i had meant to reply to you sooner but i was interrupted by things irl, sorry for the lacuna.
there are two main points i wanted to clarify in responding to you here. the first is that “market intelligence” was not the only social good that can derive from short selling. another, very important function short selling provides is as a way that long-term, institutional investors who have taken long positions on investments are the primary source of borrowed securities being shorted. this gives the institutional investors a chance to take some profits without actually selling off the investment. this gives pension plans and mutual funds an additional modality for increasing the value of the shareholders investments.
the second point i want to clarify is something i’ve brought up directly two of the four times i’ve commented on this:
as well as indirectly in a third comment:
i believe in well-regulated markets which is not the same thing as regulation by fad or fiat. i have also pointed to the fact that there are “investments” which are vastly more inscrutable than short-selling that could easily be regulated thoroughly, even to the point of being regulated out of existence that could be taken care of before we get to the short transaction.
it would be nice to live in a world where the most serious problem facing us is under-regulated short sales.
Welllllllll, that’s up for debate. On one hand, yeah. But who is to stop someone standing on a corner yelling, “Short IBM today! Their business is failing and they’re a bunch of asshats!”…and then 10,000,000 people do it and tank big blue.
I’ll admit I don’t know the whole regulatory landscape. But I do know that the regulatory apparatus is geared towards limiting insider trading and maintaining provable liquidity in the markets. I also know that enforcement of ethics has required several laws over the centuries, and imposition of bigger firms’ ideologies onto smaller ones. See the Investment Advisors Act of 1940:
Not that I personally think bigger firms are the keepers of the sacred trust. That’s been disproven 10000000000 times already.
I happen to agree with the Reddit idea here, even though they are a pack of bedwetters. They have a point: giant hedge funds should not hold sway over failing companies or groups of individual investors. People can want what they want. And that’s as far as I go. I bet that most of the jerks on r/WSB are Trump freaks, and Gamergate misogynist sympathizers… so fukkem.
IANAL but as with your second amendment and what it actually means as distinct from what the words mean or what the people who wrote it meant the question is: how is it enforced? What is the precedent in the courts? A broad reading of the provision on its face could certainly see this as illegal. So could all the stock shows on the telly, all the people offering investment advice etc.
I would doubt that this is how it is enforced but really, at this point disputes about it could probably be fairly easily settled by someone with experience in the area. A straight up investment lawyer.
I would guess it’s probably not enforced very often, but if someone specifically bought up a bunch of GameStop stock, then started getting people pumped up on Reddit to get them to buy up a bunch of stock as well and then sold when it was high, that might be considered egregious enough for prosecutors to look into. I think that prosecutors would be looking at not just what people were saying on Reddit, but also what kinds of transactions they were making at the same time. If someone said, “Let’s buy this stock just to drive up the price,” and then took advantage of what was happening as a result, that’s probably the threshold for enforcement. It’s a thin line between recommending a stock because you think it will go up, and recommending a stock so that it will go up, so this will make for an interesting case in terms of how far people can go (and maybe even spur stronger regulation).
PS. The case of Johnathan G. Lebed is interesting. He was a 15-year old who got in trouble with the SEC for buying up penny stocks and then promoting them online. And this was 20 years ago when that was all new. They ended up fining him and barring him from trading.
The short position was based, again on the face of it, on the notion that shorting it would send the stock into a death spiral unrelated to the underlying cash, assets, or current business of the company.
So if I were the SEC, and an honest actor in this, I know where I’d start and it would be looking at collusion between hedge funds and asset strippers. I don’t believe that it is an honest actor. If it were a lot of billionaires would be wearing orange instead of whatever they wear on their yachts.
Yes, absolutely. Anyone who makes a short position that is so large that its very existence causes the stock to drop, making the short a self-fulfilling prophecy, belongs in jail too.
Just to clarify, I am fully on the side of the Redditors here. I am just speculating about what legal outcomes are possible when the regulators come around. And they’re likely to come around when the stock market doesn’t make the right people rich.
In other words, I’m not saying that the Redditors should get in trouble (not everything that is illegal is necessarily wrong, especially when the big fish do it with impunity), but that there is a real possibility that they will get in trouble.
Or if they’ve been stuck with a bunch of GameStop stock for a long while, that they couldn’t unload without a big loss due to the short-sellers grinding it down.
I think the difficulty with prosecutions in either of those cases (based only on part 2 of the provision quoted by @Jesse13927 above) is that in both cases, you are positing that it’s the encouraging of other people to buy or sell that constitutes the illegality.
That may well be illegal under other provisions but the quoted provisions is about making trades yourself which are intended to induce trades by others.
So that would be buying (or selling) stock in order to persuade other people that for example “this stock is really moving, I’d better get a piece of that action” as opposed to having a bunch of stock and telling people “this stock is really going places, buy it now” in order to shift your shitty stocks.
I also think there is a logical difficulty with applying the provision as written to what happened because as I understand it, while you could argue that redditors’ trades induced the shortsellers to have to buy shares, that analysis is wrong.
As I understand it, the shortsellers had already committed to the trades, the only thing the redditors’ trades did is to change the price at which those trades took place.
In other words, their purchases did not ‘induce’ trades by others. The decisions about those trades had already been made.
My understanding is a little different here, but I could be wrong. I think what the Redditors have done is encourage (i.e. induce) each other to buy up shares so that the short sellers would lose money. In other words, they understood that the short sellers had already committed to the trades and so understood that, if they artificially inflated the price of the stock by creating a surge in demand, they could cause the short sellers to lose money (and make some money for themselves at the same time).
If the exact purpose of their trades was to do exactly that, then I think that it would fall under (2) in the law quoted above. The question is, was this totally organic, or were there people organizing it? If there were people organizing it, did they position themselves to take maximum advantage of the surge in stock price?
I also think that there is a slight, but legally significant difference between encouraging people to buy a stock, and essentially saying, “Let’s all buy this stock at the same time so that it will go up in value,” even if the ultimate effect is the same.
Sure, by messaging each other and posting. But the legislation you cited requires that it is the trading that creates the inducement. Verbal or written encouragement is not covered (by that provision).
Fair enough. I would say that that is not inducing a trade. It is affecting the price at which a trade takes place but not whether it takes place at all. But there’s clearly plenty of scope to argue there…
That’s the thing, though, they messaged each other and posted but they also made actual trades. The actual trades that they made are what caused the stock price to increase, and that, in turn, motivated others to get in on the action.
The part of the law that I am interpreting is: “To effect, alone or with 1 or more other persons, a series of transactions in any security…with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.” And I am interpreting this to apply also to a “series of transactions” to “create actual or apparent trading” in order to “raise (or depress) the price” so that other people will buy (or sell) the stock thereafter.
In other words, people who bought the stock early on in this whole caper and then spurred on others to do the same by virtue of their having already bought the stock* may run afoul of the law. (*What I mean is, the fact that they had actually bought the stocks, rather than simply posting about it, is ultimately what caused the stock to rise, which was ultimately the impetus behind subsequent purchases. The stock would not have actually gone up with just comments in the absence of actual purchases, and more people would not have jumped on the bandwagon if the stock had not started going up.)
What makes the Reddit message boards significant is that they make it clear that these people did not all happen to buy the stock at the same time by coincidence and that they bought the stocks with the specific intention of causing the price to change. By contrast, somebody who just posted on Reddit without buying stock (or somebody who just bought stock without posting on Reddit) probably did not commit a crime, at least not one that can be proven.
My understanding of a “pump and dump” scheme, is that the bad-actor gives false information (lies) to trick investors into paying inflated prices for the stock they (the bad-actor) want to sell at a profit. The investors think the stock is a “good buy”, and they will profit if they buy it, so they have been conned into thinking a bad stock is a good stock. (what is the legal term for a bad-actor that gives false information claiming a stock is bad, in an attempt to drive it down so that they can make money off of a short position?)
Reddit users, on the other hand, announced that some hedge-fund bad-actors are attempting to manipulate the market and kill a company they love, and that they should all chip in and buy some stocks in an attempt to save the company, all with full knowledge that they probably will end up losing that money. I find it hard to see how the redditors defrauded anyone.
I’m not sure how you can say there isn’t a victim isn’t he making here. The meme is that people bought in expecting to lose their money but the people that drove the GME bets are going to walk away rich on the backs of people losing a lot of money. And it’s not just the hedge funds that will lose their money in this.
I get that people like to pick sides and there is an underdog story in this, but there is a small cabal of people making bank in this story that just happen to be different people taking advantage of a situation than the usual ones in the market.
Was/is GameStop a “good buy,” or did it simply look like a good buy because everyone suddenly started buying it? If some of those Redditors sold off their shares when the stock was high (I’m not saying everyone did this, but some probably did), that raises questions about their good faith in trying to save the company.
