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Crowd power against Wall Street

Monthly chart of GameStop shares. Source: TradingView

This week, events are developing in America that are very difficult not to react to: retail investors organized on the wallstretbets forum on Reddit are trying to knock out large short positions of hedge funds, and they succeed.

Over the course of the year, discussions of cheap stocks on the forum developed into concrete organized actions to buy growth options. The decision-making logic can be explained in two popular abbreviations on the forum: SOGU (Stocks Only Go Up – “stocks always go up”) and YOLO (You Only Live Once – “we only live once”). SOGU replaced the investment analysis of securities (shares simply, by definition, cannot cost ltitdj), and YOLO – portfolio risk management (the market will decide for itself whether the deposit is positive or negative). The opportunity to make money was provided by buying call options on stocks that were cheap at a price: small investments that guaranteed a large gain in the growth of stock prices.

Hedge funds are often in short positions on depressed stocks, which created negative pressure on quotes. The community, which only got bigger over time, realized this fact, got angry with the “professional capitalists” and went on the attack, buying more and more paper call options.

Specifically, we are talking about the promotions of GameStop, a video game retailer that lost its former glory as a main network for gamers in the 2000s and 2010s and rightly lost it to online stores. But the above-described logic and dislike for “not understanding” managers led to the formation of a collective position by retail investors to increase the share price. Having lost in this bet, their accounts would have been in the red, while winning – greatly in the black.

To everyone’s surprise, the latter happened. Shares that have fallen for 6 years have risen from $ 20 to $ 370 over the past two weeks. Hedge fund Melvin Capital (the main short-term stockist) had to close short positions yesterday with a loss of about $ 3 billion (30% of capital). Retail investors, on the other hand, received their record profit on call options (some – up to several million dollars).

The victory of retail investors is curious in every sense. First, the very fact of a one-time, without obvious opinion leaders, adoption of a collective position in risky derivatives is interesting. Second, so strong that hedge funds could not resist it, which even provided additional liquidity and the opportunity to speak out to the whole country in the media against this venture.

On the other hand, the reasons for this can still be found. American physicists are already a significant force in the US stock market (77% of shares are owned by individuals directly, through pension and collective funds), and for Robinhood traders this is not a way to make money, but rather a game. And it is more interesting to play when there is a goal (professional investors) and a scenario (to knock out their short positions).

The Russian retail market is not like that and will not become so in the near future. For the time being, few investors are not ready to take significant risks, they are afraid of losing more money, and the status of the option as an easy way to lose money for a beginner is firmly established.

But the GameStop precedent showed that when certain conditions are met, it is possible to collectively organize demand, which can turn into profit “for everyone”. And this is already an interesting message for a wide audience for the future: profit can be formed where there are no fundamental prerequisites for this, but there are many who want to get it. At least “on paper”.

Author: Ilya Grigoriev


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