Tuesday, February 16, 2021

GameStop again

The Gamestop bubble is an age-old financial craze with a modern twist

It is much like the speculative tulip bulb mania of 1636, also made more manic by options.

GameStop's Reddit Raiders: Goliath Beaten by David, Then They Change the Rules

It is not true that all the Davids were speculating on the rise of GameStop's stock price and all the Goliaths were short-selling. There were both Davids and Goliaths on both sides. Parts of some Goliaths like Fidelity and BlackRock enjoyed the upward ride. Link.

The author Ron Hart asks how is it legal that more than 100% of GameStop stock is being sold short. Assuming he believes it shouldn't be legal, I agree. A person can't lend what he or she doesn't have. However, suppose a friend and I place a pure side bet on the price of a given stock now at $50. If it rises to $P my friend pays me M*(P-$50) and if it falls to $P I pay my friend M*(P-$50), M being a chosen multiple. Neither of us owns or has borrowed any shares of said stock. Either of us can stop the bet at any time. Our bet should not affect the actual market price $P, no more than my friend and I betting on the outcome of a Super Bowl game or the World Series.

With options (futures, too, if available for GameStop) on said stock that are cash settled we could actually transact with neither of us owning or borrowing shares, and make a similar bet. (If settlement must be in shares, e.g. the buyer of an exercised call option must receive shares, then there is a tie to the actual share market.) One of us is in effect betting on $P to rise and the other $P to fall. One of us is in effect going "long" and the other "short." 

Because option trades can be made in this way, it makes sense for Hart to say that more than 100% of GameStop stock is being (in effect) sold short. A strict legal limit on shorting -- the short side must actually borrow shares owned by somebody else, and the owner can't lend any more shares than he or she owns -- makes sense. The other way of "shorting" via options is somewhat a conundrum and a workaround strict short-selling.

A moralistic crusader such as Liz Warren likely smells a rat here and is eager for government intervention whenever she believes there is something wrong. Of course, any laws or regulations she would likely dream up as a "fix" would likely make matters worse.

Hart writes, "They stopped buy orders in GameStop, allowing the price to drop and bailing hedge funds out -- to the detriment of the Reddit Raiders." (For some, not all.) It was not necessarily a detriment. If a client is prevented from buying high followed by the price plummeting, that is beneficial to the client.) Hart did not outright say they -- I assume he meant Robinhood, the place where most Reddit Raiders do most their trading -- were wrong to do so or why. However, there are plausible reasons why Robinhood did what they did other than assisting the short sellers (mainly hedge funds), but that was the only plausible reason Hart gave. Perhaps Robinhood didn't have the lending capacity to support some transactions. Indeed, Robinhood's CEO denied any collusion with hedge funds. He said the limits were necessary "to meet the clearinghouse deposit requirements that we pay to support customers trading on our platform."

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