This will probably be my least popular post ever, but the explanation needs to get out there for why Robinhood stopped trading on GME.
Selling a stock short is NOT illegal. It is a perfectly valid type of investment according to the SEC:
“D. Are short sales legal?
Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.”
Basically – you can’t short sell a stock to manipulate the price down so you can buy a lot more of it later. If you believe a stock is overpriced and short sell it, that is legal. That is exactly what tons of retail traders and hedge funds do every day, including on Gamestop.
On the other hand, manipulating a stock price upwards to cause a short squeeze IS illegal according to the same SEC article:
“Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal.”
Unprecedented numbers of people on Reddit, Twitter, and elsewhere collaborated to intentionally create a short squeeze on GME in the last week. No one talked about a fundamental case why Gamestop the company was worth a lot of money and would be successful in the future; instead everyone made the argument that due to a very high short interest of 100%+, that a short squeeze would send the price “to the moon”. That is illegal according to the SEC.
Multiple brokerages, especially Robinhood, probably had their attorneys tell them that “Hey, you are aiding and abetting illegal activity by enabling a short squeeze and could be liable criminally or civilly if you continue to allow this blatant illegal activity on your platform”. So they decided to stop it by only allowing people to close their positions rather than open new ones in support of the short squeeze.
Another strong reason is that if the short squeeze caused the GME stock to go to 5000 in a sudden leap, tons of traders (both retail and professional) could instantly go broke, and then the brokerage (Robinhood) would be left holding the bag. For example, picture a retail investor with a Robinhood account had sold call options in the amount of $100,000 and their account was worth $200,000. If the price gapped from 300 to 5000 and those options were exercised, that trader could have a loss of $10,000,000. He would lose the value of his account, $200,000… but the brokerage would have to make up the rest of the settlement and take a loss of $9,800,000. Now multiply that by thousands of accounts…. no brokerage wants to take the risk of being bankrupted, so they shut it down.
The two strong reasons Robinhood and other brokers stopped trading was to prevent legal liability from enabling illegal activity on their platform, and for wanting to avoid potentially massive banktuptcy from traders unable to cover their losses.
> No one talked about a fundamental case why Gamestop the company was worth a lot of money and would be successful in the future; instead everyone made the argument that due to a very high short interest of 100%+, that a short squeeze would send the price “to the moon”.
All of this started on Reddit because someone made a case for their fundamentals.
He is considered a legend by all of the people on WSB (of which I am not one) for it and kicked the whole thing off.
My question is.. how does a guy on Reddit and YouTube giving a fundamental analysis of why he valued a stock, and millions of people seeing value and buying it, differ from something akin to Mad Money?
DFW made his fundamentals case months ago and had a real (if possibly mistaken) case at that point.
In the last week though, after the massive increase in GME's stock price, the arguments on WSB have all been about the planned short squeeze and gamma squeeze to convince people to hold on or buy more.
Taking the last week out of context makes little sense, because the last week is just a snowball that started on the 11th of January 2021, when Ryan Cohen and two of his friends from Chewy joined GameStop’s board, after building up a 13% stock position in the company over the course of the last few months. They believe that GameStop can be reimagined as a force in online retailing:
https://www.bloomberg.com/news/newsletters/2021-01-25/money-...
This is crowd sourcing to create a coordinated attack like DDOS-ing, but how did we get here? Over-shorting. How did we get there? Hedge fund data sharing dinners? So this seems more like a swing back in the other direction. I presume when the dust settles the SEC will claw back these "illegal" gains from the individual investors. Too bad trades aren't settled via blockchain.
> Unprecedented numbers of people on Reddit, Twitter, and elsewhere collaborated to intentionally create a short squeeze on GME in the last week.
You're missing a party in that analysis. For this party, maybe it was a stupid idea for them to try and short sell in a market where the fed had pumped trillions into the economy and market activity, retail and otherwise, is at an unprecedented level of froth. But with that said, they are supposed to be professionals. It seems to be within reason to expect them to be able to hedge against the risk of a bunch of amateurs deciding to protest buy a piece of their childhood against being raided by Wall Street, no?
After all, "irrationally" holding assets that have sentimental value and allocating a large portion of whatever surplus earnings you have to it is a well known American tradition. Whatever the socioeconomic bracket, people have traditionally found ways to support causes and brands that they hold dear. Shouldn't large institutional clients be asking these fund managers why they're poking a beehive right now, and whether it might just be a little unnecessarily risky?
Robinhood has no stake in whether or not individual trader actions are legal, and the entire distinction between legal and illegal here is based on being able to determine individual trader's motives. Robinhood is acting illegally by your own argument by manipulating the price and availability of a stock.
Basically there was a good fundamental analysis with due diligence that GameStop was over shorted and priced under value. Some people thought it was a good analysis and started buying. When more people buy... the price goes up.
As the price goes up more people started to believe the thesis and piled in. At some point this just becomes momentum training which last I knew was legal.
It seems like you have taken a very narrow and biased view of the law that fits the narrative you like.
Once again, I am not a shill as you keep posting on my comments. I am a real person and my blog is here - joelx.com. I have an opinion that is different than yours. I have no dog in this game.
Do you hold any positions related the question at hand? Are you trying to pump & dump the stock?
I don't have a position related to the question at hand, but I've certainly been observing closely over the last few days and for me personally it's pretty hard to shake the perception that a subreddit mostly specializing in financial market memes beat "the man" at his own game and now "the man" is changing the rules.
Meanwhile you're jumping on internet message boards to try and explain how "the man" is actually totally right in this situation and everyone should really go back to dutifully enriching him without questions.
I hold no positions related to the questions at hand. You however have gone from a random blogger who speaks largely about tech & politics and now is quite invested in defending a very crooked appearing move, all while making claims you can't support.
Selling a stock short is NOT illegal. It is a perfectly valid type of investment according to the SEC:
“D. Are short sales legal? Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.”
Basically – you can’t short sell a stock to manipulate the price down so you can buy a lot more of it later. If you believe a stock is overpriced and short sell it, that is legal. That is exactly what tons of retail traders and hedge funds do every day, including on Gamestop.
On the other hand, manipulating a stock price upwards to cause a short squeeze IS illegal according to the same SEC article:
“Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal.”
Unprecedented numbers of people on Reddit, Twitter, and elsewhere collaborated to intentionally create a short squeeze on GME in the last week. No one talked about a fundamental case why Gamestop the company was worth a lot of money and would be successful in the future; instead everyone made the argument that due to a very high short interest of 100%+, that a short squeeze would send the price “to the moon”. That is illegal according to the SEC.
Multiple brokerages, especially Robinhood, probably had their attorneys tell them that “Hey, you are aiding and abetting illegal activity by enabling a short squeeze and could be liable criminally or civilly if you continue to allow this blatant illegal activity on your platform”. So they decided to stop it by only allowing people to close their positions rather than open new ones in support of the short squeeze.
Another strong reason is that if the short squeeze caused the GME stock to go to 5000 in a sudden leap, tons of traders (both retail and professional) could instantly go broke, and then the brokerage (Robinhood) would be left holding the bag. For example, picture a retail investor with a Robinhood account had sold call options in the amount of $100,000 and their account was worth $200,000. If the price gapped from 300 to 5000 and those options were exercised, that trader could have a loss of $10,000,000. He would lose the value of his account, $200,000… but the brokerage would have to make up the rest of the settlement and take a loss of $9,800,000. Now multiply that by thousands of accounts…. no brokerage wants to take the risk of being bankrupted, so they shut it down.
The two strong reasons Robinhood and other brokers stopped trading was to prevent legal liability from enabling illegal activity on their platform, and for wanting to avoid potentially massive banktuptcy from traders unable to cover their losses.