Author Topic: The efficient market hypothesis vs. Reddit  (Read 1567 times)

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Offline XJDenton

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The efficient market hypothesis vs. Reddit
« on: January 27, 2021, 02:53:47 PM »
So, I have no idea if people are aware, but there are some shenanigans going on with Gamestop stock at the moment:

https://www.theverge.com/22251427/reddit-gamestop-stock-short-wallstreetbets-robinhood-wall-street

Long story short: /r/wallstreetbets, a subreddit dedicated to day trading and other personal stock market trades, noticed that a lot of companies were shorting (betting against) Gamestop stock, (Gamestop being a company hit hard by online selling and has been in trouble for a while) and "decided" to invest in a load of stock, driving the price up MASSIVELY, which has resulted in some hedge funds requiring capital injections to stay afloat.

It's quite the fascinating little story.
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Offline axeman90210

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Re: The efficient market hypothesis vs. Reddit
« Reply #1 on: January 27, 2021, 04:11:05 PM »
Yeah, I've gotten a good laugh out of following it this week. Just another reason I keep everything in low-cost index funds.
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Offline lonestar

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Re: The efficient market hypothesis vs. Reddit
« Reply #2 on: January 27, 2021, 04:24:37 PM »
I won't pretend to understand the mechanics behind it, but I do thinks it's quite hypocritical that they make a living fucking with the market and never have to suffer consequences all of a sudden need help when the market fucks them back (at least that's the jist I got from the radio earlier, feel free to correct me)


Also heard a story of a dude who bought a small grit of shares before xmas, and made over 3.5K without knowing what the hell was happening, he was just investing because of the PS5 coming out.

Offline XJDenton

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Re: The efficient market hypothesis vs. Reddit
« Reply #3 on: January 27, 2021, 04:34:05 PM »
I won't pretend to understand the mechanics behind it, but I do thinks it's quite hypocritical that they make a living fucking with the market and never have to suffer consequences all of a sudden need help when the market fucks them back (at least that's the jist I got from the radio earlier, feel free to correct me)

The jist is that the normal hedge funds were short selling the stock: an investor "borrows" a stock from a lender, sells the stock to some other buyer, and then after some time buys the same stock back to return it to the lender. You make money off this transaction if the stock price goes down between the selling and buying. So you are "betting against" the stock. So this kind of practice usually targets stocks of failing companies, and Gamestop has been struggling hard for years, and has been hit very hard by COVID, which in normal market conditions would make them an ideal target for this kind of short-sell.

Problem with short selling is, if instead the price goes UP, when you are required to return the stock you will then be forced to buy back the stock at inflated prices and lose money. And your potential losses are infinite. AND if, the price of the stock goes up sufficiently, the initial lender may force you to return the stock once it hits certain prices, because they know that the longer the stock increases in price the more losses the short seller is going to suffer, and so they may force a return to limit your (and consequently their own) losses.

And due to a load of posts on the subreddit hyping up the stock, loads of people ended up buying stock, driving the price up around 1800%. So these hedge funds who thought they had a sure return (after all, who would invest in a dying company?) suddenly find themselves losing a craptonne of money.
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Offline El Barto

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Re: The efficient market hypothesis vs. Reddit
« Reply #4 on: January 27, 2021, 04:46:44 PM »
My question is simply who are the people doing the short-selling? If they're just the Gordon Gecko's of the world I'm sure we can all cheer and laugh at their karmic buggering. If these are the sorts of things going on in normal people's managed portfolios that they don't really know about or understand, then it's a different matter. Sure, they should probably bone up on how their investments are going down, but having your retirement fund clobbered is kind of a steep price to pay for misplacing your trust in an investment banker.
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Offline XJDenton

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Re: The efficient market hypothesis vs. Reddit
« Reply #5 on: January 27, 2021, 04:50:29 PM »
"For a successful technology, reality must take precedence over public relations, for nature cannot be fooled." - Richard Feynman

Offline lonestar

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Re: The efficient market hypothesis vs. Reddit
« Reply #6 on: January 27, 2021, 05:25:12 PM »
My question is simply who are the people doing the short-selling? If they're just the Gordon Gecko's of the world I'm sure we can all cheer and laugh at their karmic buggering. If these are the sorts of things going on in normal people's managed portfolios that they don't really know about or understand, then it's a different matter. Sure, they should probably bone up on how their investments are going down, but having your retirement fund clobbered is kind of a steep price to pay for misplacing your trust in an investment banker.

From the sounds of it, it's karmic buggery...except that it seems they're being bailed out or some bullshit like that, because rich people.

Offline axeman90210

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Re: The efficient market hypothesis vs. Reddit
« Reply #7 on: January 28, 2021, 07:28:30 AM »
Friendly reminder that it's only a free market when it suits certain people :)
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Offline Stadler

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Re: The efficient market hypothesis vs. Reddit
« Reply #8 on: January 28, 2021, 10:09:11 AM »
Some of the comments/statements in this thread don't seem to jibe with what I'm reading.  So in case I'm missing something: 

- why is it "karmic" when Melvin Capital takes one in the shorts when essentially the subreddit members seem to be the ones dicking with the market?  I don't know who those people are, but it seems they are as culpable as the short-sellers (which while risky, isn't a controversial strategy).

- why is it just assumed all the worst things about "money"?  Because "agenda"?  According to the Wiki article, the money to Melvin didn't come for free, and it's not like Plotkin/Melvin have no track record to speak of on which those investors can't rely.   That's basically then a sound investment from private equity; I'm not sure what the problem is there?

- I can't speak to Barto's point directly, but the notion of short-selling is a known and established strategy of Melvin; anyone investing in one of their funds ought to have known that that is a risk of doing business with them.

- not sure why "free market" is an issue here; I see no indication that anyone was forced to do anything they didn't want to (absent information we don't have) and didn't take a risk they weren't at least nominally aware of. 

Offline XeRocks81

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Re: The efficient market hypothesis vs. Reddit
« Reply #9 on: January 28, 2021, 10:15:18 AM »
shorting is scummy and should be outlawed, that's what this whole episode should be putting in light imo but it won't.   "betting against" should restricted to actual gambling.

Offline axeman90210

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Re: The efficient market hypothesis vs. Reddit
« Reply #10 on: January 28, 2021, 10:27:28 AM »
And my free market comment was referencing specifically that the hedge funds who are taking a bath on their GME shorts got Robin Hood, which is far and away the most widely used platform by the individual investors who have been driving the price up, to stop its users from being able to buy shares of GME (and a few others). They can only sell.
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Offline Stadler

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Re: The efficient market hypothesis vs. Reddit
« Reply #11 on: January 28, 2021, 10:39:50 AM »
shorting is scummy and should be outlawed, that's what this whole episode should be putting in light imo but it won't.   "betting against" should restricted to actual gambling.

Why?   The stock market is a measure of future earnings, period.  Those earnings for any one company can be projected up or down, and can change upward or downward over time (that's what price fluctuations measure).   Why are only stocks whose future earnings are positive to be considered?  This, like arbitrage in currency, is a way of mitigating risk, ironically making the stockmarket generally a better investment. 

More specifically, there is a strong argument that short-selling is a way of signalling price "honesty" and keeping the market efficient.  It is, essentially, a criticism of the current stock price, much like buying is a vote of confidence in the current stock price (you don't buy if you don't anticipate it to go up over time).  As such, this tends to balance out, and may serve, for example, to curtail bubble markets.

Offline Stadler

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Re: The efficient market hypothesis vs. Reddit
« Reply #12 on: January 28, 2021, 10:42:51 AM »
And my free market comment was referencing specifically that the hedge funds who are taking a bath on their GME shorts got Robin Hood, which is far and away the most widely used platform by the individual investors who have been driving the price up, to stop its users from being able to buy shares of GME (and a few others). They can only sell.

Fair enough; though even that is not necessarily applicable.  Hasn't short selling been temporarily banned in the past when markets were overly volatile?   That's not a great argument, because it could have been the same people here just taking the opposite point of view (thus, your point) but I think it's a little risky to assume too much in terms of motivations.

Offline XeRocks81

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Re: The efficient market hypothesis vs. Reddit
« Reply #13 on: January 28, 2021, 10:49:02 AM »
itís predatory, gamestop is a traditional retail business that was already having a hard time due to changes in consumer habits that was only exacerbated by the pandemic and these shorters were driving the price even lower to make a quick buck.   Itís like what happened to toys r us, it was in trouble yes but it was stripped for parts by interests looking for short term gain. 

Offline Stadler

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Re: The efficient market hypothesis vs. Reddit
« Reply #14 on: January 28, 2021, 11:37:33 AM »
itís predatory, gamestop is a traditional retail business that was already having a hard time due to changes in consumer habits that was only exacerbated by the pandemic and these shorters were driving the price even lower to make a quick buck.   Itís like what happened to toys r us, it was in trouble yes but it was stripped for parts by interests looking for short term gain.

That makes little sense.  Did you even bother to read my post?  It's two sides of the balance; neither works in a vacuum.  This sounds more like a general criticism of the entire process than any specific beef about shorting.  Without it, then you have the same problem the other way.   

I'm not sure how "shorting" has anything to do with a ten-year decline in market share, and the veritable onslaught of etailers.   As for the piecing out, it's unfortunate, but it's a matter of perspective about whether it was "short term gain" or "any gain at all".  You can insert Sears, Kmart, or any of ten or more retailers in for "Toys 'R Us" and the problem is the same.  Why should any entity have to eat losses so that you're satisfied that god forbid someone's not actually making money? 

Offline El Barto

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Re: The efficient market hypothesis vs. Reddit
« Reply #15 on: January 28, 2021, 12:13:48 PM »
Some of the comments/statements in this thread don't seem to jibe with what I'm reading.  So in case I'm missing something: 

- why is it "karmic" when Melvin Capital takes one in the shorts when essentially the subreddit members seem to be the ones dicking with the market?  I don't know who those people are, but it seems they are as culpable as the short-sellers (which while risky, isn't a controversial strategy).
I referred to karmic buggery in relation to the Gordon Gecko's of the world. Unsure if Melvin qualifies or not. My hunch is that they probably do, though. I understand that Melvin isn't actually doing anything directly to Gamestop, but the bottom line is that they're getting rich off of the misery of others. If that's your strategy in life then I'm A-OK with you getting railed by the divine cock of Vishnu. 
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Offline Stadler

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Re: The efficient market hypothesis vs. Reddit
« Reply #16 on: January 28, 2021, 01:31:12 PM »
Some of the comments/statements in this thread don't seem to jibe with what I'm reading.  So in case I'm missing something: 

- why is it "karmic" when Melvin Capital takes one in the shorts when essentially the subreddit members seem to be the ones dicking with the market?  I don't know who those people are, but it seems they are as culpable as the short-sellers (which while risky, isn't a controversial strategy).
I referred to karmic buggery in relation to the Gordon Gecko's of the world. Unsure if Melvin qualifies or not. My hunch is that they probably do, though. I understand that Melvin isn't actually doing anything directly to Gamestop, but the bottom line is that they're getting rich off of the misery of others. If that's your strategy in life then I'm A-OK with you getting railed by the divine cock of Vishnu.

I mean, on some level you're right, and on that level, I don't disagree (maybe for slightly different reasons).  But I'm not sure I equate changing market conditions and the impacts of the efficiencies of e-commerce with "the misery of others" (and I'm not saying you do either; it's not a judgment).    I tend not to personalize this aspect of business, because in my experience it's NOT personal. 

Offline hefdaddy42

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Re: The efficient market hypothesis vs. Reddit
« Reply #17 on: January 28, 2021, 01:37:54 PM »
I tend not to personalize this aspect of business, because in my experience it's NOT personal.
It's not personal for the one making money off the misery of others.  I assure you that for those others, it's hard to say that it's not personal.
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Offline Jaffa

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Re: The efficient market hypothesis vs. Reddit
« Reply #18 on: January 28, 2021, 03:06:06 PM »
Question.

Was anything that happened illegal?  That includes the actions of the hedge fund itself and the actions of the Redditors. 

I'm genuinely asking, by the way.  I don't know much about the stock market, so I've had a little trouble following this story.  And of course it got politicized pretty much instantly, so it's hard for me to find an unbiased answer at this point.  I'm basically wondering if Reddit did anything 'wrong', or if something like this is a natural potentiality of the way the market works. 
Sincerely,
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Offline Stadler

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Re: The efficient market hypothesis vs. Reddit
« Reply #19 on: January 28, 2021, 03:22:14 PM »
I tend not to personalize this aspect of business, because in my experience it's NOT personal.
It's not personal for the one making money off the misery of others.  I assure you that for those others, it's hard to say that it's not personal.

For fucks' sake, though, that's both unfair and a tautology.  It's the easy argument.  First, I didn't make any money on this; I had no involvement in it whatsoever.  I've been on both sides of this type of thing (and business in general) and no, it's not personal.  That people might be impacted doesn't make it personal.  At that standard, EVERYTHING is personal.   So if someone owes me money, I should back off and let them have because there's "misery" involved?   

The changing fortunes of Gamestop have nothing to do with any one person.  For whatever reason, the market changed.  Is Microsoft at fault here because they went to a download only model?  Are they to blame for the "misery" of others?   And once Microsoft went to that model, do they have to forgo success because there might be "misery" to others?

Offline jammindude

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Re: The efficient market hypothesis vs. Reddit
« Reply #20 on: January 28, 2021, 04:40:44 PM »
I came to this thread for two reasons. First to see what StadlerĎs opinion was of the entire situation top to bottom and also most of what Jaffa said.
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Offline Cool Chris

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Re: The efficient market hypothesis vs. Reddit
« Reply #21 on: January 28, 2021, 09:07:59 PM »
I always roll my eyes when someone complains about the system [whatever system that may be] being "rigged." This is the first time I am taking notice that this could indeed be a case of that being true.

I'm basically wondering if Reddit did anything 'wrong'

Yeah, they pissed off very wealthy and powerful people.
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Offline XJDenton

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Re: The efficient market hypothesis vs. Reddit
« Reply #22 on: January 29, 2021, 02:39:28 AM »
I always roll my eyes when someone complains about the system [whatever system that may be] being "rigged." This is the first time I am taking notice that this could indeed be a case of that being true.

Welcome to the club, Comrade. :P
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Offline emtee

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Re: The efficient market hypothesis vs. Reddit
« Reply #23 on: January 29, 2021, 02:41:03 AM »
Fascinating saga

The power brokers and elites get mighightly peeved when average Joe's devise strategies that threaten their untouchable sovereignty. The shit really hit the fan when users were prevented from making trades..

The bottom line for me is that this proves the market carries deep and often unknown risks. We're dangerously close, with everything that has transpired since the mortgage banking debacle, to the system being broken. Wait and see what happens over the next few months. It will get ugly.


Offline hefdaddy42

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Re: The efficient market hypothesis vs. Reddit
« Reply #24 on: January 29, 2021, 06:30:43 AM »
I tend not to personalize this aspect of business, because in my experience it's NOT personal.
It's not personal for the one making money off the misery of others.  I assure you that for those others, it's hard to say that it's not personal.

For fucks' sake, though, that's both unfair and a tautology.  It's the easy argument.  First, I didn't make any money on this; I had no involvement in it whatsoever.  I've been on both sides of this type of thing (and business in general) and no, it's not personal.  That people might be impacted doesn't make it personal.  At that standard, EVERYTHING is personal.   So if someone owes me money, I should back off and let them have because there's "misery" involved?   

The changing fortunes of Gamestop have nothing to do with any one person.  For whatever reason, the market changed.  Is Microsoft at fault here because they went to a download only model?  Are they to blame for the "misery" of others?   And once Microsoft went to that model, do they have to forgo success because there might be "misery" to others?
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Offline Dublagent66

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Re: The efficient market hypothesis vs. Reddit
« Reply #25 on: January 29, 2021, 09:24:00 AM »
Uh oh!  You know this is a serious matter when Hef starts posting movie quotes.  :lol


I always roll my eyes when someone complains about the system [whatever system that may be] being "rigged." This is the first time I am taking notice that this could indeed be a case of that being true.

I'm basically wondering if Reddit did anything 'wrong'

Yeah, they pissed off very wealthy and powerful people.

Good, but they didn't do anything wrong.  The rich and powerful have been screwing the little people for decades.  It's about time a group of "little people" did their homework and stirred the shitstorm.


Some of the comments/statements in this thread don't seem to jibe with what I'm reading.  So in case I'm missing something: 

- why is it "karmic" when Melvin Capital takes one in the shorts when essentially the subreddit members seem to be the ones dicking with the market?  I don't know who those people are, but it seems they are as culpable as the short-sellers (which while risky, isn't a controversial strategy).
I referred to karmic buggery in relation to the Gordon Gecko's of the world. Unsure if Melvin qualifies or not. My hunch is that they probably do, though. I understand that Melvin isn't actually doing anything directly to Gamestop, but the bottom line is that they're getting rich off of the misery of others. If that's your strategy in life then I'm A-OK with you getting railed by the divine cock of Vishnu. 

The Gordan Gecko's of the world are guilty of breaking insider trading laws.  This really has nothing to do with that.

Offline El Barto

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Re: The efficient market hypothesis vs. Reddit
« Reply #26 on: January 29, 2021, 10:03:16 AM »
The Gordan Gecko's of the world are guilty of breaking insider trading laws.  This really has nothing to do with that.

Quote from: el Barto
the bottom line is that they're getting rich off of the misery of others.

That's a perfect description of Gordon and the short sellers. Not to mention the whole greed thing.

(And it's been a while, but my recollection is that Gordon was never charged or convicted of insider trading.)
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Offline Stadler

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Re: The efficient market hypothesis vs. Reddit
« Reply #27 on: January 29, 2021, 01:36:06 PM »
I always roll my eyes when someone complains about the system [whatever system that may be] being "rigged." This is the first time I am taking notice that this could indeed be a case of that being true.

I'm basically wondering if Reddit did anything 'wrong'

Yeah, they pissed off very wealthy and powerful people.

It all depends on what you mean by "rigged"; there is a lot of... I woudln't say "misinformation" here, but certainly "biased" information.   This is far more like one of those Ridiculousness videos, where the kid has his camera set up and heaves the basketball over his head and it goes "swish".  You see the video, and from your reckoning, he's really good at this, he PLANNED this.   But in fact, you haven't seen the 1, the 10, the 100, maybe even the 1000 tries he did until he got it right.  And he may never be able to do that again.  It's not precision planning, it's dumb luck or happenstance.   This GME event is far more likely the latter than the former.   

How do we know this?  The COMPLETE set of data, not one data point.   What's the last time this happened before this?   Who knows, but "never" is as good an answer as any.    And could they specifically plan to do it again?   Probably not. 

Offline Stadler

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Re: The efficient market hypothesis vs. Reddit
« Reply #28 on: January 29, 2021, 01:49:57 PM »
Fascinating saga

The power brokers and elites get mighightly peeved when average Joe's devise strategies that threaten their untouchable sovereignty. The shit really hit the fan when users were prevented from making trades..

The bottom line for me is that this proves the market carries deep and often unknown risks. We're dangerously close, with everything that has transpired since the mortgage banking debacle, to the system being broken. Wait and see what happens over the next few months. It will get ugly.

There's another argument, though, that this is the system working.  This is just as likely a case of something that happens fairly frequently (safeguards and controls in the system) having a light shown on them and people - not saying you or anyone here - not understanding how the system works and opting immediately for "Scam!" as an explanation.   The market puts brakes on trades all the time.   There's nothing new about that. 

We're also talking about two very different universes colliding; billionaires don't typically make their money in hour-by-hour day trades (they'd get KILLED on the taxes if nothing else).   They are long term, capital gain investors, more or less, letting their money work for them at minimal cost. Here, we're talking about a sector of investors that aren't interested in that, but are rather engaged in a daily if not hourly active exercise.    The "wealthy" being pissed off isn't JUST because of quaint notions of "getting back at them"; it's about something more fundamental.   It's like if you were a record collector, with a pristine set of Beatles first run LPs, and your kid brother comes in eating a popsicle and fried chicken and picks up your Abbey Road by the grooves. 

Offline Jaffa

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Re: The efficient market hypothesis vs. Reddit
« Reply #29 on: January 29, 2021, 02:21:06 PM »
There's another argument, though, that this is the system working.  This is just as likely a case of something that happens fairly frequently (safeguards and controls in the system) having a light shown on them and people - not saying you or anyone here - not understanding how the system works and opting immediately for "Scam!" as an explanation.   The market puts brakes on trades all the time.   There's nothing new about that. 

Does Robinhood, though?

Again, I'm genuinely asking, because I'm not well versed on this stuff.  But I've been dabbling on Robinhood myself for about a year now, and I've never received emails from them about volatility of individual stocks.  I've received three such emails about GameStop.  One of which opened with the phrase "It's been a tough day."

I get the sense that Robinhood's reaction in particular is part of what is making people think the system is being rigged (not by Reddit, but by Robinhood, Citadel, and/or Melvin).  But I'll reiterate that most of this is way over my head, and I'm mostly just trying to follow along. 
Sincerely,
Jaffa

Offline Volante99

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Re: The efficient market hypothesis vs. Reddit
« Reply #30 on: January 29, 2021, 11:57:34 PM »
Itís ironic to me; I donít think Iíve heard a single positive thing about Game Stop in many years and now all of a sudden people are coming to their rescue via stock price manipulation and thatís supposed to be applauded?

Unpopular opinion but if you REALLY want to hurt Wall Street short sellers people should try actually spending money at places besides Amazon and Walmart this year. I donít know a single person who has stepped foot into a Game Stop store since Bush 2 was President. Up until 2020 they were losing about half a billion dollars a year, just by existing. Hedge funds shorted the hell out of the stock because itís a terribly run company that no one (up until this week) gave a shit about.

Offline LudwigVan

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Re: The efficient market hypothesis vs. Reddit
« Reply #31 on: January 30, 2021, 02:05:04 PM »
There is no conspiracy between Robinhood, TD Ameritrade etc and the big hedge funds to shut out the small guy from trading GME and other names.

Practically all brokerages must be members of the Depository Trust Company (DTC), the central depot that facilitates the movement of shares bought and sold between parties. Think of it as an electronic book that monitors the inventory transferred and held by the brokerage firms on a daily basis. And to be a DTC member, Robinhood must post collateral to cover the inherent risks of settlement, i.e. the delivery and receipt of shares bought and sold between parties. At some point during the past few days, the trading in GME and other names was so huge and volatile that the collateral requirements pushed Robinhood into a red risk zone. The exposure on those trades was probably larger than the entire firm's balance sheet. If a few trades failed to settle, the entire firm could be held liable and go under. So it was for the sake of their own survival that they felt the need to halt trading. Granted, large firms like Morgan Stanley and Goldman Sachs probably wouldn't run into this, but the smaller discount brokers certainly did.

In the old days of physical stock certificates, if you bought $10,000 worth of stock and paid the seller for it, but for whatever reason said seller fails to deliver the certificates to you (lost in the mail, fraud, etc), then you just lost 10 G's. DTC became the centralized solution for stuff like that, but those "left holding the bag" risks are still there, albeit in a different form, and each brokerage house must pony up collateral to DTC to cover for that daily exposure.

The idea of a moral right/wrong between the Redditers and hedge funds is another story. I don't think there was anything illegal done on either side.  To me, it's just a perfect storm (Stad's hoops analogy) of events that conspired to bring this all to a head. It's one of those watershed moments that people dream of.

Of course, efficiency of markets is pie in the sky, but how do you keep up with an army of Ivy League hedgies and brainiac Redditers scouring for ways to take advantage of inherent flaws and inefficiencies in our exchanges? No amount of SEC regulation can fully cover every possible loophole, whether they wanted to or not (the big bank and hedge fund lobby will always have something to say about that anyway). The limited SEC budget can't keep up with the financial technology (fintech) needed to regulate it all. They are always playing catchup.

I guess from a moral standpoint, you could say that the hedgies were predatory in what they did in shorting Gamestop to the nth degree. I mean, how do you even sell short 140% of all GME shares outstanding? It doesn't sound possible. It's double dipping. You certainly can't BUY 140% of all the shares outstanding. But it's not illegal. This article gives a good idea for how that eventuality is even possible.

https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/

Another note which gets obscured by all the hoopla, is the fact that the spark for GME's price rise began when the founder of Chewy.com decided to step in and try to rescue Gamestop by transforming it from a pure bricks and mortar to an online retailer. So it's not as if there's NO justification for the Redditers jumping on the stock. Going after the short sellers was just part of it, but it ballooned into something else altogether... a crazy social movement/rallying cry, as we are now seeing. 
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Offline emtee

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Re: The efficient market hypothesis vs. Reddit
« Reply #32 on: January 30, 2021, 02:47:45 PM »
^Good post.

To me this had nothing to do with the company itself and everything to do who is allowed to prosper and by what methodology they are allowed to do it.

And yes, shorting 140% of the total stock seems, on its face, unreasonable. Kind of like consecutive life sentences when we only have 1 life.

Offline Dave_Manchester

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Re: The efficient market hypothesis vs. Reddit
« Reply #33 on: January 30, 2021, 03:37:42 PM »
There is no conspiracy between Robinhood, TD Ameritrade etc and the big hedge funds to shut out the small guy from trading GME and other names.

Practically all brokerages must be members of the Depository Trust Company (DTC), the central depot that facilitates the movement of shares bought and sold between parties. Think of it as an electronic book that monitors the inventory transferred and held by the brokerage firms on a daily basis. And to be a DTC member, Robinhood must post collateral to cover the inherent risks of settlement, i.e. the delivery and receipt of shares bought and sold between parties. At some point during the past few days, the trading in GME and other names was so huge and volatile that the collateral requirements pushed Robinhood into a red risk zone. The exposure on those trades was probably larger than the entire firm's balance sheet. If a few trades failed to settle, the entire firm could be held liable and go under. So it was for the sake of their own survival that they felt the need to halt trading. Granted, large firms like Morgan Stanley and Goldman Sachs probably wouldn't run into this, but the smaller discount brokers certainly did.

In the old days of physical stock certificates, if you bought $10,000 worth of stock and paid the seller for it, but for whatever reason said seller fails to deliver the certificates to you (lost in the mail, fraud, etc), then you just lost 10 G's. DTC became the centralized solution for stuff like that, but those "left holding the bag" risks are still there, albeit in a different form, and each brokerage house must pony up collateral to DTC to cover for that daily exposure.

The idea of a moral right/wrong between the Redditers and hedge funds is another story. I don't think there was anything illegal done on either side.  To me, it's just a perfect storm (Stad's hoops analogy) of events that conspired to bring this all to a head. It's one of those watershed moments that people dream of.

Of course, efficiency of markets is pie in the sky, but how do you keep up with an army of Ivy League hedgies and brainiac Redditers scouring for ways to take advantage of inherent flaws and inefficiencies in our exchanges? No amount of SEC regulation can fully cover every possible loophole, whether they wanted to or not (the big bank and hedge fund lobby will always have something to say about that anyway). The limited SEC budget can't keep up with the financial technology (fintech) needed to regulate it all. They are always playing catchup.

I guess from a moral standpoint, you could say that the hedgies were predatory in what they did in shorting Gamestop to the nth degree. I mean, how do you even sell short 140% of all GME shares outstanding? It doesn't sound possible. It's double dipping. You certainly can't BUY 140% of all the shares outstanding. But it's not illegal. This article gives a good idea for how that eventuality is even possible.

https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/

Another note which gets obscured by all the hoopla, is the fact that the spark for GME's price rise began when the founder of Chewy.com decided to step in and try to rescue Gamestop by transforming it from a pure bricks and mortar to an online retailer. So it's not as if there's NO justification for the Redditers jumping on the stock. Going after the short sellers was just part of it, but it ballooned into something else altogether... a crazy social movement/rallying cry, as we are now seeing.

Very informative post, thanks for taking the time to write it.
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Offline Jaffa

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Re: The efficient market hypothesis vs. Reddit
« Reply #34 on: January 30, 2021, 04:37:39 PM »
Agreed.  Exactly the kind of insight I was looking for; much appreciated.
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Jaffa