4-parter on Wall Street Bets vs Hedge Funds. Part 1: Occupy Wall Street gets even.

Some stories are too complex for our 3 minute attention span. For those stories we do 4 parts, one week apart, each a manageable 3 minute type read. Wall Street Bets vs Hedge Funds is one of those stories for sure. Today we start with the populist part of the story, how the Occupy Wall Street folks decided to listen to the old mantra “don’t get mad, get even”.

In honour of the subject, these 4 posts will be free ie outside our paywall.

Our 3 upcoming posts are:

Part 2: What this reveals about the business model issues of free trading on RobinHood.

Part 3: Shorting can be a valuable price discovery mechanism if done right.

Part 4: What changes can we expect in future?

Basics in 30 Seconds:  A subreddit forum called Wall Street Bets brought together retail investors who saw an opportunity to put a short squeeze on hedge funds betting against GameStock (symbol GME). 52-Week Change in GME shares was 4,941.67%. Knock out blow to the muppets (a derogatory term for retail investors used by Wall Street “smart money”).

One of those muppets, 34 year old Keith Gill, using the handle known as “DeepF—ingValue” by fans on Reddit’s WallStreetBets forum posted a screenshot of his brokerage account, showing a roughly $20 million daily gain on GameStop shares and options.

Ahem, that is one “F—ing Smart Muppet”!

Methinks the term Muppet will become like Punk, originally a term of abuse, used by those abused as a badge of honour.

Back in 2011 many of those muppets were protesting at Occupy Wall Street. Many of those protestors were savvy enough to see how Wall Street really works and how technology was changing the game. However apart from getting the 1%/99% meme into politics, Occupy Wall Street was not effective. The Wall Street Bets folks decided to listen to the old mantra “don’t get mad, get even”.

They decided to enter the casino and win. They did it by identifying stocks where the short sellers had got too far over their skis (ie were unstable and likely to crash). Short sellers bet on a stock going down. Technically they do this by borrowing the stock in the hope of buying it back later at lower price and pocketing the difference as profit. It can work well if enough short sellers pile into the stock making it seem as if bankruptcy is inevitable; some perfectly healthy businesses have been destroyed in this way, so one can understand why short sellers have a bad reputation. This is what seemed to happen with Game Stop (GME). More than 100% of the available stock was borrowed for shorting. In comparison, the short % of float on Microsoft (MSFT) is below 1%. The GME short sellers were vulnerable to short squeeze if two things happened:

  • There was a plausible recovery story for Game Stop. This happened in August 2020 when a successful e-commerce entrepreneur called Ryan Cohen bought 13% of the shares of GameStop.
  • Enough investors bought the stock. This happened when a lot of investors on the Wall Street Bets forum decided to buy.

Next week we get a bit more technical to describe what this reveals about the business model issues of free trading on RobinHood.

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