Stocks and Trading Thread - Channeling your inner Mono

[Oexmelin]

So you're arguing that investors that outperform have superior emotions that they rationalize?

No. 

[Admiral Yi]

And ultimately, this is a political case. I don't think most Redditors were seeing it primarily as an investment strategy; they were seeing it as a political strategy, a power-play. Which I think some people will want to read as an undue intervention of political preferences in the economy, and some people will want to read as a welcome reminder that the economy is political. I think the main issue is less about the mechanisms of the short-squeeze than about the capacity of certain individuals and groups to leverage way more power, and profit from it, than even great multitudes.

To clarify, this is a statement of your preference, and not fact, correct?

I think one of the issue here is that, as Tammas vaguely suggested, we'll have a lot of stories of controversial squeezes (and so the failed ones), because they are the ones generating the paper (and therefore, generating the regulation mechanisms), whereas if it's a "business-as-usual" thing, that will go largely unnoticed. I can't really tell - but since the sociology of traders and arbitrage shows a lot of ordinary coordination that gets erased by official paper, I wouldn't be surprised and wouldn't find it shocking to assume it happens in this case too.

Please tell me more about sociology of traders and arbitrage and ordinary coordination that gets erased by official paper, as I have no idea what you're talking about.  Bonus points for succinctness. 

[Admiral Yi]

No. 

If decisions are based mainly on emotions that are rationalized (instead of facts that are analyzed)  then it seems to me one of two things must be true.  Either performance is randomly distributed (which it is not) or better performers have better emotions.

[viper37]

Facts and logic seem a bizarre basis for a discussion of the stock market.

I have absolutely no idea how NASA can effectively plan a mission to mars.  I do not know how the next generation engines will work, not a clue.  And I've read about it, the theoritical papers.  Well, I do get the basics, but the rest is filled with sorcery and weird incantations.
But just because I do not understand the underlying maths does not mean it is not based on facts and logics.
Sometimes, reading about history, I don't understand how some people made decisions that appear totally illogical to me.  It doesn't mean those decisions were illogical at the time, with the information they had.
You are channeling your best impression of Patrick Lagacé with that statement.

[Oexmelin]

To clarify, this is a statement of your preference, and not fact, correct?

What do you mean? My analysis (and I don't see that as especially novel) is that this is not an issue driven by a loophole in the regulatory scheme, but that it's driven by politics. By the preferences and desires of Redditors to stick it to Wall Street, and make some people pay, rather than make a lot of money for themselves. Accounts of the events seem to favor this interpretation.

My preference is that the debate over "what to do" take this element into account. Your prefence may be that it does not. 

Please tell me more about sociology of traders and arbitrage and ordinary coordination that gets erased by official paper, as I have no idea what you're talking about.  Bonus points for succinctness. 

Executive summary: trading is insider trading. Information must flow, and it always does, through tons of interpersonal channels that do not appear neatly in annual reports and minutes. The delicate task of people inside businesses and inside government (who are often the same) is to decide how to index some information as "inside trading" thus worthy of being regulated, and the rest as not deserving of such scrutiny.

[Admiral Yi]

What do you mean? My analysis (and I don't see that as especially novel) is that this is not an issue driven by a loophole in the regulatory scheme, but that it's driven by politics. By the preferences and desires of Redditors to stick it to Wall Street, and make some people pay, rather than make a lot of money for themselves. Accounts of the events seem to favor this interpretation.

My preference is that the debate over "what to do" take this element into account. Your prefence may be that it does not. 

I do take this into account.  I have taken this into account in this very thread.  One complication arises over the fact that sticking it to the man can (and has) resulted in profit.  Enormous profit for some.

Executive summary: trading is insider trading. Information must flow, and it always does, through tons of interpersonal channels that do not appear neatly in annual reports and minutes. The delicate task of people inside businesses and inside government (who are often the same) is to decide how to index some information as "inside trading" thus worthy of being regulated, and the rest as not deserving of such scrutiny.

Excellent summary.  I too assume there is a lot of backdoor unofficial communication by market participants.  Insider trading is pretty gray IMO.  So is market manipulation.  Joan posted the text on market manipulation and it can be summarized IMO as "it's our judgement call."

Now do we get from there to "institutional investors have coordinated to profit from a short squeeze, so retail investors should be able to as well?"  I say more no than yes, and I'm going to guess you say more yes than no.

[Oexmelin]

No. 

If decisions are based mainly on emotions that are rationalized (instead of facts that are analyzed) 

Got it. You are opposing two things which I do not oppose. It's not one or the other. Decisions are mostly based on incomplete data and instinct. Both offer predictive value, and both are subject to analysis. Rationalizations are created after the fact to bridge the gap between the two. Reasons are offered in the hopes of winning some people over to one's side. Which doesn't mean they do not have value. In any of these steps, some people may do a better job than others; in any of these steps, some element of circumstances may be rewarded by society.

Analogy from a non-capitalist perspective: Tamas insults Yi. Yi feels he must avenge his honor with Tamas' blood. Sure, Yi could spend a full month analyzing Tamas' and figuring out the true meaning of the insult but that is neither advisable nor possible. The duel is fought with all the knowledge and skill and rules of swordfight. Yi wins. He is accused of murder. Yi defends his case in front of the king; the king is swayed. Was Yi a better swordsman, or a better lawyer? Did he have better info about the king or about Tamas? Maybe after 100 duels we'd know that Yi is indeed a better swordsman, but I contend we may also want to ask why he gets into so many duels...

[Oexmelin]

Now do we get from there to "institutional investors have coordinated to profit from a short squeeze, so retail investors should be able to as well?"  I say more no than yes, and I'm going to guess you say more yes than no.

Most probably. 

[Admiral Yi]

Got it. You are opposing two things which I do not oppose. It's not one or the other. Decisions are mostly based on incomplete data and instinct. Both offer predictive value, and both are subject to analysis. Rationalizations are created after the fact to bridge the gap between the two. Reasons are offered in the hopes of winning some people over to one's side. Which doesn't mean they do not have value. In any of these steps, some people may do a better job than others; in any of these steps, some element of circumstances may be rewarded by society.

Analogy from a non-capitalist perspective: Tamas insults Yi. Yi feels he must avenge his honor with Tamas' blood. Sure, Yi could spend a full month analyzing Tamas' and figuring out the true meaning of the insult but that is neither advisable nor possible. The duel is fought with all the knowledge and skill and rules of swordfight. Yi wins. He is accused of murder. Yi defends his case in front of the king; the king is swayed. Was Yi a better swordsman, or a better lawyer? Did he have better info about the king or about Tamas? Maybe after 100 duels we'd know that Yi is indeed a better swordsman, but I contend we may also want to ask why he gets into so many duels...

I'm afraid I don't understand any this.  Maybe best if we just drop it.

[alfred russel]

-rich people can pool their money in hedge funds, poor people can not,
-it is not explicitly illegal for a hedge fund to try to squeeze shorts, while it is illegal for redditers to organize collectively to do the same.

Which seems to me to be a way the rules really are tilted toward the wealthy.

Poor people are shut out of the market entirely - 45% of Americans own no stock and many of those that do own small, employer controlled 401K plans. This isn't about poor vs rich b/c the poor arent even in the conversation.

For the relatively affluent minority of Americans that do have non-de minimus stock holdings over which they can exercise meaningful control, it is arguably a golden age. Individual investors can trade a vast array of products unimaginable a few decades ago, quickly and conveniently, and without commissions. They even can access hedge and PE funds indirectly through fund-of-fund type vehicles but why would they want to?  The alternative fund industry does not generate alpha, at best it can claim to some degree of non-correlated beta.  An individual investor will almost always be best off buying Vanguard-type funds and ETFs with a standard asset allocation, something that is pretty cheap and easy to do.  That will perform as well over the long haul  as 99+% of the actively managed strategies out there.

What the WSB sub is doing has nothing to do with democratization or finance of evening the playing field.  It is as many have noted just the gamification of finance, applying to the stock marked the tropes, vocabulary and tactics of mobile gaming and reddit "culture". The point is not to do what real hedge funds do, the point is to thumb one's noses at hedge funds and burn a few greedy Wall Street fingers.  The point is fun, the fun of the old medieval carnivals.  And it is fun; I read enough of the sub to see that.  But there are real world consequences to this brand of fun.

If you really wanted to democratize finance you'd have to find a way to give everything HFT tech or get seats on commodities trading exchanges or give everyone their own team of 10 math and compsci PhDs to create investing algos for them.  To say the highly capitalized players have an advantage over ordinary Joes in finance is just to say we live in a capitalist system.  An ordinary Joe that decides he wants to start up his own chip foundry is going to find quickly he is not on a level playing field with Intel and Samsung.  You don't fix that problem by giving Joe the right to commit arson against the competing foundries.

If you think capitalism produces inequitable results, the two options are to abandon it for socialism or keep the system but use the power of the state for redistribution.  Anything else is a mirage.

You are obfuscating.

Groups of investors can pool their assets to collectively invest: they typically use hedge funds or mutual funds. Mutual funds are much more tightly regulated and are much more limited in the types of speculative activity they can undertake.

High net worth individuals can join hedge funds. Most ordinary investors are prohibited by law from doing so, but could if they met the wealth requirement.

If you want to argue that hedge funds don't produce above market returns and high net worth individuals aren't really getting a comparative advantage from being allowed to join them: I'm receptive to that argument. I also think the amateur speculators buying up Gamestop are by and large morons and deserve the losses most of them will suffer. But the financial regulatory structure prevents them from organizing in ways that wealthy people can--I can see a fundamental unfairness there.

[alfred russel]

For the record, if you are talking about trading major securities, there are a lot of advantages the big players have that are difficult for a small investor can't overcome. But at the same time, there are advantages that a small investor has that a big player can't match - not in trading stock in a company like amazon - but can have intimate knowledge of a smaller local company that doesn't have much (or any) analyst coverage. Or the ability to invest in smaller ventures that aren't publicly traded.

[Admiral Yi]

https://www.forbes.com/sites/antoinegara/2021/01/26/the-hedge-fund-genius-who-started-gamestops-4800-rally-now-calls-it-unnatural-insane-and-dangerous/?sh=53cf2b10303b

I was curious if the three big early pre-frenzy Gamestop buyers had cashed out their positions, so I googled "have Michael Burry and the Chewy guy cashed out their Gamestop positions?"  I got this article.  God I love Google.  So glad I own Alphabet.

One interesting factoid is that the share buyback he called for and was the reason for his buying in, helps explain the high short interest relative to float.  At his instigation Gamestop bought back 38% of outstanding shares.  [DGuller asks how this works.  No one knows.]

It also says he bought 3.4 million shares and held only 1.7 million as of September 30, before the fun started.  The author assumes he sold off as prices rose.  My understanding is we only know his holdings up to 9/30 because that's the last quarterly filing he had to make.

[Admiral Yi]

https://www.fool.com/investing/2021/01/28/yes-a-stock-can-have-short-interest-over-100-heres/

Motley Fool article on how greater than 100% of float can be shorted.

However, even without a naked short sale, it's theoretically possible for short interest to exceed 100%. The reason has to do with the nature of the short-sale transaction itself.

As an example, take a situation involving four investors. Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie's shares to short-sellers. It lends them to Bob, who subsequently sells those borrowed shares short in hopes that GameStop's share price will fall.

An investor named Chris ends up buying those borrowed shares from Bob. However, Chris has no way of knowing that those shares have been borrowed from Annie. To Chris, they're just like any other shares.

More importantly, if Chris has the same kind of agreement, then Chris's broker can lend out those shares to yet another investor. Diane, another GameStop bear, can borrow those shares and sell them short.

In this example, the same shares end up getting borrowed and sold twice. The short interest volume these transactions add to the total is twice the number of shares actually involved. You can therefore see that if this happened throughout the market, total short interest would eventually exceed the number of shares outstanding and approach 200%.

This still might seem impossible, and in a sense, it is. But part of the answer lies in the fact that there are investors that don't currently possess actual shares of GameStop but who have the same economic interest as shareholders. They have the right to get back the shares they lent at any time. When you add together the actual shares plus these "synthetic" positions in the stock, the short interest can't exceed 100% of that larger total.

I post this in part because I was wrong about short lenders being able to call back their lent stock.  I stand corrected.

[The Minsky Moment]

Big name shorts have been crushed on Tesla.

This.

Again my concern is not with the hedge funds, they can take care of themselves. They already are maneuvering to incorporate the new retail investor behavior into their modeling.

[The Minsky Moment]

Really.  Reccomending you buy a stock to bid up the price to induce a short squeeze is not something that has been done to the best of my knowledge.  If you know otherwise, please inform me.

Anecdotally I think this kind of thing happened pre-1934 (ie pre SEC).  Like in the Jesse Livermore era.