This post is gonna be long and in order to understand it, you need to understand how market makers works. If you don’t understand that concept, that’s fine. A simple google search will yield sources better than me, that can provide you a basic understanding of market makers and short selling. So try doing a quick search to educate yourself then come back here
So for anybody that has been paying attention to the market charts since December, it has become very obvious that GME is inversely correlated with the rest of the market.
Hence, when the market has major red days across multiple sectors, GME is still green among a sea of red. And when GME goes down the rest of the market goes up. Anybody with a basic broker app can look at the 3 month charts and see this correlation.
When you align charts of GME since December, with most major securities on the NYSE and especially within the Nasdaq, it’s like looking at a heart beat scan and this heart beat is rapidly heading towards major cardiac arrest
Well the simplified explanation is this. When this squeeze bleeds the financial institutions (like Melvin capital for example), it forces them to sell off their long term positions across the whole market or else they risk getting margin called.
So for example, when GME goes up 10 points they gotta liquidate millions of dollars in their AAPL positions to pay off their short position. This is pretty basic stuff
The main talking point across all of the investing subreddits and news outlets, was the fact that GME’s short percentage reached a height of 140%
But what does a 140% float mean?
Did the hedge funds short/borrow more shares than even existed?
Well yes, that’s called naked shorting but it’s more complicated than that.
When a naked short is created, it basically creates a derivative of a real share for the borrower. So when you see 140% short percentage that doesn’t mean all available shares of GME were borrowed for shorting, it means when these institutions (Melvin) heavily shorted GME, the Market Makers (Citadel) created shares out of thin air, and tethered them to the real shares that were borrowed. These made up shares are synthetic shares, they don’t actually exist but once they are created they are then traded as if they are real shares.
This process sounds absurd and more like a conspiracy but this is really how it works and how all security derivatives have always worked on the market and this process was further confirmed in the GameStop hearing today by Dennis Kelleher. I believe you can see this conversation within the first hour of the hearing, sorry I don’t have a time stamp but today’s hearing is worth watching if you have the time.
So an easy way to understand this is like comparing these naked shorts to “Synthetic CDO’s” from the 2008 crisis. I’m using synthetic CDO’s as an example because they are a financial derivative that most people are familiar with from the movie, “The Big Short.” These naked short derivatives basically function in the same manner as synthetic CDO’s.
So market makers like Citadel and financial institutions like Melvin Capital, trade these synthetic shares back and forth on the market as if they were real shares.
This would mean these financial institutions have become quite leveraged swapping these synthetic shares back and forth all over the market because in reality, they are trading an imaginary security that is directly correlated with a real one, and the real borrowed shares are already losing them money
It is dangerous to take on a short position because you have taken a position in a trade with Infinite risk. This is how short squeezes happen, if the price is driven up, the short seller has to take money out of their pocket to pay the lender, which then further increases the price of a share, and this back and forth is the driving force for a squeeze.
The current price of GME is obviously a result of a short squeeze. Anybody with a brain knows that GME is not fundamentally worth its current price of this post, at $215/share, but it’s price has rocketed up because the short sellers have to buy back their borrowed shares which then propel the price further up.
The current squeeze is only a product of the real shares borrowed, the naked shares have not come to maturity yet even tho they are directly tethered to the real shares because the synthetic shares only become “real” when the short position completely closes or is margin called.
This means, the synthetic shares will act like a multiplier upon what will already be an absurd number.
So you don’t need to be Albert Einstein to see that the final number on this squeeze will be truly ridiculous, once the synthetic shares come to fruition.
We already know these synthetic shares have no intrinsic value because they are tied to the real borrowed shares, and those borrowed shares are already costing financial institutions serious money. But that doesn’t stop these synthetic GME shares from getting traded around by market makers because they are treated as if they are real shares.
So The MM’s are essentially playing a game of hot potato right now, except they are actually passing around an Atomic Bomb.
So if you’ve been following to this point, you might be able to see that the final payday for GME could be historic.
Which sounds great for GME holders but here is the reality of this equation... I don’t think there are any institution that will be capable of footing the final bill for the GME shorts. The final payout would likely bankrupt Jeff Bezos.
So this is gonna likely result in these financial institutions committing massive sell offs (I’m talking in the billions of dollars) across the entire market in order to pay off the final fee, and I don’t think these inevitable sell offs will provide enough liquidity to payout the short cost.
I believe, with great conviction, when GME truly takes off it will cause, a major market-wide correction across all sectors.
Nobody can say what the exact date of the MOASS will be and what the final GME number will be because nobody but the shorts know the details of their deals (maybe the government should consider forcing more disclosure in the short market).
I can speculate and say that the MOASS will likely occur by the end of April because the way these contract expiry dates are usually set. And It’s possible the financial institutions could have repositioned their shorts further down the road to buy more time.
However, I can say 2 things with absolute certainty
We are witnessing history, this whole thing is already resulting in many academic studies, further government intervention, and future movies/documentaries
There are no retail brokers in America that will be capable of paying out retail investors when GME reaches the peak so we will see January 28th happen all over again.
I do not care what broker you have, fidelity, E*TRADE, Schwab, or robinhood, etc. They are gonna be forced to shut down GME buys (and very possibly sells) just like RH did on January 28th. When the number spikes again nobody will have the liquidity to move the money required for the MOASS
And I know everybody hates Robinhood but in my personal opinion, I believe they are just the patsy for this whole thing. The entire worth of most retail brokers will not be enough to payout the MOASS to retail investors so I can guarantee we will see traders shut down GME buys when it takes off like in January.
Mainstream Brokers only have so much money to provide the liquidity needed to move billions of trades a day, they are not equipped to deal with something this insane.
If you think I’m just a crazy person, that’s fine. I don’t take it personally. I’m just making this post because I believe this current squeeze is mainly responsible for the market wide volatility we have witnessed these past 3 months. I just wanted to make this post to bring caution to retail traders.
I know GME is a “meme stock” so it’s easy to discredit and it’s fun watching this David vs Goliath story but I believe this will have very real effects across the whole market so proceed with caution on your trades until this squeeze reaches a conclusion, ESPECIALLY IF YOU DEAL WITH NAKED OPTIONS
If you read this whole thing, thanks. Please let me know if there is any corrections I should make.
TLDR: just skim the bold points ya lazy fuck lol
Edit: gonna have to turn off notifications now lol. So I’m sorry if I don’t reply, maybe later.
But most importantly I’m no professional, I’m just a guy with an interest in the world of finance. So don’t take this post as gospel. I wanted to start this thread for the discussion and while I do strongly personally believe the MOASS is real, I appreciated the counter points.
Thanks for the laughs and genuine discussion
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