Together we are one (gigantic hedge fund). Reddit’s community of traders have done something remarkable. Normally the market is essentially zero sum (market makers are the exception). Wallstreetbets found a way to pump a stock price while still not leaving anyone empty-handed (theoretically). The key to what made this happen is two concepts: squeezes and group economics.
Reddit’s Main Squeeze
I’ll start with squeezes. Shorting is dangerous. Essentially you sell a stock you don’t own. The problem is the most money you can make is the current share price and your risk is infinite. The mechanisms are simple. If you sell a stock you don’t own, then the highest return is the share price (assuming the stock goes to zero). Your risk is infinite because stock prices don’t have an upward limit. Long story short (get it, short?!), shorting is difficult.
Not only is shorting difficult, squeezes can make shorting even harder. A squeeze is where rapid rises in stock prices create margin calls. Since shorting is selling a stock you don’t own, a rapid rise in stock price requires collateral. If you don’t have enough collateral for comfort, your broker will liquidate your position and remove your short. This is called a short squeeze and drives up stock prices.
On top of short squeezes, gamma squeezes push stock prices even higher. I’ll save you all the complicated details, but the key is that short and gamma squeezes drive stock prices higher. How come this doesn’t happen all the time? Well, the answer is that it takes a ton of money. Individuals can’t move markets, the money traded is too large.
Group Economics: Together We Are One
Wallstreetbets came up with a secretly genius plan around this. They created group economics. The whole idea is that “group economics is essentially a group of people who have a common economic interest. This common economic interest then drives these people to actively pursue that interest in order to create a secure economy for all participants in that ‘group economics’.”
My first encounter of group economics came from the NBA where Andre Iguodala wore a jersey with “GROUP ECONOMICS” on the back. Wallstreetbets came together as one giant hedge fund and pumped the price of GameStop, which was heavily shorted (by hedge funds). This led to a short squeeze, which led to media attention. More and more people piled in, which led the short squeeze into a gamma squeeze. All of this action led to GameStop stock mooning. Wallstreetbets transferred wealth from the hedge funds.
What happened next is complicated and still unclear. All of a sudden, many brokerages started restricting trading to only selling. Naturally if you shut off one side of a market, the price dips. Why did brokerages prevent buying? It is difficult to say. One theory says that brokerages got cut off. Another says it came from White House pressure. Others say processing transactions at that volume gets prohibitively expensive. Others say it was for the safety of traders. Either way, it isn’t a good look for Robinhood.
I don’t know what is right and frankly it doesn’t matter. All this is a mess, but if you’ve just started investing, don’t let this be your final impression. Investing is extremely important. Don’t let the chaos distract you. Invest early, safely, and often.
P.S – Feel free to DM me if you don’t know where to start investing. I’m here for you. JUST KEEP BUYING (probably not $GME).