What’s next for the Reddit crowd? Wall Street seems unsure.
The “blow-out-the-short-sellers game” is showing signs of exhaustion, but the ramifications are only just being felt.
What traders can’t agree on is what will happen next. There are four buckets of discussions: How will traders/hedge funds react? How will trading platforms react? How will regulators react? And what’s the next move for the “kill-the-hedge-funds” traders?
How will Wall Street react?
A major hedge fund losing money gets the attention of Wall Street. Wall Street does not want to get steamrolled on this short-squeeze game again. Many short sellers like Melvin Capital have already unwound their short positions.
Another response from dealers may be to increase option prices, particularly on out-of-the-money call options.
But many are still trying to profit from the game. “Anyone who knows anything about options is trying to figure out how to sell GME options,” said Larry McMillan, an options advisor with McMillan Advisory.
Why? “There haven’t been too many short squeezes like this in recent history.,” he said. “As long as people believe fundamentals matter, they are going to be selling short stuff like GameStop.”
He noted that with GameStop stock trading at $260 in after-hours trading Thursday night, the $260 call expiring Feb. 19 is selling for $107, which means it would have to be above $367 to make money. The put at the same strike price is selling for $150, so it would have to go below $110 to make money.
“The issue, is how to do this without leading down the road to ruin?” he said. “It’s highly risky but definitely possible.”How will trading platforms react? Online brokers like Interactive Brokers and Robinhood have put the brakes on trading in individual stock and options on many of the heavily shorted names. TD Ameritrade is raising margin requirements and preventing shorts on these names. Robinhood said the decision to restrict trading was a risk-management choice to meet “financial requirements, including SEC net capital obligations and clearinghouse deposits.” While Robinhood has faced considerable criticism from many traders for its actions, Global Markets Advisory Group’s Charles Dolan said the online brokers have significant reputational risk. “If I’m the CCO [chief compliance officer], I will be very conservative and overreact rather than underreact because it is easier to fend off an angry customer than fend off an angry regulator,” said Dolan, whose firm provides strategic advice on market structure and regulatory compliance. Robinhood said it will resume limited trading of previously restricted securities on Friday.
How will regulators and Congress react?
You know it’s a strange situation when ultraliberal Rep. Alexandria Ocasio-Cortez and archconservative Sen. Ted Cruz agree there should be hearings about Robinhood’s decision to block retail investors from trading. Rep. Maxine Waters, D-Calif., chairwoman of the House Financial Services Committee, and Sen. Sherrod Brown, D-Ohio, incoming chairman of the Senate Banking Committee announced they intend to hold hearings.
UBS’ Art Cashin suggested that this could be a rich source of investigation: “The chat book revolt against the hedge funds might not be filled with little guys but rather some bigshots who are portraying themselves in anonymity as the little guys. Only an investigation will tell.”
It’s a far more delicate issue for regulators like the SEC, FINRA, and CFTC, which cannot easily resort to political grandstanding.
“The regulators have to be thinking, how do you remove the incentive?” said Amy Lynch, a former SEC compliance official now with Frontline Compliance.
“The exchanges could step in and limit options trading by placing position limits or other restrictions, but they would need to do an investigation on what market rules need to be changed,” she added. She noted that restrictions and even outright bans on short selling are not unheard of: Europe instituted a short-selling ban when the pandemic started.
Nick Note: I can tell you some really big guys engineered this MANIPULATION. Posing as get rich quick millennials. They can run but they cannot hide. One of the biggest manipulations i have ever seen. It is the high of lunacy that Funds shorted 130% of the outstanding shares. And even more than crazy but criminal that an overt manipulation using internet chat rooms and millions of piss ant trader accounts like Robin Hood and El Toro is allowed. Short seller loses are over $100 billion and climbing. To cover these loses Funds are selling their most liquid profitable stock holdings. That is why the markets are down. Their is the most cash on the sidelines ever. So i am betting on 2 things. And I only need one of the 2 to happen to have this become a MAJOR trade. The first is the exchanges and regulators swoop in raise margins to the moon (I have seen them do this many times) and suspend short selling in the stocks involved in the squeeze play. Second is for the buy on the dip momentum players to swoop in and pick up bargans. In all the smoke many people have not noticed what an outstanding earnings season it has been so far especially for high tech stocks!