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Recently the GME stock moved in an extreme way, though there is more to it, these steps appear to have happened:

  1. A hedge fund had a large short position
  2. Many retail investors bought the stock, forcing the price up
  3. The hedge fund closed its short position, the expected loss is over 5 billion USD

This is not the end of the story, but I want to understand what happened upto and including this point. Or if it is impossible to know, what likely happens/typically happens in such situations.

Considerations

  • If the hedge fund lost billions, they presumably provided cash or cash equivalents to 'someone' in the order of 5 billion USD
  • Suppose there are 10k retail investors that sold stock (at that time many appeared to even be holding), then either they would have made about 500k average, or most of the cashflow was not in their direction.

In short: Many people now have stocks which they will later be able to sell at some price to generate cashflow in their direction, but if billions of cash have already been drained from the hedge funds, where did these go?!

Again, the actual answer for GME would be great, but a likely answer based on industry experience or past occasions is fine as well.

EDIT for clarification

I understand how the money moves (the party that was short brought shares), my question is where the money went. Did they really just have to go through the market, or perhaps just bought all the shares from one party that had a lot.

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  • Additional thought: Is there perhaps a sizable party that declared a reduction in their long position at this time? And can parties even make deals outside the market? (if so, that is what I would have looked for if I noticed buying piecemeal boosted the price) Jan 30 at 15:10
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Let's try a very simplistic example involving only two market participants. Suppose I'm a a hedge fund and I sell 10,000 shares of GME short at $20 for an account credit of $200,000. You, a savvy trader, buy them at $20 for $200,000.

GME rises to $120 and we both decide to close the positions. I buy 10,000 shares for $120,000 and I have lost one million dollars. You sell your shares for $120 and you have made one million dollars. This was simply a transfer of wealth from me to you.

The stock market isn't quite this simple. There might are tens of thousands of people (or even more) people who bought and then sold GME (as well as shorted and covered) during this example's share price rise from $20 to $120, perhaps many times each. Regardless of that actual number, it's still the same transfer of wealth, just involving more players.

In reality, GME rose as high as $483 and a lot of the gains and losses are still on paper. But for every shorter, there is a counterparty that is long and the end result is a zero sum game for these traders.

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  • This is mostly about the how, my question is more about the who/what kind of party was mostly bought from. Have edited this into the question as well. Jan 30 at 15:05
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    Who/what kind of party was mostly bought from? Over the past 12 trading days, 1.2 TRILLION shares of GME traded. That's an average of 100 MILLION shares per day. I'd say that every kind of imaginable party in the stock market was involved in this. Jan 30 at 16:26
  • Thanks, I believe the main short position was 'only' 55 million shares, so I guess that could have been solved by just normal transactions. Would still be interested in a classification of the main parties that cashed out, but can imagine that may not be very transparent so will accept the answer if no other insights come in. Jan 30 at 17:53
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    I think that in the next few weeks more information will be coming to light and there will be a lot of post mortem media stories provided by the knowledgeable as well as the Monday morning quarterbacks. Stay tuned. Jan 30 at 18:25
  • I would think the net flow of hedge-fund money would mostly be to the entities that originally owned the stocks that were shorted, rather than to retail traders who were buying shares to push the price up. Some retail traders may have profited handsomely, but on aggregate they bought high and are going to sell low.
    – supercat
    Feb 5 at 17:19
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The money one person loses on a trade always ends up in someone else account, minus the costs of the broker.

If a hedge fund loses 1 billion USD, then some other people made 1 billion USD. Simple like that. It is simply how trading like this works - you pay out, someone else gets the payout, and in the case of shorts that is the people being long.

Note that this does not apply to the market value of a company, which is simply the last trade price * the number of shares in existence (outstanding).

Again, the actual answer for GME would be great

Given how generic the answer has to be that makes no sense.

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  • This is mostly about the how, my question is more about the who/what kind of party was mostly bought from. Have edited this into the question as well. Jan 30 at 15:05
  • OP already covered your generic answer: "Suppose there are 10k retail investors that sold stock (at that time many appeared to even be holding), then either they would have made about 500k average, or most of the cashflow was not in their direction." He's questioning whether 10,000 retail investors really each are $500,000 richer.
    – RonJohn
    Jan 31 at 2:27

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