The GameStop Stock Thing - Editor's Desk

NOTES

A reddit forum called r/WallStreetBets describes itself as “like 4chan found a Bloomberg Terminal”

Last year user delaneydi argued GameStop was underpriced

People started joking that WallStreetBets users should take over GameStop

The idea was driven in part by punishing Wall Street, particularly short-sellers -- people who bet that a stock will tank. 

What is Short selling? In short selling you borrow shares for a fee and sell high... then you wait for the price to fall.. after the price falls you buy at the lower price and return the shares. 

Works best if the company goes bankrupt and you don't even need to return the stock. 

Does not work if the stock goes up. 

If a LOT fo people are shotring  a stock- say 71.2 million shares of GameStop-- You can try to execute a short squeeze.

What is a Short Squeeze?

If you know folks are shorting in large enough numbers, you buy enough outstanding stock to force the price up. That forces some short sellers to "cover" and buy the stock and return it, losing their short bet. That of course, means a lot of people might be buying the stock to cover, driving the price higher in a chain reaction. The short squeezer wins!

What is a Call Option?

Another thing that can accelerate this is something called a call option.

A call option is a contract to buy a stock for a specific price on a specific date.

Say Stock X is at $10. I set a call option to buy 10 shares at $25 on April 1. 

April 1st comes along and Stock X is at $50. Great! I can take delivery on my stock at $25 a share and immediately sell them at a profit. (You can also sell your option before the call date)

Of course the stock might be less than $25 on April 1st. In which case you just never buy the shares and you're out your fees. But you don't lose as much as if you had bought the stock outright.

To prevent that from happening though, the company that handles call options will buy stock in company X, not only to sell it to you but also to get that price up so your call option comes through. So if a short squeeze is happening and a bunch of people have call options then that will also accelerate the price rise.

Are apps at fault?

This rather sophisticated processes made easy by apps. So when delaneydi made the post about GameStop being undervalued, some folks started piling in, which drove up the price which caused people to buy options which caused the options holders to buy more stock and then short sellers started to have to cover, sending the price up more .... and .....price spike.

How does RobinHood even work?

Robin hood accelerates this not just because it is more accessible but also because trades are free. And they're free because big brokerages pay to see what retail investors are doing, automatically take the other side of the trade. This generally means retail investors get a little better price and brokers make money. THOUGH Robinhood got fined $65 million by the SEC for misleading statements and omissions about this practice which previously led to retail traders paying more because of brokers anticipating the trades and driving the price up so they could make money that way. The SEC prohibits this and Robinhood says it no longer allows that. But even without that side of it companies can still make money.

Citadel Securities handles 40 percent of retail investor trades by doing this not only for Robinhood but also TD Ameritarade and Charles Schwab. 

So that process ALSO fuels the rise and algorithmic trading may too. Other outside investors like Elon Musk are enjoying the show as well. 

Is the Reddit collaboration legal?

Nobody is sure.

The key here is nobody is lying about any of this. It could still possibly  be considered a "pump-and-dump" scheme even without lying about anything but who do you prosecute? There's not a ringleader. 

And it's not ending either. The WallStreetBets crowd has moved on to Blackberry, AMC theaters and electric carmaker Nio.

And is it punishing short sellers? Maybe? About $5 billion is estimated to have been lost on GameStop BUT short selling is continuing because hey. Imagine how much you can make when GameStop stocks fall from $147 back o $18?