What you still DO NOT know about the origin of the Reddit case

Is it true that a group of anonymous foreros has put Wall Street in check? In Economipedia we have found the epicenter of the most viral stock market earthquake in history.

Imagine that you are a student with just over $ 2,000 in your pocket. You have nothing except data, a computer with an internet connection, and access to the largest digital forum in the United States.

Nobody listens to you at home. Probably because no one understands what you say. But long ago the Internet revolutionized the way we communicate and now you have a loudspeaker capable of catapult your message to millions of users. Although Reddit has more than 1.7 billion views every month, you decide to share your message in a small part of it: Wallstreetbets.

Wallstreetbets is the part of Reddit dedicated to stock issues and has more than 8 million readers. In fact, at the moment I write these lines there are 500,000 users connected. It is almost impossible to open a gap in the crowd, but for now, not bad, right?

You have little to lose and a lot to gain. And you start your post with a statement of intent.

“This is fundamentally my goddamn magnum opus so upvote late. Don’t reward me, buy GameStop’s annual Powerup. “

The thing promises, right? Well, it’s only just begun.

The origin of the GameStop case

I will not fool you. I know because most of the media have not put anything about what I am going to tell you. It is almost impossible to find it. Reddit is like an M2 relentlessly opening fire in the form of messages.

Wallstreetbets is gigantic. There is so much activity that information becomes fleeting faster than you imagine. So much so that it looks more like an instant messaging application than a forum.

Also, it’s like the broken phone game. A user creates another thread and links you, thus promoting the expansion of the message exponentially. In the end, the body of the message arrives, but the media end up inventing what they would have liked it to be and making news of other news.

And I say invented because in no sentence, within the 3,700 words that the publication has, does he mention that his idea involves a struggle of the poor against the rich. In the same way, it insists by active and passive, that it was not necessary to buy with leverage and that all purchases had to be with cash.

He was the first to make a real thesis around the short squeeze. But he was not the only one and neither was he the one who started with the soap opera. You probably haven’t read it anywhere, but this started almost a year ago. The initial thesis was that the company was undervalued and that buying was a good investment. And along the way, purchases by reputable institutional investors such as Michael Burry increased the conviction of small investors.

In other words, the initial thesis, the one from months ago, was clear. A highly undervalued company on which some sharks on Wall Street who are sorely mistaken are betting on the downside. And in which it was not mentioned that this was a battle against the rich on Wall Street. That was later, when everything went viral and, of course, not by those who gave rise to the content.

What is this short squeeze and what did this thesis say?

A short squeeze translates to a short squeeze. Basically it occurs when the rise of a certain financial asset , forces operators who have a short position to close their operation to avoid larger losses. Since in a short position you are selling something that you do not have, to close the operation you have to buy that something and it has a bullish effect on the price.

Also, when this occurs in large quantities, what happens with GameStop. Uncontrollable climbs. So, in the following graph we can see how the story goes back a long way, but the explosion was just after January 18. Date on which the student we talked about at the beginning of this article presented the best thesis on the matter to date.

The box at $ 40 was the time this thesis was published.

I am not going to bore you with the whole story, so at the end of this article I will leave you the link to the complete thesis and a Bloomberg article that expands (and very well) much of what I have told you so far. But the following graph is the one that best summarizes the reason for the phenomenon.

The orange line is the value of the short positions open at all times. The green line , for its part, represents the value of the outstanding shares. In other words, in the hypothetical case that all short positions were liquidated, it would be impossible to find a sufficient counterparty .

Imagine there are 10 chairs on the market at a price of $ 100 each. You think the price of the chairs is going to fall, so you open a short position on the chairs. How do you do this in reality? Very easy. You talk to the buyer and tell him that you are selling the chairs for $ 100. But you tell him that you will give him the chairs within 4 days and a deal is done. The day of delivery your thesis is fulfilled, the chairs have dropped to 90 dollars each, but you have already sold them. So to undo your short position, you buy $ 90 chairs, deliver them, and have earned $ 10 for each chair. But remember, you sold something you didn’t have.

Now imagine that you would have sold him 14 chairs, instead of 10. But there are only 10. On the market, and to make matters worse, the chairs are now worth $ 400 each. You are losing $ 300 for each chair and you are missing chairs.

This is the essence of the movement. An excess of short positions, a forum with the ability to viralize an idea and randomness. And other ideas got on the boat, such as trading derivatives to accelerate the short squeeze, fight the rich, or that the rise was justified. But the latter are not the origin, they are the consequence of a viral movement in which many ended up doing different things than planned.

In short, we can draw the following conclusions:

  • The origin of the GameStop case has been going on for months.
  • In the last month, the short squeeze thesis has gained relevance among Wallstreetbets foreros. The one of the user that we mentioned, spread like wildfire through different channels such as YouTube or Twitter.
  • For the idea to work, the main creators of the thesis insisted that stocks not be bought with margin, that they demanded that they not be loaned to third parties by their broker and that they not sell under any circumstances.
  • The operation with financial optionsto create an even greater short squeeze, came later and on the part of investors who had more advanced knowledge.
  • The Securities and Exchange Commission (SEC) willinvestigate all this phenomenon. And, of course, to brokers like Robinhood whose practices are more than in question.

 

by Abdullah Sam
I’m a teacher, researcher and writer. I write about study subjects to improve the learning of college and university students. I write top Quality study notes Mostly, Tech, Games, Education, And Solutions/Tips and Tricks. I am a person who helps students to acquire knowledge, competence or virtue.

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