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Michael Gardon

  • Writer's pictureMichael Gardon

Can't Stop, Won't Stop, Game Stop!

What has gone on in stocks like GME, AMC and KOSS is insane. This chart doesn't even do it justice! GME went to $500 before finally pulling back.

People were buying GME, AMC and KOSS just to stick it to Wall Street - price be damned!

What I try to do here is give some perspective.

First, there are calls all over the chat rooms and r/wallstreetbets that these short squeezes are somehow a revolution of retail investors over elite wall street traders. While I agree with some populist sentiment, winning a battle does not mean anything revolutionary has changed. You still have a huge information disadvantage to 'elites'.

Kudos for bankrupting a couple hedge funds and beating them at their own game.

But what happened here?

To sum, hedge funds were all in a massively crowded trade of shorting GME and others to the tune of 134% of outstanding float. What this means is that hedge funds and banks essentially allowed more stock to be shorted than was available. This shouldn't happen. Why should there be more stock shorted than is even circulated?

The answer is our financialzed economy. Everything is credit based. "I don't actually have the underlying asset, but if you post enough collateral I should be able to cover my VAR (value at risk). This is stupid quant speak and it create massive counter-party risk in a situation like this.

Normally when you own a stock you sell to get out of the trade, in this case, the short 'borrows' the stock from a bank, sells it on the open market in hopes that it will go down in price, and has to buy the stock back to close the position. When they all go to buy, there's no sellers of the stock because all the sellers are short, and all the robinhooders are long wanting the price to keep going. When EVERYONE MUST unwind their position at the same time, price goes WAY up.

A very smart person in r/wallstreetbets figured out that the short interest in the stock was too much, and 'gangs of retail traders' bid up the stock then banks forced the hedge funders to liquidate their short positions, except

People think the shorts are to blame. They're not. Short sellers serve a valuable purpose, many times uncovering fraud such as with Enron. When shorts are wrong, they fuel bull markets because they have to buy to cover their losses - just look at Elon Musk's feud with short sellers and the eventual price outcome.

Brokerages and regulators are to blame. There should be no instance where the amount of shares available to short is greater than the amount of shares that are owned.

GME at $387 a share is a market anomaly - a mis-pricing that speculators should be able to trade away. I tried to short GME at $387 because the stock is fundamentally not worth anything close to that price! I couldn't do it. Why? Because brokerages curbed short sellers based on the volatility of the stock and number of shares already shorted. But shorting from $387 as opposed to $20 is a far stronger position.

So all the Robinhooders screaming that they should be allowed to buy as much GME as they want, I would have liked to sell you as much as I could up there - but I wasn't allowed to.

When intermediaries need to stop services to their customers because of the their counter-party risk, the system is not free, open or robust.

The blockchain is the answer here. With the blockchain, you have actual ownership of bearer assets and instantaneous settlement. This episode is hugely bullish for crypto asset exchanges and the entire DeFi movement. This is coming.

Meanwhile, I'm sorry I couldn't sell you Robinhooders all the GME you wanted at $387. I woulda won. Instead, the only winners here are insiders, like the KOSS family, who dumped a bunch of stock at the highs. And kudos to them. I woulda done the same thing. Your company has been worth $3 a share for years and suddenly it hits $100?

Price matters.

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