Wall Street should have seen the GameStop Corp saga coming. Easier access to information, the proliferation of trading apps, zero-fee commissions, the ability to buy fractional shares, and US government stimulus checks to individuals have all led us to this moment. Let us not forget the actions by the US Federal Reserve and government during the early days of the COVID-19 pandemic that not only supported financial markets, but made everyone forget that investing does carry potential risks.
The rise and newfound clout of retail investors has been evident for all to see if they just opened their eyes.
First, this cohort of investors embarrassed Warren Buffett after he sold his airline stocks in May last year and “wished them well.”
Photo: Bloomberg
Led by Dave “Davey Day Trader” Portnoy, airline stocks almost doubled the next month and are still well above the levels when Buffett exited his positions. The retail investor tugged on Superman’s cape and won. Which is why Buffett should understand what is happening.
Stuck at home, retail investors recognized trends were changing and found a way to profit. They opened brokerage accounts by the millions last year to buy the risky stocks that professional money managers avoided because they believed they were overvalued. These stocks are not in the broad market indices that popular exchange-traded funds mimic. These stocks went on to double and triple in price, with some gaining by even more. The brokers and money managers should understand.
Now it is the retail trader’s turn to take center stage. This crowd is a little different from those the retail investors highlighted above. They are like the professional trader in that they look for opportunities to game the system, hopefully legally.
As we now know, they traffic on Reddit’s WallStreetBets investing forum, which at last count had more than 7.5 million members. There is some very smart analysis in this forum, just like on Wall Street. They also have many “follow the crowd” chasers, also just like on Wall Street. They use screen names like “roaringkitty,” “stonksflyingup” and “veryforestgreen.” That is not very Wall Street-like.
As early as October last year, these and other Redditors were detailing how the “Masters of the Universe” were making an egregious error in GameStop. The number of GameStop shares that were sold short exceeded the amount available for trading, or the “float.” It was the most shorted stock on the New York Stock Exchange. They even singled out hedge fund Melvin Capital, which had shorted most of the shares, as particularly vulnerable.
A massive “squeeze” was possible, but like a good trader they waited for a catalyst. This came in the middle of last month when a surge in the buying of puts preceded a report from Citron Research recommending going short the shares of GameStop. This meant the short squeeze potential was now at its maximum. The Redditors struck with the execution rivaling any of the greatest traders in Wall Street history, and many lawyers say it all looks legal. The “masters” never saw it coming.
Selling more than 100 percent of the float of a stock is what is known as a “naked short,” or selling stock with no intention of delivering the shares. Such activity is illegal under US Securities and Exchange Commission (SEC) rules and stopping it was a principal reason the SEC was created in 1933.
As the investigation into the GameStop saga gets under way, the SEC might want to start with why it failed its own basic mission. The SEC’s job is to see these things coming and it failed.
However, even more disturbing is Wall Street itself. Plenty of smart people must have known that this big a short position put the masters in a position of vulnerability.
However, they did not believe the situation was dangerous, because it was unlikely that any large institution would take advantage of it and attempt a massive short squeeze. Self-regulation keeps the entire financial system honest, but it seems to have gone missing here and in many other corners of Wall Street.
Questions about why these masters were not called out by other masters need to be asked. Is this just “the way the game is played” on Wall Street? In other words, collusion? Rushing to bail out Melvin Capital is consistent with this idea.
The masters did not see the many thousands of retail traders banding together as a large enough force to halt their best-laid plans. As a result, a big new player with lots of money and sophistication has entered the game and is probably not going away. They are outsiders who use the masters’ own practices to change the rules and win.
So many on Wall Street and elsewhere could not, or did not, want to see this coming. They have a vested interest in the “status quo” that clouds their judgement. Many of those same people are now saying that there is elevated risk in the markets due to the rising power and participation of retail investors. The truth is that they might be looking at the wrong risks and at the wrong players.
Jim Bianco is the president and founder of Bianco Research, a provider of data-driven insights into the global economy and financial markets. He might have a stake in the areas he writes about.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
MULTIFACETED: A task force has analyzed possible scenarios and created responses to assist domestic industries in dealing with US tariffs, the economics minister said The Executive Yuan is tomorrow to announce countermeasures to US President Donald Trump’s planned reciprocal tariffs, although the details of the plan would not be made public until Monday next week, Minister of Economic Affairs J.W. Kuo (郭智輝) said yesterday. The Cabinet established an economic and trade task force in November last year to deal with US trade and tariff related issues, Kuo told reporters outside the legislature in Taipei. The task force has been analyzing and evaluating all kinds of scenarios to identify suitable responses and determine how best to assist domestic industries in managing the effects of Trump’s tariffs, he
TIGHT-LIPPED: UMC said it had no merger plans at the moment, after Nikkei Asia reported that the firm and GlobalFoundries were considering restarting merger talks United Microelectronics Corp (UMC, 聯電), the world’s No. 4 contract chipmaker, yesterday launched a new US$5 billion 12-inch chip factory in Singapore as part of its latest effort to diversify its manufacturing footprint amid growing geopolitical risks. The new factory, adjacent to UMC’s existing Singapore fab in the Pasir Res Wafer Fab Park, is scheduled to enter volume production next year, utilizing mature 22-nanometer and 28-nanometer process technologies, UMC said in a statement. The company plans to invest US$5 billion during the first phase of the new fab, which would have an installed capacity of 30,000 12-inch wafers per month, it said. The
Taiwan’s official purchasing managers’ index (PMI) last month rose 0.2 percentage points to 54.2, in a second consecutive month of expansion, thanks to front-loading demand intended to avoid potential US tariff hikes, the Chung-Hua Institution for Economic Research (CIER, 中華經濟研究院) said yesterday. While short-term demand appeared robust, uncertainties rose due to US President Donald Trump’s unpredictable trade policy, CIER president Lien Hsien-ming (連賢明) told a news conference in Taipei. Taiwan’s economy this year would be characterized by high-level fluctuations and the volatility would be wilder than most expect, Lien said Demand for electronics, particularly semiconductors, continues to benefit from US technology giants’ effort
‘SWASTICAR’: Tesla CEO Elon Musk’s close association with Donald Trump has prompted opponents to brand him a ‘Nazi’ and resulted in a dramatic drop in sales Demonstrators descended on Tesla Inc dealerships across the US, and in Europe and Canada on Saturday to protest company chief Elon Musk, who has amassed extraordinary power as a top adviser to US President Donald Trump. Waving signs with messages such as “Musk is stealing our money” and “Reclaim our country,” the protests largely took place peacefully following fiery episodes of vandalism on Tesla vehicles, dealerships and other facilities in recent weeks that US officials have denounced as terrorism. Hundreds rallied on Saturday outside the Tesla dealership in Manhattan. Some blasted Musk, the world’s richest man, while others demanded the shuttering of his