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[quote=Anonymous][quote=Anonymous][quote=Anonymous]
I agree that overleveraging is bad and should be prevented, but that's not the issue.  You manipulate the market, you create risk.  These people manipulated the market and made money.  They also identified a type of risk that was ignored before and should be closed in the future.  Good for them!  But they don't get a medal, they don't get to dictate a price, and[b] the stupid shorts did not break any laws[/b].  Sorry, it just doesn't work the way you think it does.[/quote]
Did the Reddit longs break any laws either?

Yes, the whole system if f-ed. AFAICT, the Redditors goal is to prove that. I do think that the collateral impacts are concerning...but I'm not 100% how to fix this. I think if it gets fixed in a way that more than a few pounds of flesh aren't extracted from WS (which I doubt will happen), then in the long run it's worse than any short-term instability the Redditors caused. The system is rigged so that WS always wins. That will continue to drive destabilizing behavior. We at least need to start by admitting that and taking the risk seriously. I don't think we really did in 2008 (i.e. didn't take the moral hazard concerns seriously), and I don't think we've learned enough since.

A big problem, IMHO, is that no one has seriously challenged the notion that more liquidity is always good. [/quote]

Exactly.  The redditors did nothing wrong.  They had a discussion on a messageboard, like we're doing right now, and one guy posted an idea he had in August 2019.  This guy, a dad from Boston that lives in a house worth less than the average priced home in DC, said he had looked closer at the cash flow figures.  He said that at $4 it was undervalued and that he had bought in.  He was made fun of and told it was a stupid trade, that gamestop was poorly run, indebted, reliant on dying malls, and about to be left behind by digital distribution.  The guy said, you may be right about most of that but they arent going bankrupt.

When they looked closer at the stock, they noticed it had an extremely large short interest.  In fact, the stock was undervalued.  It was undervalued because a series of extremely large shorts had been placed against it and capital was scared.   They then figured out that more shares were shorted than existed in the company.   So they asked, how can this possibly be right? So they learned about how brokerage/dealers lend out our shares to big money traders tomwrite options, literal bets on a stock's future price.  Stay away shouted the horde.  Do you realize how much money's against you?   Things looked bleak but then the Chewy Founder was brought onto the board with a 10% stake.  The stock goes up based on that good news.  As the stock went up the shorts started having to buy and it became apparent that an awful lot more shares needed to be bought than were easily available.  People started buying in and the word spread.  Then they asked, what if we just refused to sell? Jokes were made and memes created.  They had fun with it.

Meanwhile, traders notoriously lurk on wsb to turn their schemes into pump and dumps.  Most of wsb are momentum chasers you see.  Robinhood used to publish it's daily trade numbers both by size and number of accounts.  Professional traders were using that data to build up and then destroy popular robinhood positions.  They did this by front running the robinhood order book.  Anyway, I digress.  Traders read the idea, looked at the numbers, and realized that wsb was right.  Institutions that dont actively trade held most of the shares.  Real money started buying in and each time that happened they started to make more people notice who then jumped on in turn.

Meanwhile the shorts kept doubling down and refusing to give in.  They were not going to lose to a bunch of messageboard nerds.  But the nerds didn't care.  The original guy cashed out a bit and bought back in.  They posted their holdings throughout to prove what they were doing.  They held.  They joked.  At any time the billionaire shorts could have covered, but they refused to.  They were too cool and werent going to give in to the amateurs.  As this standoff was happening, index funds were having to buy more and more shares which was driving the price higher.  Now more big money came in.  The shorts still refused to cover.  They had even sold calls to the redditors.  And now, here we are.  Either a bunch of hedge funds are going to go bankrupt, which will trigger a sell off in their holdings, or the indexes will crash and trigger it's own cascading automated selloff, like happened in march.  Fun times.

To blame the redditors for this situation is preposterous.  To claim they broke securitoes law is slanderous.  They did nothing wrong.  Against all the odds they did the research, with access to way less of it by the way.  They formulated a strategy and explained their reasoning along with the upsdie and downside.  They were transparent about what they were personally doing.  They didn't mislead anybody.  They don't have the money to do this on their own.  Professional traders agreed with them and jumped on the trade while also playing the wild intraday swings.  See, even within this trade there a professional traders skimming a piece of the action.  HFT is even involved.

And yet, some want to blame a few thousand nerds because they think they're stupid[/quote]

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