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In general I understand the mechanism of the Gamestop event (short squeeze), but I am a bit confused as to why it happened only when Reddit investors got involved.

I would presume that anybody with enough money (and there are plenty of rich people on Wall Street) could have done the same. Or there was something unique about this that makes it impossible for "regular" players to do what Reddit investors did?

Steve Melnikoff
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NoSenseEtAl
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    There have been arguments that this constitutes illegal stock manipulation. Rather it does or doesn't is...complicated, but there is at least some risk here. If a single large firm tried the same thing then if it was determined that this was an illegal manipulation of stocks they would face sever legal penalties. By contrasts redditers are small-fry investors who are not, individually, important enough to go after. Thus they can afford to 'risk' actions that could be deemed potentially illegal with little concern of legal penalties. A large firm may not be as comfortable with that risk. – dsollen Feb 01 '21 at 18:33
  • In addition ultimately this technique is harmful to the economy as a whole, already groups that usually really heavily on shorting stocks have slowed shorting and even started rebuying stocks early in fear of redditers pumping up some other stock. This results in further risk and a general chilling effect on the economy as a whole. A large investment firm that is dependent on the stock market for their wealth may also be more apprehensive of choosing a short term profit method that would risk a long term weakening of the market they depend on. Redditers have less to fear from this. – dsollen Feb 01 '21 at 18:37
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    The GME short squeeze had no effect on the economy whatsoever. It dramatically affected the players but that was money changing hands. If groups that rely heavily on shorting stocks have slowed shorting and even started rebuying stocks early in fear of redditers pumping up some other stock, it may boost the market but it also will have no effect on the economy. – Bob Baerker Feb 12 '21 at 15:09

4 Answers4

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Short squeezes and gamma squeezes (the option counterpart) are not unprecedented. They are however quite risky.

An example of this happening before is the Volkswagen Short Squeeze.

JP Morgan squeezed the aluminium market back around 2015.

Here's Goldman squeezing aluminium back in 2011.

To some extent, the big players are defined by always looking for opportunities to do this. What they don't do, because it's effectively illegal, is go round publicising their holdings and trying to rope in others to the squeeze.

pjc50
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    Can you perhaps elaborate on what exactly makes this illegal on this question? – Philipp Jan 29 '21 at 12:56
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    Big players in the U.S. markets don't publicize their holdings unless they exceed a position threshold (SEC regulations). But it's not illegal for them to do so. What is illegal is conspiring with others to drive share price down. – Bob Baerker Jan 29 '21 at 14:28
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    While Bob makes a valid point, it's not always easy to differentiate, "I'm offering advice because I like offering good advice," from "I'm sharing a great/awful/interesting trade I just made" and "I'm offering advice because I want to manipulate the market." – Brian Jan 29 '21 at 19:27
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    @Bob Baerker: But in this case we have people conspiring with others to drive the share price UP. – jamesqf Jan 30 '21 at 18:22
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    @jamesqf - Suppose a Goldman Sachs analyst comes out with a stock recommendation and 10,000 account holders receive it. Based on your proposition, how is that not people conspiring with others to drive the share price UP? Redditors were openly discussing their ideas and trades. They put their money where their mouth is and at risk. They did nothing illegal. The hedge funds were awfully stupid if they weren't monitoring Reddit and other stock discussion sites regarding their holdings. Even stupider for taking such large short positions. If you see it otherwise, we agree to disagree. – Bob Baerker Jan 30 '21 at 18:53
  • @Bob Baerker: It's a conspiracy because they aren't making good faith recommendations, they are doing it for the purpose of causing massive losses to whoever happens to be holding short positions. It's basically the same as if that Goldman-Sachs analyst said to buy a stock because the company just discovered how to turn lead into gold - or in the classic stock kiting scheme, had just discovered gold/oil/whatever on one of their properties. – jamesqf Jan 31 '21 at 04:45
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    As written by @gaefan in an answer to another question, You can't prevent people from giving their opinions on stock even if the opinions are completely unqualified. An opinion is not market manipulation. Redditors did just that in an open forum where anyone could heed their opinion or not. That is not illegal nor is it a conspiracy. It was full disclosure. Conspiracy is when big players secretly decide in the back room to corral the stock and manipulate share price. – Bob Baerker Jan 31 '21 at 14:35
  • @Bob Baerker: There's a difference between opinion and "information" you know to be false. The question here, I think, is whether the Reddit thing was spontaneous, or whether it was intentionally created by a small group (or even a single individual) with the express purpose of using the gullible people in the group to create the bubble. – jamesqf Jan 31 '21 at 19:15
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When the music stops, whichever Redditors are left holding GameStop shares at that point will lose their shirts, because the shares are really only worth a few dollars. No serious fund is going to take that risk.

Mike Scott
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    That's obvious. But what matters is that while the stock is high, the hedge funds who shorted these stocks are forced to buy them at these greatly inflated prices from those who are willing to sell right now. Couldn't another hedge fund also pull this off? As the answer by @pjc50 says, the answer is yes. – Philipp Jan 29 '21 at 12:54
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    @Philipp Before a hedge fund can sell shares at greatly inflated prices, it first has to buy them at very slightly less inflated prices, and then wait for the price to go up further. If the music stops between purchase and sale, then they’ve made an enormous loss. – Mike Scott Jan 29 '21 at 13:51
  • @MikeScott so the question is, could MarvinCorp have bought up all/most of GME at $10-ish, waited a bit for MelvinCap to "lose their shirts", and then sold it to MelvinCap at $400-ish? – user253751 Jan 29 '21 at 18:38
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    @user253751: which boils down to the questions: (a) could MarvinCorp work out that $400-ish was the right place to sell, i.e. the place at which MelvinCap breaks? (b) would it be legal for a single entity to acquire that much stock for the purposes of short-term price manipulation? – Steve Jessop Jan 29 '21 at 19:06
  • Note also that MarvinCorp couldn't place a single order for the whole lot at $10, because the market isn't that liquid. They have to ride the curve up. Maybe it'd look a bit like a takeover in that sense. But, if you somehow know for a fact that MelvinCap is going to have to buy stock at $400 in the near future, then the stock's worth $400. Otherwise, you're just betting that MelvinCap will do that. – Steve Jessop Jan 29 '21 at 19:08
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    @SteveJessop well, you know it'll have to buy them at some price at some time, and if you have deep pockets, that price can be as high as you can afford to lock them out of. I suppose there will be reporting requirements when you get to a large percentage, which retail investors don't have because none of them individually meet the percentage. – user253751 Jan 30 '21 at 00:05
  • @user253751: one thing I haven't seen discussed (not that I've put much effort into the search), is what stops the institutional investors in Gamestop from closing out their long positions, taking their profits, and (by doing so) allowing the shorters to close their positions. I don't think the price of Gamestop genuinely is unlimited solely as a function of how long MarvinCorp holds out, because MarvinCorp cannot own all the shares. GrammasPension owns some of them. So, MarvinCorp doesn't make this play without a model of where the limits are. – Steve Jessop Jan 30 '21 at 12:09
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    Also, MelvinCap might eventually fail a margin call and declare insolvency, so it's not necessarily true that they have to buy them at some price at some time. If that happens, MelvinCap's broker is a creditor in the insolvency, but MarvinCorp isn't because MarvinCorp never lent shares to MelvinCap. That isn't what the real MelvinCap did on this occasion, of course, but shorters in general do not have unlimited money to meet their liabilities. – Steve Jessop Jan 30 '21 at 12:24
  • Gamestop does have considerable value *to gamers*. They just said so, in the sincerest way possible. – Harper - Reinstate Monica Jan 30 '21 at 18:37
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    @Philipp: There's a difference between a fund technically being able to pull off that sort of squeeze, and considering it an acceptable risk. The fund would have to commit a lot of capital, while the Reddit crowd are each individually using only a small amount. – jamesqf Jan 30 '21 at 18:55
  • @Harper - Reinstate Monica: Value why? To me, one of the surprising things about this was the idea that people still bought games - or any sort of software - at brick & mortar stores. That just seems so 20th century :-) – jamesqf Jan 30 '21 at 18:57
  • @jamesqf the X-factor is surely consoles and hardware sales. Can't download an Oculus Rift. And physical media is still popular in the console space, because it's a happy compromise between DRM and portability. Essentially this is gamers saying "We don't want what happened to electronics geeks to happen to us" (loss of Radio Shack). – Harper - Reinstate Monica Jan 30 '21 at 19:06
  • Gamestop had a market capitalization of a few millions. In theory, if you bought all shares for that price, you could sell them at any price. Hedge funds reportedly lost billions. It wouldn't matter if you're left with half of the shares at the end. This isn't an answer to the question, this is criticism of wsb. – DonQuiKong Jan 30 '21 at 19:33
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    @Harper - Reinstate Monica: But I can, and do, order hardware online much easier than in a physical store. I suppose the same would be true for games on physical media. (I'm not a gamer, but I don't see why it'd be different than books.) As a semi electronics geek, I can order components from Jameco or Mouser much easier than I could find them at Radio Shack. And I don't really see the involvement of gamers here: what eventually happens to GameStop as a business has nothing to do with the short selling. (Except for some of GS management selling their holdings at a nice profit :-)) – jamesqf Jan 31 '21 at 19:26
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    @jamesqf I think your argument here is rather shallow. First your argument applies equally to ALL bricks-and-mortar from the Verizon store to Hobby Lobby, and fails on that alone. Second, you're armwaving away shipping time... and also the rocks and shoals of ordering online generally: not being able to see it, shady sellers, Amazon Marketplace crap, fake reviews, lost packages, you name it. Third you claim short selling does not affect a business' fate, and such a bold statement needs bolder proofs than fit in a comment. – Harper - Reinstate Monica Jan 31 '21 at 19:55
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    @Harper - Reinstate Monica: WRT short selling affecting the business, I think the shoe is on the other foot. That is, the claim that short selling, or any other stock trading, directly affects a business is what requires supporting evidence. WRT brick & mortar stores, I would think that a major factor is the need to inspect selections. Though I don't (and won't) patronize Hobby Lobby, the same might be true of say Home Depot or a grocery store, in a way that it's not of a retailer of standardized things like games or electronic parts. Verizon stores I just don't understand at all :-( – jamesqf Feb 01 '21 at 20:19
  • @SteveJessop Well, the WSBers would hope to buy the long positions from the institutional investors before the hedge funds do. In fact the current rumour is that hedge funds should be doubling down on their shorts, and who can blame them for that, since the price is obviously going to go down... – user253751 Feb 02 '21 at 09:26
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The people doing it care more about making an example of the short sellers, than they care about not each losing a little money.

A very different motivation than a fund manager.

Flux
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Ian
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Of course they could have. In fact, they are probably already participating, and the price movement is more due to the funds than to individual investors on Reddit. Just check out GME's statistics.

As of time of writing:

enter image description here

95% institutional ownership. Unless the fund managers themselves are on Reddit, the Redditors account for no more than 5% of GME's outstanding shares, and GME's price movements are still largely due to the funds.

Allure
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