Archive for January 26th, 2021

Stop the Games

Roulette wheel and a winning number

Mr. Wisdom of Crowds himself, James Surowiecki, compares the Reddit/Robinhood action on GameStop to the bull runs of the early 20th Century, or to the social media manipulation in the 2016 elections.

In a classic speculative craze, investors may take cues from each other — the fact that everyone is buying internet stocks makes you think it’s smart to buy internet stocks — but they’re not working together to make stock prices rise.

With meme stocks, on the other hand, that’s exactly what’s happening: The small investors on the r/Wallstreetbets subreddit (which has 2 million subscribers) and other sites are taking part in a conscious collective effort to drive the prices of these stocks up. No one is in charge of this effort, though, of course, some voices are louder than others. But it is a self-organized campaign with people using the message boards to communicate with each other, encourage each other, and reassure each other (thus the many posts on r/Wallstreetbets admonishing fellow “autists” — their self-mocking term for each other — to not lose their nerve and to keep holding GameStop’s stock). Thus threads with titles “We are the captains now,” “Have no fear, GME gang. We are consolidating in preparation for tomorrow’s moon landing,” and “GME — it never has to end.”

In the short run, if I were an existing GME shareholder, shorter, board member, or member of senior management, I’d be furious. I’m now holding shares that nobody knows the actually value of.

The company can’t go back to the market for additional capital, because it’s like walking into a casino with my own company’s money; only about 2/3 of outstanding shares are floated right now, so there was always the possibility of raising cash, but that can’t happen now. If it does, and sells for $200 and buys back for $50, it’ll be accused of market manipulation, even if it’s just being opportunistic. And to be fair, starting to sell more shares out of the treasury could pop the bubble, and some of this crowd might decided to take it out on some of the local storefronts.

Eventually, yes, this does have to end, but if the phenomenon becomes commonplace, it will destroy the stock market as a useful tool for capitalization. I have no idea when my own stock is liable to become to target of this kind of manipulation. That’s in the long run.

In the past, these kinds of bull raids have been orchestrated by a few investors with limited resources, hoping to drive up the price and then sell high. Think of the Hunt brothers trying to corner the silver market. Maybe they’re able to sell out, maybe they’re not, but they’re not capable of sustaining a market for the security at an artificially high price.

What makes this different is the large number of investors, and the lack of a single or small group of ringleaders. Some will make money pushing the price up and then selling. But money can continue to flow in at the higher price, at least for a while. If GME were to continue to trade with volatility between, say, $200 and $240 a share, lots of individual investors could continue to make money on the movements.

Ultimately, the only solution to this may be coordinated action between sites like Reddit and the markets. Suspend all trading for a few days. Right now would be excellent, since a set of options expires on Friday, and the raiders have become adept at using options to buoy the price. Then have Reddit shut down this chat room, to keep the buyers from coordinating. When signs of new bull raids appear, wash, rinse, and repeat.

Otherwise, virtually stock could end up being the victim of a bull raid flash mob.

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