Makestation

This is still largely a developing situation, but it's hard to understate it's significance. A small (ish) group of folks from Reddit successfully brought the 9th largest hedge fund in the world to its knees. 

How? Short selling. And they outplayed these folks at their own game. 

It's a relatively simple concept really, albeit somewhat dodgy. The short seller "borrows" a stock from someone who is holding it (strange as this may sound, the stock market allows for this). When someone is holding a stock they've borrowed, they can sell it. Literally, they can borrow/rent a stock and sell it, so long as they buy it again when it's time to return that stock to the lender. 

This is exactly what Citadel did. They borrowed what became billions of dollars worth of stocks, and they sold them. A lot of them. They sold them while they were $18 a share, while they were contractually obligated to return them eventually to their lenders. 

If this sounds like a roundabout way to make money, it is. They were betting on Gamestop's failure. They were counting on predictions that their stock would tank. When it did, they were going to buy back these stocks at a much lower price and then return them to the lender. In doing so, they pocket the difference and have pure profit from Gamestop's demise. 

This did not work as planned. A group on Reddit got wind of this. SpookyZalost has a much better explanation than I do, but in short, the folks on Reddit started buying stocks in large numbers via Robinhood. This drove the stock price up rather than down. The stock prices exploded by over 1000% over the span of a week, and they became short in supply and forced Citadel to buy back these stocks at exhorbant prices in order to ensure that they could even get a hold of them at all. They had no choice but to shell out billions of dollars in order to fulfill their contractual obligations. 

This sort of dodgy behavior from hedge funds and lenders was the leading factor for the 2008 market crash. It has been 12 years since the great recession, and it is clear that they did not learn their lesson. Citadel had made a risky bet, and is now salty that it did not work in their favor.

But even more shocking were Robinhood's subsequent actions. Stocks were quickly suspended by the popular trading app, preventing anyone from purchasing any more stocks from the company.

This is already suspicious because it's technically market manipulation. It's a private company arbitrarily attempting to inhibit the market from rising, which is illegal and frowned upon strongly by the SEC. But the story doesn't stop there, because Citadel so happens to be a 40% stakeholder in Robinhood. IIRC, this makes Citedel the largest stakeholder. And thus, they have more control over Robinhood than any other player/party in their sphere of influence. So when Robinhood subsequently choked off Gamestop's stock rises to protect Citadel from experiencing further losses, it raised a lot of eyebrows in the industry, and was evidently a very clear indication of collusion to the tune of several billion dollars. And it happened practically in plain sight.

What are your thoughts on this situation?

I think Citron/citadel are idiots but they aren't the only ones guilty of this shady practice of short selling.

one thing you didn't mention is that the hedgefund broker didn't just shortsell, it wouldn't be that big a problem if they did because this is done to maintain a kind of balance.
They shortsold more than they had.

if you borrow 100% of the stock and shortsell 120% of it because you're greedy you really only need to give back that 100%, that 20% is pure profit on top of whatever profit you earned shortselling.

what's worse is they shortsold around 128% of the available stock meaning that with all these people buying low and refusing to sell they are liable for every single stock they borrowed including their profit margins.

their greed bit them in the arse and they are getting punished for it.

it gets worse though because they're raising a big stink and it's obvious that institutions like forbes, bloomberg, cnn finance, etc are biased because they're going out of their way to make citadel/citron out to be the victim in all this and the people on reddit are being displayed as monsters who act like degenerates and hack people...

those people on reddit bought the shares through completely legitimate means, by going to a stockbroker and saying I want to buy these stocks at current market value.

but now reddit is being called out as being a den of criminals and delinquents because a bad actor in the stock market flew too close to the sun and got burned.

that's not right either.

and before people start posting memes...
this one seems appropriate.

This whole thing is beautiful! Hedge funds are finally getting their due. I love all of this.

I love it too

Elon Musk is now putting a lot of pressure on the RobinHood CEO as well and is making waves. He's highly influencial, hopefully some more information comes to light about this entire fiasco. It's been interesting to watch, for sure.

GME has fallen a LOT now.

I'm worried Congress is going to find a way to prevent this from happening in the future. Specifically preventing everyday people from fighting back, but still allowing hedge funds to play their shady games.

I had no idea the hedge fund that fell was the ninth largest in the world, that's craziness, even assuming that hedge funds are very monopolistic. The gulf between the power of the hordes of us normal people and the very wealthy isn't so large after all, especially when you have hundreds of thousands of people all going for one thing

The most interesting thing I saw about this was this, although I must admit I didn't quite understand the explanation (but that I think is because I didn't try thinking it through): https://yudkowsky.medium.com/r-wallstree...b507e4a038

(February 3rd, 2021 at 9:17 PM)Guardian Wrote: [ -> ]GME has fallen a LOT now.

I'm worried Congress is going to find a way to prevent this from happening in the future. Specifically preventing everyday people from fighting back, but still allowing hedge funds to play their shady games.

As long as congress is bought, unfortunately yes. 

It's just not a level playing field. It's not. The hedge funds still have an unfair advantage, so to speak, in that they have the money and the capability to put power in the hands of the right people. 

Gamestop falling was predictable. But the whole thing was just... we can't forget the lessons that caused the 2008 financial crash. They were what they were, and congress I think remembers as well, so long as they aren't bribed. 

It's easy to tell that some folks are bought, sadly.