GameStop

No doubt like others, I’ve been watching with some fascination the GameStop issue in the US, where short sellers in the stock market  appear to have been caught out by the “little guys”.

Put simply, some of hedge funds (in this case, one in particular called Melvin Capital) were “short sellers” of a stock that they thought was over-valued.    But, the story goes, they’ve been caught out on this occasion by the “social media crowd”, particularly on a Reddit thread called “WallStreetBets”. 

It seems that social media users swarmed to buy the stock that the funds were shorting.  This has been pushing the price up instead of down as the short sellers were predicting.  The motivations of the social users are partly to make money but it’s also said that there’s a feeling that the large funds have played the market over the years to their advantage, on occasion making a lot of money shorting vulnerable stocks.  Hence, on one view, this is the revenge of the little guys on Wall Street.     Certainly, it appears that some of the social media users are saying this, but I wonder whether a motive can ever truly be ascribed to a “mob”?    I suspect that everyone has their own motive.

Anyway, the big players don’t like what’s been happening and there have even been calls for regulation.  

This has been met with suggestions of hypocrisy, and there have been comments to the effect that while the actions of the social media users have some features of manipulation, it seems that it would be very difficult to demonstrate that this had occurred.    How can a bunch of people talking on a reddit forum about a stock be “market manipulation”?

But in fact, there are many “moving parts” here.     The first is, it’s not really clear just what is going on.   Sure the price of GameStop appears to be volatile, but who is making money and who isn’t isn’t necessarily apparent.   Melvin appears to have had to be re-financed, so perhaps it did in fact suffer.   But why did Melvin choose to go short in GameStop?   It was very heavily shorted, so it was a “crowded” trade and in any event it was (until the present issue) a small company. 

There’s also the the role of those institutions – such as many superannuation finds – that “lend” stock to funds such as Melvin so as to avoid “naked short-selling”.  In Australia, these also include listed investment companies such as Djerriwarrh Investments which openly acknowledges that it’s in this business.   Related to this is that the investors in funds such as Melvin in fact include funds such as superannuation funds (or the US equivalent) – so what isn’t good for Wall Street may (indirectly) not be good for some of us Mums & Dads!   However, the bonuses that managers of hedge funds receive for making money tends to obscure this aspect.

At the time of writing, the full implications of the issue haven’t played out, but there seems to be at least an element  of truth in the statement that we’re seeing some “democratisation” of the markets, so perhaps the Wall Street funds won’t have things quite as easily going forward.   Partly thus is due the rise of trading platforms such as RobinHood which apparently facilitate trading by people such as social media users by not charging commission, although it eludes me how this works.

That said, the people that run the Wall Street funds are well-versed in the markets and no doubt they will adapt.   For one thing, no doubt their traders will be watching on-line forums and perhaps using what they see to their advantage.

I looked at the Reddit feed, but wasn’t impressed with what I saw;  perhaps regular users know how to find what they need.   Locally, there’s been some comments on Whirlpool.