“Liquidity, not low bond yields, is fueling this market, and market behavior is so speculative in places like the Russell 2000 that the headline writers are struggling to keep up,” SocGen’s Andrew Lapthorne wrote this week.
It’s true. The headline writers were struggling to keep up as a Reddit-fueled mania played havoc, compelling Bloomberg (and, as of Wednesday, Andrew Ross Sorkin) to spend an inordinate amount of time covering a phenomenon which, at a basic level, just entails a group of people becoming suddenly aware of their collective capacity to shape reality.
“These guys see their collective power and go on stop-hunts,” Nomura’s Charlie McElligott said, adding that “they understand that their grabbing of short-dated, deep out-of-the-money calls in stocks packs a lot of convexity and dealer-hedging sensitivity to a move higher in the underlying stock.”
That realization actually happened last summer, but this week’s action in GameStop (and AMC and Express) marked what I think it’s fair to call “insanity squared.”
On Wednesday morning, a “sticky” chyron appeared on Bloomberg Television touting a special TV event called “The GameStop Phenomenon.”
So, after three days of incessant stories and journalists playing catch up to the latest triple-digit surge, the world’s most trusted financial media outlet finally just decided to go all-in (“YOLO,” after all) and produce an entire television segment dedicated to a message board-fueled mania in shares of a downtrodden, video game retailer. It was set to premier at 5 PM EST.
Goldman’s basket of the most-shorted stocks is having its best month since… well, since “ever,” apparently.
Notably, Michael Burry sought to distance himself from the rally in GameStop which, as Bloomberg reminded folks, he may have helped spark.
“If I put $GME on your radar, and you did well, I’m genuinely happy for you,” he said, in a tweet that was later deleted. “However, what is going on now – there should be legal and regulatory repercussions,” Burry added, calling the rally “unnatural, insane, and dangerous.” He tagged @SEC_Enforcement.
That latter bit will be an issue going forward. The notion that the Reddit crowd can plausibly claim they’re just buying on “fundamentals” is undercut (severely) by the tenor of the cacophony. There’s a risk that some of the braggadocious rhetoric could be construed by overzealous regulators as tantamount to an admission of collusive activity.
I’m not weighing in personally one way or another on the relative merits of that. I’m just saying that it’s never a great idea to engage in activity that could be seen as collusive and then boast about it explicitly in a forum that’s being monitored in real-time by hundreds of thousands (if not millions) of people, from traders to journalists to who knows who else. Full disclosure: I’m likely to buy some puts on some of these names — in my opinion, this is one of the most out-of-hand situations witnessed in decades.
The underlying fundamental case for many of these stocks is flimsy at best, so it would be extremely difficult to argue away one’s bombastic references to manipulative market behavior by way of some rational bull thesis. Indeed, it’s not likely that many of the people involved in this trade know anything about the underlying fundamentals for the names they’re collectively driving higher.
Of course, there’s nothing illegal about taking a contrarian bullish position alongside a bunch of your friends, and as far as I know, there’s no law that prohibits individuals from “knowingly weaponizing gamma” (now I’m laughing).
Still, you get the distinct impression that this isn’t going to end well for someone. It’s just not clear who. On Wednesday, both Melvin Capital and Citron said they closed out their shorts in GameStop.
I also wonder whether it’s occurred to the media that without the help of around-the-clock coverage, this phenomenon likely wouldn’t have manifested as dramatically as it did.
Panning quickly back out to the 30,000-foot view, SocGen’s Lapthorne said that “the assumption is that the new US administration and others, faced with the ongoing COVID-19 pandemic, will sit idly by and let this speculative market build and build without intervention.”
“We’re not so confident,” he added.
I’m hardly an expert in this stuff, but isn’t this entertaining r/WSB dogpile going to last only as long as the dealers, exchanges, brokers and SEC want to let it last? Dealers could jack up options premia to make calls 5X more expensive, exchanges could halt stocks so that OTM options expire worthless, brokers could increase margin requirements and restrict trading, and the SEC could tell the foregoing to do any or all of those things in addition to prosecuting the r/WSB ringleaders for stock manipulation. As far as I know, a trader has zero recourse against any of those moves, regardless of how much money they lose. My guess is that when/if this gamification actually starts to affect orderly market functioning in stocks that actually matter, it gets shut down – which will be SAD! for the cause of popular entertainment.
In the meantime, it is hard for me to have much sympathy for a hedge fund whose risk management is so poor that it had major uncapped short exposure to stocks with extremely high short interest. Everyone knows that high short interest is a positive factor on the long side – its actually a factor in the stock screens I use. It will also be hard to have much sympathy for the guy or gal who loses the money that they need for rent, mortgage, college, food, etc by being a day late to the trade du jour. “Tough cookies” applies to anyone who swims in these waters.
Clearly at some point Gamestop will revert to value and all the longs will get hammered. I think at that point many will lose their enthusiasm.
Very scary- I just hope I do not get caught in the crossfire. I actually own UI- which is heavily shorted, but has solid fundamentals and I am gett
Getting swept into scary price action
Take your 100% gain since September and wait for it to fall back to earth. Or if you think it is worth $500 or so, take it off your screen and don’t worry if it falls back
“Palihapitiya claimed the best research on stocks done by retail investors inside wallstreetbets is nearly indistinguishable from the best research on Wall Street. ‘That edge is gone. Now all of a sudden, retail can be on the same footing and they don’t have to be the ‘bag-holder’ to Wall Street.'”
https://www.cnbc.com/2021/01/27/chamath-palihapitiya-closes-gamestop-position-but-defends-individual-investors-right-to.html
Worth watching the back-and-forth with Chamath and Minerd on CNBC this morning, which will surely be on YouTube later today.
And of course this has nothing to do with “fundamentals” – it’s a bunch of “kids” (and by now surely including other hedge funds) who saw an opportunity when a hedge fund got mega-greedy – what else can you call it when you are 138% short on a $4 stock?
Question is, when does this turn around? When is the time to go short, without getting burned? I’m not playing, but I have popcorn…
Have you priced out those put options? I’ve never seen options trading with an implied volatility of 570%.
I haven’t looked. Or haven’t as of this comment. I was putting that out there preemptively as a kind of disclaimer.
Kevin Muir called the vix spike overall thanks to this “entertainment”. I admit, I bought a share at 300 in solidarity with wsb, I might even double that for a fun story to tell in a decade. It’s astounding the number of people casually talking about risking their ‘total savings’ of 25k positions on top of 25k positions without considering taking a profit. I have to wonder how much of that is just boasting, stupidity, or both.
Though if this madness does continue, I’ll be shifting into vix puts because eventually someone is going to run out of money. 500% implied volatility is going to resolve itself one way or another.
PS. I have taken the phrase “weaponize gamma” from you and I appreciate it immensely.
Funds have been gaming the market for decades, but now that retail nerds have chalked up a few wins by “weaponing gamma”, CNBC and the status quo-ers are whining and crying for regulation blah blah, as if the retail folks are somehow more irresponsible than the funds. Why is it a worse idea to let the little guy collude out in the open than to let the powers that be collude behind closed doors? Give me transparency every time–it is a good idea, H. Just watch what happens if the SEC goes after WSB while turning a blind eye to everyone else. Regulators be dammed, the internet will spawn other social movements (which WSB is), and they will find other means to upend these rigged systems.
It’s not “a good idea” if it gets you into trouble. 🙂
That’s all I’m saying.
I’m not weighing in on the normative side of it. I’m just stating the obvious, which is that if you intend to engage in a conspiracy (and please don’t ascribe that accusation to me, I’m just saying that to some other people it may seem like a conspiracy), it might be perilous to do it on a message board that’s publicly visible.
Hence my quick mention of puts in this article before I even pulled up a chain — when you’re putting things out there on the internet for everyone to see/read, you have to cover yourself, preemptively if possible.
That Reddit board seems to be reckless in that regard.
That’s all true in the short run, but I think sustained efforts by SEC (or FBI et al.) to smother non-violent yet disruptive collective action will bring a more significant form of trouble to Wall Street, the USG, and “the man” writ large. A few message board geniuses may spend six months in federal prison, but they spawned a movement (aka conspiracy) that largely will escape trouble by virtue of being huge and distributed. So I’m buying puts on the SEC and long calls on WSB or its successors.
Yeah, I mean look, I don’t think anyone’s “going to prison” here.
I just think folks need to exercise discretion with what they say in public or, if they’re not going to, then just be sure to add enough caveats to give yourself some plausible deniability, that’s all.
I admit that it took me a couple minutes to figure out what was happening here, but now that I have, I have to say I’m rather enjoying the show.
While not a “populist” I find it amusing when the big institutional and hedge fund folks who have manipulated this market for years, especially with high-speed trading, get taken out by the “kids” on Reddit.
Yes, yes there are regulatory issues, and those who will be screaming the loudest will be the institutional and hedge fund losers. I just hope the kids know when to sell.
Pass the popcorn
I see there is a push to get #occupywallstreet trending. This all should be expected in a world with such a deep accountability deficit. It is likely far from over, soon to be transmuted elsewhere. Long vol.
Wall Street, as I have known and seen it over the past 40 years, is getting disrupted just like retail was disrupted by Millennials and beyond.
Hard not to cheer for them. (Millennials and beyond)
I think this article/discussion also points to the fact that liquidity is still razor thin if deep OTM call purchases and small time traders, even en masse, can cause price moves like these. If these heavily shorted name’s Execs/Boards are paying attention, a nicely time capital raise might be a pretty smart move on their part.
Traders- use XRT ETF as a proxy for GME. Good luck.
The system is probably too complex and too vulnerable to manipulations. Following the GFC there was some examination of instruments like CDOs and discussions of whether some of these things presented too much risk to the system. It’s possible that there shouldn’t be options for most stocks. The rules of capitalism–and there do need to be rules–should be constructed in such a way as to reward actual productive investment, and not to incentivize destabilizing behavior. Perhaps the financial system should be extremely boring.
WSB has been around for a while, and they’ve been successfully pumping “meme” stocks for years (eg, SPCE, PLTR, etc), it’s just that nobody noticed them till now- I think their first mention on the “mainstream media” was last summer, via Jim Cramer, or mabye a CNBC article. Anyway, they really took off at the start of the pandemic (quickly went from 1 million members to 2 million; in the last two weeks, they got up to 4 million), when everybody was stuck at home and there were no sports on TV to watch (or bet on).
And GameStop is NOT the first time they’ve pumped a highly shorted stock way beyond its value via continuous buying of OTM calls – here’s one you may have heard of – Tesla. And yes, Elon Musk is a fan – who do you think his price prediction of “420” was aimed at?