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According to

the subreddit r/wallstreetbets is buying, en masse, stocks that are being shorted by institutional investors. How does this benefit the members of r/wallstreetbets?

Once they decided to move onto another stock them all selling, at the same time, will mean they'll all stand to lose a lot of money, i.e., they won't be able to sell the shares for what they paid for them.

If it was a bunch of people with a high disposable income who were willing to throw away $100 / each to "stick it to the man", that'd be one thing as it's not monetary gain they're looking for, anyway. But if that's what it is then it seems to me that the problem will eventually self correct as the /r/wallstreetbets/ community eventually runs out of money?

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    In addition to what Franck Dernoncourt said, there is some motivation beyond pure profits. A lot of people hate wall street and find the schadenfreude of seeing them suffer worth losing their entire investment. – Ryan_L Jan 28 at 22:16
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    @Ryan_L which then reinforces their belief in "powers beyond their control". – RonJohn Jan 28 at 23:46
  • A company at risk of bankruptcy can't have its stock used as a cryptocurrency. The stock will be dissolved in either a reorganization or a liquidation. Now some of the short sellers may just be bond holders with ill-liquid bonds. – S Spring Jan 28 at 23:46
  • @SSpring As far as they are saying, Gamestop isn't really at risk of bankruptcy, it's not doing well but it's not in massive debt or anything either. – user253751 Jan 29 at 18:18
  • Well, go to marketwatch-dot-com and read the year 2020 balance sheet for GME. – S Spring Jan 29 at 20:01
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The idea is that WSB members will buy up a bunch of the stock, which will raise the price of the stock. Short sellers will then buy up stock to cover their positions, and they'll have to buy those shares at the higher price. This will raise the price even more, then WSB members will sell their stock at this higher price. This sell off will then create a crash. If it goes as planned, there will be a net transfer of money from short sellers to WSB members. But this money will not be evenly distributed; those who bought in early and sold right before the crash will make the most, while those who bought later, or sold after the crash, will make less, or even lose money.

Basically, this is very much like a pyramid scheme, except that with a normal pyramid scheme, there is no outside source of money, so once the transaction costs are included, there's a net loss of money over all the participants. With WSB, on the other hand, the idea is to force short sellers to be the bottom of the pyramid, so that it's possible for the rest of the pyramid to make a net profit. With short-selling, you're essentially selling the stock before you're buying it. Or, in terms of a pyramid scheme, short sellers are cashing out of the pyramid scheme first, and then are forced later to buy into the scheme.

Imagine it's 2007 and you're trying to decide whether to invest in Bernie Madoff's "investment fund". You know it's a Ponzi scheme, but you also know that there are a bunch of people that have promised to "invest" money into the scheme. So you decide to put your money in, figuring that as long as Madoff has money from those other investors coming in, he'll keep running the fund. That's sort of what this is like, except not as illegal (probably).

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  • Comments are not for extended discussion; this conversation has been moved to chat. Please see The Intent and Purpose of Comments New comments on this answer will be removed with no further notice. – JTP - Apologise to Monica Jan 30 at 12:56
  • Re "except not as illegal", perhaps not illegal - you won't go to jail - but in the Madoff case the Feds came after a lot of investors who'd taken out profits, or their capital, before the fraud was discovered. See "clawback". – jamesqf Jan 31 at 4:25
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how does this benefit the members of the /r/wallstreetbets/ ?

To simplify:

  1. Institutional investors short stock A
  2. Massive purchase from WSB of stock A
  3. WSB members (on average) profit during the subsequent short squeeze.
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    basically a net transfer from short sellers to buyers. But note that it doesn't mean every buyer got money! (Feel free to buy in now, but treat it as a donation to stop Big Finance, not an investment. Your money will probably end up in WSB) – user253751 Jan 28 at 22:47
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    @user253751 yes, e.g. WSB -> loss flair. – Franck Dernoncourt Jan 28 at 22:51
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    I nearly got this... Could you describe a bit what each step means? I understand 1) means; institutional investors borrow stock A (from, e.g. pension fund portfolios), sell it immediately, hoping to buy it back later at a lower price to return to the lender. But I don't know what a short squeeze is. – Oscar Bravo Jan 29 at 7:15
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    @OscarBravo done – Franck Dernoncourt Jan 29 at 7:17
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    This is a probably a great simplification for people who already know what shorts are and how they work. For most readers though, it might as well be Greek, even with the link to a short squeeze Wikipedia article. Indeed, even to fully understand a short squeeze, I have to click through to yet another link to read about what 'covering positions' means. – TylerH Jan 29 at 16:22
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From what I understood about the news coverage regarding this, was that the WallstreetBet community was not only/primarily interested in gaining money from this scheme but also/rather inflicting loss on the hedge funds who shorted GameStop. So apart from possible monetary gains, the WallstreetBet community gets the psychologically reward of teaching big finance a lesson. Or at least that's what they are pretending.

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    I take issue with that last word. How is costing the hedge funds an estimated $2b so far "pretending"? – Adam Barnes Jan 29 at 12:38
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    The idea that they did it to help the SEC and Wall St beat up on a hedge fund, is hilarious. – Fattie Jan 29 at 13:50
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    @AdamBarnes The leaders of this short squeeze can make millions while a lot of the followers are going to lose a lot of money. So the implication I take from this is that, it we take the cynical view, the pretense of 'sticking it to the man' is a way to trick fools into pissing away their money to execute the scheme. I don't really know but I'm having trouble making a clear distinction between this and your run-of-the-mill pump and dump scheme. – JimmyJames Jan 29 at 19:30
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    @JimmyJames: it's a pump and dump if you give the other investors bad information. If you publically say, "hey, I think $300 is a price we can realistically squeeze to", and you bail out at $300 as promised, and other new investors (not just the shorters) are still piling in at $350, then it it might be some other form of price manipulation but I don't think it's a pump and dump and you never advised those people to buy. OTOH if you publically say $1000 and bail at $300, that's starting to look shady to me. But I'm not the SEC, a fact for which everyone is grateful. – Steve Jessop Jan 29 at 20:15
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    And to be fair, the hedge funds are also manipulating the price of the stock. Typically within whatever rules pertain at the time. OK the stock didn't go where Melvin Capital wanted it to, but short-sellers collectively are pushing the price in the direction they're betting it will go, just as much as long-buyers are in the other direction. – Steve Jessop Jan 29 at 20:36
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I find it hard to understand your question - it's rather disjointed, in particular it's not possible to run out of money as long as you don't put in new money. The folks on WSB bought the stock (or bought call options). As long as they don't buy more, they are not putting in new money, so they cannot run out of money.

Once they decided to move onto another stock them all selling, at the same time, will mean they'll all stand to lose a lot of money, i.e., they won't be able to sell the shares for what they paid for them.

Once they decide to move on (or take profits) and sell, then yes, the bubble will crash, GME will drop down to Earth, and whoever still holds the stock will lose a lot of money (in finance jargon this is known as "holding the bag"). So it becomes a mind game. If you sell now, you might lose out on making even more money if the short squeeze continues and the stock keep going up. On the other hand, if you don't sell now, the stock might crash tomorrow and you will be caught holding the bag. You want to sell just before the other people on WSB decide to sell, which is not something that is easily predictable.

But if that's what it is then it seems to me that the problem will eventually self correct ... ?

It really depends on what you consider the "problem", because for many people, there is no problem at all. Sure GME can gallop up and down, but if you're not invested in the stock, it doesn't affect you in the slightest.

Still, one thing we can say is that almost surely, GME will crash at some point. So "self-correct" is odds on to happen at some point. When that will happen, however, is something nobody knows.

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    I'm not sure you interpreted the question correctly. The question specifically mentions that it considers the ability "to [not] sell the shares for what they paid for them" as a loss of money. But your response effectively talks about loss of money in the context of losing money that is not yet tied up in stocks ("As long as they don't buy more, they are not putting in new money, so they cannot run out of money.") – Flater Jan 29 at 11:04
  • In this situation, the beauty of options is that you can pull money out of a winning long call position, locking in profits and lowering your risk - which is not available with owning the the underlying. Yes, you take a beating because of the wide bid/ask spreads but it's a no brainer to do so when you have a call that is scores if not hundreds of points in-the-money. – Bob Baerker Mar 2 at 22:29
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The biggest piece of information to understand is this: the number of shares short-sold actually exceeds the number of stocks in existence!

Gamestop wasn't chosen at random by the WSB folks - it had the record of the most shorted stock, at about 140% (a crazy high number).

All those short-sold stocks? They have to have their position closed at some point - which means that the person has to actually buy a share of the stock. And they might not have a choice - they have a debt of a stock, and if the value of that debt gets too large, the broker might force them to cut their losses (and buy the stock at that point in time.)

So the main two questions are this:

  • When are the WSB folks going to sell their shares?
  • When are the Hedge Fundies going to actually close out their positions?

The first one is very difficult to answer. The closest approximation I can give is of a Labor Strike. If a decent fraction of them cave and start selling, it could start a downward spiral (nobody wants to be the last one holding the bag.) Which is why the WSB folks are trying to keep unified together on it.

The second one is tough, because the fundies want to say, "This is just temporary; we'll wait until this blows over and then buy" when it's like $10/share." But they might not be given a choice, if the broker forces their hand to stop catastrophic losses. And if that happens? Well, there's another "nobody wants to be the last one holding the bag." Because 140% of shares need to be purchased at some point, and nobody wants to be the person forced out of a position buying stock for $10k+ per share.

Or another way to look at it is this: Gamestop's stock dropped from $30 to $3 in the span of 3 years (mid 2016 to mid 2019). This wasn't because the valuation got cut by 90%. It's because more and more hedge funds were shorting the stock (again, more shares were shorted than actually existed!) So you had a situation where the a potentially undervalued stock was only selling for $3 (because hedge fundies were flooding the market with additional shorted shares) and whose price might climb quite a bit as those hedge funds closed their positions. So people started buying the stock, even when it climbed to the pre-2016 levels. Not because they thought the company was necessarily worth that much - but because they knew there were an awful lot of shares that were going to be forced-purchased and it could cause a spike in price.

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  • For "When are the WSB folks going to sell their shares?" - I can tell you that I, personally, if I had a stockbroker account right now, would buy one or two shares and never ever ever sell them. And I think a lot of people feel this way. Of course some people have already sold and made a profit, subsidized by people who feel this way. – user253751 Jan 29 at 18:22
  • @user253751 - yeah, but it's a weird situation. It could easily be that it turns into an "infinity squeeze" like what happened with VW. Or, if enough WSB people decide to jump ship at, say, $500, and the hedge funds start closing their positions and alleviate the pressure, it could trigger a "jump ship before it's too late" on larger and larger portions of the WSB crowd. Dunno. Put it this way - I'm not willing to put my money where my mouth is, so I'm keeping my mouth tempered a bit ;-) – Kevin Jan 29 at 19:02
  • odd to say "yeah, but" and then agree with me. I'm not saying I'm sure about what will happen, but I am saying we can't assume there will be a panic sale like there normally would be. – user253751 Jan 29 at 19:03
  • Btw the 140% figure isn't shorts vs shares in existence, it's shorts vs floating shares. You (well, maybe not you, but Melvin Capital) can borrow non-floating shares to short. As it happens, I believe at some points the shorts did exceed total shares, but not by that much, just a few percent. Still you're right: enough shorting pushes the price down, just as enough new Redditors piling in pushes the price up. – Steve Jessop Jan 29 at 20:27
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The point here is that the community as a whole is not going to make money, any more than say Bernie Madoff's (https://en.wikipedia.org/wiki/Bernie_Madoff ) investors made money. Those few who thought up the scheme and got it started, and who bought stock at the original price, will benefit if they sell the shares they hold before the bubble bursts. Those who are left holding shares that they bought at higher prices than the eventual final price will lose most of their investment.

Just a new form of the old stock kiting/pump & dump scam, IMHO.

PS: From recent news articles, it now seems that the people who really benefitted from this (perhaps entirely by accident) are the GameStop management & board, and other investors with large holdings, who were able to dump their shares in a failing company at greatly exaggerated prices: https://www.marketwatch.com/story/gamestop-shareholder-sells-off-stake-valued-at-over-1-billion-11611855951

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    You are missing the effect of Melvin Capital though. I fully expect WSB to make money as a whole. It just won't be evenly distributed throughout the community and half of them will make losses. – user253751 Jan 29 at 18:23
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    Yeah, this really misses the boat. A lot of hedge funds were shorting the stock back when it was at $3-$5. If they're forced to close their position at, say, $500/share or $1k/share, it's not like the money they lost just disappears. It's not a zero-sum game for the WSB crowd - they're collectively pocketing the difference (though not necessarily in equal portions.) – Kevin Jan 29 at 18:31
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    Most of the difference will go to whoever sells at the right time; those people will have already paid those who got in early, to get their stock, so the ones who got in early will also have made a profit. – user253751 Jan 29 at 19:04
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    @JimmyJames source for the claim: "exchanges were unable to fulfill orders"?? From what I have read, it was the brokers who halted buying only. The exchanges did not trip any circuit breakers that I could see. – Lawnmower Man Jan 29 at 22:41
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    You said "the community as a whole is not going to make money". Which isn't true. Put it this way - the hedge funds have lost billions. If they lost billions, who won it? The community as a whole. Maybe not all of them, but to treat it as a zero sum game definitely isn't the right way of looking at it. – Kevin Jan 30 at 21:20

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