The collective "pump and dump": GameStop and others

[DonaldsRump]

I'm no expert on the stock market, but I understand that these insane price increases are being caused by many nameless investors acting together to drive up the price of certain companies' stocks and then profit off of them. I am happy to be corrected if I'm wrong.

I sure hope the SEC etc is looking into this. As far as I can tell, there's no relation to reality as to how these stocks' prices are increasing by so much and so quickly except for investors who got in early and at low prices pumping the stocks to irrationally high valuations.

https://www.marketwatch.com/story/here-are-some-of-the-other-stocks-seeing-gamestop-like-short-squeezes-11611687693

[Wellstone ruled]

1. Overstock was one of the first

trial balloon's. Billions of shares were cycled through the hands of day traders and market makers. When you buy anything via the OTC,hang on baby,you are in for a interesting ride most likely to the poor house.

[TheRealNorth]

2. I worry about pension accounts that rely on the stock market being raided by these schemes.

[DonaldsRump]

4. Completely

I'm sure that there are fund/pension managers in place that can see what's going on here.

However, I find it hard to believe that the SEC and other regulators are powerless to stop this. When the carpet is pulled out from under these stocks, those that bought late and high are going to get crushed. Blackberry? AMC?

This is why stock market performance should not be the leading or only indicator of how well the economy is doing.

[customerserviceguy]

16. Believe me

Pension accounts are not invested in GameStop. The stock has become a vehicle to do two things. One is to royally screw with the hedge fund managers who thought that shorting the stock was a sure way to bring in a few million. The other is that it has become a legal vehicle for a pyramid game, such as "Airplane" that was a big thing back in 1980. Get in while it's cheap, get out when and if you can.

With Robinhood, etc. there are ways to buy a fraction of a share, and drive up the price while risking less than most people will be putting down on Super Bowl pools for the next week or so. It's also about the joy of messing with the powers that be on Wall Street.

Dividend stocks are not going to be affected by this phenomenon.

[jmbar2]

3. Fascinating...and a bit terrifying...

In the past couple of years, thousands of young kids with money signed up to become daytraders with an online app called Robinhood, a free stock trading platform that competes with Etrade and the bigger platforms. It makes money by frontrunning the trades, scalping a few cents off each trade.

With covid, lots of young folks were laid off, and daytrading boomed. A lot of them jumped into cryptos like Bitcoin. But recently, they are piling in on heavily shorted, moribund stocks like Gamestop, Nokia, AMC theaters, and blackberry.

They gather at a Reddit site -- "Wallstreetbets", which is heavily promoting these schemes. The kids are trading en masse and there's enough of them to now affect the market.

Pump and dump schemes are not new, but I've never seen them at this scale before. They are common in penny stocks. Online shills start hyping a stock that is "just about to hit it big". Rubes rush in to buy running up the price, then the shills sell. The last people out lose big and become "bagholders".

This morning, the extreme volume of these trades was enough to jam up the trading platforms like Etrade, TDAmeritrade, etc. They couldn't keep up with volume of orders, and the hypersonic market price changes.

GME, AMC, NOK and BB are up hugely because of this, and waiting for a crash. When the stampede to sell starts, it will overload the trading platforms again, and perhaps also trigger "breakers" imposed by the SEC. Lots of these kids are going to get their asses handed to them on platters when they can't get out of their trades at a profit.

This trading frenzy was promoted on Reddit as a way to screw over the evil "hedgies" that typically short dying companies like GameStop, AMC theaters, Nokia and Blackberry. Hedge funds were hugely "short" on these stocks, so the bidding frenzy caused them to have to cover their shorts at huge losses. At least one hedge fund has been bankrupted by it.

I don't know what the longer term consequences are for this, but I've never seen it at this scale before. It scares me a bit if foreign govs or evil cabals jump on the trend. I don't think the powers-that-be could foresee a time when warfare could be waged in the stockmarket. Imagine the QAnons deliberately trying to destroy the stock market.

A can of worms has been opened.

[customerserviceguy]

17. Having social media

means that crazy stuff can go viral in ways that nobody previously imagined. The Internet is the wild, wild West, and anything that you can imagine (and a lot that you can't!) is bound to happen.

But this sideshow is not going to impact solid companies with actual viable business models. Maybe it will foster some distrust of the stock market, but the businesses that keep grinding out profits from normal operations will still be unaffected.

[unblock]

5. it can be very difficult to dissect the reasons for stock movements

for starters, after a big stock price increase, is the new price irrationally high, or was the old price irrationally low?

big price movements "without news" are often actually with news, at least from a market perspective, it's just that we only find out about it later, if ever. for instance, private hedge fund might have just made a change in its analysis of that particular stock, or the industry, and made a big change in its portfolio. or an advisor made a big recommendation about that stock to its private clients.

in at least some of these cases, there are also supply and demand matters. stocks with large short position are prone to panics because any increase can lead to a spiral of short-seller capitulating, buying to cover their positions, and driving the price even higher, causing more short-seller capitulation, etc.


or there could be manipulation going on. or a combination of legitimate and illegitimate effects.

hard to tell.

[DonaldsRump]

6. Could be. But Blackberry? And AMC?

Maybe there is a reason for these shooting up, but no one can seem to find it.

[unblock]

7. amc recently announced they shored up their cash position and bankrupcty is off the table

not sure about blackberry, but generally, any company with meaningful bankruptcy risk can swing wildly as investors' assessment of the likelihood keeps changing.

personally, i stick to etfs these days. too much trouble and risks involved in picking individual stocks, for the most part....

[calguy]

9. AMC shot up because they secured almost a billion dollars in new financing

Which means they won't be going bankrupt. But going from $4+ yesterday to $22 this morning is shear madness. I watched it climb from $11 to $22 in the premarket but I never played it. Too crazy for my blood.
When the hype goes away, they are still a company losing big money, showing movies to empty seats.

[TheRealNorth]

11. Exactly

Cinemas were not exactly doing great before Covid-19.

[calguy]

14. AMC closed at $19.90 today

Afterhours trading it has dropped into the $14's. Why I don't stocks that move that fast.
Traveling twice the speed of sound it's easy to get burned.

[bif]

20. I bought AMC at $16 a couple years ago.

Then it tanked and I bought some more at $7 or $8. When it hit $2 I told several people to by it and sell it at $4 or $5. It's done that over and over but no one listened to me. I just wish I bought a ton at $2 and sold it all yesterday. But I'm in it for the long haul. Maybe when it hits $30 I'll unload it.

[customerserviceguy]

18. It's not about their business models

They are merely a vehicle for a pyramid style scheme that gets people caught up in it, while those in (and out) early profit.

[KPN]

8. This makes me really wonder about the prudence of options trading being a legitimate market

instrument.

[A HERETIC I AM]

12. Can you explain what you mean?

“ This makes me really wonder about the prudence of options trading being a legitimate market instrument.”

How so? The sentence is a bit confusing. Do you wonder whether trading options is prudent, or are you wondering whether options are a “legitimate market instrument.”?

Or both?

The way you worded it makes it seem as if it is one question, but you have asked two.

[KPN]

13. Lol. What's clear to me is clear to me. Had a

Professor in college many years ago who used to say “What’s clear to you is clear to you”. A valuable lesson. Yeah, I meant the 2nd. Options are a fabricated instrument as opposed to investment. As such, options come with a plethora of potential, purely greed driven — that is sociopathic — abuses. Hope this adequately clarified.

[A HERETIC I AM]

21. Fair enough!

Any further, detailed response to this is not forthcoming, as I am on the road and using an iPad that is a pain to type on at the moment!

Suffice to say that Option Contracts do serve a legitimate purpose and I would disagree that they are “sociopathic” in any way. No more than hoping to sell your house for more than you paid for it is.

[RainCaster]

15. Agreed. Derivatives are the devil's playground

However, the two hedgefunds targeted did a bad thing. They got greedy and shorted more than 100% of the total available shares. Since it was only two firms, it was very easy to spot.

[bucolic_frolic]

10. Pools and syndicates drove the 1920s market mania

Gamestop is https://www.finviz.com/quote.ashx?t=gme

I think this is worse, this seems like the legendary Tulip Mania Bubble to me.

By the way, money is free. At 0%. Margin accounts are cheap too. That's why manias lead to crashes. The debt implodes with margin calls.

I wonder how many will owe more than they put into it originally.

"Jr., how much did my little genius make in the market today?"

[whttevrr]

19. There is a large short interest in $AMC and people are hungry for more

That means someone has been selling borrowed shares to knock the price down, and average joes have had enough of the hedge fund bullshit.

Now people know that those people are on the hook for an increase in price and will be forced to buy when the price goes up. The main short interest of GME (Melvin Capital) closed their position and lost big.

Melvin Capital, hedge fund targeted by Reddit board, closes out of GameStop short position
https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html

Melvin Capital closed out its short position in GameStop on Tuesday afternoon after taking a huge loss, the hedge fund’s manager told CNBC.

CNBC could not confirm the amount of losses the firm took on the short position. Citadel and Point72 have infused close to $3 billion into Melvin Capital to shore up its finances.

Melvin manager Gabe Plotkin told Andrew Ross Sorkin that speculation about a bankruptcy filing is false.

And now, the horde is hungry and is eyeing that short interest in $AMC for their next feast.