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A Reddit group with millions of members, WallStreetBets, has been the main topic in the international press for the past two weeks. These investors, who call themselves "degenerates", perhaps in order to distinguish themselves from the financial "nobility", massively bought the shares of a little-known company, GameStop (GME), after noticing a "anomaly" that should have criminal implications at least from November 2020.
The anomaly was represented by a cumulative short position of about 140% of the traded shares of GameStop, according to data from S3 Partners taken over by Bloomberg.
That absurd situation lasted more than three months and started with some hedge funds betting against GME, which did not just consist of the short sale of the stock, but also of some derivative instruments that had the GameStop stock as its underlying asset.
Short selling involves borrowing shares, selling them immediately and repurchasing them at a much lower price. If the investor is "unlucky" and the stock rises, then the losses can increase exponentially, given that the securities must be repurchased at sometimes much higher prices in order to square the trade.
The phenomenon is known as "short squeeze" and has the "gift" of substantially increasing the pressure for a stock's price to rise.
How was a short position of 140% in the listed shares of GameStop achieved? Through "naked short selling", which is "the illegal practice of short selling shares that have not been affirmatively determined to exist", according to the definition from Investopedia, meaning stock that has not been borrowed before being sold.
By "naked short selling", which is "the illegal practice of short selling shares for which the actual existence has not been proven", as defined in Investopedia, i.e. shares that were not borrowed before being sold.
That's how it was possible for a stock that was "worth" about 4 dollars in January 2020 to rise to 347 dollars on January 27, 2021, after reaching nearly 500 dollars intraday.
Thus, it was possible for a stock with a "value" of about $ 4 in January 2020 to increase to $ 347 on January 27, 2021, after reaching intraday quotations of almost $ 500 (see chart).
Grafic gme-nyse.pdf
Commenting on a Bloomberg article about the "slides" of GME shares, the readers think that "stock market fraud and market manipulation are only investigated when they are not done by members of the financial aristocracy, otherwise it's all perfectly legal when it is done by hedge funds or by the Wall Street institutions".
Under these circumstances, the Robinhood platform temporarily stopped trading, and in the chat groups claims Robinhood selling GME shares in its customers' portfolios without their consent.
In a Bloomberg article on the "slippage" of GME shares, readers believe that "stock fraud and price manipulation are investigated only when they are not committed by members of the financial aristocracy, otherwise everything is perfectly legal when done by hedging funds or hedge funds." Wall Street institutions".
The rise resumed after the lifting of the ban, but the pressure on GME shares has fallen sharply in recent days, amid declining short positions to about 53% of total shares available for trading. The price of a GME share dropped to $ 90 in the first two days of February 2021, after daily declines of 31% and 60%, respectively.
According to Investopedia, "Despite being made illegal after the 2008-09 financial crisis, naked shorting continues to happen because of loopholes in rules and discrepancies between paper and electronic trading systems".
Most of the recent trading in GME stock took place on the Robinhood trading platform, which prided itself in the "democratization of investments", amid the zero commissions charged. Now the platform is being abandoned by more and more retail investors.
Unfortunately, the lack of fees was only possible as a result of agreements between Robinhood and large investment firms, including hedge funds, for the former to sell the latter the data on the trades made by retail investors.
As a result, the major players on Wall Street could engage in what is called "front running", i.e. the execution of transactions in their own name before the processing of stock orders of investors.
These operations are also illegal, but investigating and obtaining evidence is extremely difficult, given that the large investment banks on Wall Street have also set up private trading platforms, the so-called "dark pools".
All these "details" about the privileges enjoyed by large investment and financial intermediation firms, not to mention direct support from the Federal Reserve through the money creation printing press, did not matter to those who immediately launched accusations of market manipulation and dirty attacks against the group of retail investors on Reddit.
Laura Unger, a former commissioner with the US Securities and Exchange Commission, whose stated mission is to "protect investors, maintain fair, orderly and efficient markets and facilitate capital formation," compared the group's acquisitions on Reddit to the assault on the Capitol on January 6th, 2021, in an interview with CNBC.
The New York Times wrote about the "Reddit army," and Investing Daily characterized the attack on hedge funds as an "insurrection," while NBC News said "insurgency" has taken place.
Opinions have surfaced on Twitter that the attacks on hedge funds also had a Nazi component or that they were carried out by supporters of President Trump. There were also accusations against Russia.
Sebastian Mallaby, of the Council on Foreign Relations and author of "More Money Than God: Hedge Funds and the Making of a New Elite," wrote in the Washington Post that "the good guys in the GameStop story are hedge funds and short sellers" because "speculators who bought GME aimed to destroy traders who make the connection between the price of a stock and fair value", and "short selling is the method of maintaining fair stock prices".
Mallaby isn't saying anything about the 140% short position, which is only possible through illegal operations, nor does he mention that short selling of major Wall Street banks were banned during the global financial crisis.
Wasn't fair and honest price discovery necessary then?
In the best of all possible worlds, it is normal for a former Federal Reserve chairman, in this case Janet Yellen, to showcase her wisdom to knowledge hungry bankers for hundreds of thousands of dollars in "compensation".
Their cumulative value exceeded 7 million dollars, and that amount includes the 800,000 dollars offered by the Citadel hedge fund, involved at least indirectly in the stock market action around GME shares.
Now Mrs. Yellen has summoned the regulatory bodies in the US, as Treasury Secretary, "to discuss the recent volatility on the financial markets", Bloomberg writes.
There is no discussion of a potential conflict of interest or a potential moral issue for the new finance minister of the US.
Among those "summoned" are the Securities and Exchange Commission (SEC), Federal Reserve, Federal Reserve Bank of New York and Commodity Futures Trading Commission (CFTC), as "Secretary Yellen believes market integrity is important and wants to know whether recent activities are consistent with investor protection and fair and efficient markets".
Ms Yellen has now called on US regulators, as Secretary of the Treasury, "to discuss the recent volatility in financial markets," according to Bloomberg.
Nothing is said about a possible conflict of interest or a possible moral issue for the new US finance minister.
Has Janet Yellen forgotten her contribution, as president of the Federal Reserve, to the gradual but complete elimination of all the fundamental characteristics of the markets?
What is there to analyze?
The capital market does indeed play a key role in allocating resources to a free economy, but this role has been constantly undermined by major central banks in recent decades, especially through the moral hazard introduced in the markets, but also through the distortion of competition, and by favoring players considered too big to fail.
All the lamentations of those considered true geniuses of finance, even when they would resort to begging or blackmail to force the authorities to save them, show the true face of a "caste" that has contributed enormously to "building" the current reputation of what is still called capitalism, but which has only been an empty shell for many years.
Today's paragons of "fair" and "honest" markets have much to learn from Jesse Livermore, especially when it comes to acknowledging mistakes and leaving the stage "gracefully".
The last week of January 2021 may go down in history as a populist revolt, as some call it, against financial capitalism.
Such riots, by which hordes of barbarians from Reddit or elsewhere will terrify the "ladies" on Wall Street, as long as the "authorities" do not limit or restrict retail investors from participating in the markets, could be the last hope of capitalism.
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