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I'm still shit at these things, but so far, I seriously cannot understand how hedge funds get away with "shorting", but people doing the same thing in reverse i

I'm still shit at these things, but so far, I seriously cannot understand how hedge funds get away with "shorting", but people doing the same thing in reverse is market manipulation. From this (admittedly naive) POV, this sounds like double standards.

kmeisthax 6y ago
Holding a short position (selling before you buy) or a long position (buying before you sell) are both valid and legal trading decisions on their own. Market manipulation arises out of context. When you start tweeting about how you should totally sell a stock that you have a short position on, then you start stepping into illegal behavior. In other words, the capital firm that got short-squeezed by the idiots at /r/WSB were also doing something illegal. It's not the case that the short is legal but the longs aren't. Alternatively, if the argument is that /r/WSB isn't market-manipulating, they just think the stock is undervalued, then the hedge fund can use the same argument. "We think this stock is overvalued so we shorted it" is how they'll explain it to the SEC. And that's not an invalid position: GME has been suspiciously overvalued way before any of the parties involved started holding positions. It's a retail-heavy business in pandemic season with multiple year-over-year same-store sales cuts. What that means is that, for each one of their stores, on average, they sold 30% less product in Q3 2020 than they did in Q3 2019. And even if you think, "oh, that's just the COVID economy, they'll be back"; Q3 2019 sales were already 20% down from the year before. This is a company nobody wanted to buy games from even before a novel coronavirus decided to close a good chunk of their stores. The fun fact about that above explanation is that it provides plausible deniability for someone trying to juice the market in a particular direction. Hell, if /r/WSB hadn't caught the hedge fund with their pants down, they probably would have gotten off scot-free. However, the financial vigilantes dumping fat stacks into GME don't have the same kind of excuse - they explicitly coordinated in public fora to manipulate stock price, so it's an easy target for an SEC that really doesn't get the budget necessary to prosecute the complex kinds of financial crimes they're tasked with. So, from a legal perspective, both parties are in the wrong. From an enforcement perspective, /r/WSB is a soft target.
- folkrav 6y ago
  So definitely double standards.
- aikinai 6y ago
  I think you missed most of the story. The stock was massively undervalued before attracting the attention of WSB. The first posts were when it was valued less than the cash it was holding. On top of that, you have the beginnings of a takeover by a successful e-commerce CEO and potential for real turnaround. That would have been enough on its own for WSB longs to jump in, but then the hedge funds shorted over 100% of the stock making it the perfect powder keg for this explosion.
notahacker 6y ago
The same thing in reverse isn't market manipulation. Buying call options or the stock itself is legal. What can be market manipulation is to collude with others to move a stock price not because you believe it is worth a different amount, but because you predict others will react to the movement you create. That applies to collusion involving shorts (bear raids) too. Proving the collusion and the artificial price bit is the difficult bit

kmeisthax 6y ago

Holding a short position (selling before you buy) or a long position (buying before you sell) are both valid and legal trading decisions on their own. Market manipulation arises out of context. When you start tweeting about how you should totally sell a stock that you have a short position on, then you start stepping into illegal behavior. In other words, the capital firm that got short-squeezed by the idiots at /r/WSB were also doing something illegal. It's not the case that the short is legal but the longs aren't. Alternatively, if the argument is that /r/WSB isn't market-manipulating, they just think the stock is undervalued, then the hedge fund can use the same argument. "We think this stock is overvalued so we shorted it" is how they'll explain it to the SEC. And that's not an invalid position: GME has been suspiciously overvalued way before any of the parties involved started holding positions. It's a retail-heavy business in pandemic season with multiple year-over-year same-store sales cuts. What that means is that, for each one of their stores, on average, they sold 30% less product in Q3 2020 than they did in Q3 2019. And even if you think, "oh, that's just the COVID economy, they'll be back"; Q3 2019 sales were already 20% down from the year before. This is a company nobody wanted to buy games from even before a novel coronavirus decided to close a good chunk of their stores. The fun fact about that above explanation is that it provides plausible deniability for someone trying to juice the market in a particular direction. Hell, if /r/WSB hadn't caught the hedge fund with their pants down, they probably would have gotten off scot-free. However, the financial vigilantes dumping fat stacks into GME don't have the same kind of excuse - they explicitly coordinated in public fora to manipulate stock price, so it's an easy target for an SEC that really doesn't get the budget necessary to prosecute the complex kinds of financial crimes they're tasked with. So, from a legal perspective, both parties are in the wrong. From an enforcement perspective, /r/WSB is a soft target.

folkrav 6y ago
So definitely double standards.
aikinai 6y ago
I think you missed most of the story. The stock was massively undervalued before attracting the attention of WSB. The first posts were when it was valued less than the cash it was holding. On top of that, you have the beginnings of a takeover by a successful e-commerce CEO and potential for real turnaround. That would have been enough on its own for WSB longs to jump in, but then the hedge funds shorted over 100% of the stock making it the perfect powder keg for this explosion.

notahacker 6y ago

The same thing in reverse isn't market manipulation. Buying call options or the stock itself is legal. What can be market manipulation is to collude with others to move a stock price not because you believe it is worth a different amount, but because you predict others will react to the movement you create. That applies to collusion involving shorts (bear raids) too. Proving the collusion and the artificial price bit is the difficult bit