Business & Investment

How does this wild GameStop story end?Past Trading Catastrophe Ghosts Provide Clues

GameStop’s astonishing stock surge champion portrays it as a long-time mom and pop investor victory over malicious Wall Street institutions, but some veteran market observers eventually We see similarities with the catastrophe of past transactions where the same individual left the bag.

Richard Smith, executive director of the Foundation for the Study of Cycles, has pasted GameStop’s stake increase and other significantly deficient stakes targeted by the military of retail investors through forums such as Reddit’s Wall Street Bets. Compared to the market bubble. It happened rapidly.

At some point, the buyer’s pool is exhausted, he and other market observers warn, and stock prices soaring purely due to trading flow can collapse.

opinion: Stop laughing at GameStop stock enthusiasts — no, really

A clear similarity is the dot-com bubble in the late 1990s. Like that episode, “too many businesses are making too much money from promoting and encouraging speculative excesses by the masses,” Smith said in a telephone interview. “I don’t think it’s going to work, and I’m worried that investors of all generations are at risk of being lost in the capital markets.”

In this case, the companies that drive speculative excess are online brokers and marketmakers who have turned trading and liquidity into games, effectively bringing Silicon Valley’s “turning users into products” model, he said. It was.

GameStop Corp.
+ 134.84%

stock Soaring at $ 200 shy, Or 135%, ending on Wednesday for $ 347.51. This week’s stock price has more than quintupled so far. They ended at $ 18.84 last year. Shares of other serious short companies, including theater chain AMC Entertainment Holdings Inc.
+ 301.21%
It also surged on Wednesday as Reddit users encouraged efforts to create additional short squeeze.

read: It’s not just GameStop: some of the other very scarce stocks here shoot higher

There’s nothing new about short squeeze when professional investors try to get short sellers to buy back stocks to make up for losses, accelerate profits, and create feedback loops. What’s unique about this time is how retail investors unite through Reddit and other forums to fight short sellers.

This surge has been fueled by retail investors, many of whom have purchased out-of-the-money call options as part of a collaborative effort to raise stock prices. Market makers who sell calls to retail investors need to buy the underlying stock to hedge their exposure. The sharp rally seemed to accelerate the rally by catching the bad sellers and forcing them to buy back their shares at a loss.

to see: How options trading frenzy lifts stocks and stirs fear of market bubbles

One such short-seller, Melvin Capital, was virtually KO’d earlier this week and had to inject nearly $ 3 billion from hedge fund Citadel and Point 72 Capital.On Wednesday, Melvin Capital’s Gabe Protokin Told CNBC The company’s short position was closed the afternoon before due to a huge loss.

Also, short-selling Citron Research’s Andrew Left In a video posted on youtube On Wednesday, he said he covered most of Citron’s short positions at GameStop in the $ 90 price range.

The GameStop phenomenon, and the reliance of retail investors on option-related activities, can also be seen as the latest chapter in the story of seeing derivatives and perhaps sophisticated financial strategies disrupting the market.

In a thread on Twitter, Emanuel Derman, a pioneer in mathematical finance, explained its history, beginning with the spread of the 1980s portfolio “insurance” developed by financial experts using the Black-Scholes option pricing model. .. The dynamic portfolio “hedging” was blamed for amplifying the October 1987 stock market crash.

In the 2000s, credit default swaps made it easier for less sophisticated segments of financial professionals to trade credit, contributing to the financial crisis, he said.More recently, options and futures based on the Cboe Volatility Index (VIX)
“And the concept of volatility for protection has made it relatively easy for amateurs to trade volatility, which was also a professional skill before,” he said.

Investors who were aggressively betting on long-term market calm were forced to rewind volatility and short-term bets after a rude revival in February 2018, when VIX surged. Blow up some popular trading vehicles..

“Because it’s part of the tendency to use derivatives, it’s easy to do difficult things. This isn’t too bad if a few people do it, but it fails if everyone does it.” Derman writes.

How does this wild GameStop story end?Past Trading Catastrophe Ghosts Provide Clues How does this wild GameStop story end?Past Trading Catastrophe Ghosts Provide Clues

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