of Melvin Capital to carry on with this practice.

WolfeTone said:
Certainly the apparent lack of any urgency by authorities to arrest anyone would seem to support that.
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Hmm...that's one interpretation. Another could be that everyone's happy with the status quo even if its morally reprehensible and against the greater good.

WolfeTone said:
However, from what I understand of the practice (admittedly I'm gauging it from public news outlets) of selling shares that don't actually exist, it sounds like a practice that should be illegal.
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My understanding is that shorting shares that don't exist can simply destroy companies. There's a solution. Put equities on a blockchain and nobody can do it.
 

You should check /r/wallstreetbets. Nobody is trying to do anything with SLV - that's a lie that has been spun by media.

I think a lot of people here are missing the point of this whole thing. The users of /r/wallstreetbets know exactly what they're doing - they're not stupid. They simply don't care about the losses. If you had ever visited /r/wallstreetbets before this whole GME thing you would know the kind of mentality they have there. It is a meme subreddit that was mostly full of "loss porn".

It has become more about fucking over the hedge funds than actually making money and people are well aware the hedge funds will use any method they can to escape this and that there is a very real chance of losing money.

I am sure there are people that have cashed out and are keeping quiet but I do believe the "hold" position of most people on /r/wallstreetbets is genuine. It is a culture that has been exhibited there for a lot longer than GME has been around. Take a look back through the archive and see some of the top posts of all time on that sub and you will get a feel for the mentality over there.
 

Selling shares with no ability to settle the trade is illegal. That's not what anybody here was doing. The hedge funds had borrowed the shares - the trades had settled. That's what caused the short squeeze - the fund has to post increasing amounts of collateral back to the lenders until at some point they were forced to close the position because they had run out (or hit their internal max limit).

But they can also short the stocks via derivatives and I have no doubt they were doing that. Which explains the overall market short being greater than shares issued. But again, as the mark to market on the derivatives goes negative they would have had to post collateral. Though I would expect the derivative writers to hedge out by being long the shares - though they might have had off-balance sheet alternatives.

Blockchain on securities is actively being worked on. It is part of the drive to shorten settlement cycles (I'm not sure - it may have already been tested). Wouldn't have changed what happened here because nobody was selling and not settling
 
@EmmDee : So when a 138% short interest in GameStop is mentioned, are you saying that 38% of short equity interest was conjured up through derivative products which are perfectly legal - providing a loophole to get around the theoretical illegality of naked shorting?

If so, surely there should be a move against that form of derivative trading?
 

It seems it was not unlike the mortgage bond markets in 08 where the "open interest" was significantly more than the actual value of mortgages.

It's hard to move against a trade between two people. To touch on your area of interest, there have been threads on here guessing the value of Bitcoin at end of year. If, in theory, there was money on those predictions, you have an open interest on the price of Bitcoin that is not related to the amount of Bitcoin in circulation. How do you move against that.

It happens quite a lot btw - the value of Wheat futures or Oil futures often exceed the actual market. Often because they are being used as a proxy for some other cost that people want to hedge. I only mention to point out how difficult regulation becomes - you get into all sorts of weeds

Didn't think you'd be type looking for increased regulatory oversight btw
 
Thanks for the explanation.
EmmDee said:
Didn't think you'd be type looking for increased regulatory oversight btw
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If we're talking about centralised entities and centralised markets, then of course it has its place albeit it can be progressive or otherwise. More a case of the right sort of oversight rather than more of it.
 
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I borrow your shares in Gamestop for a week for a small fee and then sell them, hoping to buy them back cheaper next week when I have to give them back to you. I have shorted your shares once

The person I sold them too, does the same so now your shares have been sold and shorted twice.
If enough people do this, it is possible to have more shares sold short than there are shares in the company.

Obviously, this is a very risky business, as everyone will have to buy them back next week to repay them forcing the price up.

The hedge funds were caught with their trousers around their ankles
 
@jpd
so when i borrow a share to sell short I immediately sell it to another investor, but who owns the share during that period ?, the original investor did not participate in the transaction yet his share has been sold to another investor without his knowledge . Therefore two investors believe they own a share when in fact only one share is in existence ? I struggle to understand why this would cause a share to fall though, there is indeed a "shortage " of shares alot more transactions but surely that "shortage" should be pushing up the price not depressing it?
 

In a stock loan, the lender retains economic ownership (rights and dividends for example) but borrower takes legal ownership... So the borrower has to pay the lender any dividends during the period. The lender will account for the shares as owned but lent out (in return they get collateral which they account for as collateral but not owned in an accounting sense)

If the borrower sells the shares, the buyer owns the shares (legally and economically). There is still only one legal owner. If a dividend is paid the new owner receives it and keeps it. The borrower has to pay the lender the equivalent out of their pocket.
 
Seems the biggest winners were the larger and long term holders of gme stock - reports that many cashed out their positions.

And hedge fund short sellers probably jumped back in at the height and most likely made a killing.
 
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There are significant conflicts of interest in play between Citadel and Robinhood. Robinhood generate 35% of their total revenue directly from Citadel.

Having bailed Melvin out they would have been very keen to avoid Melvin also having to liquidate their long positions to cover margin calls which would have significantly impacted Citadels other long positions.

Who knows what indirect of direct hints were given to Robinhood. Let's hope all is revealed...
 
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