We are a long way from the dust settling around the commotion that has become known as the GameStop story, which has magically pushed an age-old trading strategy to the forefront of disruptive social media banter, which is probably a redundant statement.
What we know so far, for those of you keeping score at home, is that actual market forces are accomplishing what eons of more formal education have never been able to master: educating the masses on how short-selling works.
By my latest count, everyone and their mother is suddenly fluent in the intricate workings of a short-squeeze, or at least they claim to be on social media.
For those of you without a Twitter account or ready access to your mother, the simple definition of a short-squeeze is when someone betting a stock will go down is suddenly forced to buy that same stock long to cover losses incurred by others buying the stock long.
We have been witnessing this carnage in its full-throated glory over the past few weeks as what looks like the enthusiastic masses with smartphones and apparently lots of time and free cash flow are determined to take down the man (i.e., rich and greedy hedge funds) by driving up the price of crappy stocks to force hedge funds to take heavy losses.
It’s a brilliant strategy if your only objective is to disrupt obscure corners of the financial markets by inflicting financial losses on billionaires. But in the end, you are still just overpaying for crappy stocks.
Take GameStop Corp., for example, which has become the poster child of this entire calamity, even though the coordinated efforts have since spread to at least a dozen other heavily shorted stocks.
In the most generous description possible, GameStop is a money-losing mall store that mostly traffics in video games and the kinds of knit beanies that for some reason gamers wear year-round.
For as far back as anyone cares to go, GameStop shares have been enjoying a mediocre ride. Six months ago, the stock was happily flatlining at around $4, but thanks to the marvels of crowdsourcing, algorithmic trading, and a bunch of other stuff, it was driven above $400.
That 8,100% gain occurred since the second week of January, and that’s where the real fun begins.
This wouldn’t be such a fun mess if there weren’t conspiracy theories galore around who or what might be behind all these people suddenly agreeing to push their money through trading apps like Robinhood just to inflict pain on some super-rich hedge fund folks.
Some references have been made to this being a technologically advanced version of Occupy Wall Street. Remember that thing?
None of us non-billionaires are supposed to care about the mounting losses incurred by hedge funds, but the extreme trading levels and price spikes initially forced some brief trading stoppages, and then led some trading platforms to restrict buying of targeted companies.
This naturally triggered more conspiracy theories about the trading platforms stepping in to help the big bad Wall Street institutions.
Ironically, many of the same folks who supported the rights of private companies to ban select individuals from social media platforms, do not support private companies from limiting trading of select companies. Hmm.
This is the point where we remind people why it is important to read the fine print on those brokerage agreements before just clicking through because you’re so darn eager to get on with the trading.
Naturally, the loudest of the political class has already jumped into the fray with snipes at Wall Street, charging of systems being rigged against the little person.
Keep in mind, those same politicians still afford themselves the unexplainable right to trade their own portfolios on inside information in ways that would put the rest of us in the slammer.
Despite the predictable noise from elected officials, including such aggressive statements as “We’re monitoring the situation,” no formal action has yet been taken.
This public spectacle will be and should be subjected to a full investigative scrubbing. But unless the rules are changed, which is always possible when it comes to Washington, there isn’t much that can be done to curtail anything I’ve laid out so far.
While I’ve grown bored with the “new normal” phrase, I’m afraid this is exactly that, and it will continue to evolve because that’s what humans and markets do.
As explained earlier, short-selling and its belligerent cousin the short-squeeze have been around forever, this is just a louder way of doing it.
As one brilliant market watcher told me this week, the current mayhem is just the result of the perfect storm of market liquidity combined with free trading platforms, stimulus checks, and too much spare time.
And to that, many of those fired-up traders might politely respond, “OK, boomer.”
Just keep in mind that nothing in finance happens in a vacuum, and while the ride up might be exhilarating, especially when you believe you’re sticking it to the man, at some point you will need to figure out how and when to sell the $4 stock that you bought for $330.
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