Is this free market capitalism or a rigged system? A GameStop perspective:
When you short a stock 130%+, you’re not just betting on companies to fail. You’re betting on people losing their jobs and their inability to put food on the table. For many, it’s bigger than sticking it to hedge funds; they’re efforts could give GameStop enough wiggle room to keep paying their people and trying to reinvent their business model.
EDIT: since the time of this article, the US Gov’t has taken action.
How do I know all of this? Well, I went viral in the WSB subreddit.
Please note I am not a financial advisor and none of the information in this post is to be construed as financial advice. It is a pure opinion based on my Ant, Hobbit, and Sloth view of today’s current state of the market.
A hedge fund works on the principal that the market is complex and requires insane amounts of research and education in financials if you want to make serious money in the market. Basically, just time and money. People that are already rich have the money, what they often don’t have is the time to dedicate to studying the market. So they pay a hedge fund to do that.
Rich people give a hedge fund large sums of money with the expectation that people working at the fund are smarter than your average Joe and have the time to dedicate to timing the market and helping the 1% make even more money as well as the hedge fund and its employees as well.
So when a hedge fund makes a stupid, greedy bet in the market, like they have done with GME, they start losing the money of the very wealthy, very influential investors, including financial institutions that lend extra money to the hedge funds.
People who have more money change the rules so that when Joe Six Pack loses, he really does lose. However when they lose… it works kind of differently.
Hedge funds bet on GameStock to fail. It kept on going. They shorted +130% of the stock’s shares since last year.People used openly available data to see that the stock was shorted and to what extent. They realized they’d have to buy back the shares available. But when there aren’t that many shares available, that’s going to raise the price. They say to themselves: “I’m going to buy it”. A bunch of people purchase using that basic calculation, not looking to manipulate the security but just simply to purchase it.
This raises the price incredibly as hedge funds are forced to cover the short because of the position they put themselves in.If that happened in a free market, you’d be able to purchase that security. And then when the short was forced to recover, they’d go bankrupt.
In this current world, it looks like this is not allowed. When it hit the news that Melvin Capital, a billion dollar hedge fund, was losing money and it got to the point where other hedge funds started investing in the hedge fund, there was not a mea culpa moment where they admitted that they were going to lose.
Instead, trades were halted across exchanges. This means you can buy but you can’t sell. Many retail traders are now submitting complaints to the SEC for market manipulation and launching lawsuits against brokers like Robin Hood.
If the average person was getting f*** on stock trade, would the stock exchange come to a halt? Heck no, but it’s happening now. I’ll leave the reasons why to the speculators. What I do know is that billion dollar hedge funds were getting bled dry. And as a reminder, it happened because they made insanely risky trades. Halting trading of securities gives wiggle room for hedge funds to buy back in at a lower price and not go completely bankrupt.