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Comment by akira2501 | Hacker News Reader

> Isn't that the problem?

Shorts have finite payoff for infinite risk. If you buy into shorts when the interest is above 100%, you _immediately_ open the door for this type of counter position to become rational.

Is it really a problem that a bunch of people on a message board collectively decided to act on a rational position?

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And further, these were large sophisticated investors that should have known when to get out and take their losses (as Melvin eventually did). For us small time folks we can do a limit short so that our risk exposure is limited.

Is there proof Melvin actually got out? All I saw was a “source” on CNBC.

EDIT: This is the story: https://www.cnbc.com/video/2021/01/27/melvin-capital-sells-o...

It's full of plausible deniability phrases like "from what I understand" and it's very much a game of telephone. They could easily say "when I meant we were out of the stock, I meant that we had covered some of our positions" or similar.

I can't find a non-hearsay source anywhere, neither written nor in the form of a recorded interview.

I thought the source was Melvin. Lying about it would be extremely risky, I think? As in jail time risky? Could be wrong.

Every article I can find just says “CNBC reported” or similar. And CNBC just mentions a “source”.

I’ve yet to find an actual statement from Melvin.

FT reported it as well. Not bulletproof, but I think they have a bit more reputation than CNBC.

Perhaps I'm naïve, but I think to lie about such a thing would pretty clearly fall afoul of the law?

An official statement would run afoul of the law, yes. A concerted effort to whisper to many people in an effort to manipulate the market would be fairly easy for the SEC to uncover in an investigation.

A single false statement or two, said to a reporter as a confidential source, would be much more difficult to prosecute. The reporter might not willingly give up their source, and the company could deny everything, fire the person who "inaccurately represented our position", and claim the party acted of their own volition. Modest fine, at best.

FT has Citron on the record saying the position is closed. Muddy Waters is on the record saying the position is greatly reduced. Melvin has "people familiar with the matter".

There is no actual proof that Melvin got out. No.

I am inclined to believe Melvin got out, because market manipulation that the SEC will actually go after is lying about your trades (covering your short) when you haven't made those trades.

Most of what WSB is doing is market manipulation but from what I've read it isn't something the SEC will go after in court as fraud is not clearly involved.

Unless the big guys are convinced that they are right and have the money to not worry about a margin call. In that case they should be shorting more. If GameStop is really worthless then they win when the company finally files bankruptcy.

but with this high a stock price, they could issue new shares can't they? They can survive by diluting existing shares at this price, and work out a new business model with plenty of runway.

This is all presuming your average retail investor doesn't get cold feet and drop out.

This is, unfortunately, going to be a situation where the sophisticated investors win out, and the people they cajoled into buying stocks will be left holding the bag. Gamestop could not reorganize quickly enough to assure investors that they actually have the ability to capitalize on this influx of investment, especially not with a historically terrible business performance.

Not without voting rights, no? The people that won’t sell also wouldn’t vote to split.

Not if their short positions expire before the price falls.

borrows don't expire, puts don't have infinite loss potential.

You are mostly correct, but there is one exception. When you own a stock your broker keeps them for you, and can loan them out (for money - this is why brokers don't charge to hold your stocks for you). There are various ways to buy stocks and then get them transformed into a form where they cannot be shorted. If enough people do this the brokers will be forced to get those shorted shares back, which means they can buy your shares back on the market and leave you with the bill.

The above has happened, but it is rare. Not letting your broker deal with holding the stock for you is a big hassle.

Read that way, this may be really needed to correct that sort of behavior within options. Just maybe short interest above 100% is a problem to avoid in itself.

The thought of GameStop stock going up to infinity (and never coming down) doesn't seem rational.

It doesn't need to go to infinity. GameStop just needs to get to parity with totality of the collective assets of every short seller. Then to make good on their debt, those entities will be fully liquidated.

They took on unbounded risk and have no leverage if all of the stockholders refuse to sell for anything less.

The stock is less a company than a contract that can be purchased that says the other party has to pay you any price you set (assuming the stockholders are able to hold until the shorts must close their position).

There is a lot of assumptions there. You're assuming the short sellers must cover their shorts at the highest possible price instead of, you know, waiting a day or two. You're also assuming that GameStop doesn't issue any new stock which is already not the case for AMC.

I'm not assuming anything, I'm just asserting that it's a rational strategy that has a possibility of succeeding.

Can the short sellers stay solvent long enough to wait for the price to drop? Short squeezes can last for weeks. The answer is already no, at least some of them cannot, e.g. Melvin Capital

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