GameStop & The Day Trader Takeover

Day Traders have officially taken over GameStop and are causing a serious disruption in the investing world. For several years, day traders have been publicly looked down upon by TV personalities and others in the industry.  As a day trader, we know the game is rigged.  As I’ve mentioned in other blog posts, winning a game I’m expected to lose is the most fulfilling part of trading or investing.

Dirty Game:

Historically, hedge funds and big banks have used private exchanges, more commonly known as, “dark pools” to hide their position size and their overall strategy from the everyday investor.  For example, think you’re a savvy trader? You watch the level 2, you read the tape, you watch the position size on the bid/ask.  Of course you do, only one problem. The big money doesn’t show up on level 2. You will not see a Goldman Sachs size trade on your level 2.  Those are completed through private exchanges (not the NASDAQ or NYSE). Is that fair?  I’ll let you be the judge, but in poker you never want to show your hand. Especially if its the winning hand.

Another well know practice by hedge funds and/or big banks is constant short pressure on stocks which might be easily manipulated.  Stocks with a small number of shares outstanding, are the easiest to control.  With GameStop having a dying brand and only 69.7M shares outstanding (as of 1/29/21), the short was on.  The short pressure took the stock all the way down to $2.57, but that wasn’t enough.  As a trader, I almost always do the opposite of what CNBC or other TV personalities are suggesting, but I have learned one thing.  Pigs get slaughtered (from Greed).

The GameStop Downfall:

The GameStop downfall started in late 2015. The stock fell from $45 a share to the current 52 week low of $2.57.  If the stock had fallen from such heights, why was the short pressure still so strong?  Was the goal really to put GameStop out of business?  Of course it was. If you have had the unfortunate pleasure of owning a stock which is relentlessly shorted, you understand there is almost no escape. Regardless of any positive press release, you will see a pop and fade, day, after day, after day. This pattern will occur until all retail traders have been scared out of their position, with massive losses incurred, or until the company goes bankrupt. During this period, there is no remorse for the small retail trader.

Short Selling:

Short Selling: When investors expect a decrease in stock price, they borrow shares and sell them to individuals willing to pay the current price.  Due to the fact these shares are borrowed, the short seller must purchase these shares at a later date. The idea is to purchase them at a much lower price, securing the profit from the downside.  This is an extremely risky strategy.  The amount an individual can lose from short selling is theoretically unlimited, considering the stock increase is potentially infinite.

You have heard of Melvin Capital as the big short, but let’s be clear there are SEVERAL in the mix. As of 1/29/21, GME short float was 121.98%.  A topic for another day, but how can a stock be shorted more than their total float?  Naked shorting is also illegal, but it happens all the time (don’t be surprised).

The GameStop Short Squeeze:

The internet finally decides to fight back.  A reddit forum and it’s members started buying and holding every share they could get their hands on, forcing the stock price to increase. As the stock price increased, so did the story and the following.  Soon enough, almost every trader on internet focused entirely on GameStop.  The sudden increase in stock price forced several shorts to buy back their borrowed shares, in an effort to limit their losses.  Obviously, this will also cause the stock price to continue upward (hence the name short squeeze).

Melvin Capital publicly announced they have exited their short position, but GME still has 121.98% of it’s float, shorted (a very greedy position).  Meaning the internet still has WallStreet in an extremely uncomfortable position. While the bigs always find a way to win. There is currently no remorse for the big banks, hedge funds or the shorts. Pigs get slaughtered.

How the tables have turned.

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-AT