Bros before Pros on Wall Street
The past few days you may have read something about wild stock market gyrations of otherwise unremarkable companies like GameStop- they're still around?- and WallStreetBets (WSB), a Reddit forum. What's happening? Well, think about the movie The Wolf of Wall Street, then think about this as a case of man-bites-dog. Or as I've called it above, "Bros before Pros".
On the surface what you see is that the price of certain stocks has risen meteorically in just a few days, then crashed. The value of GameStop stock (ticker: GME) two weeks ago was about $36. On Wednesday it was trading for 10x that price; yesterday it hit a high of $468- 13x its earlier price- before finishing the day at $197.
Under the surface what's happening is a classic market move called a short squeeze. A number of big investors thought GameStop was overpriced and headed lower, so they shorted it. By shorting a stock they borrow shares to sell, figuring they'll buy them later at a lower price- when the stock falls- to cover their borrowing. But what if the stock doesn't fall? Well, as the price climbs higher, short sellers grow increasingly nervous about their positions. Unlike with simply buying a stock, their potential loss isn't just the money they invested; they could lose many times their original investments. Some of the shorts are squeezed out, buying the stock back to close their positions and limit further losses.
A short squeeze is nothing new on Wall Street. The news here is all about who is making the squeeze. It's not the big-money hedge funds in Manhattan and Chicago. It's an army of small-money retail investors. They're using Millennial-friendly free stock trading platforms like Robinhood and coordinating in social media forums like WSB. WSB, a cesspool of rampant sexism and homophobia (it bills itself as "4chan with a Bloomberg terminal"), has seen its membership swell to over 5 million users in just a week.
Individually, the WSB crowd seem mostly to be small-time investors. The joke is many of them are gambling their Covid stimulus checks on the stock market. Anecdotally, many of them are young (under 30) and investing with small starting portfolios. How are they taking on the billionaire hedge funds- and winning?
Well, even small investors can move the market... if they a) coordinate and b) target stocks in precarious positions, such as those ripe for a short squeeze.
"Isn't this market manipulation?" you may ask. "Isn't this illegal?" I'm not a lawyer so I won't attempt to answer that question definitively. I will answer a related question, though: Short squeezes happen All. The. Time. But previously they've happened between billionaire firms competing with each other. All that's different here is now it's Robinhood Bros taking on the Wall Street Pros... and the pros have just gotten slaughtered and they really don't like it.
[This entry was cross-posted from https://canyonwalker.dreamwidth.org/25114.html. Please comment there using OpenID. That's where most of the action is!]
On the surface what you see is that the price of certain stocks has risen meteorically in just a few days, then crashed. The value of GameStop stock (ticker: GME) two weeks ago was about $36. On Wednesday it was trading for 10x that price; yesterday it hit a high of $468- 13x its earlier price- before finishing the day at $197.
Under the surface what's happening is a classic market move called a short squeeze. A number of big investors thought GameStop was overpriced and headed lower, so they shorted it. By shorting a stock they borrow shares to sell, figuring they'll buy them later at a lower price- when the stock falls- to cover their borrowing. But what if the stock doesn't fall? Well, as the price climbs higher, short sellers grow increasingly nervous about their positions. Unlike with simply buying a stock, their potential loss isn't just the money they invested; they could lose many times their original investments. Some of the shorts are squeezed out, buying the stock back to close their positions and limit further losses.
A short squeeze is nothing new on Wall Street. The news here is all about who is making the squeeze. It's not the big-money hedge funds in Manhattan and Chicago. It's an army of small-money retail investors. They're using Millennial-friendly free stock trading platforms like Robinhood and coordinating in social media forums like WSB. WSB, a cesspool of rampant sexism and homophobia (it bills itself as "4chan with a Bloomberg terminal"), has seen its membership swell to over 5 million users in just a week.
Individually, the WSB crowd seem mostly to be small-time investors. The joke is many of them are gambling their Covid stimulus checks on the stock market. Anecdotally, many of them are young (under 30) and investing with small starting portfolios. How are they taking on the billionaire hedge funds- and winning?
Well, even small investors can move the market... if they a) coordinate and b) target stocks in precarious positions, such as those ripe for a short squeeze.
"Isn't this market manipulation?" you may ask. "Isn't this illegal?" I'm not a lawyer so I won't attempt to answer that question definitively. I will answer a related question, though: Short squeezes happen All. The. Time. But previously they've happened between billionaire firms competing with each other. All that's different here is now it's Robinhood Bros taking on the Wall Street Pros... and the pros have just gotten slaughtered and they really don't like it.
[This entry was cross-posted from https://canyonwalker.dreamwidth.org/25114.html. Please comment there using OpenID. That's where most of the action is!]