Hedge fund fun: the GameStop wars
So I’ve spent a while trying to get up to speed on the GameStop battles. If I can be said to have a wheelhouse, this is not it, and I’m going to assume that most of my readers already know more about it than I do.
If not, you might want to read any of these articles (somewhat arbitrarily chosen; there are tons more): this or this or this.
But that’s old news. Today the hedge fund protectors fought back, and trading platforms such as the somewhat ironically named Robinhood have shut down the buying of GameStop and related stocks on its app:
“We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only,” the company wrote in a blog post.
Other platforms like Interactive Brokers have either confirmed similar moves or been rumored to have placed restrictions, though traffic and trading halts have also stymied traders.
Robinhood also shut down buying of AMC (AMC), BlackBerry (BB), Bed Bath and Beyond (BBBY), Express (EXPR), Koss (KOSS), Naked Brand Corp (NAKD) and Nokia (NOK). Users can only liquidate or close positions.
Which brings together the following very strange bedfellows:
Fully agree. ? https://t.co/rW38zfLYGh
— Ted Cruz (@tedcruz) January 28, 2021
Here’s my question, which is probably very stupid – but hey, as I said, this is far from my field of expertise: is Robinhood legally allowed to do this, and if so under what sort of rule or rationale? I might add another question: did anyone twist Robinhood’s arms?
[UPDATE: As expected, AOC’s and Cruz’s romance was short-lived. Her response could be viewed as hysterical – if in fact it was actually sincere, which I’m going to assume it was not.]
As to the legality, given the lawsuites being filed there may be differing opinions. Some person named Brendon Nelson:
“sued Robinhood Financial LLC, Robinhood Securities, LLC, and Robinhood Markets, Inc. in the Southern District of New York this afternoon for “removing Gamestop from its trading platform.”
The lawsuit reads:
“Robinhood purposefully, willfully, and knowingly removing the stock “GME” from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market.”
The legality might come down to whatever it says in the terms of service.
There’s also the issue that Robinhood has almost certainly destroyed itself as a company. What small investor is going to put a single dime with them after this? I’m pretty sure deliberately bankrupting a business opens you up to some legal jeopardy.
Mike
Whether that is legal or not, Robinhood’s latest action might be: they’ve not only frozen the trading on Game Stop (and other properties), they started selling shares against the wishes of the owners of those shares.
I’m struggling to find the words for this situation. In its way, it’s as stark, revealing and chilling as the theft of the election. Possibly more so.
AOC, true to form, later responded very badly to Cruz. It is noteworthy that, for many years, the biggest hedge-funds (among the most unethical and the most unsavory of all Wall Street investors) have donated mostly to the Democrats, while it is now the New York Young Republican Club which will be planning a protest against the titans of finance. In this new battle of David vs Goliath, it is mostly conservatives arguing against entrenched power.
I just want someone to explain to me what the purchasers have done wrong. Yes, I understand they are disrupting the market. And I also realize that while it’s fun to watch hedge funds have to eat it, long term market disruption isn’t good for anybody.
But still, what have they done wrong? This is not insider trading. This is just a person telling 250,000 of his closest friends that he’s going to buy a stock and thinks they should too.
As in most cases, I’m going to err on the side of Free Speech here.
j e:
True, and quite fascinating.
The Occupy crowd must be rather confused.
Fractal Rabbit:
It reminds me more of the actions of Twitter and Amazon.
Chris of Rights,
What they did wrong was this: they revealed, definitively, that the game is not only rigged, but only some people are allowed to play the rigged game and win. This is a paradigm shift for a lot of people, the kind the powers that be spend a lot of time and money and trying to prevent.
Neo,
I guess it’s likely all part of the same Gordian Knot of incestuous totalitarianism that our tech oligarchs and their pet politicians helped tie. Sooner or later, an Alexander the Great will appear to cut that knot. That scares me. Even if he’s ostensibly on my side, the thought scares me.
Begun, the Gamestop wars have.
Boss I reckon AOC only has 1 setting – hysterical, but I could be wrong there.
If you include stupid, then maybe there’s 2.
It’s not a dumb question Neo, and I don’t know the answer.
traffic and trading halts … This is exactly the sort of thing that should be originating from the exchanges themselves (under clear SEC regulations) and not the brokerages.
Long ago there was the uptick rule. A short seller could not short trade as long as the share price was declining. They needed an uptick in price to short trade. They got rid of that in the 90’s or 00’s, and the free fall market crashes of 2008 was partly a result.
After 2008 they (SEC & exchanges) decided they needed automatic circuit breakers that would halt trading (15 min. or so) for extreme price moves, which they did. Except, … the specifics are all stupid. (I may be wrong on some details.) It only works for stock prices going down not up. And the triggers are mostly or entirely based on market averages like the S&P500 and the Nasdaq, or the QQQ. Why the QQQ ETF? Who knows.
The commodities futures markets have always had high leverage and extreme price moves. For a long time they have had the regulation that if a commodity price moves too far too fast, up or down, trading stops for a time. This happens for each individual commodity. Why is this a difficult concept?
The good thing about trading halts is that buying and selling stops. These jokers like Robinhood are halting buying but not selling? That is like placing a whole fist on the scales balancing market forces. I can’t imagine they would not get their clock cleaned in a courtroom.
John Guilfoyle – Sandy Cortez, an over educated bartender is stuck on stupid.
Her volume level goes from hysterical, screech, blathering to inane.
To address the point that Fractal Rabbit brings up: There are at least three different ways a trader can buy a stock. Buy it with cash, buy it on margin (borrowed money), or buy a stock call option.
Fractal is maybe referring to the buying on margin situation. A trader can control their shares that they buy on margin, only as long as they are not losing a large amount of money. Once the losses become too large, you don’t control the shares, the guy (brokerage) who lent you the money does. And if he doesn’t recoup enough money he can come after your house.
The last one is sort of a virtual buy. If the stock price goes up greatly, you can either sell the option for a gain, or convert the option into shares by buying shares at the option price which should be much lower than the market price. And then selling said shares at market price.
The stock options route is interesting for a couple reasons. This is what most of the r/WallStreetBets Redditors were doing, or so I’ve read. The second point is that options give you leverage. This is a story of 250,000 Davids taking on 5 or 50 Goliaths and winning. Did the Davids really have enough money to do this? No, but they leveraged their cash via stock options.
Jon Najarian, an options expert, stated yesterday that the Redditors did not have enough cash to fully realize their options gains by exercising the option’s right to buy shares at a cheap price. Instead they just dumped the options themselves driving the options price low in the process. They still made a killing but less of a killing than they would have, if they had more funds available.
I think Sandy is a hoot. She cracks me up almost as much as Tatiana McGrath.
I confirmed that indeed Robinhood did halt buying of shares but did not halt the selling of shares in the gaming company. Bad on them.
I’m not sure what TDAmeritrade did at the beginning yesterday, but there is this from CNet:
In the first half of that blockquote the trading activities that are restricted both involve TDAmeritrade acting as a lending institution. That is, you gamble with our money and we get to set the rules. I’d guess that would stand up in court.
TommyJay,
I don’t believe this case is margin. Could it be? Of course. And I’m sure that people might claim that but I think they’re just giving cover. Time will tell.
They still made a killing but less of a killing than they would have, if they had more funds available.
I trade options and if they used the option, they would still pay the premium. Then they would have to sell the 100 stock per contract they got. Of course 100 stock x the price of 200-400 USD is… probably not what they can get.
The premium though… was pretty much 0 or .01 or basically 1 dollar per contract, if they bought the contract up at 100-200 when the price was like 15-50. THe premium then would be 100 dollars per 1 contract, every time the stock went up 1 USD above the call option strike price. That’s actually really good. Someone could turn their 20-50k small trading account to 11 million.
Somebody still had to actually buy the stock up to drive thep rice that high however, which was likely the “super short squeeze” that happened. Basically the bigger day traders were adding their capital to the “short squeeze” play. When stock prices go up too fast, they sometimes trigger a squeeze on short sellers, forcing the short sellers to “buy” more stock at bad prices for them.
Fractal Rabbit on January 28, 2021 at 6:34 pm said:
TommyJay,
I don’t believe this case is margin. Could it be? Of course. And I’m sure that people might claim that but I think they’re just giving cover. Time will tell.
Robinhood does offer 2x margin, at 3-5% per year interest, which is actually zero if you don’t hold overnight. The first 1000 USD is interest free on margin.
So if a margin call was made, yes they can force you to sell the stock but… how would there be a margin call for people that bought gamestop at 10-100 USD and the price was at 200-400 USD? That’s like somebody ran out of money. Or rather, ran out of the actual stock because it was borrowed, so they had to sell the actual stock.
This was a rather clever gambit figured out by the Reddit small investors. They noticed that some stocks were being sold short in large percentages – mostly by hedge funds. In fact, Charles Payne of Fox Business said that some of the stocks had over 100% of their shares shorted. (Not sure that’s legal) So, what happens to short sellers when the stock begins to go against their position? Unless they want to lose big (Your losses on a short sale can be much larger than on a downward move in a stock you own.), they have to buy the shares they borrowed for the short sale. If enough people keep buying, and the price keeps rising, it becomes a “short squeeze play.” Now the big boys often do this to one another, they have the bucks to do it, and it’s all part of the games they play. But to have a large number of small investors taking positions in options is a brand new idea. It creates an massive short squeeze. The problem in this case is that the prices of the shares are driven so far out of whack with reality that it creates distrust in the game. Not to mention that it enrages the hedge fundies. The brokers recognized this, but didn’t really have any answers. Except to stop selling shares. At least that’s what it looks like to me.
Liquidating people’s positions without their permission sounds like a bad idea unless those were accounts with big margin debt. Even then, it sounds as if they panicked or were pressured by some authority or hedge funds to stop the run. The SEC is going to be making some new rules about this issue, I’d bet.
https://www.thenewneo.com/2021/01/27/fortress-dc/#comment-2537406
This comment in the last thread and mine 2 counts down, covers this gamestop trade war topic in more detail.
The SEC is going to be making some new rules about this issue, I’d bet.
The SEC and the Congress critters are the bigger mafia. The mafia will make rules to regulate the mafia, you see.
Your system is… ; )
“Chris of Rights,
What they did wrong was this: they revealed, definitively, that the game is not only rigged, but only some people are allowed to play the rigged game and win.” Fractal Rabbit
Bingo. Whatever the legality, that is the issue.
It doesn’t matter whether AOC was serious or not. She has to be held to the same standard she and those on the Left have advocated for and is guilty of doing the very same thing she pretends to abhor. You fight fire with fire until the fire is out.
When the democrats abandon their “incitement to violence” meme, then we can go back to our previous freedom of speech standard. But both sides have to adhere to that standard or its agreeing to a “cage match” where we have to fight by the Marquis of Queensbury rules and they by no restrictions whatsoever.
A failure to hold them accountable, encourages them to advocate for even greater restrictions upon free speech. There will be no end to it until disagreement itself is outlawed. And we are already far too close to that precipice.
I don’t trade, but out of curiosity I just began the steps of setting up a TD Ameritrade account. They won’t let me fund it with a credit card, and doing a wire transfer or something sounds like too much trouble, but I did check to see if they were prepared to sell me a share of Gamestop. Apparently they are. It’s trading at about $325, up 168% today. I’d kind of like to own a share and refuse to sell it on general principles.
Investors who think a stock is worth more than what a short-seller thinks it is worth send invaluable market information to a hedge fund. They should be praised & rewarded.
Why would shorting more than 100% be illegal?
Hedge funds can short at a variety of prices. One hedge fund at 100$ thinking the stock will drop to 90$; another at 95$ thinking the stock will drop to 80$. Do that enough times and 100% is shorted.
The problem in this case is that the prices of the shares are driven so far out of whack with reality that it creates distrust in the game.
See: Nikola. An obvious fraud from the start. And is small-time car maker Tesla really worth its current value?
“Tesla’s market capitalization has increased by more than $500 billion in 2020, and the company is now worth about as much as that of the nine largest car companies globally, despite selling a small fraction of the volume of cars that they do.”
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