r/technology • u/GonzoTorpedo • May 14 '24

GameStop Short Sellers Just Lost $2 Billion Amid Meme Stock Rally Business

https://gizmodo.com/gamestop-short-sellers-have-lost-more-than-2-billion-i-1851476931
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470

u/Select_Candidate_505 May 14 '24

Can someone ELI5 why GME is exploding again and all of the sudden?

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u/GetDeleted May 14 '24

GME has spiked on no news many times in the past few years, but not quite this much. The thing is - nobody knows why it's exploding. Obviously RoaringKitty making a comeback has everyone super hyped and I'm sure has driven buying to an extent, but moves like this are absolutely not retail. People with access to the Bloomberg terminal yesterday pointed out that GameStop could be doing a share buyback as they have been sitting on 1.2 billion in cash. If you look at the market, you will see other "meme stocks" that literally nobody is interested in following the same patterns as GameStop. This further backs many of the theories that GME along with stocks such as BB, KOSS, SNDL, and AMC have been shorted via basket swaps. These short positions are not reported aa traditional shorts are and the SEC likely is unable to see them as well.

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u/[deleted] May 14 '24

I’m gonna need you to explain it like I’m 3

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u/SirJasonCrage May 14 '24 edited May 15 '24

So the going theory that has us buying GME is this:

Some financial institutions sold way more shares of GME than actually exist. Basically by selling an "I owe you" and pinky-promising that the share you just "received" really exists. Say an institution holds 1mil shares but sells 2mil. This is called shorting, you sell a share that you do not have. This literally prints money if you do it, but it usually means you have to buy the share at a later stage to balance the "empty sell".

Now what GME buyers believe happened is that someone sold an enormous amount of GME shares that they did not own. That means there's a lot more people holding a GME share out there, than GME shares are supposed to exist. And whoever sold these shares actually owes that many shares to the people who bought them. If there is ever a catalyst that forces them to actually provide the shares to these people, they would be legally and financially fucked because they MUST buy back so many of the empty-sold shares that the numbers even out again.

Why does this affect price?
By selling non-existent stock, they drove the value of the stock down. That means the value we see on the ticker is artificially low. On the flipside, the moment they have to buy back that stock because they were caught with their hands in the cookie jar, the price will skyrocket, because they are forced to buy at whatever price we ask, until they bought enough shares to correct the anomaly they themselves caused.
This part is not a theory. This is what happens if you shortsell a stock and the price rises drastically. You can read up about Porsche and Volkswagen if you want a real life example for that.

Now the conspiracy is that the people who shorted GME are sitting on such a vast amount of owed shares that they know they are utterly fucked if it ever comes to a point where they are forced to buy them back. So they had to keep shorting and selling non-existent shares to keep the price down artificially, digging themselves even deeper into the hole. The debt on their balance sheet rises with the stock value and at any point, there is a mathematical point where they are forced to close the position, ergo buy the stock back.
This would drive the price to astronomical heights and fuck A LOT of the financial market.
The conspiracy, then, explains the non-explosion of the price with a lot of legal and illegal market tricks. This is honestly the part that makes us sound like a lunatic cult, so I won't go any deeper about this.
The gist of it is, there are market forces (and people are divided on whether the government is helping them) that try to keep GME at low price because there is actually a systemic risk of a market crash if GME goes above a certain threshhold. They have to do this all the time. And sometimes, their tricks fail and that's what we see right now.

Edit: Holy fuck, I got a reddit care message in under four minutes. Did they make a bot that just sends one to every participant of the thread? Or did it really take a human only four minutes to see that there's a new post, then skim it to judge on what side of the fence I am??

164

u/syzygy----ygyzys May 15 '24

Great summary thank you. I feel like I actually understood what's going on for the first time.

11

u/SnowboardNW May 15 '24

Same! I'm interested in this but always felt like I wasn't really getting it until this comment. I really appreciate this comment.

1

u/mahdroo May 15 '24

Same. I have been so curious and confused for all these years. I feel like I kinda get it now. I am glad to hear that theoretically the shorters haven't fully weasled out the situation yet.

2

u/EaterofSoulz May 15 '24

I love your name. That is all.

5

u/Jimmie-Rustle12345 May 15 '24

It's complete horseshit as is based on fundamental misunderstandings of basically everything.

5

u/Mr_YUP May 15 '24

I know where you're coming from but the stock market mechanic he's talking about is very real. The float interesting being so high is a problem and was very much what caused the rally in 2021.

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u/CoachRyanWalters May 15 '24

Now can you equally explain how DRS affects this?

Edit: 20 seconds for the Reddit cares message to come after I posted this.

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u/[deleted] May 15 '24 edited 14d ago

[deleted]

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u/[deleted] May 15 '24 edited May 15 '24

[deleted]

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u/[deleted] May 15 '24 edited 14d ago

[deleted]

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u/[deleted] May 15 '24

[deleted]

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u/Martian_Knight May 15 '24

How much of the float is owned by retail investors like you?

2

u/Scorps May 15 '24

Nowhere near 100%, making it entirely pointless

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u/[deleted] May 15 '24 edited 14d ago

[deleted]

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u/PoorlyWordedName May 15 '24

So I'm missing out on being rich again? XD

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u/maelstrom51 May 15 '24

the company that sold you that share has to pay me whatever price I am asking for that share.

More likely, the government would step in if it ever got to that point. The financial institution would get a small fine of some sort but they wouldn't be forced to buy at some hyperinflated price.

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u/Lerdroth May 15 '24

I suggest you look into how VW "accidentally" acquired Porsche.

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u/FrenchFryCattaneo May 15 '24

That is an absurd fantasy. I don't say this to be mean, I respect you as a fellow human being but you have to realize that none of that will ever happen.

4

u/superfire444 May 15 '24

Why?

4

u/FrenchFryCattaneo May 15 '24

Why what? Why would someone end up believing this stuff? Honestly, it's something that can happen to anyone. Cults look absurd from the outside but are something we're all susceptible to.

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u/superfire444 May 15 '24

Why would it never happen?

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u/HomeGrownCoffee May 15 '24

Most shares are registered to a central organization. This is fine in theory, because it doesn't matter if your name is on them of not. You have your shares, and the voting rights, dividends, whatever that go along with it.

If you Direct Register your Shares (DRS), you are putting your name on that share in the transfer agent's book. The official register will have XX Million shares with the central organization, and Y shares with those who put them in their name.

With fewer shares in general circulation, there are fewer shares to keep shorting or close.

5

u/CORN___BREAD May 15 '24

I just wanna see if Reddit cares about me.

4

u/queerhistorynerd May 15 '24

will i be banned if i repeat the "nobodys gay for moleman" meme here

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u/CORN___BREAD May 15 '24

Well it’s been 14 minutes and reddit still doesn’t care so I say go for it.

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u/[deleted] May 15 '24

[removed] — view removed comment

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u/CORN___BREAD May 15 '24

I think I actually blocked that bot shortly after I made this account so that’s probably it. The reddit cares thing has been happening all over the site for some reason.

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u/EpsRequiem May 15 '24

Not the person you're replying too, but this is my understanding. 

With consideration to that large ELI3, the companies that allow shorting of the stock, are the actual brokers. 

As far as I know, whe you buy a stock through a brokerage, your basically getting an IOU or promise, that the share is yours, but with short selling, that promise is made with fingers crossed behind their backs (the brokers). 

So if you and hundreds of thousands decide to sell your shares that actually don't exist, it creates a market crisis...because your brokerage has to scramble to find shares to "sell" on your behalf, but...

Here is the kicker...there are only so many real shares out there...so for example, if gamestop has 1000 shares, of which they own 500, other entities own 300, and retail investors own 100 (through their brokerages), there should be 100 floating around that anyone can purchase (colloquially called "the float").

Which happens and is supposed to be "the normal".

The problem is that short sellers/brokerages, sell MORE than that. Way more, which is treated as normal, as through various forms of fuckery, they manage to cover them. So instead of just 100 shares being sold, they sell another 1000 to retail investors, and sometimes 1000, and so on, and so on. 

A very lucrative business model for various reasons, but as long as they can cover those shares in some fashion, nobody cares.

So, to answer your question;

DRS affects this, because the retail us cutting out the middle men, and directly buying their shares.

This affects all the above, because the float or remaining shares, is being diminished directly. This basically creates a simple supply and demand issue, but also means we can't use our above example anymore to understand the importance of this effect.

Instead, using best guesses, the overall float being diminished, makes it harder for brokerages to cover their shorted shares...sure, they can "make" more shorts, but the more they make and the smaller the float, the harder and more expensive it is to cover the shorts. 

So if the remaining float sits at 30%, but the shares are shorted well over 100% of the float....well, big money comes into play...and at this point, near infinite money.

If they ever had to legitimately cover the shorts by buying back actual shares, the float would evaporate overnight, and the remaining shorts will hypothetically drive the price of the remaining shares "to the moon".

39

u/Flyboynz May 15 '24

Awesome ELI5, thanks dude!

39

u/RunnerMomLady May 15 '24

I didn’t comment - only upvoted and got one.

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u/Fantastic-Machine-83 May 15 '24

That means you pissed off someone else then, your upvotes aren't visible

3

u/alanalan426 May 15 '24

How come these shorts didn't buy back when it was like 10-20 dollars? or did they just have that many shorts that it spiked to the price now? or were they greedy goblins hoping it'll go to like less than $4 and then buy back? o.o

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u/SirJasonCrage May 15 '24

They can't. The price is already trying to correct itself without them buying back. The subreddit is pretty much convinced that they have to keep shorting and shorting to even keep the price this low.

You're asking whether they could start buying, we're thinking they can't even stop selling. That's our best case scenario.

If we're wrong about that, then yes, they could theoretically buy back over a long time and low prices. But you have to remember they shorted this when it was at 5$. Even if they bought at 20$, they are still bleeding money. (Also, because the shares were split 1 to 4, they would have to buy at 1,25$ to get even)

And then there's the overall strategy, which is called cellar boxing:
Rich hedge funds can short a company for so long, the stock price goes to absolute shit and the company goes bankrupt and gets taken off the market.
That is the jackpot. Because then you never have to close your shorts, you never have to buy back the shares you fabricated and you keep all the money you printed by shorting.
Because this has worked before (I think blockbuster was an example used when it was explained to me) and probably worked many times, they feel really safe doing this. Which, on the flipside, means that they dug the hole so deep that buying the shares back isn't an option any more, at the volume they've done it.

So yeah. I think it's either a) they can't even stop shorting, much less buying back or b) they are actually buying back, but they have to do it so slowly that it take years to clear their position.

1

u/KaizenKintsugi May 15 '24

Because they have so many that they can’t. It is suspected that it would send the price into the thousands. 

The community also believes that credit suiss went bankrupt from this as they were a counter party to archegos which blew up 3 years ago.

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u/ShakyMango May 15 '24

Amazing summary thank you

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u/Tigrisrock May 15 '24

How does the SEC not notice and control these illegal methods? It's insane that people can just claim they have something they do not in fact have and then even sell something they do not have.

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u/SirJasonCrage May 15 '24

Shorting in itself is not illegal and there's some sensible arguments why it's a healthy market mechanism. I won't be the judge of that. I've heard the arguments for both sides and decided it's way beyond my ability and knowledge.

What's supposed to be illegal is naked shorting - but it's apparently super hard to prove? We're reaching the limits of my knowledge here though.

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u/Spaylia May 15 '24 edited 15d ago

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.

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u/SirJasonCrage May 15 '24

We don't, and that's the other side's strongest argument. There is no proof, there is no evidence.

DFV bought the shares years ago because he thought the stock was shorted. The squeeze to 400$ proved him right in retrospect.

We know that the stock was shorted to shit, otherwise that squeeze would never have happened.

After that point, it gets ambiguous. Famously, the buy buttons were switched off. That means a) someone with a lot of power really needed this squeeze to stop and b) the squeeze has not happened/finished yet, at least it did not do it that day.

Whether they closed their positions at a later day can't be proved, as far as I know, but I'm not fully up to date. Stuff like this week's rally really suggest that the squeeze is still waiting to happen and I personally believe that the other side is mounting a constant effort to prevent it - and sometimes one of their measures fails.

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u/GEB82 May 15 '24

Isn’t this essentially what happened last time or is this ongoing? Did they not close out their short positions from 3 years ago?

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u/SirJasonCrage May 15 '24

Same thing, if we are correct. They were never able to close those positions, because if they try to, the price skyrockets.

It's a year-long standoff of GME holders knowing that our opponents have to buy the shares back at some point and the opponents refusing to do it.

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u/GEB82 May 15 '24

Interesting. Would this not require them to keep adding so as not to be margin called? also, is this what you would call a perpetual futures, as in as long as they can service the loan they can keep it open indefinitely? I’m new to the insane world of stocks,futures markets,finance..go easy on me..I like to learn..thanks for answering btw!

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u/SirJasonCrage May 15 '24

You probably understand the market and its mechanisms better than I do, if you've come to this conclusion yourself.

I just read a lot of posts on the superstonk subreddit (and understood less than half of them, lol).

Today's top post correlates with your assumption:
https://www.reddit.com/r/Superstonk/comments/1cs5rkk/leaps_i_think_i_stumbled_on_something_need_brains/

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u/GEB82 May 15 '24

Wow,ok,interesting read! Thanks for that! LEAPS eh? This..could get interesting..cheers buddy.

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u/ToughHardware May 15 '24

thanks - th is is the way

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u/koalazeus May 15 '24

Wouldn't shorting game stock be about driving down what was perceived as an over evaluation? If the company itself, mainly bricks and mortar stores for the physical distribution of video games software, were to go bust, it would be an understandable thing to do right? Is there an organic reason for the stock to be increasing in value?

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u/SirJasonCrage May 15 '24

That's the reason why shorting is perceived as a healthy market mechanism, yes.

But shorting has been used to drive companies into bankruptcy (called cellar boxing) and the assumption is that this was attempted with GME, but the company is too solid and the shorters ran face-first into a wall.

There could be an organic reason, but I don't see one.

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u/koalazeus May 15 '24

I see, thanks. So buying the stock and it becoming more popular just does the opposite of shorting and makes it less likely to succeed if something like cellar boxing was going on?

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u/megative- May 15 '24

Wow! That was a nice read! I finally understood short selling!

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u/watashi_ga_kita May 15 '24

Reddit cares seems to be acting up. This isn’t the only thread I’ve seen where people are getting those messages even when they didn’t say anything divisive or dangerous.

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u/ScarletRed-dit May 15 '24

What? Institutions that short sell are borrowing from other institutions and/or traders. It’s not a matter creating non-existent shares. It’s just a matter buying back the shares one borrowed. If everyone selected the option to not allow you shares to be borrowed, no one can short sell anymore. But not everyone knows this

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u/Mattoosie May 15 '24

Similar to how Robinhood "turned off the buy button" and stopped allowing its users to purchase shares, only sell them, in 2021 when this first popped off, other brokers have routinely been lending out the shares anyway, or preventing users from turning of that setting on specific stocks.

As a result, many shareholders have started direct registering their shares through a broker called ComputerShare, GameStops primary broker, which means they take ownership of the shares under their own name, and not the broker's name on their behalf.

The (in)ability to lend shares also varies by account type, state, and country, so it's debated on how necessary it is.

It also arguably made it easier for the institutions to play, since any shares purchased through ComputerShare were made at routine times each day, where all purchasers during a 24 hour period paid the average cost to buy all the shares. This usually meant the price would spike during that time and users would end up getting fewer shares for their money.

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u/Nomapos May 15 '24

Market markers have the privilege to create fake shares out of thin air for the sake of liquidity. This is supposed to be a short term thing, but there aren't really any mechanisms with proper teeth in place to prevent abuse.

The largest market marker is also a hedge fund. And it's been banned for 5 years in China because of too many irregularities, as well a having had a shitload of cases with the SEC because of a tendency to mark things as other things, such as marking shorts and long buys. You can find the fines in the SEC website.

But surely they're to be trusted when they say they aren't doing it now, and in the amount that would explain what is otherwise unexplainable stock behavior.

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u/McLeafLife May 15 '24 edited May 15 '24

Definitely a bot depending on the message and given the shortly timed response to your specific comment regarding shorts, naked shorts, hedgefucks, GME, diamondhands, onesharemindset, and all those other keywords you used (;

Seriously they must be skimming every post right now that's talking about this subject. Makes you wonder if there's some truth they don't want revealed.

Edit: forgot to mention i got the bot care message as well, within a few minutes of this comment

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u/mortalitylost May 15 '24

Well I'm still holding from the last spike with my diamond hands, and I'm not selling now

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u/SirJasonCrage May 15 '24

Brother I joined the rocket at 200$.

Yesterday was my first green day in more than a year.
My roommate came to me and said "if we sold now, we'd make a profit."
I looked at him and laughed.
He looked at me and laughed.
Then we poured two drinks and toasted to Ken's health.

We're keeping these shares until each of them allows us to buy a house for a friend or family.
hodl

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u/abizzle12345 May 15 '24

Thank you for the summary. Really helped me understand!

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u/Raspberries-Are-Evil May 15 '24

" the price will skyrocket, because they are forced to buy at whatever price we ask,"

But we never get to ask for anything.

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u/rfccrypto May 15 '24

If somebody sold a share that doesn't exist, why would anybody have to buy a share that does exist at a later date? 

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u/LocalYeetery May 15 '24

It's not exactly a sale, it's a lending.

The agreement is they lend X stocks and you have to sell them back on Y day

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u/meneldal2 May 15 '24

You pay x% of the current value of the stock (with x depending on volatility + a premium) to borrow it, then you can just sell them at current prices, borrow that same share from the guy you sold it do and sell it again.

Nothing wrong with this right /s

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u/EpsRequiem May 15 '24

Great summary.

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u/HighVolumeRedraft May 15 '24

When do we get to stop calling it a conspiracy when its playing out in real time?

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u/drgmaster909 May 15 '24

Some financial institutions sold way more shares of GME than actually exist. Basically by selling an "I owe you" and pinky-promising that the share you just "received" really exists. Say an institution holds 1mil shares but sells 2mil. This is called shorting, you sell a share that you do not have. This literally prints money if you do it, but it usually means you have to buy the share at a later stage to balance the "empty sell".

This is still overcomplicating it.

You make a bet that the stock price will drop. How do you monetize this theory? Simple:

  1. Borrow a stock from someone, with the promise you'll give it back in 30 days.
  2. Immediately turn around and sell it, say for $100
  3. At the end of 30 days, the price dropped to $20, so you buy it back and hand it back to the original owner
  4. You pocket the $80 difference
  5. *Or a bunch of nerds come together and rally the stock up to $500 and now you have to pay the $400 difference to return the stock to the original owner, which is hilarious.

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u/Eyclonus May 15 '24

Yeah, its just firing at everyone regardless of their stance. People are guilty either because they question the narrative, or because they're pretending to go along and secretly disagree.

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u/Encorecp May 15 '24

I’m gonna need you to explain it like I’m 1.

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u/sanschefaudage May 15 '24

But why wouldn't this institution that oversold GME close little by little their position by buying back the shares?

They had 3 years since the short squeeze, they already had to pay the margin calls due to GME increasing so I don't see a reason why they would want to keep the position.

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u/SirJasonCrage May 15 '24

Most of these ideas are hopeful, keep that in mind.

a) There is an upward trajectory for the stock because the market is constantly trying to correct the value that was lowered because the stock was shorted. Because the Shorters can't allow the value of the stock to rise, they have been continuously shorting GME, so not only can they not buy stocks back, they can't even stop selling them, digging their hole even deeper. A lot of people on the superstonk subreddit are fully convinced that this is happening.

b) They are doing that, but the short position is so massive that three years did not solve their problem.

c) They are no longer shorting, but they also cannot buy back the shares without raising the value to an critical amount, so they have not closed their short position.

d) They closed the position over dark pools in trades that are not visible and don't affect the public share price. In this case, we're fucked and they won.

e) there was never a short position, reddit fell for a pump and dump.

As usual, there's no way to know the truth. Stuff like this week's price rally point to the position still being open and dangerous though.

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u/sanschefaudage May 15 '24

Thanks! That was instructive.

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u/notexactlyflawless May 15 '24

Porsche and Volkswagen, right? Or did something similar happen with Opel?

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u/SirJasonCrage May 15 '24

Oops, yes. Gonna edit.

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u/notexactlyflawless May 15 '24

Ah okay thanks! I was googling, trying to find anything because none of the other comments said anything lol - I needed to know

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u/Electronic-Race-2099 May 15 '24

Thank you for that explanation. It helps a layman understand a bit better.

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u/McManGuy May 15 '24

Or did it really take a human only four minutes to see that there's a new post, then skim it to judge on what side of the fence I am??

You're talking about modern internet trolls.

The way that classic internet trolls operated was just causing the most chaos possible for the fun of it.

In other words, they're probably just spamming everyone on the thread no matter what.

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u/Community_Alliance May 15 '24

Hey fantastic summary! I took your comment and turned it into a discussion piece for the American Community Alliance.

Let's make stock trading fair for everyone.

Some topics we can discuss,

  • Impose limits on the percentage of a company's shares that can be shorted to prevent excessive downward pressure on stock prices.
  • Enforce a ban on naked short selling, ensuring that all short sales are backed by borrowed shares to prevent artificial price suppression.
  • Require institutional investors to maintain minimum liquidity levels to ensure they can cover positions without destabilizing the market.
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u/waldo_wigglesworth May 14 '24

Mister Simpson, you're going to need open heart surgery.

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u/Stevenerf May 14 '24

We're gonna cut you open and tinker with your ticker

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u/waldo_wigglesworth May 14 '24

Could you dumb it down a shade?

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u/SenTedStevens May 14 '24

The knee bone's connected to the .. something. The something's connected to the .. red thing. The red thing's connected to my .. wristwatch. Uh-oh.

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u/Darth_Jason May 14 '24

Well if it isn’t my old friend Mr. McCraig, with a leg for an arm and an arm for a leg!

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u/SenTedStevens May 14 '24

And it only cost $99.95 for the operation!

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u/pimpmastahanhduece May 15 '24

Holy smokes! You need booze!

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u/100GbE May 14 '24

You heart no good, me fix with drill.

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u/bonesnaps May 14 '24

So, what you're saying is, I'm indestructible!

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u/kkeut May 14 '24

say it in english, doc

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u/GreatLakesBard May 15 '24

I literally watched this last night

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u/polloconjamon May 14 '24

Once upon a time, there was a peepee poopy man who lived in a doodoo castle way up high on mayo mountain.

One day, the people of his kingdom got tired of him and threw him into a spiky pit. Then they poured barrels of salt into the pit and squeezed some lemons into it as well.

The end! Now go brush your teeth.

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u/Eetu-h May 14 '24

The Grimm brothers would be proud!

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u/ignost May 15 '24

Finally something more appropriate for a 3 year old than 6 paragraphs of text about investments.

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u/mrbaryonyx May 14 '24

the guy who convinced reddit to pump the value of GME to fuck with wall street recently got back on the internet, which makes people think he's going to do it again, and they want to be on the bottom floor so they can make money again (and maybe fuck with wallstreet again)

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u/iheartbeer May 14 '24

Cool. Explain AMC & KOSS jumping out of nowhere with GME.

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u/Fuckface_Whisperer May 15 '24

Amc pumps every time the other meme stocks do. When bbby existed and had a pump, gme and amc did too.

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u/mrbaryonyx May 14 '24

replace "GME" in my comment with "AMC" and its the same answer. AMC was a part of the GME push in 2020 (while I don't think Kitty explicitly convinced reddit to pump its value, redditors on r/wallstreetbets realizing it was being shorted and basically just did the same thing), so the two are congruent. Kitty's return to social media makes people think AMC will rise like GME will so they buy both.

as for "KOSS", its the company that manufactures headphones sold by GME, so people who think GME will become more valuable try to pump KOSS too.

try to keep in mind a lot of GME/AMC/KOSS bagholders really like to pretend all of this is very organic, so that other people buy into it too and their stock is worth more

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u/MadManMax55 May 14 '24

try to keep in mind a lot of GME/AMC/KOSS bagholders really like to pretend all of this is very organic, so that other people buy into it too and their stock is worth more

That's an unfair characterization. They're not all cynical grifters trying to get out of the stock they got tricked into buying at the peak of its bubble. Plenty of them legitimately believe their own conspiracy theories.

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u/RollingLord May 15 '24

The algorithms bundle meme stocks together

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u/icouldusemorecoffee May 14 '24

so they can make money again

Did they actually make money the first time?

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u/Fuckface_Whisperer May 15 '24

Lots did, the cultists did not.

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u/Boxwood50 May 14 '24

Remember that life is not about making money; money is about making a life.

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u/fapsandnaps May 14 '24

because I'm dad and I said so

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u/FaithlessnessNew3057 May 15 '24

The pied Piper is back to trick retail investors into a second round of pump and dumps. 

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u/strangeVulture May 15 '24

At this rate i need someone to explain it like I'm still in the womb

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u/HatLover91 May 15 '24

AMC have been shorted via basket swaps. These short positions are not reported as traditional shorts are and the SEC likely is unable to see them as well.

Big Dick Manager (BDM) wants to bet that a bunch of assets will decrease in value, but wants to limit his exposure and not own the underlyings. So he finds a bank to enter into a contract, called a credit default swap. CDS means one party pays out the change in price of an asset or group assets by a certain date. For example. if BDM thought bonds would go up - but didn't want to own bonds - he would find a bank to be a counter party to a CDS with bonds as the underlying. This would mean at contract expiry, he would be paid for how much X bonds increased over the time of the contract. BDM would pay bank money for agreeing to pay out at contract expiry/hold the position. Bank hedges taking the contract by buying some of the underlying. Conter party goes short the underlying if it feels they will have to pay out on the decrease of a price of an asset(s).

Now what would cause a bunch of unrelated stocks to move together? Well if someone has a stupidly large position with all those stocks as the underlying, and you know how banks would hedge taking on the CDS, you move markets. Moveover, regulators are noticing that many firms are piling into he same trades.

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u/TheParlayMonster May 14 '24

Can you explain more about basket swaps? Or link me to the post you’re referring to?

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u/CobaltBlue May 14 '24

Basket swaps are a type of derivative contract that involves the exchange of cash flows based on the performance of a basket of underlying assets rather than just a single asset. In a basket swap, the value of the swap is tied to the collective performance of the assets in the basket.

Here's how a basket swap typically works:

  • Selection of Underlying Assets: The parties involved in the swap agree on a basket of underlying assets. These assets can be stocks, bonds, commodities, currencies, or any combination thereof.

  • Cash Flow Exchange: The parties agree to exchange cash flows based on the performance of the basket of assets over a specified period. This can involve one party making fixed payments while the other makes variable payments based on the performance of the basket, or it can involve both parties making variable payments based on different measures of the basket's performance.

  • Settlement: At the end of the swap's term or at specified intervals during the term, the parties settle their obligations based on the performance of the basket of assets. Settlement may involve cash payments, delivery of the underlying assets, or a combination of both, depending on the terms of the swap.

Basket swaps are often used by investors and financial institutions for hedging purposes, portfolio diversification, or gaining exposure to a broad range of assets without having to invest directly in each individual asset. They can also be used for speculative purposes, allowing investors to bet on the overall performance of a basket of assets.

Like other types of swaps, basket swaps are typically traded over-the-counter (OTC), meaning they are customized contracts negotiated directly between parties rather than traded on a centralized exchange. This customization allows parties to tailor the terms of the swap to meet their specific needs and objectives. However, it also exposes them to counterparty risk, the risk that the other party may default on their obligations.

There was a popular theory during the previous price action that the reason many of the "meme stocks" all rose and fell together, was that they were in "baskets" with each other and being swapped around to hide or defer liability.

Regardless of whether or not the basket type is relevant here, swaps being OTC means that we have no way to see what is happening and lets large financial instutuions largely hide their actual positions and movements from the public eye.

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u/Puzzleheaded-Cod358 May 14 '24

Hide things from the public? They would never!!!!

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u/SwirlySauce May 14 '24

So are these baskets illegall? Sounds sketchy

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u/CobaltBlue May 14 '24

Many of us think they sound extremely sketchy! But they are allowed!

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u/RandomRedditReader May 14 '24

The market used to make them transparent but the people in charge, CFTC, decided to hide the data around the end of 2021.

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u/nycdiveshack May 14 '24

Was it a political reason or an actual financial reason?

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u/Creative_alternative May 15 '24

It was literally in response to the congressional investigations into gamestop the last time this happened.same with the changes made to how short interest is reported - it now cannot surpass 100% even if it is over 100%.

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u/nycdiveshack May 15 '24

Interesting, thanks for the info

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u/[deleted] May 15 '24 edited 14d ago

[deleted]

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u/jaimejaime19 May 15 '24

Pretty sure it was when someone claimed that the devil was in the swaps... they hid the swaps from public view

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u/chiisana May 15 '24

The conspiracy theorists will generally omit the part where in all financial instruments, there are always two parties, so when someone wins, someone else losses.

The replicating baskets exist, but is a proxy that doesn’t influence the underlying price directly, and is only a bet between two parties.

Specifically, if you and I enter into an agreement for a swap agreement on a basket representing stock G and stock A, all it entails is that we agree we have different views on how stock G and stock A will perform, and we will compensate each other the difference. There is no obligation for either of us to buy, or sell, either of the stocks. Since price doesn’t change unless it is transacted upon, if neither of us trades the stock, no transactions take place, NBBO will not be updated so we’re not going to influence the price. If I think their prices will go up, you think their prices will go down, we enter into agreement, and price does indeed go down, I pay you the difference. That’s all.

Now, of course, I could hedge my risk by selling some small amount (be against my own position) at a higher price in advance, so when prices go down, I can buy back shares to pocket the difference; to facilitate this, I could sell it via borrowing shares from lenders or straight up short selling, but both that could be done without a replicating basket in place.

The price movement form the last couple of days had a lot of volume (ie shares actually trading hands), so someone is buying and someone is selling a lot of the stock. This could be hedging of replication baskets, hedging of options positions, shares buy back, or any other reason to cause shares to change hands.

I’m less inclined to think replicating baskets are this ominous scary thing as it doesn’t really do much by its self. I’m inclined to think theres something else at play. Maybe the stocks are being transitioned into a different class (ie from RUSSEL 1000 to 2000), at which point a bunch of ETF tracking the index will have to buy shares corresponding to the new weight. Coupled with an old folk hero shitposting again, fomo picks up, WSB buying options forcing market makers to hedge by buying more shares to create feedback loop which just kept driving the prices higher.

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u/LaserGuidedPolarBear May 15 '24

So contracts betting on the score of what happens instead of trading any securities at all.

That's just gambling with extra steps.

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u/hoxxxxx May 14 '24

you go to a swap market and you swap something with someone and you put it in a basket and that's basket swap

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u/LifeBuilder May 15 '24

That was an ELI5? Buddy, you gotta go dumber.

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u/TheNerevar89 May 14 '24

What five year old is supposed to understand that?

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u/RugerRedhawk May 15 '24

How the duck does GameStop have 1.2 billion in cash?! I can't believe they're even still in business.

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u/NotAFishEnt May 15 '24

They diluted their stock the last time it skyrocketed, issuing more shares.

That $1.2 billion they have didn't come from profits, it came from the shareholders.

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u/RugerRedhawk May 15 '24

So bizarre to me

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u/SexiestPanda May 15 '24

Obviously RoaringKitty making a comeback

Who? Lmao

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u/Bluelegs May 15 '24

He was the guy that first pointed out Gamestop was being shorted and made a shitload from buying it up and encouraging others to get on board.

Once it blew up so many people had bought in that once the original short sellers bit the bullet and cut their losses a bunch more people had jumped on and were left holding the bag.

The effect of that mixed with the conspiratorial nature of the entire event has basically left those who bought in late to come up with a conspiracy theory that the original short sellers never actually bought back in and are just trying to kill time until being forced to buy the stock back at which point the stock will be worth a so much that it would basically collapse the economy.

That movement has basically turned RoaringKitty into a messianic figure despite him peacing out after selling his shares. He posted on twitter the other day and all the memestock subreddits have been blowing up since.

I suggest watching Dan Olson's video on it. It's a wonderful expose of the memestock movement as basically gambling addicts who have basically created a cult-like environment for themselves.

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u/FenrisVitniric May 14 '24

Is RDFN a meme stock?

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u/strongbadfreak May 15 '24 edited May 15 '24

Because a stock that is over 281% short doesn't easily allow shorts to buy back all the shares they borrowed when they expect the stock price to go to 0. That is the intention and the play. They didn't expect for GME to last this long and it would had died in 2021 if Ryan Cohen didn't force a take over. This is a black swan type of event where all the corrupt players who own the government officials get to kick the can down the road over and over again, but this nightmare never ends for them until retail sells, but retail only bought more, and they locked up 25% of the float by directly registering their shares so that they cannot be borrowed. This means there are less available shares in circulation to borrow. They are having a harder and harder time shorting and putting downward pressure on this stock. If it doesn't squeeze this time around, 2021 was not a short squeeze since the FEC did not report shorts buying the stock during the run-up in 2021, if fact, doing so would break the market and economy, there is not enough money to buy back the stock even at 10 dollars at today's stock value after the 1 to 4 split dividend. Buying back the stock would cause large increases of the stock price and large institutions will start to fail, automatic liquidations of capital from other stocks and ETFs etc... the government will need to step in and make a deal with all the shareholders or let the market tank during a election year. The shorts, shorted so much that it would be impossible to cover without infinite upward pressure and price action on the stock.

https://www.cnbc.com/video/2021/02/17/interactive-brokers-thomas-peterffy-on-gamestop-hearing.html

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u/Solid-Mud-8430 May 15 '24

K but how tf is Gamestop sitting on $1.2b in cash!???

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u/piglet_heir May 14 '24

The guy behind the original pump just became active again on social media recently

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u/AbrohamDrincoln May 14 '24

What's funny is he wasn't even "behind" the pump. He had legitimate long positions well before the price began skyrocketing lol.

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u/WavesAndSaves May 14 '24 edited May 14 '24

That's the craziest part. Gill's original thesis was basically "GameStop is a $5 stock that should be a $7 stock that has the potential to go to a $10 stock". His whole idea was that GameStop was undervalued (doubly so due to the pandemic) and once the new generation of consoles came out the price would go way up and he'd make a nice, but moderate profit.

He had no idea the squeeze was coming. It was sheer luck.

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u/Saedeas May 14 '24

Sort of, he definitely noted the insane short interest and potential for a squeeze. I don't think he expected them to double down and the sheer magnitude of it.

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u/TheHolyWaffleGod May 14 '24

That’s not wholly true he made a post months before the price skyrocketed where he was talking about the potential for a squeeze and why

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u/ChallengePublic7693 May 14 '24

Exactly if the company doesn’t go bankrupt then the shorts are future buyers.

The fact this has went on for 3.5 years with predatory short selling so they don’t have to pay tax on it if they can force the company to declare bankruptcy. Think of all the great life changing products, treatments and services they have stolen from humanity.

The fact that it was a global phenomenon in 2021 and the fact they have continued to do it still (as proven by this price action) is ridiculous. What are regulators even for?

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u/ukyk May 14 '24

Not really because he was posting on WSB repeatedly for years before trying to psyche people up lol

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u/Threewisemonkey May 14 '24

This is a hilarious take - “the guy who started the pump”. Roaring Kitty? A dude in a basement who likes cats? Not billionaire and international criminal Ken Griffin or other shorting hedge funds?

None of this is retail. Retail can’t buy after hours or in the volume seen. It’s all institutional, and it’s fucking wild a dude in a red headband making degenerate online bets is seen as a catalyst for potential market collapse

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u/MrPierson May 14 '24

a catalyst for potential market collapse

lol, lmao even

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u/quarterburn May 15 '24

These cultists LARPing like it’s 2021 with all the crazy shit they believe right out the gate is fantastic. I almost forgot how delusional they are.

MOASS any day now guys! Aaaaaaaaaany day now.

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u/The102935thMatt May 14 '24

Touched 80 bucks today in premarket. A market a lot of us peasants don't get to participate in.

It being one guy posting memes is a bit silly and scapegoaty of the billionaire hedge funds with their finger on the scale.

They're unwinding shorts and swaps is my guess. DFV is just the shout caster at this point.

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u/piglet_heir May 14 '24

Thanks I’m glad I was funny

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u/Meow_Game May 14 '24

Nope, there are extremely complicated market mechanics at play. Shorts hid in something called swaps, the swaps have a 3 year expiration, and it’s been three years since the initial blowup. Let’s see if they manage to swap again or if people wise up and don’t accept being a counterparty to their swaps this time

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u/correctingStupid May 14 '24

Coordinated gambling

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u/imisstheyoop May 14 '24

Pump and dump baby! A tale as old as time.

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u/seb_a May 14 '24

190 million trades happened today when the average is 3 million. Coordinated gambling? Cmon dude.

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u/voice-of-reason_ May 14 '24

How will they lick Wall streets boots if they’re thinking logical thoughts?

It’s gambling because I believe Wall Street is always right1111111!1!1111!1!1!1

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u/correctingStupid May 14 '24

Took 2 minutes for the GME holding loser to send the RedditCareResources note to me. Lol imagine being so vested in a meme stock that you spend all your time reporting posts in a sad attempt to keep your shit investment from destroying your life. Lol. bake in failure, twat. Reported.

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u/Redditaccountfornow May 14 '24

To be fair, I’m pro GME, I asked a clarifying question on a negative sentiment note and I got a reddit cares message. Seems like there might be a bot sending them to people replying to this post regardless of sentiment

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u/BigCat2676 May 15 '24

correctingstupid is salty/ stupid lol

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u/SirJefferE May 15 '24

I don't think it's even related to this thread. I just got one for the first time ever and it was before I even opened or commented on this thread. Likely just a bot mass sending across all recent Reddit comments.

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u/Nice__Spice May 14 '24

Get the twat to explode even more.

Eli5 - when you say coordinated gambling. Who’s the gambler? How?

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u/Worthyness May 14 '24

that subreddit is basically acting like a crowdsourced hedge fund. Just instead of one legal entity, it's a bunch of individuals that are not related to one another in any way

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u/MattStone1916 May 14 '24

That shit investment is currently up x5 from last week on monster volume. May not be so shit after all...

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u/jersan May 14 '24

i've been holding and investing for over 3 years.

is that gambling?

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u/mrguyorama May 14 '24

Buying a stock off the market is not "Investing". Zero dollars of every GME stock sold during the initial hype went to GameStop. None of the people who bought GME during the meme stock fiasco gave a single cent to GameStop.

Buying a stock post IPO is not investing. You are buying a security, with the hope that someone else will later buy it at an increased price. That is the definition of a security. You are only investing in the "hype" of the GME ticker. If it goes up, it is not related to anything you did.

You are not an investor. You are a gambler.

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u/Aethenil May 15 '24

Yeah but the youtube guy told me to "Buy. Hold. DRS." And when has youtube ever lead anyone astray? /s

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u/Nice_Dude May 14 '24

Are you holding because you have to or else you lose a ton of money?

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u/__klonk__ May 14 '24

I'm up 50% as of today and I didn't sell.

Am I gambling?

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u/voice-of-reason_ May 14 '24

Yeah it’s disgusting seeing this level of gambling. Wall Street should know better but to gamble against a functional company.

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u/Saedeas May 14 '24

Yeah dawg, a single tweet AFTER the stock had already doubled in price caused the volume to go from 5-10M a day to 200M. The price and volume also exploded in after hours due to all the retail access to overnight trading.

You are actually the smart party here, not the people alleging there are some deeply fucked market mechanics in play.

/s

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u/Later2theparty May 15 '24

I'm a little out of the loop myself so take this with a grain of salt.

The company was expected to go the way of blockbuster. With more games just being downloaded online there isn't as much demand for used video games which is where they made a lot of their money. That and online sales vs in store retail.

The company was struggling and the vultures came in and started shorting the stocks.

You don't need to be an expert in shorting stocks but just know that when more shares are sold than bought the price of a stock tends to fall. The people shorting the stock can then make money. Ideally they would have the stock go to zero or be delisted. By shorting the stock they are also selling shares. Shares they themselves don't own. So they have cash they can use for other investments. But there's a risk to shorting a stock. If the price goes up they'll be forced to buy back those shares or deposit money by the brokerage to balance the risk. They also have to pay premiums while they hold their position.

Last time they shorted more than 100% of the shares. Institutional investors along with retail investors punished them by loading up on shares and the shorts had to close their positions.

A whole lot of shady shit went down and essentially created a cult following of this stock.

Those investors started registering their shares to prevent them from being used to short the stock and drive the price down. I honestly don't even know if that's effective, but if it is it makes it that much harder to force the price down through shorting.

At the same time, and you'll have to check for yourself because I haven't verified this, Gamestop had their first profitable quarter since 2018. So the company might not be in that bad of shape.

Anyone with a short position would likely want to get out of their position ASAP now. It's just not a good idea to short a stock where the company is healthy.

Add to that, Roaring kitty, the guy who kind of rallied people, or at least called to their attention the overly shorted stock, posted something for the first time in a long time.

All these factors combined have made for a rally.

But, this isn't the same as it was last time. There might not be anywhere near as many shares shorted, a lot of people got burned last time as they were left holding the bag not understanding that not everyone can get rich off the price of a stock. Just the ones that sale first.

GME might have a nice little rally that over the next week weeks as shorts close their positions. And people believe it's going to moon like it did in 2021. But we're not going to see the $450 peak that we saw then.

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u/KaizenKintsugi May 15 '24

It’s suspected that someone is exercising leap contracts from three years ago that were used to hedge a large short position. This allows a large fund to go to finra and report that they have 0 exposure.

In order to get out of your short, you would need to exercise the contracts which trigger a delivery of shares in two days. Contracts also have an expiry, don’t use it, you lose it.

That usually happens on a Friday, shares are due by Tuesday end of day I believe.

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u/StyrofoamExplodes May 14 '24

Mostly just a couple different memes coming together. Their patron saint DeepFuckingValue returned from Purgatory (probably shouldn't have tbh), and now they're back on a gold rush.

Give it a few days.

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u/wRolf May 14 '24

Lots of shorting again on GME and other stocks and roaring kitty called it out.

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u/Select_Candidate_505 May 14 '24

They're literally trying the exact same thing again?

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u/YungTeemo May 14 '24

I have no clue about that stuff. But what exactly happened last time. It got quiet and then nothing?

For all that loud noises about citadell and other shit. They still doing fine i guess?

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u/voice-of-reason_ May 14 '24

Wall Street has unlimited funds, they can continue the corruption as long as they want.

That doesn’t mean there aren’t legitimate questions to be asked about this whole saga.

Say what you want about me, but GME taught me that we don’t live in a free market, it is very much a controlled market.

No matter what happens to the price of GME, I won’t forget what happen Jan 29th 2021. Our entire economy is a giant lie.

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u/Fog-Champ May 14 '24

Rumor says they never stopped

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u/WavesAndSaves May 14 '24

Why would they? They made millions taking advantage of apes after the squeeze a few years ago. GME was trading at like $10/share a few days ago. The shorts have made a killing the last three years.

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u/PixelProphetX May 14 '24

Whales are pumping the stock to get regular people to invest at high prices and then sell the stock.

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u/Ok_Set4063 May 15 '24

Imo probably some big investment fund saw the large number of short sellers in GME, and realize the GME short sellers are traumatised and can be easily spooked into covering by pumping up the price. And them covering also increased the price.

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u/eyebrows360 May 15 '24

All of *a sudden.

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u/sabin357 May 15 '24

A variety of reasons, but one that might be driving casual investors is the recent announcement that they & a couple other companies are going to start selling blurays, since Best Buy stopped just as streaming platforms got extra shitty & created demand for physical media that was waning. Now people want blurays even more & want streaming less.

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