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There were a lot of objections and claims about yesterday’s breakdown of the GameStop saga on FB, so I’ll address some of the major ones here as well.
Hedge Funds shorted GameStop, then came out with predictions the company would fail.
This is what hedge fund shorts do. They do research, make bets, then publish their research to try to convince others they are right. Those investing long do the same thing.
Both are good things, they put out more information into the market. Other investors can then believe them or not, and trade accordingly.
Unfortunately, this is now slowing down. Citron Research just announced they are stopping. Remember, more information is good for markets, it leads to more efficient allocation of capital. Often, shorts expose fraud or other valuable info. We should want more shorts, not less. https://twitter.com/citronresearch/status/1355152873487798274
Hedge Funds shorted GameStop with over 100% of available shares.This sounds nefarious, but it can happen. Shorting a stock means you borrow it from someone & then sell it into the market. That buyer could also potentially lend out their shares to another short seller.
There’s still only one stock, but it now has two shorts. It’s sort of like fractional reserve banking, where one dollar can be multiplied & lent out. It’s unusual that a stock would be shorted over 100%, but it need not involve naked shorts. https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/
The conspiracy between Robinhood, Citadel, Melvin Capital, etc.Melvin closed their GME short position on Tuesday. This was reported by several outlets (CNBC, Reuters, Bloomberg, etc.) https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html
Robinhood restricted trading on Thursday, so that wouldn’t help Melvin. The response to this seems to be “they’re lying.” Ok, then you’re in conspiracy land, there’s no proof of that. Right now the evidence shows Melvin closed out their position prior to the RH restrictions.
The restrictions on GME weren’t just on RH, many other brokerages had similar restrictions. Again, the evidence shows this was due to increased capital requirements from clearinghouses. Which brokerages either didn’t have or didn’t want to put up, thus they had to stop trading.
Most Robinhood users are margin accounts, so they don’t even own the stocks they buy, RH does. They simply pass on the rights of ownership. The user thinks they’re simply using their deposited money to purchase a stock, but that’s not how it works
Behind the scenes, there are several players exchanging money & titles with each transaction. These involve risk. And when tons of new & small accounts buy huge amounts of extremely volatile stock, these players demand much more collateral. Which is what happened to RH, WeBull.
This is an excellent thread which goes into much more detail on this. https://twitter.com/compound248/status/1355274739351248898
The little guy screwed over the fat cats.Certainly some hedge funds had huge losses, and some little guys had huge gains. But overall it didn’t really hurt Wall Street, & probably helped many. You can bet that sophisticated investors were also making money on the huge rise.
Meanwhile, Citadel makes money off every trade on RH! And RH’s user agreement allows them to lend out their customer’s shares to other short sellers. The longer this goes on, you can bet the sophisticated players on Wall Street will win and make money.
H/T @yaronbrook
