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There are 100 cows. A hedge-fund believes that the milk consumption will go to zero, so they borrow the 100 cows for one month and sell them for $1 each. Then
by noncoml 6y ago
There are 100 cows.
A hedge-fund believes that the milk consumption will go to zero, so they borrow the 100 cows for one month and sell them for $1 each.
Then they borrow them again, and sell them once more for 90c. Certain that they will worth $0 at the end of the month
A Redditor notices this. She knows that in a month's time, the hedge-fund will have to buy 200 cows, and there are only 100 available.
Her plan is simple. Buy all 100 cows, and at the end of the month, when the hedge fund will have to buy the cows back(twice), she will be able to dictate the price.
Hedge-fund cries foul. Doesn't like being beaten in it's own game.
Milk consumption doesn't even matter.
- wolverine876 6y agoCan you provide some factual basis for these claims? We can type out claims without foundation endlessly; the Internet demonstrates that well; what we need is real knowledge and facts.
- astrange 6y agoAre there any claims in that post?
- wolverine876 6y agoI'm not making claims, if that's what you mean. The burden of proof is on the person I was replying to.
- deleted 6y ago[deleted]
- stale2002 6y agoThere is no burden of proof on anyone. The person was simply explaining a concept, known as a short squeeze. A short squeeze is a well known financial concept. It is not a claim. It is a concept.
- liveoneggs 6y agowas there a double blind study proving the existence of cows in the first place? I don't want to be mislead.
- was8309 6y agohilarious, given i just came from https://news.ycombinator.com/item?id=25928183 https://news.ycombinator.com/item?id=25928183
- andybak 6y agoYeah. It read just as a simplified explainer of shorting.
- gpm 6y agoWell, that "Hedge-fund cries foul" (which I've questioned in a direct reply, let's keep that discussion over there).
- Thorrez 6y ago"Claim" seems like the wrong word. It's explaining shorts, but I think it's actually doing it inaccurately. It's saying the hedge fund will have to buy the cows at the end of the month. I don't think that's accurate. I don't think shorts ever expire.
- deadbunny 6y agoNo claims, just explaining how shorts work.
- anm89 6y agoWhat are you defining as "these claims"?
- thenanyu 6y agothe only thing resembling a "claim" is greater than 100% short interest on the security. This information is public https://www.marketbeat.com/stocks/NYSE/GME/short-interest/ https://www.marketbeat.com/stocks/NYSE/GME/short-interest/ As of this comment, it's 134%. So, 134 cows are borrowed from a base of 100.
- deleted 6y ago[deleted]
- sfilargi 6y agoJust google "GME Short Float". I would also suggest not using so strong language and almost accuse someone, without at least googling the info.
- AlexCoventry 6y agoThe cows are GME shares. The repeated sale of cows corresponds to short interest in GME greater than the number of available shares. Hope that answers your question. To me, that's the central claim of the OP. https://www.bloomberg.com/news/articles/2021-01-25/gamestop-short-sellers-reload-bearish-bets-after-6-billion-loss https://www.bloomberg.com/news/articles/2021-01-25/gamestop-...
- vmception 6y agoThis explains it https://i.redd.it/9micoqswusd61.gif https://i.redd.it/9micoqswusd61.gif The “short interest” is very factual and if you are not able to corroborate that on your own someone else will have to chime in
- tengbretson 6y agoYou might have missed it, but the cows are the facts, Jack.
- yudlejoza 6y agoThanks. Great explanation. I don't get the over 100 percent part though. Is it required to squeeze the short (i.e., beat hedge-fund at this game)? Wouldn't hedge-fund still need to purchase 100 cows even if they only borrowed once? Because as I understand, the way it works is that: - You borrow 100 cows. - You sell them immediately. - You wait for the cow price to drop. - Now you buy 100 cows, netting a profit. (but they need to buy back those 100 cows here, and they only borrowed once). - Now you return those 100 cows to the lender.
- User23 6y agoWell over 100% of GME’s float was short.
- boringg 6y ago150%
- thenanyu 6y agoYou don't need to borrow more than 100 cows, the short squeeze of Porsche/VW had a much lower short interest because the shares were all tied up in institutional holdings.
- parsimo2010 6y agoYou don't have to have over 100% but you do need a significant amount. For a squeeze to occur you have to have 1) some initial upward price movement and 2) enough short interest that as people get uncomfortable with the increased downside (or their broker calls them on their margin), they have to buy real shares to close out their short positions, thus increasing the upward pressure on the price. That drives the price higher, and causes more people to get uncomfortable and more margin calls to be made, driving the price even higher. Other people notice the price and trade volume going up and want in on the action, which drives the price even higher. This cascades until there are no more surviving short positions. The whole thing about borrowing 200 cows is illustrating the concept of leverage, but it isn't necessary. We could have illustrated the concept of a short squeeze by saying the hedge fund borrowed 50 cows, and a Redditor noticed and bought 51 cows. When the hedge fund needs to close their position there are only 49 cows available and the Redditor can ask an insane amount of money for the last cow. And that isn't even really how a short squeeze works (see top paragraph). A squeeze can happen with any amount of short interest. But if it's a tiny amount it will be swallowed by the other random noise in the market, and won't cascade into a giant news story. Gamestop had right around 150% short interest in December. The other crazy thing is not just the number of shares shorted, but what prices they might be at. The 50 day moving average is about $30. If you shorted at $30, you had a 500% downside yesterday. If you still weren't forced to close your position then you were at 1000% downside today. The one year low is $2.57. If you shorted any sizeable position at $2.57 you're probably thinking about jumping off a skyscraper.
- AlexCoventry 6y agoI agree. The anger seems like an ancillary phenomenon. People seem to be buying because they think it's a sure thing that the asset price will increase. Maybe anger at shorters helps justify exploiting their error, but it's not the primary motive.
- aaron-santos 6y agoAnger/vengence seems like a primary motivator. Let me put it this way: how much money do you think these folks would pay to see a hedge fund manager crap his pants?
- somedude895 6y agoNot much. Everyone is mainly hoping for big profits and if they manage to show they're powerful enough to bring a hedge fund to its knees in the process then that's simply an added benefit. The anger at the big guy is just an artificial banner behind which to rally the troops. The objective is profit and the motivation is greed. I have no skin in the game so I don't care who comes out on top, but it's delusional to think there's some noble cause behind all this on either side of the game.
- bgutierrez 6y agoYeah, I think the anger is a device for keeping each other from selling, but has nothing to do with how this situation arose.
- EGreg 6y agoHODLers also use emotion and ideology to keep from selling. It’s decentralized motivation to coordinate!! :) Someone would do well to inspire a cult following and a viral one at that... then it will attract people who just believe in the To the Moon rocket emojis
- chillacy 6y agoThis is some of the oldest stuff in the book in terms of human psychology: how to create group beliefs, how to punish defectors, etc. I think it might work surprisingly well, given the rise of populist movements in the past few years.
- majormajor 6y agoIsn't this more like "10000 people each buy a fraction of the 100 cows" and you need all 10,000 of them to coordinate extremely well to manage it? Would even getting 1 cow from someone breaking with the big group let you break the pressure if the person you initially borrowed the cows from isn't part of the group trying to squeeze you? Return them 1 cow first, then buy it back, then return it again as the second cow you borrowed, etc? You're gonna lose on this trade, but so is everyone else, then?
- parsimo2010 6y agoYou don't even need them to coordinate extremely well. This isn't some sophisticated group with plans, this is a bunch of randos making jokes on the internet. If you have a large enough starting pool (like say a subreddit with 3 million followers), you've got a pretty big force even if it's just a small fraction of them buying a single stock for the lulz. And once the price starts moving up, even more will join in without you asking. If all of those people are using their play money then they aren't getting hurt at all. But with that said, u/DeepFuckingValue started his YOLO over a year ago- he was super committed and it finally came around. How many other idiots did something similar and went bankrupt? How many will try it because they saw it happen this time?
- gpm 6y ago> Hedge-fund cries foul. Doesn't like being beaten in it's own game. Have any of the hedge funds actually cried foul?
- grecy 6y agoWho do you think complained to the SEC and is having them investigate?
- gpm 6y agoI mean... Do we know if anyone actually complain to the SEC? I know they put out a statement they are monitoring it, but it's rather hard to miss, especially when noticing weird market trends is literally your job, unless they've said something otherwise it seems likely they did that on their own initiative. Especially when congress members (i.e. your bosses) have been putting out various statements about it... If there was a complaint there are also lots of other options than hedge funds... banks, mutual funds, pension funds, etc...
- objektif 6y agoI do not think pension funds and mutual funds short GME I mean hope not.
- gpm 6y agoIt seems somewhat unlikely that they were short, but they are the parties who I would generally expect to want increased regulation. Hedge funds on the other hand are probably delighted as a whole that there are lots of retail investors throwing money around in interesting ways - they generally excel in taking money from people doing that.
- garmaine 6y agoHave you seen CNBC this week?
- 6y ago
- dheera 6y ago> Then they borrow them again, and sell them once more for 90c IANAL but I believe this is actually illegal and if so the hedge funds are in the red for doing this
- kllrnohj 6y agoThere's really not any other way to get to shorted at 150% of the float, which was the GME reality. So... yes, likely illegal things happened by the hedge funds. Will the SEC investigate or fine them for it? Probably not, they'll probably get a(nother) bailout instead.
- adolph 6y agoUnder a title of investigate there are two red buttons in front of a sweating SEC, one reads /r/wallstreetbets and the other ... https://en.wikipedia.org/wiki/Bernie_Madoff https://en.wikipedia.org/wiki/Bernie_Madoff
- fractionalhare 6y agoNo it's not illegal. Reasonable people can disagree about whether it should be illegal, but it would be nontrivial to enforce and it's meaningfully distinct from what's termed "naked short selling."
- sircastor 6y agoWait until someone figures out how to automate this for small small small investors. Distribute across millions of Redditors
- epa 6y agoBot traders for bitcoin/crypto already exist for purchase.
- dcolkitt 6y ago> A Redditor notices this. She knows that in a month's time, the hedge-fund will have to buy 200 cows, and there are only 100 available. This is a common misconception, but fundamentally wrong. Every short sell has an equal but opposite buy. Therefore every share shorted creates a new synthetic long share. Alice owns 100 shares. Bob borrows 100 shares from Alice, then short sells them to Chuck. There are now 200 shares long available to buy back- 100 owned by Alice and 100 by Chuck. Therefore it's easily possible for short interest to be well over 100% of the float. There's no upper limit, it could literally be 10,000% of float. Shares sold short, can then be re-borrowed for new short sellers in an arbitrarily long chain. It's the same way that fractional reserve banking creates money out of thin air. It starts with a small set of "hard assets", then lends, say 90%, of them out to other banks. Those banks then lend out 90% to other banks. And so on, until the system has 10 times the money supply it started with. Now, the reason that high short interest may result in a short squeeze is because usually some percent of longs at any given time tend to be long-term investors who are unlikely to sell. If, say 66% of investors are long-term holders, then short-interest above 50% could create a squeeze. If float's a million shares, then they'll be 1.5 million shares long and 500 thousand shares held short. But 1 million of those shares will be held by long-term investors. Therefore there won't be enough immediate buyers if all 500 thousand short sellers liquidate in a short period. But... With Gamestop this logic makes no sense. At $300 per share, no one is a long-term investor. Nobody is buying or even holding at that price because they think the company is worth $10 billion (more than five times higher than its 2007 peak). Since there are always more shares held long than short, and since every share held long is held in anticipation of a short squeeze event, then even in the event of a massive unwind there will still be more sellers than buyers, and the price will fall, not rise. In fact during this whole price runup, short interest has actually increased. So clearly it's not short squeeze driving the melt-up. The only reason Gamestop is going up is because of Tulip-mania. It's a classic bubble. Some early people on the hype train reaped eye-popping gains as more jumped on and bid up the price. That attracted even more attention, more buyers, and higher price. Like any classic bubble it requires an ever-widening net of greedy but foolish patsies to jump in at the bottom of the pyramid.
- delaaxe 6y agoNaked short selling is illegal
- gcblkjaidfj 6y ago> borrow the 100 cows for one month and sell them for $1 each. Who on earth is buying those cow for $1, if it is pretty obvious they are worth $0?!?! By cows i mean GME, before the meme.
- freeone3000 6y agoPeople who would like to rent out cows for other people to sell, and then pay back.
- gcblkjaidfj 6y agoAll those still need someone to ultimately buy a cow at some point, when everyone knows the value is zero. Or are the ones holding the cow the last ones that assumed they would be able to still sell a cow?
- freeone3000 6y agoEven if you think a stock should be worthless, it may make sense to hold it, even if eventually it will become worthless. The sale value may be zero, but as long as people are making shorts, the use value is the fee you can charge for lending them out. (And since it has a use value to make more profit, the sale value isn't exactly zero, but is more related to its use value than anything about the underlying product being securitized.) Being able to sell it on is one exit from this gamble; but also, simply having accrued more lending fees (over time) than the share cost to acquire. Mostly, it's some combination of the two.
- vineyardmike 6y agoPeople who buy one of every livestock, then sell shares of that bundle. (index funds, for example)
- 0xB31B1B 6y agoTo add something to this: The redditor doesn't need to pay 1 dollar per cow (the market price as sold by fund), the redditor pays .01 cents for an option contract to buy the cow for 2 dollars at the end of the month. The options contract requires the bank selling the contract to buy a cow today. In effect, the redditor is able to force the bank to buy 100 cows by spending only 1 cent.
- onlyrealcuzzo 6y agoNo. It's a lot more complicated than you buy a call option and the brokerage buys 100 shares immediately.
- 0xB31B1B 6y agoYea, but we’re describing the basic mechanics of what’s happening, we don’t need to get into the details of delta hedging. The basic mechanic is that large groups of folks buying Out of the money calls results in the sellers of those options buying shares to offset risk in the trade. In effect, in an env where lots of shares are locked up due to shorts, an cash efficient way to cause a squeeze is to buy out out of the money options, causing more shares to be bought to offset risk, sending the price up.
- Thorrez 6y agoThe bank has to buy the cows right away? I thought when the redditor buys the call someone else, let's say Bob, sells the call. If Bob already owns 100 cows (covered calls), then no one will be forced to buy cows ever. If Bob doesn't own 100 cows (naked calls), Bob will have to buy 100 cows at the end of the month if the call is in the money, not right away.
- omginternets 6y agoWhat does it mean to "borrow" a cow?
- js2 6y agohttps://www.investopedia.com/terms/s/shortsale.asp https://www.investopedia.com/terms/s/shortsale.asp
- SigmundA 6y agoWhat makes no sense to me as a layman is how can you sell something you don’t own legally? If I borrow your cow and sell it that’s illegal without consent, if you give me consent to sell the cow, there is still only one cow and ownership changes hands, there are not now two cows.
- mehwoot 6y agoBecause cows aren't really fungible, but stocks are. If I borrow $10 from you, you don't expect the literal note that you gave me back. I can give you $10 back in coins, or $10 transferred to your bank account. I can burn the $10 note you gave me, give it to a homeless person, or re-lend it to my friend. There's nothing illegal about that. On the other hand if I borrow your car, you're expecting the same car back. I can't sell it and then give you another similar car in return. I can't borrow your car and then lend it to my friend.
- otoburb 6y ago>>I can burn the $10 note you gave me [...]. There's nothing illegal about that. Not to detract too much from your analogy but burning money is illegal in some jurisdictions[1], and in the United States is prohibited under 18 U.S.C. §333: "Mutilation of national bank obligations"[2]. [1] https://en.wikipedia.org/wiki/Money_burning https://en.wikipedia.org/wiki/Money_burning [2] https://www.law.cornell.edu/uscode/text/18/333 https://www.law.cornell.edu/uscode/text/18/333
- CGamesPlay 6y agoCows aren't fungible, so that analogy isn't great. The key thing to keep in mind is that here you do legally own the share you bought, except that when buying it you also signed a contract that says you will resell a share to the original owner at the original price, plus interest. This is exactly how loans from banks work. You took money from the bank and bought a house. You now do not have enough money to pay back the bank, but the bank doesn't mind, because they only care about the contract that says they will get their money back plus interest.
- 6y ago
- bilekas 6y agoI have to admit. Its really a bit disappointing to see how many people don't understand the short, given we bailed out and financial institutions, its worth everyone to know.
- MrMan 6y agoWhy use analogies? This one is wrong. Talk about short lending mechanics.
- buggythebug 6y agoHow do you know the redditor is a woman?