‘Insane, Dangerous’ Reddit Stock Phenomenon Raises Uncomfortable Questions

‘Insane, Dangerous’ Reddit Stock Phenomenon Raises Uncomfortable Questions

"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 peop
Subscribe or log in to read the rest of this content.

20 thoughts on “‘Insane, Dangerous’ Reddit Stock Phenomenon Raises Uncomfortable Questions

  1. 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.

  2. “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…

      1. 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.

  3. 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.

    1. 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.

      1. 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.

        1. 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.

  4. 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

  5. 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.

  6. 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)

  7. 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.

  8. 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.

  9. 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?

Leave a Reply to Idylweiss Cancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.