I’ve been enjoying the antics of the Robin Hoodies, tear hedge funds a new one. It’s a sign the world has changed and creative destruction is in the air.
1. The Setup
Last year the government response to unemployment was to issue checks. Here a check, there a check, everywhere a check check. The casinos are closed, the sports books are closed. Dave Portnoy doesn’t have anything to talk about. A company set up day trading for the little guy. The company is called Robinhood, as the fable goes take from the rich and give to the poor. Suddenly these new Millennial traders were making daily book trading QQQ and HERTZ (HTZ now HTZGQ). Hertz had gone bankrupt a fallen victim of the pandemic. The Robinhoodies didn’t care. They kept trading HTZ as if it was alive. To make money all you have to do is buy low and sell high. So although a dead cat the hoodies just kept bouncing that SOB pulling nickels off of each bounce.
Compounding is an interesting thing. Let’s say you buy HTZ for a buck and sell it for a buck fifteen (15% return). The next time you buy low you have $1.15 to invest and if it pops another.15 cents you have $1.32. 15 cents again, 1.52. Trading is free. The government is sending you $600 per week. It doesn’t take very long to make a PILE of cash bouncing the dead cat playing with the houses money. 600/wk at 15% per week and 600 additional added each week is 170K in 26 weeks. It’s the houses money being played with a bunch of gamblers and gamers. Robinhood has 20 million accounts and represents 20% of the daily market volume.
2. Revenge of the ants:
Gamers hone their skills by playing games and sharing strategies. Boomers “invest” meaning they park their cash in some instrument with a scalper like Vanguard, sit around and philosophize about 5% yearly return while the gamers are looking at 350K/yr return on their government checks of a compounded $600/wk. With their skills honed and an open network established on Reedit the ants set about to loot hedge funds. Options contracts are contracts. You don’t buy an equity you buy a time value decaying promise. There is a winner and a looser. If I buy June IBM calls the option means I can buy IBM stock in June for the price I negotiated earlier. If IBM goes up more than my option I will exercise my option and then sell at the higher price. If IBM doesn’t pan out with a higher price I won’t exercise the option and loose the money I paid to buy the option. The option was sold to me by an IBM stock holder so it’s a bet between me and him about the future price of IBM. If IBM is 150 and I buy a call option for $10 and IBM goes to $170 at the call the stock holder gets $160 (150 +10) for his IBM and I get a $170 share of IBM or I can just sell the 170 share and pocket $10. The option cost me $10 and if exercised as described I make back $10. If IBM went to 180 I’d make $10 dollars for 100% profit on the trade less short term cap gains. Short sellers have the other side. Their option is a put, a bet that IBM will go down. If IBM is 150 and they pay 10$ for the put and IBM goes down to i40 the put gives me sell 140 dollar IBM to someone for a 150 price and I make back my $10. If IBM drops to 130 I make an extra 10 for 100% profit. If IBM goes 150 and above you loose $10
A boatload of synchronized and coordinated hoodies can drive a stock price where ever they want in a thinly traded market. Because it’s supply and demand low supply and high demand will shoot up the price dramatically. If you’re short and you’ve sold a put it means when the piper is paid at expiration you have to come up with shares to settle your contract. If you sold a 150 IBM put and IBM goes to 300 you have to buy 300 IBM and sell it for 150 and loose the difference less what you were paid for the option. This is called a short squeeze. I buy a low cost option and force the market to the moon then buy the stock at the option price and then sell the stock at a big profit.
In a thin market it can be done and was done with Gamestop and several other thinly traded stocks. All of this amounts to levered bets on the underlying, like a game, and Millennials are good at games. It worked so well Robinhood closed down trading on Gamestop tp protect Wall Street. I expect they will be sued 10 ways to Sunday for protecting Wall Street over the little guy. Should be interesting how ol lunch bucket Joe responds to the little guy getting screwed.
The nugget to glean from this networks matter. They change the “game”. The Bayesian odds shifted from a rigged wall street game to a bunch of unaffiliated little guys who rose up to loot the bastards. A network that represents 20% of market volume is a network to be reckoned with. If the network set up a PAC then it would REALLY matter because that network would become the new AFLCIO in terms of political clout. $5 a month from 20M peeps is 1.2 billion per year. If the government tries to shut it down, who’s the Nazi? Not the Donald, he’s hiding out in FL. BTC and Ethereum are also money based networks. Suppose the contracts move from an exchange to a decentralized network with a standard verifiable contract that trades in Ether instead of dollars. I could trade by VPN from a Hong Kong address in a non exchange way and there wouldn’t be a Robinhood to pull the plug on the money machine. Networks matter. Maybe not to geezers earning 5% while Vanguard rips them off but to those interested in playing the game. Networks matter to the geezers as well but they don’t even know it. If you own a mutual fund you own an instrument that has a similar risk to manipulated Gamestop because the price becomes disconnected from value. At one point Gamestop became the MOST VALUABLE stock in the Russel. If you own VTWO you own Gamestop. Game stop is one stock. Suppose 100 stocks in the Russel become part of a basket of network trades. How does the government respond to that? Mutual funds are not indexes. They are derivatives and susceptible to risk distortion through network means.
If you think you’re going to rely on a 60/40 to get you through, that’s last century thinking.
4 Replies to “Easy Peazy Wall Street Squeezy”
Could you elaborate how passive indexers be affected here?
Are you saying these ETFs rebalancing based on market cap will essentially shoulder the losses (subsidize the gamers’ wins)?
Gamestop is/was a very small part of the Russel. For a short period it became the LARGEST stock in the index. This means indexers HAVE to buy more or else they are technically short Gamestop a risky proposition. Gamestop is relatively thinly traded meaning it price is demand driven so index funds were forced to buy Gamestop at high prices to keep from being short. Today Robinhood and others halted trading unilaterally causing a big price drop, so now the indexers are forced to sell Gamestop at a loss because they bought high and now must sell low to keep from being too long a stock with a rapidly decreasing market cap. THIS throws the index out of balance and it no longer effectively tracks the index. It is the problem with robot buying of index funds without price discovery. In addition short sellers were forced to cover meaning they had to buy stock to cover the shorts at a loss. Buying stock in a thinly traded market further drives demand and further distorts price discovery because foir every dollar the stock goes up is a dollar the short owner looses. This is another form of forced buying and cause the index to have to buy at a higher price. Another source of forced buying is if I buy a call YOU are liable to own the stock or else you are extremely at risk. This is another form of forced buying If the call price collapses then you are stuck owning a stock at a loss which is a form of forced selling ALL of these causes the index heartburn, because the index just follows flow and makes no attempt at price discovery. If an index gets a buy order it buys, a sell order it sells a rebalance order it rebalances blindly without regard to price. Also as the volatility increases in the index it’s price starts to gyrate and people get nervous and start to sell. This causes the fund to sell at any price and if everybody is liquidating at once it causes a MAJOR price distortion to the downside. Did you buy the Bogglehead bullcrap about index funds being safe? They are safe all the way to the second they are not.
All this GME mania will end right after the short interest gets resolved. Will they go after another target? Maybe…
I don’t see this as a mania. I see it as a well thought out attack against wall street by people that were ripped off in the financial crisis and so forth. Nobody of the elite went to jail while little guys lost a lot of money. I lost 1M in the GFC and it took me 2.5 years to get back even. A lot of people lost 6 years of compounding, mostly Boggleheads because their risk management was screwed up People responsible walked away with hundreds of billions and never paid a nickel or spent a day in jail. The ploy to shut down exchanges will backfire. Millennials are pissed off and now the biggest voting block and they feel entitled. The leadership in the country doesn’t have a clue. you know there is trouble when Ted Cruise and Ocasio Cortez are on the same side of an issue. I think Joe hasn’t got a clue and Yellen is a labor economist who doesn’t know the first thing about hardball options arbitrage. Minooch was a Goldman guy, he would know what to do, this Yellen babe is lost at sea.