Okay, so let me ask you; do you think these billionaire hedge fund companies should be bailed out if they go under?
good question, but demanding of a long and maybe overly technical answer..
- first off, it's likely there are almost a dozen of these guys exploiting Reddit to ramp the share price of GamesStop (amongst others) and, which shouldn't be a surprise to anyone who understands things, they are sophisticated market players (professionals)
- what's actually going on here is to do with order book depth, and the fragility of modern markets (all of which the above understand and have taken full advantage of)
- short sellers (just as in any walk of life) have bad apples amongst them, exactly the same as buyers of a company who ramp prices up through fraudulently publishing and promoting stocks, only one benefits when the stock goes down and the other benefits when the stock goes up.. it's all the same; there should be no distinction between going short or long, and what the above ill-informed and ignorant commentators (in those videos) do not understand is that short sellers provide much needed and important liquidity to markets in order for them to work efficiently.. short selling isn't wrong, it's just the opposite of going long a company (nothing to see here, as long as no one is doing stuff fraudulently) you need longs and shorts to make efficient markets.
- what happened with Melvin (the long/short hedge fund) which was one of the main targets of the organised attack, is it had short positions which it had to publish as part of its regulatory compliance activities (all funds of a certain size must publish their positions periodically) and they'd built a short position in GamesStop. GameStop in case anyone reading this isn't aware, is a mall-based company selling games without much of an internet presence.. it sells via bricks and mortar outlets and was likely going bankrupt (like other retailers Sears, Woolworths, like TopShop etc) as people for various reasons stopped going to malls as much to do their shopping and started buying more online in general, as the US economy hit the skids (so people were also spending less too) with Covid, and also because in their particular market consumers of games actually just buy stuff and download it directly from the producer - more and more cutting out the middleman entirely... so GameStop in general, like BlockBuster before it for other structural reasons, was in trouble.. hence it was a company that attracted the attention of short-sellers. The Reddit guys decided to attack the short positions they saw in GameStop, and initially they utilised the retail readers of their online blog posts to get the ball rolling..
- what happened next is still clouded a little in the fog of war, although details and statistics are slowly coming out, but I can assure you it isn't what the 'Peter & Jane' co-anchors were banging on about above in those videos you posted..
- FACT (if you'll allow me to put on my Rafa hat):
* Citadel Securities accounts for over half of all retail trading in the USA, and brokerage firms route the majority of their business through Citadel (which is a part of the problem I'm going to get to at the end of this)
* Citadel's numbers showed retail traders were net BUYERS of GameStop on Monday, but net SELLERS of GameStop Tuesday, Wednesday and Thursday (I've not yet seen the figures for Friday so cannot comment) and retail order flow was net NEGATIVE over the whole week for GameStop, so who is actually doing the buying if it's not the little guy and GameStop's price is still going up?
* GameStop's share price over the entire week was not being moved by masses of little retail traders (as the balloons in that video were ignorantly suggesting) but by professionals, hedge funds, proprietary trading firms and professional day-trading shops - ESPECIALLY as retail traders were actually shut down from entering new positions by their brokers at various points during last week's fiasco.. so the only buyers left were the professionals.
So what is really going on, and why are those in the know concerned about it? Why is GameStop so important?
What you've seen last week is akin to financial thuggery.
It turned into a gigantic punch-up between big money.
Melvin (the long/short hedge fund mentioned by many as a target of their ire) isn't the only fund involved, and at this point it's vital to remember that Melvin doesn't just short stocks, it also buys them (long) so it's also an investor in companies and holds long positions.
I heard there could be around a dozen such firms involved in this GameStop short squeeze like Melvin, with for sake of argument around $100 billion in assets under management, but that isn't the problem. The issue here is the gearing employed by these funds, which if levered at 10-1 would mean the combined assets they all have under control is around $1 trillion, which is significant.
What was going on last week when GameStop, a company that let's say is actually worth $5 to $25 (forgive my wide range, but I've erred on them not going bankrupt just yet) starts inflating, and goes to prices that no one has ever expected, like $50, $100, $150.. $250, and almost hit $500 in the same day.. the reason it moved to levels like this is because of NO LIQUIDITY, and a lack of ORDER BOOK DEPTH, coupled with the sizeable short stock positions held by certain market participants who found themselves trapped 'on the wrong side' of this mania. With Citadel accounting for over half of US retail trade, liquidity isn't what it used to be - just because of this sheer concentration, which can exacerbate the potential for outlandish price moves and extremes like this.
Ordinarily, no one in their right mind is going to buy a share of GameStop at $100 - unless they believe they can turn around and sell it to someone for $110 - which is the oft quoted 'GREATER FOOL THEORY' and is what momentum traders base their whole existence on, and especially the prop day-trading specialists. Neither is an actor going to be able to easily push the share price of GameStop up to such ludicrous prices, unless there is a problem with liquidity in the markets and a lack of order book depth.
Now you cannot ignore what's going on with GameStop and at Melvin et al, because this whole episode could bring down the entire market - such is the fragility of our modern mechanisms of exchange, which are nowhere near as robust as they used to be, for various reasons - many to do with current market structure, but I recommend people interested in theoretical modelling of what could happen go look up Michael Green (he works at Logica) and his publication of his quant findings, which are sobering to say the least.
Anyway, if you're working at a hedge fund and you've got a short position in GameStop and it's going up in price against you (against all reason and mathematical expectation) you're going to get a margin call. If you're using 10-1 leverage, you're going to get an even bigger margin call against you.
When you have to raise cash to satisfy a margin call - and what happened last week was one of the most extreme examples - you must sell EVERYTHING, all your winning positions (longs and shorts) because you must raise cash to satisfy your obligations to the exchange and your clearers.
What would it look like if $1 trillion worth of assets were suddenly liquidated by the handful of funds caught short GameStop?
Anyone who was trading in the US last March got a brief glimpse of things for a couple of days of what a liquidation looks like when stocks went down, bonds went down, gold went down all together at the same (although the USD went up; everyone needed to raise dollars to satisfy their obligations in a flight to safety) before the chaos ended and markets returned to a more balanced order flow between buyers and sellers.
This was why Citadel and Point72 came in with $2.75 billion in additional liquidity to Melvin last week, not because they were feeling especially generous or altruistic, but because they were holding the same long positions Melvin had, and if Melvin's fund managers had been forced into a liquidation of its whole book this event could have triggered other participants to sell (including long-only funds) creating a cascade-type effect and a general market sell-off - a panic, and a mass deleveraging with everyone running for the exit doors at once.
Short sellers actually create liquidity - serving an important market function, in addition to (the better ones) playing sheriff, so that companies who fraudulently cook their books get policed and exposed for what they are by 'activist' short sellers who aim to help set things straight and improve companies.
The ramifications of what happened last week are yet to fully unfold, but on Thursday with GameStop declining intra-day from $483 to $112, it created havoc with margin calls and system settlements, with virtually every retail broker losing money (because everyone had retail clients blowing out their accounts with such moves) with the collateral requirements jumping up over $7 billion and most retail brokerage houses having to act to protect their retail clients from exposure to such extreme volatility
The general focus on unnamed 'billionaires' (as a shared enemy) is so wide of the mark it's ridiculous, as is the idea that all the retail traders ganged up against the 'billionaires'.
In reality, the market manipulation of a stock (never worth even a fraction of the prices it was changing hands at last week) by a savvy group of operators (who I'm told are all professionally experienced, and who knew how to take advantage of the fragility of the system) via an internet forum that initiated retail buying en masse, later to be seriously compounded by professional proprietary day-trading firms, other hedge funds, high frequency traders etc - who all together created a massive gamma squeeze through call option buying, bringing about the forced liquidation of smaller funds exposed to short GameStop positions and nearly exploded some of the larger funds - like Melvin with more serious funds under management, which ultimately could have - and maybe still could result in second and third order effects no one would like to see, that could affect ordinary pension-holder's funds.
In a nutshell Bigga, what you've seen happening in GameStop could easily affect the regular person in the street's pension fund; the sheer size of money flows and disruption that - if left unchecked, could seed the next financial panic - and I'll have you know on an even more serious and heinous level, I should have been out trying to find myself a decent stainless steel frying pan this afternoon - as all the retailers I've been into only have non-stick, but you've had me hammering at my keyboard, you horror!
NB: and I didn't even touch on the 'little guy' buying GameStop at $250 let's say, and then getting his fingers chopped off when it collapses (assuming he's not sold out beforehand) because it likely has to (get unwound) and that is not going to look pretty either and is going to cause a lot of unsophisticated players a lot of hurt. This has nothing to do with your question about the larger 'bail out' but it is also something I don't think is right. This whole episode in GameStop is quite dangerous, and this is why it has caught the attention of the regulators and the Federal Reserve - who ordinarily don't have much of a clue about systemic risk even when it's staring them in the face.
www.forbes.com