Everyone seems to be missing the point of WHY collateral requirements have gone up. It is not because of volatility of the price movement, but volatility of whether the trade will clear.
The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay. What seems to have happened is somewhere along the line a broker did not margin call the hedge funds fast enough, and DTCC with their collateral requirements has spread the risk from that one broker or clearing house to all of the brokers. In essence, the hedge funds losses are in a way "too big to fail" now because of the way the risk was spread.
In this system, everyone is working to protect themselves (thus not conspiracy), which in turn happens to be screwing over retail. The big issue is the broker somewhere or risk management team that did not force the short sellers to buy back their shares when it was still possible to do so without affecting the brokerages. They missed the time and now the losses might be too large to absorb.
Meanwhile, they have no problem margin calling retail. Robinhood might be faced with an impossible situation they didn't cause, but they also aren't pointing the finger at the culprits and where the problem started, which is some entity allowing the hedge funds to be over leveraged and then not de-risking from that leverage fast enough when the trade went against them.
Your argument relies on the assumption that hedge funds haven’t been margin called, and that they haven’t closed their early short positions. Many funds have claimed they closed early shorts.
The piece people seem to misunderstand the most is that total short interest won’t tell us if specific shorts were closed out. New shorts can replace old shorts at the higher price.
It’s like arguing that nobody could have lost their job or got a new job because the national unemployment rate was unchanged. Aggregate numbers don’t tell us about specific shorts.
Is it really so hard to believe that people would want to short the downside of an obvious short-term market bubble?
Yeah. I find it hard to believe that any serious money is shorting anything remotely close to a meme stock right now. Who the hell would want to risk their career on a trade with infinite downside when it seems like the prevailing market sentiment is crush the shorts?
Don’t forget that this is a market where most people believe TSLA is vastly overvalued.
I mean, I'm not willing to risk my money on a short (and I wouldn't recommend anyone else to either), but I would be intensely surprised if the stock is not below $50 at the end or February. If the current price is north of $300, and holding costs on a short for a month aren't too bad, there's like $200+ of movement there to capture. Pump and dump is going to dump at some point. The market can stay irrational for a long time etc, but I suspect that's less true when everyone knows it's being irrational.
I'll just leave everything in my three-fund portfolio though, cause boring is the right fit for me.
On the contrary, as the gap between the current price and the range everyone knows it will fall to eventually grows, the stock is becoming more and more attractive to short to people with "serious money" and a little appetite for risk.
Meme stock just makes it look more like a huge opportunity on both sides and in the long run everyone knows which direction it goes from here so the opportunity is clearly more on the short side if they size their position so they can hold it long term. Even if there is the chance for further squeeze, I'm sure enough people will still feel this is a huge shorting opportunity that short interest will not go down much from here, and the higher it goes the more people will feel that way.
The share capital of the company isn't fixed... The company could issue more shares, and invest the money raised, turning the business around.
That wasn't a possibility before, but it is now. Given that, I don't think "the range everyone knows it will fall to eventually" is a foregone conclusion.
They're not in a promising sector and there's nothing to suggest raising a bunch of money is going to allow them to turn into the kind of company a market cap of $20 billion suggests.
But if they could raise $1 Billion by selling 5% more shares, they could pivot into an entirely new sector using some of their existing assets.
For example, they could make an online gaming platform using their relationships with game studios, or they could move into 'gaming cafes' using their retail space, or start designing games themselves using their storefronts for marketing.
Sure that could happen, but it's just as likely as giving anyone a billion dollars and expecting them to become a company that justifies a $20 billion valuation very quickly. The timing is important too because at the end of a mania like this that is entirely based on a quickly rising price, as soon as enough people decide this isn't going to continue rocketing up, there will be a rush to take their profits or to stop their losses.
Considering how unpleasant it is to talk to a GameStop employee (they upsell you on like 5 different things a purchase), starting a business where people stay longer and talk to them more doesn’t sound appealing for the customer.
It could, and GME trying to capitalize based on insane stock performance would be a real test of nerve, because it's one thing that could focus the news off the WSB vs institutions narrative and back on the business fundamentals of business, which still suck.
Maybe it works, maybe it just collapses the whole house of cards.
With enough capital, they could retool and and do something completely different, like setup a network of local-market-optimized ghost kitchens (or some other completely different business model responding to current opportunities that has nothing to do with what GME does today.) It’d be potentiallty more expensive than building a similar operation from scratch, but if them using the stock price to capitalize doesn't immediately collapse it instead of providing them money (which, to be fair, is far from guaranteed) it's free money that a new business trading on its business plan and not someone else's market manipulation games wouldn't have, so why not?
The game has gotten sufficiently big enough that long-sided whales haven entered and are snapping up shares and abosrbing short attacks. See the long buying at Friday market close, institutional volume aimed at boosting close price to inflict pain on short via higher maintenance margin.
The shorts are in a corner now, their positions are underwater on paper and long whales have an incentive to keep it there.
1. Even if some shorts are in trouble (you don't know whether or not it's the same people as at the beginning of the run), others are willing to take their places.
2. Long whales also have plenty of incentive to sell. Namely they can bank their profits on a stock that is likely to collapse quickly
Why do you say that? The total free float is about 47M shares; I understand short interest was about 150% of float but volume on GME last week was over 500M, wasn't it?
Shorts covering is expected to move the price way more that it has. That 500m vol is people/algos trying to profit of intraday movements keeping the price relatively stable (for GME)
Hedge fund has huge unrealized loss that may bankrupt them if they try to buy the shares that they shorted back.
Their broker realizes too late, and if they margin call them now, the hedge fund might not have enough money to pay for the shorts. Thus, the broker will need to pay.
DTCC realizes this, and ups the collateral requirement so that the broker / clearing house has to insure someone will pay (whether it's the broker or hedge fund).
Because DTCC works with all the clearing houses and brokers, the risk from the hedge funds is suddenly everyone's problem to deal with together. By trying to deal with it, they close down trading for retail, and coincidentally aid the hedge funds short position.
Maybe the answer to this is DTCC needing to have collateral requirements per clearing house or broker where they think the risk is highest (the bankrupting hedge funds). Maybe it's regulation to not allow such high leverage or force margin calls faster so the losses can't be too big to fail. Hopefully something is done to fix it!
That's a succinct but false explanation. DTCC does not care if a HF is about to lose a bunch of money and maybe even put a prime brokerage on the hook. Hedge funds make and lose hundreds of billions every week. No prime brokerage would let Melvin end up near insolvency before issuing liquidation margin call and even if there wasn't enough post-liquidation to cover losses, prime brokerages have a collective market cap of more $1 trillion and are easily able to absorb a several billion dollar shortfall. It's obvious to anyone who knows what they're talking about that you are a financial neophyte inventing nonsense conspiracies.
Can you explain why the collateral required is higher (if no one has any insolvency issues)?
If you watch the video I posted in the parent comment with the webull ceo, he states the exact scenario where brokers have no problem margin calling a small retail account, but for a big firm and big losses it's problematic, and so do you have more to add than the webull ceo on this topic?
I encourage the discussion and the information you added. Prime brokerages may be able to absorb the damage and thus are able to post the collateral needed, but then if the smaller brokerages like robinhood also need to post the same collateral while having smaller risk of clearing problems, isn't that the problem of the risk spreading?
>Meanwhile, they have no problem margin calling retail.
Presumably because hedge funds have more lenient margin agreements than retail. After all, it's easier to collect from a hedge fund with billions AUM compared to a bunch of millennials living paycheck to paycheck with $50k of student loans.
Yes this is true, and sometimes they don't even need to collect because they can write off the small loss (this is explained in the video from the webull ceo).
But the lenient margin requirements let them hang themselves when they can't collect because the losses are too big and will bankrupt the hedge fund. So now they are too big to fail, it's not only the hedge funds problem that they made a bad trade, it is now DTCC and the brokers problem that the hedge fund made a bad trade.
> The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay.
If anything wasn't the market worried that RH would go bankrupt (when the GME inevitably crashes)?
Unlike retail, hedge funds and market makers have risk modelling, and they got out of trades they can't afford (plus all the shorts had collateral, if they can't afford it the broker closed it).
Everyone seems to be missing the point of WHY collateral requirements have gone up. It is not because of volatility of the price movement, but volatility of whether the trade will clear.
The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay. What seems to have happened is somewhere along the line a broker did not margin call the hedge funds fast enough, and DTCC with their collateral requirements has spread the risk from that one broker or clearing house to all of the brokers. In essence, the hedge funds losses are in a way "too big to fail" now because of the way the risk was spread.
In this system, everyone is working to protect themselves (thus not conspiracy), which in turn happens to be screwing over retail. The big issue is the broker somewhere or risk management team that did not force the short sellers to buy back their shares when it was still possible to do so without affecting the brokerages. They missed the time and now the losses might be too large to absorb.
Meanwhile, they have no problem margin calling retail. Robinhood might be faced with an impossible situation they didn't cause, but they also aren't pointing the finger at the culprits and where the problem started, which is some entity allowing the hedge funds to be over leveraged and then not de-risking from that leverage fast enough when the trade went against them.
A lot of this is explained by the webull ceo in this video: https://www.youtube.com/watch?v=4RS4JIEVyXM&feature=youtu.be