{"id":833,"date":"2021-02-26T23:30:45","date_gmt":"2021-02-27T04:30:45","guid":{"rendered":"http:\/\/commoncents.blogwyrm.com\/?p=833"},"modified":"2023-05-06T16:49:58","modified_gmt":"2023-05-06T20:49:58","slug":"a-february-to-remember","status":"publish","type":"post","link":"https:\/\/commoncents.blogwyrm.com\/?p=833","title":{"rendered":"A February to Remember"},"content":{"rendered":"

Their trading company of choice is called Robinhood<\/a>, the subreddit where they discuss and plan is called r\/wallstreetbets, and their now trademark move is called the GameStop short squeeze<\/a>, but a name has yet to attach to the group of retail investors who\u2019ve jumped into the spotlight for their role in one of the landmark incidents in the world of high finance.\u00a0 Whatever name history eventually dubs these \u2018average joes\u2019, there is no doubt that their actions \u2013 which are one part David versus Goliath<\/em> and one part Revenge of the Nerds<\/em> \u2013 have bloodied the nose of high finance and will change the way Wall Street, Congress, and society at large looks at investing and stock trading going forward.<\/p>\n

Despite the excitement and drama surrounding the movement of GameStop<\/a> stock during the past month, the mechanics of the story are rather simple, although, perhaps, couched in unfamiliar terms.\u00a0 A group of institutional traders (e.g., brokerages, hedge funds, etc.) decided that GameStop was an over-valued company and shorted the stock<\/a>.\u00a0 These actions were followed by the retail reddit investors driving the stock price up in a squeeze that caused big financial losses for many of those institutions.<\/p>\n

\"\"<\/a><\/p>\n

In a short, the trader, called the short seller, borrows the stock from a lender and sells it to the broader market at the price Pb (\u2018b\u2019 for borrow).\u00a0 The short seller, in addition to paying a lending fee, has an obligation to buy the same amount of the stock back and return it to the lender at some future time.\u00a0 During the time between the loan and the repayment, the short seller must collateralize the loan with a cash holding called margin, and may have to post additional margin as the stock price moves.<\/p>\n

As long as the future price Pf (\u2018f\u2019 for future) is lower than the Pb, the short seller stands to make a profit equal to (Pb \u2013 Pf)*n (with n = number of shares), which is his reward for correctly betting against the stock.\u00a0 But if the future price is greater than the borrow price, the short seller loses money, and since there is theoretically no limit to how high a stock price may go, the corresponding losses are unlimited.<\/p>\n

By rule, whenever a trader takes a short position (i.e., short sells a particular stock), it is publicly disclosed; this disclosure has both a downside and an upside.\u00a0 On the downside, the fact that someone has bet against the stock puts a downward pressure on the price of that stock, which strengthens the short seller\u2019s chances of realizing a profit.\u00a0 On the upside, the public position of that bet makes the trader vulnerable to others pushing the stock price higher, forcing the short seller to increase his margin (held collateral) or to exit his short position at a loss.\u00a0 This later event is an example of what is called a short squeeze<\/a>, and is precisely what the group in r\/wallstreetbets did.<\/p>\n

As Jill Schlesinger points out in the following video, what makes this story \u2018delicious\u2019 is that, in crowdsourcing this short squeeze, the retail investors of this world (so-called dumb money) showed that they could also manipulate the market to their advantage in the same way that only the institutional investors (so-called smart money) could do until now.<\/p>\n