The Perils of Shorting: A Real Life Example


I've been told that unless there are regulated entities behind the reddit posts, it is fine for unconnected retail investors to do what they did.

It is wrong for the likes to Robinhood to close trading on certain stock to protect Wall Street.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
If the hedge funds were shorting more that 100% of the amount of shares in gamestop, is that legal to be able to short more than 100% of a company?
 
Brendan that would only happen if you all shorted it to that extent at the same time, But I doubt that's what happened with Gamestop, and the short interest is publicly available information. Would it not be easy enough to cap short interest at a max of 50% for example, if there was a will to, by monitoring the current short interest. At the very least it should be possible to keep it under 100% by preventing any shares from being shorted twice.
 
This is a really fascinating story. It is also a story that makes me think very carefully about how I look at stock market performance especially in the US. I hadn't realised that retail activity in equities and especially options was reaching the level it is.

I am all for the small man and I have zero sympathy for hedge funds being squeezed considering that is exactly what these guys did to Sean Quinn when he built a large leveraged position in Anglo. (NOT FEELING SORRY FOR QUINN). However, some of those guys on Reddit are not stupid. They played the game and got out. Unfortunately you will have people now looking for a quick buck on the back of all the media stories. They will jump on and will get burnt.

I thought Central Bank money was the biggest risk to stock market bubble but I think I will need to look into it a bit more. The Shoeshine boy might be back in the market and giving advice.....
 

they were beating them until the big dogs called in a favour and a few brokerages ( with links to the Citadel hedge fund ) restricted purchase of shares , thus driving down the price and allowing the big dogs to cover their shorts

a blatant form of market manipulation and in plain sight , class action law suits lodged in several places yesterday , i made a modest grand trading Gamestop this past week , got out two days ago , was never in with much to begin with and only heard of all of this last monday

i also bought two option calls in bed bath and beyond yesterday which was also heavily shorted , il loose about $100 by close of trading today if those dont rally hard today
 

the market is stacked against the small guy in terms of the short term , long term buy and hold is the only way to win but of course thats "dull and boring "
 
RedOnion said:
I had a look at this, because I couldn't understand how the short interest was so high. There's already regulations to prevent naked short positions, so there must be actual shares being sold.

Found this very simple explanation of it....
Click to expand...

Right, but at this part:

> Chris has no way of knowing that those shares have been borrowed from Annie.

Would it be that difficult for them to track when shares are borrowed so that Chris would know, I mean it's not everyday people who are lending stock out, it's institutions, so they could report it.
 
It reminds me of a very good 2-part novel that I once read. Daemon and Freedom by Daniel Saurez.
The premise that the internet is allowing people to organise and have large scale power through distributed cooperation and knowledge. That is one of the themes.
It also uses a type of cultural currency or standing based on others upvoting or downvoting you based on your actions, knowledge, and deeds. This can be viewed using VR as it is displayed over your head. (think Google Glasses)
China's social credit system springs to mind - but not in a good way.

I'd recommend the book.
 
I'm in for a bit of interest in a dull month.For full disclosure,I bought $1k @$289.
I should probably jettison them today!
 
Probably result in more regulation of shorting, as another post above suggested limit it to a certain proportion of a company stock especially with very small stocks. Sure didn't the irish government stop shorting of bank shares for a few years after the financial crash. So obviously they saw it as a dangerous activity for vulnerable banks then
 
vandriver said:
I'm in for a bit of interest in a dull month.For full disclosure,I bought $1k @$289.
I should probably jettison them today!
Click to expand...

Looks like it is going to open up (a lot) today. You might be able to come out of it $100 up if you do. I'd imagine it will be incredibly volatile and fundamentally isn't worth that much
 
RichInSpirit said:
If the hedge funds were shorting more that 100% of the amount of shares in gamestop, is that legal to be able to short more than 100% of a company?
Click to expand...

Not all the shorts are "physical shorts". A large portion is not on the traded stock but in the optiosn and swaps markets. So I can short the security by buying puts, selling calls or return swaps with the share price as the index.

It's a similar situation to the CDO's during the '09 crash. The value of debt traded on the US mortgage market was 100's times more than the actual mortgage market because of the "side bets" using derivatives.

It's explained well in "The big Short" - say you and a friend are betting €1 on the toss of a coin, i could have a €100 side-bet with Brendan that you would win. In this case the market cap is €1 but the open interest in the derivatives is €100
 
RichInSpirit said:
@EmmDee. Thanks for that explanation.
Googling CDO's though.
Click to expand...

The film The Big Short is worth watching - it's on Netflix. It does dramatise what went on - but it's reasonably accurate. It's based on a book of the same name. Same guy who wrote "Liars Poker" which outlines the intiial growth of CDO's and various other debt structures - also worth a read
 
With the fun and games in Crypto, thought it would be fun to start this up again....

If Colm is still checking in, appears he has some respected company with regard to Tesla....
 
Hi @Sunny Only saw your post now. As some of you know, I have been focusing recently on trying to persuade government to buy into my proposals for a smoothed equity approach to auto-enrolment (so far without success) and I only make the occasional visit to AAM (sorry, Brendan!).
Anyway, my views on Tesla have not changed. It even it got a brief mention on page 37 (Section 8.4) of my January paper on auto-enrolment ('Higher Pensions for Half the Cost'):
"While there is undoubtedly an asset bubble at present in certain stocks and sectors (I make no secret of my conviction that Tesla’s current share price, at more than $700 as I write, is over seven times its true worth), any possible overvaluation at the level of the total market is nowhere near that of the Japanese stock and property markets at the end of 1989".
By the time I delivered the paper on 20 January, the price had risen to over $800. It has now fallen to just under $581 (close of business today). As you will have gathered from the above quote, I think a fair price is under $100.
I have backed my belief with hard cash, but have not repeated my previous mistake of leaving myself exposed if the madness resumes. I have a graduated series of stop losses in place, so that portions of my position are closed out at various (higher) prices. I have set a budget for what I'm prepared to put at risk. This means that, the more the price falls, the more I can put at risk. It's counterintuitive, but it means that my grandchildren's inheritance is not at risk if things go pear-shaped. The more the price falls, the greater my short exposure. As you can gather, that means that I now have a significant short position in the share. The $64,000 question is: at what price do I start cashing in if it keeps falling?!
 
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