Ask HN: How is GME not a pump-and-dump?

[callwaiting]

I've deliberately stayed away from WSB so far, but curiosity got the best of me now, and I took a look.

The amount of pumping behind GME is unbelievable. On of the top comments as of right now justifies burning a year's worth of income, just to stick it to Wall Street.

The thing is, I don't think anyone at Wall Street is touching this stock right now. The stock price is far too high for a buy grounded in fundamentals, and shorting this particular stock right now can backfire catastrophically, as we have seen.

This has the veneer of a crowd sticking it to someone they felt exploited by, but in the end, they're just being exploited by someone else.

Right now, the only ones benefiting from someone sticking a year's worth of incoming into GME are those doing the pumping.

[nowherebeen]

If the stock was <100% shorted, it would be a pump and dump. The moment it was >100% shorted, the hedged fund exposed themselves to financial risk.

No matter how much people buy, they can't buy >100% of the shares on the market unless GameStop issues new shares. The people buying are betting that when these hedge funds need to cover, they will be covering ~120% of the number of shares (the amount of shorted stock) on the market. That covers everyone that has shares right now.

So right now, its a tug of war (hence the volatility). Its a zero sum game where one side will definitely lose. You can argue that the company isn't worth anything and that buyers will get hurt, but only when <100% of the stock is shorted.

edit (below):

The loser will be the one holding 100% of the stock. At that point the stock would plummet because all the buyers have left. Meaning if the hedge fund loses, they are not just covering at a higher price (and thus continuing to drive it up even more), they will effectively be buying worthless stock.

I consider this a battle of trading strategies. The fundamental value of the company is beside the point. Hedge funds have done this to each other before, that's why there's an existing term for it - short squeeze. Its definitely covered in a textbook for first year business school students.

[boatsie]

There isn't something "magical" about > 100% short interest. It should be stated a ratio to be less confusing, rather than a percentage. It just means that if there were, say 100 shares of a company, and 120 shares sold short, it would be "120%" short. But all this means is that there are 220 shares "owned" by others. And thus, to cover, the "shorts" need only buy back 120 of those 220 shares, so there will certainly be bag holders at the end of this since the shorts don't actually need to buy up "all the shares", only 54% of them in this case.

Now, of course, some of those shares are locked up by funds tracking, say the Russell 2000 index, which cannot liquidate their holdings (and may even be required to buy more as GME climbs) in order to maintain it's percentage in the fund. Other shares are held by other funds or institutions, and so on. So the reality is it is difficult for the shorts to cover quickly.

This isn't a problem during "normal times" because the volatility of the stock is relatively low and thus the short margin interest that you have to pay to keep borrowing the stock is a small percentage. But as the price runs up, that interest and collateral requirements grow dramatically since the broker needs to be sure you can pay up if you have to buy the shares at the current market price.

[jfengel]

I've seen this argument several times and I don't understand it. Why can't they buy >100% of the shares in exactly the same way they were able to sell >100% of the shares? They buy some shares, return them to their owners, and then buy them up again?

They don't even need to buy up 100%. They only need to buy up 20%. Then they're back in the situation of being under 100% shorted, and problem no longer applies.

With such a large short interest it means that a motivated or coordinated buyer can force them to cover it at highly inflated prices, and that's their fault. But doesn't seem to be impossible just because the interest is >100%, merely very expensive (perhaps bankruptcy expensive).

Am I missing something?

[bjourne]

If I understand what you're saying is that what WSB is doing isn't anything new but something hedge funds has been doing against each other before? The novel part of it is that their "attack" is organized through a Reddit community and requires lots of people pooling their money together? If they "win", they get their money back?

[pastrami_panda]

But according to statements from e.g. Melvin Capital they closed their position at a loss already. It's very hard to tell if this is actually the case but assuming it's true that ought to change the situation, no?

[savorypiano]

If a stock is shorted, someone else bought the shorted shares, creating extra supply to cover with. Percentage >100 doesn't mean they cannot cover, in theory.

[franklyt]

I don’t see how that term is applicable to a grassroots phenomenon when it purports to describe an explicit corporate strategy.

[maest]

> This has the veneer of a crowd sticking it to someone they felt exploited by, but in the end, they're just being exploited by someone else.

You are 100% right and that's what's going on.

However, the pump-and-dump kinda took a life of its own becuase GME is a perfect storm:

* it's a highly shorted stock, so the chance of a short squeeze is high

* there's a (misguided) wall street vs retail narrative going on

* GME is a name everyone knowns, especially the reddit crowd, so people are more willing to buy in

People are being duped into raging against the machine right until they lose their life savings, while u/deepfuckingvalue and friends are laughing all the way to the bank.

And when it will all collapse, everyone will point fingers at the rigged market, instead of realising they shouldn't have thought twice before jumping in this senseless buying.

[mckirk]

Retail investors being blocked from buying while short sellers use ladder attacks to buy back shorts cheaper very much seems like a 'rigged market' though, no? (Even if the move to block buyers wasn't orchestrated.)

Granted, the big fish are just playing the game, but that doesn't mean it's just 'whining' to take serious issue with how it's played.

[space_rock]

Except this is all trur at the same time. It's a rigged market, it's a pump and dump and a protest all in one

https://twitter.com/IsicaLynn/status/1354894529208348673?s=2...

[imtringued]

>And when it will all collapse, everyone will point fingers at the rigged market, instead of realising they shouldn't have thought twice before jumping in this senseless buying.

https://www.reddit.com/r/wallstreetbets/comments/l8b92a/cnbc...

Are you sure?

[nwallin]

IANAL. I'm not touching GME with my money, but I'm happy to stand on the sidelines and cheer the memers on.

You need to define your terms. You don't get charged and go to prison for "pump and dump", you get charged and go to prison for "securities fraud".

Right now, people are saying it's worth burning a lot of money just to stick it to Wall Street. As in, if you do this, you're probably gonna lose a lot of money, but you should do it anyway, because it's the right thing to do. (note: I'm not arguing the merits of this argument, I'm just stating what I interpret the argument to be.)

The thing that's illegal that will put you in prison for securities fraud is to claim that if you buy GME and hold it, you will make a lot of money. This isn't illegal because it's fucking over Wall Street, this is illegal because you're lying. The crime isn't "pump and dump", the crime is "securities fraud".

Also note that traditionally, in a pump and dump scheme, you buy first and pump later. People right now are buying and pumping at the same time. They're not (just) pumping by telling other people to buy the stock, they're pumping by buying the stock. This is a significant difference.

That being said, since Everything Everywhere Is Securities Fraud, I guess this is securities fraud too. (/s)

https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...

[Terretta]

> one of the top comments as of right now justifies burning a year's worth of income, just to stick it to Wall Street

For the past week, a majority of “stick it to Wall St” comments have been saying (a) don’t buy it if you don’t like the stock, (b) only buy with money you don’t care if you get back, and (c) if you really really just want to stick it, then buy in order to take the share off the market not to make money, only buy a share or two then put them under your mattress.

Can’t speak for the top comment, but a majority of the advice has been in the “only spend a few dollars for entertainment and political value, and only spend if you never expect to get back”.

Some are being explicit, saying, think of your buy as a political contribution to Occupy Wall Street.

[interestica]

So I've been wondering about how this is different.

I'm wondering, at what level, this can become a self-fulfilling prophecy?

A lot of the talk has been that the stock price doesn't reflect the company's 'true value' (it's volatile and mostly inflated). But there are a few outcomes that truly increase the company's value. Obviously the brand/marketing aspect -- lots of free marketing. New key board placements show that they are potentially restructuring/refocusing and that potential strength is highlighted by the public messaging within WSB. (The messaging is obviously disproportionate and a reaction to negative valuations by the those that shorted it...but still influential.). It seems to be growing at about 1m+ per day. You have a lot of influencable eyes on content there.

What if GameStop gets essentially treated like a defacto co-op of sorts? What if WSB helps coordinated buys? What if it becomes the "preferred retailer" for purchasing/selling consoles? (Even going so far as recommending against purchasing from other retailers). What if it gets championed as some sort of anti-corporation corporation. What if WSB helps guide whatever transition is necessary at the retailer (e-sports? some sort of wework-gaming hybrid? Sustainable? who knows). The brick-and-mortar retail space is going to be very unpredictable in a post-pandemic world.... There could be a certain pride and self-interest in helping drive gamestop's business. A lot of the wit and intelligence gets overshadowed by outside reading of the memes. The mods over there are very smart and there's potential for something well-organized to come out of this.

We might look at how WSB affects Robinhood as a business as some kind of indicator of the massive power of such an organized group.

The company has the potential to become as valuable as the "inflated" valuation.

[dev_tty01]

>> I don't think anyone at Wall Street is touching this stock right now.

Hmmm. Why wouldn't the hedge funds that are not short GME jump all over this? That is probably why it has gone so high. The quant programs detect the momentum and ride it up. The funds can trade so fast that they will exit before any of the RH traders.

[nursur2011]

Yeah, I have a hard time believing it's just small retail investors.

[strikelaserclaw]

I truly hope the ones benefiting are really the little guys and not "other" wallstreet, manipulating desperate people by giving them a narrative is so easy.

[LatteLazy]

People seem very convinced that because the "victim" is Big Finance, that makes it OK. Convincing them otherwise requires logic to beat emotions or prejudice. That's proving very difficult at the moment.

[valdiorn]

as someone who actually works in finance, I've just decided it's not even worth engaging with people on reddit, trying to explain that the actions of RH and other brokers is justified. There too much of this "us vs. the evil Wall Street system" going on for people to actually listen to reason.

Nobody gives a fuck about the fact that, if RH continued to sell shares and options to customers, they would be liable for billions in damages, and a whole host of related entities (clearing house, market markers they work with, etc) would be in the shit. It would effectively "break the system". Of course, that's what some people want. However, don't blame them for not wanting to sell customers illegal services, just because the customers feel entitled to it.

Also, there's this huge misconception that the markets are "free", and that means anyone can participate. Soooo not true. First of all, you don't get to rock up to any market and just ask to buy or sell stuff; only trusted members of that exchange actually have the right to do that. Even hedge funds with direct market access are usually sponsored by a broker, so while they get to submit their own orders, the broker oversees the flow and can pull the plug, because the fund is trading on their good word. Some funds (like one I used to work for) go as far as actually buying a seat on the board of major exchanges, like the CME, and that seat itself is worth millions or tens of millions of dollars. that's the premium you pay for market access.

Maybe now people understand why RH would rather play it safe and anger their customers rather than piss off literally the entire market and get kicked out, along with the clearing house and market makers going bust in the process. It's bad for everybody - even the retail traders, because their assets become worthless when there's nobody left to fulfill the trade.

[CTDOCodebases]

You can only consider it a “pump-and-dump” if the individuals doing the “pumping” buy in at a low price and “dump” at a high price.

I too doubt this will end well for the people pouring money in at high prices but no one seems to have trouble with the legality of gambling so I don’t see how this is any different.

If Gamestop issues shares at these elevated prices and successfully uses this money to pay down debt and pivot it could end up a good long term investment.

I think the bigger question is “Is allowing market participants the ability to drive down the price of a share using leverage or no capital at all a good thing for the stock market and economy as a whole?”

[User23]

On a tangent, are insiders who can’t trade still allowed to lend their shares out to shorts? The idea of Elon Musk collecting borrow fees from TSLA shorts and then watching them get crushed is an amusing one.

[victor106]

Great question.

I am not an expert in this area, so don’t take this as the correct answer I think the way it works is your broker lends out your stock (at a profit) to short without any explicit consent from you. It’s your brokers responsibility to make sure that you have access to your stock when you need them.

[zaphirplane]

I think it started as some noticed the hedge funds with their pants down. Now a whole bunch of pump and dump people are taking advantage of the “movement” with this rocket Valhalla business

[sizt]

First you need to offer a definition of "pump and dump".

Otherwise you're just using a term that fits your conclusion.

[chovybizzass]

its because the hedge funds are shorting and buy buying $GME we are effectively going to bankrupt them. This is payback for 2008 and a million more things.

[dev_tty01]

I suspect you don't understand how large many of these funds are. This nonsense is not going to bankrupt these folks. Non-shorted hedge funds are going to use this event to extract more dollars from individual investors. Frankly, I wouldn't be surprised if the funds that were initially short have already reversed their positions and are now riding this momentum to the bank. They have much more information and much more trading speed.

[hknd]

Which will only get the price up for a short amount of time, it will be dumped after that anyway.

GME fundamentals haven't changed (much) - it's not worth much on paper, maybe $10, $20, $30?

Market behaves irrational rn, but at some point it will become rational again. And then GME stock will crash.

[callwaiting]

> its because the hedge funds are shorting and buy buying $GME we are effectively going to bankrupt them.

Which hedge funds? Melvin has already retreated.