Why Did Reddit Trigger a GameStop Stock Surge?

[russ_watters]

By posting one aspect you seem to assign importance to that aspect, if you want or not. As if Robinhood wouldn't have been criticized if that aspect had been different.

"but Robinhood got criticized for preventing users from buying at $400 a share." (your post)
"but Robinhood got criticized for preventing users from buying on Thursday"
"but Robinhood got criticized for preventing users from buying"

All three statements are factually correct, but they are not equivalent.

I agree those statements aren't equivalent -- it's pretty obvious, isn't it? Yup, $400 maters and Thursday doesn't (maybe informationally, but it's obvious what event we're talking about so it doesn't need to be stated). GME (not Alaska Airlines) matters too. I don't think this should be difficult to understand, but since you're laying it out, I guess you are trying to tell me you just figured out that "it" matters? Do I need to say the word again or do you get it now? Robinhood prevented redditors from buying GME at $400+ a share. Yep, every noun and verb in that sentence is a relevant "aspect". Or c______. They're all factually true and I said them because they matter.

At this point, I'm not even sure if you ever even had an actual point to make except to attack, attack, attack.
[edit]
Ehh, you actually made enough of a point I can respond to it again:

Robinhood got criticized for preventing users from buying shares. Independent of which share, independent of the current price of that, and certainly independent of the future price evolution of it. Independent of which share, independent of the current price of that, and certainly independent of the future price evolution of it
...
Alaska Air

You're saying that if Robinhood had shut down trading of Alaska Air at $60 on Thursday two weeks ago, the reddit army and Alexandra Ocasio-Cortez would have criticized them for it. I say again: Nonsense. The criticism came specifically because Robinhood's action interfered with the reddit army's attack on the hedge funds; it interfered with buying GME at $400 a share in hopes it would go higher ($69,420 was a target I saw in several posts). If Robinhood had shut down trading of Alaska Air at $60 for no reason at all, it would have been weird, but odds are the reddit army and OAC would not have even noticed.

I'm trying to figure out why you are doing this. The best I can come up with is that you are trying to defend the reddit army's actions as being something more than a stupid political, chatroom, video game, boredom-fueled lark, so you are trying to generalize the issue beyond what actually happened. It isn't -- it is what it was and nothing more.

 

[Vanadium 50]

"but Robinhood got criticized for preventing users from buying on Thursday"

It wasn't all that long ago when the NYSE was closed on Wednesdays.

t would seem like he should not have been given a credit line from the casino Robinhood to bet with.

Robinhood has a very different business model than most brokerages. Most places, you get a cash account and have to take positive action to turn this into a margin account. With Robinhood, it's the reverse. They also have no-fee options, unlike say Etrade, and this opens up a source of revenue when two clients share an options contract.

That said, what is the difference between a $1000 cash purchase of a leveraged ETF and a $2000 leveraged purchase of an un-leveraged ETF? (e.g. SSO vs SPDR) It's probably impossible to protect people from themselves. As a good friend once said, "you can't legislate common sense". The best you can hope for is limits on margin, higher requirements for pattern day traders, and so on. But every time you block someone from losing a bundle because they didn't know what they were doing, you also block someone else from making a killing despite not knowing what they were doing.

And the Robinhoodrats will not take kindly to that.

 

[Office_Shredder]

That said, what is the difference between a $1000 cash purchase of a leveraged ETF and a $2000 leveraged purchase of an un-leveraged ETF? (e.g. SSO vs SPDR)

In the one case your maximum loss is 1,000 dollars, in the other one it's 2,000 dollars. Seems straightforward to me.

 

[russ_watters]

...

Like I said, we're getting beyond my knowledge of the nuts and bolts of this to be able to suggest practical/viable constraints. [edit] I own around half a dozen individual stocks and the other ~90% of my personal portfolio is in an S&P Index fund. I keep it simple, on purpose.

It might be a cop-out but the best I can do is broad strokes and principles with some of this:

But every time you block someone from losing a bundle because they didn't know what they were doing, you also block someone else from making a killing despite not knowing what they were doing.

And the Robinhoodrats will not take kindly to that.

To me, morally, those are the same person, even if they don't see it that way.

 

[Rive]

The saddest/dumbest comments I saw were from those who were down 85% and still said it was worth the loss based on the "principle" of it all. They basically handed someone else a big bag of cash and still believe they "stuck it to him". And there were a lot of those posts.

Well, as I see it with currencies poppig up in games (so called trading included) some people started to sense currency as a game.

 

[Vanadium 50]

In the one case your maximum loss is 1,000 dollars, in the other one it's 2,000 dollars. Seems straightforward to me.

You are correct. However in this case there has never been a day since fund inception (or even the US stock market) when losses hit even $500. So it's more a theoretical than practical objection. There is also the practical difference that one pays for this leverage (the fund manager takes the risk you describe, not the buyer, and this comes out in fees).

But I think my point remains. You can restrict Product X, but the market can create a Product X' that is substantially similar. If you reason you restricted Product X was that it was too complicated for an inexperienced investor to figure out, odds are that Product X' is even more complicated. And any restriction leads to the complaint "I'd make a ton of money, but I am not allowed to. The game is rigged!"

 

[russ_watters]

Well, as I see it with currencies poppig up in games (so called trading included) some people started to sense currency as a game.

Yeah, good point. You might even throw bitcoin into this. It blurs the lines between figurative and literal for my "video game" comment earlier (in video games people spend real money on virtual currency).

 

[Vanadium 50]

To me, morally, those are the same person, even if they don't see it that way.

Can you elaborate? I thought we were talking about unsophisticated investors. Can they act immorally without a mens rea?

 

[russ_watters]

But I think my point remains. You can restrict Product X, but the market can create a Product X' that is substantially similar. If you reason you restricted Product X was that it was too complicated for an inexperienced investor to figure out, odds are that Product X' is even more complicated. And any restriction leads to the complaint "I'd make a ton of money, but I am not allowed to. The game is rigged!"

I agree that professional investors will always find more complicated ways of making and losing money, but from what I've seen, the backlash is usually against them, not in support of them. The reversal of that is one of the unique features of the current situation.

Can you elaborate? I thought we were talking about unsophisticated investors. Can they act immorally without a mens rea?

I'm talking about casinos and brokerage firms profiting from unsophisticated "investors"(and maybe a guy sitting at the table who is cheating). The winner and loser are literally the same person. A brokerage firm makes money either way, whereas to a casino a winner is just someone who hasn't played long enough to lose yet. In both cases, the goal is to keep them playing because over time, the casino/brokerage is guaranteed to make money. Casinos are worse, though, because their game is negative sum and requires their customers to lose.

 

[Vanadium 50]

Channeling my inner Marxist, if life is better for capitalists, isn't it better for us all to become capitalists? Investing in the market let's us do that. I've done very well indeed doing this. And once you have markets, you have different people holding different values in their heads, and you can't avoid speculation. I think Pepsi has a brighter future than Coke, you think the reverse, so we trade.

I think it is true that brokerages have carved out niches on the investing vs. speculation spectrum, with maybe TIAA/CREF on one side and Roibinhood on the other. What I find objectionable about Robinhood is that their fee structure and product selection are such that it guides their clients into investment choices that are more beneficial to Robinhood than the clients. How many boring no-load no-fee mutual funds can you buy on Etrade? Four thousand four hundred and eighty. On Robinhood? Zero.

Robinhood is also cagey about how it makes its money. If you know to look at its "Rule 606 Disclosure" (and you have to know that's what you want to look for) you will discover that it gets about 3x as much for "payment for order flow" as, say, Etrade. Robinhood would probably argue that they are picking which market maker to use based on whoever gets their customers the best price, and it's either coincidence or savvy that they get three times as much as everybody else this way. Their model is very much like Google and Facebook - you are not the customer. You are the product. Robinhood's customers are the market makers.

Finally, there exist rules to try and reduce the risk inexperienced investors might face. For example, Pattern Day Traders need substantially more equity (and often cash on hand) than other traders. You can see thousands of messages on various boards discussing how to get around this. People who underestimate risk well, they tend to underestimate risk.

 

[Office_Shredder]

You are correct. However in this case there has never been a day since fund inception (or even the US stock market) when losses hit even $500. So it's more a theoretical than practical objection. There is also the practical difference that one pays for this leverage (the fund manager takes the risk you describe, not the buyer, and this comes out in fees)

If the complaint is that these are complicated products where investors don't understand the risk, I think they understand the risk of a 2x levered etf pretty well, you can lose all the money you put in. I would be surprised if someone was confused by that, and if they are, well you can lose all your money doing anything in trading so I'm not sure what we're supposed to do to help them. A 2x levered s&p500 etf is still less volatile than like, half of all stocks.

To be honest, letting people lever up 2x to buy the s&p500 is not the worst thing in the world. We let people lever up 5x or more to buy a house... What is the difference between taking out a mortgage and buying some stocks, vs taking out a smaller mortgage and buying those stocks with leverage? Not a lot.

 

[russ_watters]

Channeling my inner Marxist, if life is better for capitalists, isn't it better for us all to become capitalists?

I'm pretty sure you aren't a Marxist, so while I appreciate the irony, I think you probably know of an error of his that is relevant here: Marx believed free markets were fundamentally and fatally unfair and unstable. And maybe he was right, but one thing he didn't foresee was that regulation could dampen the instability and level the playing field. I think you made the point earlier that for the most part individual investors should avoid competing with professionals. There are some regulations preventing some unfair advantages and exploitations, both for unfair competition and collaboration. I favor that. Robinhood and the GME fiasco may be an example needing more protections on the amateur side. But I recognize that protecting someone from being cheated by someone else is fundamentally different than protecting someone from their own bad decisions. But maybe the SEC will find fraud here and make this debate somewhat moot.

I think it is true that brokerages have carved out niches on the investing vs. speculation spectrum, with maybe TIAA/CREF on one side and Roibinhood on the other. What I find objectionable about Robinhood is that their fee structure and product selection are such that it guides their clients into investment choices that are more beneficial to Robinhood than the clients. How many boring no-load no-fee mutual funds can you buy on Etrade? Four thousand four hundred and eighty. On Robinhood? Zero.

So it's marketed toward unsophisticated investors and structured to guide them toward complicated/risky investments that aren't in their clients' best interest? Yeah, I find that unethical too.

But I do get how the specific case we're talking about can be framed as so basic that it is hard to regulate/judge. If one guy wants to buy a share of a stock at $400 and another guy wants to sell it to him, why should anyone (regulators) object to that? Well, we have to look at it in... context.

 

[russ_watters]

A new article in USA Today discussing what we are discussing:
https://www.usatoday.com/story/mone...rs-gamestop-hearing-roaring-kitty/4442330001/

And contrary to all the company's hype, critics say Robinhood is not about leveling the playing field for the little guys. Rather, it's about finding a better, faster way to separate them from their money...

"The way the app is set up, gamification is used to nudge investors into those practices that are most profitable to Robinhood – frequent trading, trading on margin and trading options," said Barbara Roper, director of investor protection at the Consumer Federation of America, a consumer advocacy group. "This is not remotely appropriate for unsophisticated, new investors."

Roper said that if a brokerage were really designing a system with the interest of the investor in mind, traders would face hurdles before being able to trade options or trade on margin, which means trading with borrowed money. They would have to pass tests to make sure they understood the risks.

"Instead of that, they make it as easy as possible," she said.

In December, regulators in Massachusetts filed suit against Robinhood, claiming the stock trading app treats investing like a video game and lures young and inexperienced investors into taking on excessive risk...

"As a broker-dealer, Robinhood has a duty to protect its customers and their money," Secretary of the Commonwealth William Galvin said in a statement when the suit was filed."Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require in Massachusetts."

 

[Vanadium 50]

Most brokerages execute orders at or better than NBBO (kind of a national average) around 97% of the time. There is one outlier at 93%. Most brokerages have a price improvement percentage of about 80-90% - i.e. the fraction of time they do better (not just "as good or better"). One outlier doesn't make this information public.

The outlier is Robinhood.

I'm pretty sure you aren't a Marxist

Not so fast, Tovarich. ++L

But maybe the SEC will find fraud here and make this debate somewhat moot.

We will see. A very interesting question is how Keith Gill got $14M in cash. If he got it by selling GME at the same time he was exhorting others to buy, he may be in a bit of trouble. The lawsuit was mentioned upthread, but I can't see how suing him for billions will work. He doesn't have billions. MassMutual, on the other hand, has the deep pockets, but was not sued.

 

[BWV]

If the complaint is that these are complicated products where investors don't understand the risk, I think they understand the risk of a 2x levered etf pretty well, you can lose all the money you put in. I would be surprised if someone was confused by that, and if they are, well you can lose all your money doing anything in trading so I'm not sure what we're supposed to do to help them. A 2x levered s&p500 etf is still less volatile than like, half of all stocks.

To be honest, letting people lever up 2x to buy the s&p500 is not the worst thing in the world. We let people lever up 5x or more to buy a house... What is the difference between taking out a mortgage and buying some stocks, vs taking out a smaller mortgage and buying those stocks with leverage? Not a lot.

Cant lose all your money in a levered ETF unless there is a one day decline of ~50% or more, as it resets daily (which is why these funds are long term losers)

Big difference between mortgages and stock market leverage - the bank cannot call your mortgage if the loan-to-value drops below a certain threshold. Now, if I could get a 30-year, fixed rate no recourse margin loan at current mortgage rates, that would be great - but who would make that kind of loan? The reason market leverage is regulated is to protect the stability of the overall system. If there is too much leverage in the equity markets and prices then drop sufficiently, you get a vicious spiral of forced selling to cover margin calls (arguably this happened during that first wave of selling in March)

 

[mfb]

@russ_watters: I have written my very specific point clearly and more than once. You ignored it every time, instead you chose to invent absurd straw-man arguments and decided to refute these. It's easier to "win" arguments if you write for both sides, I guess. But it's clear that the discussion can't lead anywhere that way.
The only thing I "attacked" were your misrepresentations of my posts. I would see that as defense, however, and the misrepresentation as attack.

 

[phinds]

It's happening again. GameStop opened at 44 and closed at 91 then after-hours went up to 200 briefly and is now (10pm 2/24) at 168. Some of the other reddit-promoted stock also jumped but not by as much as GameStop. They DID get a new CFO but that's not justification for this kind of jump.

 

[Vanadium 50]

Does anyone think they are investing in GME because they think it's about to turn the corner? At this point, pretty much everyone is investing in GME because they don't want to be left behind when it zooms even higher. Because stonks!

And what's so wrong with that? The price is no longer driven by fundamentals, everybody knows that price isn't driven by fundamentals, some people are going to win big and some people are going to lose their life savings. So, let the games begin!

PS You mentioned a price for GME. That makes mfb cross.

 

[russ_watters]

Does anyone think they are investing in GME because they think it's about to turn the corner?
[snip]

Who is "anyone"? Us, the Reddit Army, the hedge fund managers, media pundits, or do you really mean anyone/everyone?

[snip] The price is no longer driven by fundamentals...

Right now, evidently, it's being driven by an ice cream cone emoji. Yes, I'm serious.
https://www.dualshockers.com/ryan-cohen-ice-cream-cone-did-one-tweet-doubled-gamestops-stock-price/

At this point, pretty much everyone is investing in GME because they don't want to be left behind when it zooms even higher. Because stonks!
[snip]
And what's so wrong with that? ...everybody knows that price isn't driven by fundamentals, some people are going to win big and some people are going to lose their life savings. So, let the games begin!

I've vaguely considered betting against the irrationality of the Reddit Army, but it is hard to predict what an irrational group is going to do...beyond of course acting irrationally. In that way, they're somewhat predictable. But if I'd bought a few shares at 50 when it settled down for a couple of weeks, hoping to unload them on a 22 year old redditor at 100 the next time they got bored and picked up this video game again, that would just make me a big meanie, wouldn't it?

PS You mentioned a price for GME. That makes mfb cross.

No, I think it's any suggestion that the redditors aren't polished, responsible, mature, intelligent (rational) investors that does it.

 

[Vanadium 50]

Who is "anyone"? Us, the Reddit Army, the hedge fund managers, media pundits, or do you really mean anyone/everyone?

I do pretty much mean "anyone". Oh, sure, I bet someone can find someone clueless enough to think $150 is a sensible price based on fundamentals, but that's like picking a flat-earther to explain geography.

(A $10B company at P/E of 20 means $500M/year of earnings. GME's sales are around $4B/year. Earnings are negative: $-200M/year.)

I've vaguely considered betting against the irrationality of the Reddit Army, but it is hard to predict what an irrational group is going to do...beyond of course acting irrationally.

As Keynes said, the market can remain irrational longer than you can stay solvent.

I am not a Jim Cramer fan, but he said one very wise thing (maybe only one) - "This isn't a good company to invest in, but it is a very good trade." That distinction is important: GME is not a company I would invest in (at $150) but there may be a good trade.

I would also factor in the possibility of GME issuing more stock, which would dilute the value of existing shares. I am certain GME is pondering this - it would be malfeasance if they weren't - and it will certainly perturb the system.

that would just make me a big meanie, wouldn't it?

Yes. That's exactly what it would make you.

 

[mfb]

PS You mentioned a price for GME. That makes mfb cross.

I know you can distinguish between posting news and posting sarcastic comments. I don't understand why you keep choosing the latter.

No, I think it's any suggestion that the redditors aren't polished, responsible, mature, intelligent (rational) investors that does it.

That's nonsense and you know it.

 

[nduka-san]

i wonder how long this will happen?

 

[nduka-san]

The outlier is Robinhood.

good old robinhood :(

 

[phinds]

i wonder how long this will happen?

It will go on until it stops.

 

[mfb]

*The game will go on until it stops.

Peaked at 170 on Thursday, closed at 100 on Friday.

 

[phinds]

*The game will go on until it stops.

Peaked at 170 on Thursday, closed at 100 on Friday.

Actually, it peaked at 200 with reasonably high volume just after the market closed on Wed.

 

[Klystron]

Actually, it peaked at 200 with reasonably high volume just after the market closed on Wed.

Correct.

This image shows a plot of GME price versus time-of-day over 5 days confirming an ~200 price late 24 Feb 2021.

Using tradingview.com software with optional Bollinger bands. If you want to change views or use other measures of GameStop price fluctuations, build your own chart using the free trial software.

 

[Vanadium 50]

Does that software allow one to plot the prices of two stocks or indices in an x-y plot? (Each point would be at a particular time) I think that could be quite interesting.

 

[Vanadium 50]

A very interesting paper just came out: "Attention-Induced Trading and Returns: Evidence from Robinhood Users" by Barber, Huang, Odean and Schwartz. Barber and Odean wrote a very famous paper "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors" in 2000 which is the source of the following very famous plot:

Anyway, the 2021 paper does a few things. In my mind, the most interesting is that they have a unique handle on what Robinhood users are actually doing by looking at outages and seeing how overall market transactions change. This doesn't tell us anything we didn't already suspect - no surprises here - but I for one prefer evidence to "it seems to me that..."

They also discuss what they call "herding events", days when the number of Robinhood users owning a particular stock increases dramatically. These are generated by external attention (e.g. Reddit). They show that returns following such events are typically negative,

 

[Klystron]

Does that software allow one to plot the prices of two stocks or indices in an x-y plot? (Each point would be at a particular time) I think that could be quite interesting.

I have been using the free Trading View trial package to peek at recent market fluctuations. If the paid service does not provide what you need, I think you can output data streams for further processing.

https://www.tradingview.com/

 

[mfb]

A very interesting paper just came out: "Attention-Induced Trading and Returns: Evidence from Robinhood Users" by Barber, Huang, Odean and Schwartz.

Interesting paper. Something went wrong with the link. Here it is: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3715077

Figure 6 shows that events with larger herding effects tend to have larger negative returns.

 

[Vanadium 50]

Thanks for fixing the link.

Another interesting thing is that there are strong positive returns immediately before the herding events.

 

[mfb]

GME closed at 250 and then went to 275 (=now) outside of trading hours.

So much speculation going on.

https://finance.yahoo.com/news/game-stop-gains-another-20-extends-five-day-rally-163401966.html

 

[phinds]

GME closed at 250 and then went to 275 (=now) outside of trading hours.

I continue to be amazed that this stock can maintain such a high stock value w/ no justification.

I DO think it might have moved up slightly from a $20 stock since they are changing executives (well, at least one) and are re-planning the business model. But there's still no way this is a $200+ stock.

 

[Vanadium 50]

I continue to be amazed that this stock can maintain such a high stock value w/ no justification.

I think the justification is not that people intend to collect some of GME's profits. It's that they intend to sell to someone else at a higher price. Like today at nearly $300.

AT $300, the company is worth $20B. At 4-5% ROI that means an expectation of profits around $1B/year. GME's sales are around $5B and dropping, and are losing about $400M/year. To support a proce of $300, one needs to believe that GameStop can increase sales by 28% at no increase in cost, or decrease costs by an equivalent amount with no decrease in sales, or some combination.

That's asking a lot of new management.