GameStop Short Squeeze: The Media Has It Wrong

> I rarely write about current events on this site, but in the past year, I’ve already broken that rule multiple times due to the (government-imposed) coronavirus “crisis.”

The first sentence of the linked article calls into question the remainder of the article.

Oh boy for an article about how the media has it wrong, this guys says $600 govt handouts are what is causing the investment, and young folks who lost their jobs are the main folks on Reddit.

Yikes, I’m sure the average person on wallstreetbets is well educated and employed.

And let alone the take that “covid has 99.7% survival rate” don’t get me started there...

This article is junk at the end

I agree with most of the article except for the evidence of block size used to claim that the bulk of the volume was not retail. 500k - 4 million blocks can easily be retail. I trade that size all the time, even up to 12M blocks, I'm a retail trader. There are dozens of screenshots from wallstreet bets of fellow retail traders trading this size. Many retailers use up to 3x or more leverage, meaning one would only need a low 6 figure account size to trade the low end of that block range, and yes, many retailers are "all in" during this frenzy with a single trade, again evidenced by YOLO screenshots on WSB recently.

Retail does not mean "poor". Retail means you don't work for an investment fund. In fact, my grandfather is worth $250M and frequently trades 10-50M blocks. He is still a retail trader managing his personal assets. Despite popular belief, a large portion of the 1% and even billionaire class manage their own money or at least a large part of it in the stock market.

The piece made some good points but referring to the “coronavirus crisis” in scare quotes doesn’t inspire confidence in the authors motivations. There were a lot of coronavirus skeptics here in the UK who were forced to eat humble pie when the second wave and the new variant came into the picture. In some places you hear ambulance sirens all day at the worst of it. I am also aware that some places do escape with less damage than others. Eg India or Japan. Sorry for the digression but I just had to call it out.

> No, Ken Griffin did not call Janet Yellen and ask her to order Robinhood to shut down speculative buying.

Don't be so quick to absolve the elites of all wrongdoing. The NSCC is not a government agency but an industrial consortium of sorts. The formula they use to determine margin requirements for a given stock has a "discretionary" parameter that can be raised at will. Ken Griffin didn't need to ask Robinhood to delist GME directly, he just could've told his buddies at the NSCC to raise margin requirements so high that Robinhood & other brokers didn't have any other choice.

Reading and researching the concept of naked shorting and counterfeit shares, done via hedge funds, paints this current situation in an eerily similar light to that of of Sedona's plight in the 2000s.

https://www.youtube.com/watch?v=hH5cMQLJRUo

Form your own conclusions, personally I am convinced the author is wrong and hedge funds really are the human incarnation of evil.

Of course most of the transactions will be executed by hedge funds, as Redditors were buying out of money call options that hedge funds are writing. Without accounting for hedging highly leveraged call options the buy/sell volume can’t be analyzed.

The author’s bio.

> Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

the author is basically a coronavirus denialist and has some very disturbing views "500k people died, not a big deal, it's only old people".

As an ex fund guy:

- I think he's right, it's other funds pushing it, not the little WSB people. But the funds that pushed the squeeze probably had a good eye on WSB. At least it would make sense as a place to coordinate the buying, with the useful benefit that you don't even need to say anything, you just bet that other funds are reading it too and seeing the same names.

- It does seem like RH ran out of collateral at the clearinghouse, forcing them to shut down buying. Probably not so smart from a business point of view.

- I'm not sure market makers do that well out of the squeeze. You want someone to buy at 101 and someone else to sell at 99 all day, not buybuybuy. You'll end up selling 101, 102, 103... until you have a huge position averaging a sell at 110 when the market is 120. Options market making as well, yes you can sell at implieds above the market but with that short gamma you hurt yourself in the squeeze. Having said that there's probably some MMs who've done great from it, depends a lot on how you model it.

- The reason Citadel likes to buy order flow is not that they have some cunning plan to screw everyone who comes through the RH pipe, it's more mundane. Normally a bunch of retail punters are not smart, and they're not coordinated. Some guy comes in, buys something. Another guy comes and sells something. Market maker takes that spread, happy days, they can even give you a discount because they win a lot that way. What they are trying to avoid is toxic flow. That's when some guy who knows he's going to move the market comes in and does that thing I mentioned above... buybuybuy, MM is left sad and short when the market is up massively. Luckily that fund shark guy doesn't use the RH app, he hides in the institutional broker world, maybe he has direct market access too. So by buying the RH flow, the MM avoids getting eaten by the shark, and that's worth something, because shark guy can really bite you.

- He's right about it being dumb to short a thing that's already massively shorted. There's an implicit skewness in return in that it's the kind of strategy that is likely to win you a lot of little wins with the occasional catastrophic loss. Melvin probably got away with it many times before this happened.

- There's nothing inherently wrong with shorting a stock. It's useful to be able to exchange risks, which is what trading is about. If you think it's going up, you want there to be people who think it's going down, so you can swap risks. Yes, there are complexities around naked shorting, but let's not get into that.

- He tries to mix in the money printing and stimulus, but I don't think it really belongs in this story. That has many facets other than this particular thing.