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Shorting and Indian capital markets

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Re: Shorting and Indian capital markets

#31

Post by PeterisP »

WJW wrote: post #15
ignoramous wrote: post #11

> While everyone is celebrating retail traders winning over a large hedge fund in this case, it rarely ever plays out this way. Most commonly, retail ends up losing money when there is excessive speculation. This is the only passage anyone with too much at stake (than they can afford) in this short needs to read. Other than that, I believe industry insiders / traders are missing the mark in that the current dynamic i…

Eventually, either the Wall Street "hive mind" (really though, WS contains thousands of funds and many would be overjoyed to see some competitors fall) or the retail buyers of these companies will be proven wrong. What happens next is way more interesting than the current situation. Even if it turns out that GME can be short squeezed until there is not a single share shorted anymore, the retail investors will then co…

"There is no way everyone can get out at the top" - this is the big issue here - as far as I understand, the position of WallStreetBets is that there are (were?) so many shorts of GME compared to the shares on market that they would be required to buy all that stock and everyone can get out at the top. I don't feel certain about this (especially since if any of the funds actually go bankrupt, they would default on their obligations, not actually buy the shorted stock at all and just owe some not-fully-collectable money), but that seems to be the whole reason for this situation.

Re: Shorting and Indian capital markets

#32

Post by CTDOCodebases »

In reference to the GME/WSB fiasco the issue isn't so much the shorting itself but the large number of “fails-to-deliver”.

This was happening since early December. It looked suspicious and was reported to the SEC. Read comments for receipts.

https://www.reddit.com/r/wallstreetbets/comments/kr98ym/gme_...

Re: Shorting and Indian capital markets

#33

Post by WJW »

lovich wrote: post #27
ignoramous wrote: post #11

> While everyone is celebrating retail traders winning over a large hedge fund in this case, it rarely ever plays out this way. Most commonly, retail ends up losing money when there is excessive speculation. This is the only passage anyone with too much at stake (than they can afford) in this short needs to read. Other than that, I believe industry insiders / traders are missing the mark in that the current dynamic i…

>rejecting the fundamentals I think what is missing in many people's analysis is that there is a new fundamental value in this situation. Buying GME shares is now linked to destroying a hedge fund and ruining some billionaire's days. For many people, and I include myself in this group, that has a real tangible value that outweighs the actual dollar amount it costs to buy a few GME shares. When the leaders of these br…

While some billionaires are having a terrible week, market makers and prop trading desks have been making an absolute fortune. I'm sure the billionaires owning the market makers are more than happy to sell "financial uprising points" to WSB readers if they so desperately wish to purchase them.

It's a mistake to see "the billionaires" or "Wall Street" as a single homogenous group. 99% of them don't mind Melvin capital going under at all.

Re: Shorting and Indian capital markets

#34

Post by dmingod666 »

ignoramous wrote: post #11

> While everyone is celebrating retail traders winning over a large hedge fund in this case, it rarely ever plays out this way. Most commonly, retail ends up losing money when there is excessive speculation. This is the only passage anyone with too much at stake (than they can afford) in this short needs to read. Other than that, I believe industry insiders / traders are missing the mark in that the current dynamic i…

lol, when did the stock market reflect the fundamentals? Its post 2020, the whole economy had come to a standstill and the market was rallying like nothing happened. All this 'fundamentals' talk just sounds hollow.

Re: Shorting and Indian capital markets

#35

Post by ZephyrBlu »

WJW wrote: post #15
ignoramous wrote: post #11

> While everyone is celebrating retail traders winning over a large hedge fund in this case, it rarely ever plays out this way. Most commonly, retail ends up losing money when there is excessive speculation. This is the only passage anyone with too much at stake (than they can afford) in this short needs to read. Other than that, I believe industry insiders / traders are missing the mark in that the current dynamic i…

Eventually, either the Wall Street "hive mind" (really though, WS contains thousands of funds and many would be overjoyed to see some competitors fall) or the retail buyers of these companies will be proven wrong. What happens next is way more interesting than the current situation. Even if it turns out that GME can be short squeezed until there is not a single share shorted anymore, the retail investors will then co…

> There is no way everyone can get out at the top, so a lot of people will have to sell at very low prices. This is even true if the original thesis of "we can pump this stock to $1000" is true

This is what I've been thinking about the whole time. They can definitely pump the stock if they keep HODLing, since sellers effectively set the price when the short positions have to be closed.

Someone still has to be the bagholder and end up holding near worthless stock at the end of this though.

$GME will come crashing down once the short squeeze is over, and there's only going to be a small minority of retail traders who get out at the top.

People who have bought in later at hundreds of dollars are likely to lose a lot of money IMO. Possibly to the tune of over half their initial investment.

Re: Shorting and Indian capital markets

#36

Post by ZephyrBlu »

PeterisP wrote: post #31
WJW wrote: post #15

Earlier quoted context omitted.

Eventually, either the Wall Street "hive mind" (really though, WS contains thousands of funds and many would be overjoyed to see some competitors fall) or the retail buyers of these companies will be proven wrong. What happens next is way more interesting than the current situation. Even if it turns out that GME can be short squeezed until there is not a single share shorted anymore, the retail investors will then co…

"There is no way everyone can get out at the top" - this is the big issue here - as far as I understand, the position of WallStreetBets is that there are (were?) so many shorts of GME compared to the shares on market that they would be required to buy all that stock and everyone can get out at the top. I don't feel certain about this (especially since if any of the funds actually go bankrupt, they would default on th…

I'm pretty sure a mass buying of the stock would drive the price right into the floor.

So the first few people will get an extremely high price because like you said, the shorts are forced to buy, but as the sell off begins the price will plummet.

Re: Shorting and Indian capital markets

#37

Post by ZephyrBlu »

CTDOCodebases wrote: post #32

In reference to the GME/WSB fiasco the issue isn't so much the shorting itself but the large number of “fails-to-deliver”. This was happening since early December. It looked suspicious and was reported to the SEC. Read comments for receipts. https://www.reddit.com/r/wallstreetbets/comments/kr98ym/gme_...

Which I believe is due to them having shorted over 100% of the float making it impossible for the shares which were shorted to be purchased.

Re: Shorting and Indian capital markets

#38

Post by twic »

seanhunter wrote: post #20
blueblisters wrote: post #4

Zerodha (top Indian broker) posted an article earlier which explained why the Indian brokerage industry has very few avenues to make revenue: https://zerodha.com/z-connect/rainmatter/the-race-to-zero-ca... The lack of any mechanism for payment for order flow is quite interesting - how do market makers get incentivized to provide liquidity in such situations? Or asked another way, are American market makers being subs…

Market makers are incentivized to provide liquidity by the fact that they earn half the spread on average every time they trade. If a stock trades for 10 bid 11 offer then the market maker makes 1 every time they buy at 10 and sell at 11. They do this a very large number of times a day. I'm not sure this still happens, but Marketmakers (and broker dealers) also used to earn rebates from new venues to incentivise them…

To expand on this a little for anyone interested, the problem with classical market-making is that you only make money as long as the trades are crossing back and forth around a stationary price. If the market moves suddenly, you end up losing money. In your example, if a huge sell comes in at 10, and the market then moves down to 8 bid, 9 offered, the market maker has a position they bought at 10, but can only sell at 9 at best.

So, profitability depends on the ratio of the nice "random crossing" to the nasty "toxic flow". The toxic flow tends to come from large, well-informed market participants who can act very quickly. That means institutional players with colocated trading machines and so on. There are none of those on retail brokerages, so retail flow has a great ratio of random crossing to toxic flow, and so market makers are happy to pay for it. Meanwhile, the exchange itself is crowded with players like that, and there's a worse ratio, so market makers are a lot more wary.

This is why market makers invest a lot in low-latency trading. If you can find out about an impending market move, and cancel your resting orders before other participants cross into you, you can dodge the toxic flow, and have a better chance of making money.

Longer explanation: https://insights.deribit.com/market-research/toxic-flow-its-...

Unrelatedly, another source of revenue for market makers is maker-taker pricing, where the person crossing the market pays a little fee to the person who rested the order they crossed into:

https://www.investopedia.com/articles/active-trading/042414/...

But i'm not sure how common this is these days.

Re: Shorting and Indian capital markets

#39

Post by wrkronmiller »

ZephyrBlu wrote: post #37
CTDOCodebases wrote: post #32

In reference to the GME/WSB fiasco the issue isn't so much the shorting itself but the large number of “fails-to-deliver”. This was happening since early December. It looked suspicious and was reported to the SEC. Read comments for receipts. https://www.reddit.com/r/wallstreetbets/comments/kr98ym/gme_...

Which I believe is due to them having shorted over 100% of the float making it impossible for the shares which were shorted to be purchased.

> There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.

https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga...

Re: Shorting and Indian capital markets

#40

Post by leprechaun1066 »

WJW wrote: post #33
lovich wrote: post #27

Earlier quoted context omitted.

>rejecting the fundamentals I think what is missing in many people's analysis is that there is a new fundamental value in this situation. Buying GME shares is now linked to destroying a hedge fund and ruining some billionaire's days. For many people, and I include myself in this group, that has a real tangible value that outweighs the actual dollar amount it costs to buy a few GME shares. When the leaders of these br…

While some billionaires are having a terrible week, market makers and prop trading desks have been making an absolute fortune. I'm sure the billionaires owning the market makers are more than happy to sell "financial uprising points" to WSB readers if they so desperately wish to purchase them. It's a mistake to see "the billionaires" or "Wall Street" as a single homogenous group. 99% of them don't mind Melvin capital…

99% of them are doing more than just not minding Melvin's issues, they're actively feeding off Melvin. Melvin is going to be (or is already) selling off what they have in stuff like FB, MSFT, AAPL, etc, and it's not the retail traders who are benefiting from this, it's the other parts of the investment banking system. Even the sales traders are going to be on the phone with Melvin going "Sell 200k AAPL? No bother."
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