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> The overall market is stressed, things are getting weird and I would not be surprised if this is the beginning of another stock market crash. GME short inter

> The overall market is stressed, things are getting weird and I would not be surprised if this is the beginning of another stock market crash. GME short interest was still greater 100% of shares outstanding as of 1pm 1/29 (S3 Shortsight numbers). If forced to cover, short holders will have to liquidate other assets. Could those liquidations force more liquidations in a positive feedback loop? Hopefully no, but certainly possible.

eurasiantiger 6y ago
Time to short everything.
fractionalhare 6y ago
Yes, exactly. When a hedge fund is getting its face ripped off because its shorts are up 50 - 200%, it will liquidate its longs to cover. The rotational dynamics of many funds doing that at once can drive the price down on traditionally stable stocks that everyone owns. In a worst case scenario that could trigger a massive selloff which would crash the market. This is compounded by the fact that funds will defensively sell off (or sell short) stable stocks owned by other funds that look like they're about to blow up. If a fund seems like it's circling the drain and it owns 5% of a ticker, other firms are not going to wait for it to implode and move the price down before they liquidate their own positions in that stock. This market is terrifying.
- codeisawesome 6y ago
  After the sell-off, there’s a lot of cash (yes even more) washing around right? It has to go somewhere, and so it will come back into securities in probably a few weeks or max, months. The value represented isn’t exactly disappearing it’s still in the ‘system’. So why is a crash in equities prices such a big deal?
  - fractionalhare 6y ago
    It depends. If a hedge fund went bankrupt, the cash will go to investors who may be risk averse. If the hedge fund survives it will have significant losses and probably be cagey about deploying a lot of capital again too quickly because it just stared into the face of death. In the case of individual investors selling off everything, they might be scared because everything is crashing. There's no rule that says the money will come back to the market quickly. It depends on investor sentiment. Often things have a V-shaped recovery and things are more or less "fine". We had a few of those over the past few years. But put it to you this way, if this statement of yours: It has to go somewhere, and so it will come back into securities in probably a few weeks or max, months. The value represented isn’t exactly disappearing it’s still in the ‘system’. ...was correct, then we wouldn't have crashes. But we do. When fear takes over the money doesn't just come back into the market quickly. And then even if it could, it doesn't because second order effects take over. Small businesses close en masse, etc, which magnifies the downturn until it snowballs into a legitimate recession. I'm not saying a crash will happen because of this. I'm saying it very realistically can happen.
    - smaddox 6y ago
      There's also leverage/margin (i.e. borrowing to buy stocks). With higher volatility, investors might be less willing to use leverage, resulting in less total demand, which results in lower prices. When stocks drop, excess income and capitol drops, reducing demand in the wider market. Companies come under pressure to cut costs, and end up doing layoffs. This further lowers demand, resulting in a feedback loop. This is all described by Minsky's financial instability-hypothesis. And Steve Keen has built fully dynamic mathematical models that exhibit the process.
      - codeisawesome 6y ago
        Okay - that begins to explain the problem a bit. So people being afraid and just holding on to their newfound gains in just cash or say, T-bills - can depress the entire economy by a lack of interest in stocks. Structurally it seems a little problematic though that companies would depend so much on issuing stock to fund their operations or even growth - ideally they should be able to do that with revenue (or even debt)...
  - wrycoder 6y ago
    It only becomes a big deal when the government steps in to "assist" in any way beyond providing copious liquidity. Downdrafts and even crashes are called corrections for a reason. They eliminate the weak holders and cause the remainder to carefully evaluate their positions. In the absence of interference, they will be over quickly. They are a disaster for retail investors on margin. I've never understood why the SEC doesn't gradually increase margin requirements across the board when the market starts to get overheated. (But not once it tops!!)
  - jewel 6y ago
    Money isn't conserved in the same way that matter is. Right now the market cap of gamestop is $22B, which is calculated by multiplying the share price times the number of outstanding shares. If some news comes out over the weekend that causes people to value the stock lower, we could see the first trade at $33/share instead of $330/share. $20B of money just disappears. It never really existed in the first place.
    - fractionalhare 6y ago
      Right. At the same time, there would be a net loss of value because any shorts who were margin called on GME's meteoric rise will have blown up. Their investors will have lost (possibly all their) money at the same time retail investors found their asks unfulfilled at $330 because the bids crash landed at $33. In this scenario both the short funds and the retail investors are fucked. A select few retail investors and some of the momentum-trading quants do well. But the majority of the money on either side just evaporates - rapidly. In a more distant but plausible scenario, this hits a bunch of funds across a bunch of tickers, and it goes systemic. They liquidate their longs trying to survive, and when it's not enough it rolls up into their brokers who are left holding the bag.
- jbay808 6y ago
  Is there some reason a crash shouldn't happen? If you have a stake in the market, even in diversified index funds, presumably you know the risk is non-zero, and accept that because the rewards are higher than lower-risk choices like, say, stuffing your money under the mattress.
  - MrFoof 6y ago
    Been ten years since I was last in it, but a lot of large investment firms (before automated trading was prevalent in the older large institutions) don't have people responding to the market ad hoc. Trades are executed infrequently (weekly, if not monthly) and are approved upfront during trade planning meetings to define the qualifying parameters for a particular order.
- chordalkeyboard 6y ago
  > This market is terrifying. I think this represents an upgrade from being chased by tigers. Sedentaryism, metabolic syndrome, being fired by the machine, sweatshops, homelessness, addiction, those are downsides from foraging aboriginal lifestyle. But being terrified of losing money is different than being terrified of getting literally eaten.
  - fractionalhare 6y ago
    Well sure, I'd definitely rather short Gamestop and watch my short thesis get delegitimized in real time than literally run from a hungry tiger.
  - chillwaves 6y ago
    Except humans have been apex predators for a long long time.
- throwawayboise 6y ago
  If people know why the hedge funds are selling other positions (to cover shorts) I don't see that triggering a crash, more likely a buying opportunity. Crashes happen when everybody starts selling and nobody knows why, so they sell even more.
  - Closi 6y ago
    It seems like a reduction in short-selling will probably help the market be healthier. Companies shorting 130% of a stock doesn't help the market.
- ihavenoclue62 6y ago
  That doesn't necessarily have to be a bad thing doesn't it? If large hedges stop overleveraging themselves to such an extent where this could happen we might see a return to more accurate company valuations. I see it as a net positive for the market in the long run
ivalm 6y ago
There is nothing special about being short more than 100%, they short shares that are borrowed multiple times. But it also means the “long” interest is more than 200%. Even if you own equivalent of 100% of float there are still other shares that can be used to cover. The only issue starts if someone has lent out more than 100% of float and tries to simultaneously recall all of them.
- samename 6y ago
  It does create an issue for the company of the stock, though.
  - jmalicki 6y ago
    What issue is that?
  - ivalm 6y ago
    Unless the company is trying to do a primary raise, which most companies do only once in a blue moon, the price of the stock is fairly irrelevant to the operations of the company.
- zaphirplane 6y ago
  How is that, it means (within the statement made)the stock is lent multiple times if a stock can be lent multiple times then that’s no different from a naked no borrowing short b) if it lent to multiple people it’s owned by none
  - ivalm 6y ago
    No. Naked short would be when I sell without borrowing hoping that the stock will drop sufficiently (or new shares will be available for borrowing) that by the time settlement occurs (T+2) I will be able to cover. The “fraud” of naked short is that you fail to deliver the shares at settlement to the new owner. If you re-borrow shares then that’s different since then you really do have shares to deliver.
toast0 6y ago
Short interest is high, but AFAIK, none of the reporting tells you what price the shorts sold for. If the shorts from $20 all got out, and you're seeing new shorts that got in wednesday, the dynamic is much different.
- samename 6y ago
  Is there any way to know if that has happened? I imagine if a big player knew this or it leaked from a credible source, the stock could crash.
  - toast0 6y ago
    Watch the documentary in 3 years? :) I've only got enough knowledge about the markets to be dangerous, so don't expect any of this to be complete and accurate. I don't think this type of information is publicly reported; or really aggregated anywhere. The brokers whose clients sold short presumably know the clients positions, and the clients know their positions, but absent an aggregated report across brokerages of that, nobody would know the whole picture. A brokerage probably has a duty to keep their clients' positions confidential, however. I don't know how securities lending is organized. If it's centralized around a single vendor like clearing and depository is; maybe that vendor would know when shares were borrowed and returned, and could guess about the positions. Similarly, brokerages with lending programs should know when their clients' shares were borrowed and returned and could have a partial picture. This may again be data the brokerage or the lending facilitators would have a duty to keep confidential.

eurasiantiger 6y ago

Time to short everything.

fractionalhare 6y ago

Yes, exactly. When a hedge fund is getting its face ripped off because its shorts are up 50 - 200%, it will liquidate its longs to cover. The rotational dynamics of many funds doing that at once can drive the price down on traditionally stable stocks that everyone owns. In a worst case scenario that could trigger a massive selloff which would crash the market. This is compounded by the fact that funds will defensively sell off (or sell short) stable stocks owned by other funds that look like they're about to blow up. If a fund seems like it's circling the drain and it owns 5% of a ticker, other firms are not going to wait for it to implode and move the price down before they liquidate their own positions in that stock. This market is terrifying.

codeisawesome 6y ago
After the sell-off, there’s a lot of cash (yes even more) washing around right? It has to go somewhere, and so it will come back into securities in probably a few weeks or max, months. The value represented isn’t exactly disappearing it’s still in the ‘system’. So why is a crash in equities prices such a big deal?
- fractionalhare 6y ago
  It depends. If a hedge fund went bankrupt, the cash will go to investors who may be risk averse. If the hedge fund survives it will have significant losses and probably be cagey about deploying a lot of capital again too quickly because it just stared into the face of death. In the case of individual investors selling off everything, they might be scared because everything is crashing. There's no rule that says the money will come back to the market quickly. It depends on investor sentiment. Often things have a V-shaped recovery and things are more or less "fine". We had a few of those over the past few years. But put it to you this way, if this statement of yours: It has to go somewhere, and so it will come back into securities in probably a few weeks or max, months. The value represented isn’t exactly disappearing it’s still in the ‘system’. ...was correct, then we wouldn't have crashes. But we do. When fear takes over the money doesn't just come back into the market quickly. And then even if it could, it doesn't because second order effects take over. Small businesses close en masse, etc, which magnifies the downturn until it snowballs into a legitimate recession. I'm not saying a crash will happen because of this. I'm saying it very realistically can happen.
  - smaddox 6y ago
    There's also leverage/margin (i.e. borrowing to buy stocks). With higher volatility, investors might be less willing to use leverage, resulting in less total demand, which results in lower prices. When stocks drop, excess income and capitol drops, reducing demand in the wider market. Companies come under pressure to cut costs, and end up doing layoffs. This further lowers demand, resulting in a feedback loop. This is all described by Minsky's financial instability-hypothesis. And Steve Keen has built fully dynamic mathematical models that exhibit the process.
    - codeisawesome 6y ago
      Okay - that begins to explain the problem a bit. So people being afraid and just holding on to their newfound gains in just cash or say, T-bills - can depress the entire economy by a lack of interest in stocks. Structurally it seems a little problematic though that companies would depend so much on issuing stock to fund their operations or even growth - ideally they should be able to do that with revenue (or even debt)...
- wrycoder 6y ago
  It only becomes a big deal when the government steps in to "assist" in any way beyond providing copious liquidity. Downdrafts and even crashes are called corrections for a reason. They eliminate the weak holders and cause the remainder to carefully evaluate their positions. In the absence of interference, they will be over quickly. They are a disaster for retail investors on margin. I've never understood why the SEC doesn't gradually increase margin requirements across the board when the market starts to get overheated. (But not once it tops!!)
- jewel 6y ago
  Money isn't conserved in the same way that matter is. Right now the market cap of gamestop is $22B, which is calculated by multiplying the share price times the number of outstanding shares. If some news comes out over the weekend that causes people to value the stock lower, we could see the first trade at $33/share instead of $330/share. $20B of money just disappears. It never really existed in the first place.
  - fractionalhare 6y ago
    Right. At the same time, there would be a net loss of value because any shorts who were margin called on GME's meteoric rise will have blown up. Their investors will have lost (possibly all their) money at the same time retail investors found their asks unfulfilled at $330 because the bids crash landed at $33. In this scenario both the short funds and the retail investors are fucked. A select few retail investors and some of the momentum-trading quants do well. But the majority of the money on either side just evaporates - rapidly. In a more distant but plausible scenario, this hits a bunch of funds across a bunch of tickers, and it goes systemic. They liquidate their longs trying to survive, and when it's not enough it rolls up into their brokers who are left holding the bag.
jbay808 6y ago
Is there some reason a crash shouldn't happen? If you have a stake in the market, even in diversified index funds, presumably you know the risk is non-zero, and accept that because the rewards are higher than lower-risk choices like, say, stuffing your money under the mattress.
- MrFoof 6y ago
  Been ten years since I was last in it, but a lot of large investment firms (before automated trading was prevalent in the older large institutions) don't have people responding to the market ad hoc. Trades are executed infrequently (weekly, if not monthly) and are approved upfront during trade planning meetings to define the qualifying parameters for a particular order.
chordalkeyboard 6y ago
> This market is terrifying. I think this represents an upgrade from being chased by tigers. Sedentaryism, metabolic syndrome, being fired by the machine, sweatshops, homelessness, addiction, those are downsides from foraging aboriginal lifestyle. But being terrified of losing money is different than being terrified of getting literally eaten.
- fractionalhare 6y ago
  Well sure, I'd definitely rather short Gamestop and watch my short thesis get delegitimized in real time than literally run from a hungry tiger.
- chillwaves 6y ago
  Except humans have been apex predators for a long long time.
throwawayboise 6y ago
If people know why the hedge funds are selling other positions (to cover shorts) I don't see that triggering a crash, more likely a buying opportunity. Crashes happen when everybody starts selling and nobody knows why, so they sell even more.
- Closi 6y ago
  It seems like a reduction in short-selling will probably help the market be healthier. Companies shorting 130% of a stock doesn't help the market.
ihavenoclue62 6y ago
That doesn't necessarily have to be a bad thing doesn't it? If large hedges stop overleveraging themselves to such an extent where this could happen we might see a return to more accurate company valuations. I see it as a net positive for the market in the long run

ivalm 6y ago

There is nothing special about being short more than 100%, they short shares that are borrowed multiple times. But it also means the “long” interest is more than 200%. Even if you own equivalent of 100% of float there are still other shares that can be used to cover. The only issue starts if someone has lent out more than 100% of float and tries to simultaneously recall all of them.

samename 6y ago
It does create an issue for the company of the stock, though.
- jmalicki 6y ago
  What issue is that?
- ivalm 6y ago
  Unless the company is trying to do a primary raise, which most companies do only once in a blue moon, the price of the stock is fairly irrelevant to the operations of the company.
zaphirplane 6y ago
How is that, it means (within the statement made)the stock is lent multiple times if a stock can be lent multiple times then that’s no different from a naked no borrowing short b) if it lent to multiple people it’s owned by none
- ivalm 6y ago
  No. Naked short would be when I sell without borrowing hoping that the stock will drop sufficiently (or new shares will be available for borrowing) that by the time settlement occurs (T+2) I will be able to cover. The “fraud” of naked short is that you fail to deliver the shares at settlement to the new owner. If you re-borrow shares then that’s different since then you really do have shares to deliver.

toast0 6y ago

Short interest is high, but AFAIK, none of the reporting tells you what price the shorts sold for. If the shorts from $20 all got out, and you're seeing new shorts that got in wednesday, the dynamic is much different.

samename 6y ago
Is there any way to know if that has happened? I imagine if a big player knew this or it leaked from a credible source, the stock could crash.
- toast0 6y ago
  Watch the documentary in 3 years? :) I've only got enough knowledge about the markets to be dangerous, so don't expect any of this to be complete and accurate. I don't think this type of information is publicly reported; or really aggregated anywhere. The brokers whose clients sold short presumably know the clients positions, and the clients know their positions, but absent an aggregated report across brokerages of that, nobody would know the whole picture. A brokerage probably has a duty to keep their clients' positions confidential, however. I don't know how securities lending is organized. If it's centralized around a single vendor like clearing and depository is; maybe that vendor would know when shares were borrowed and returned, and could guess about the positions. Similarly, brokerages with lending programs should know when their clients' shares were borrowed and returned and could have a partial picture. This may again be data the brokerage or the lending facilitators would have a duty to keep confidential.