Naked Short Selling on GameStop (Deep Dive) transcript

in today's episode I'm going to talk about the illegal practice of naked Short Selling it's been occurring in our financial markets it's been the topic of conversation with stocks like AMC GameStop Bed Bath and Beyond and so many others and I'm going to share with you the very real toll that this illegal practice takes on the companies that become a target of it on their shareholders their employees on the stability of the entire Financial system and last but not least on individual retail Traders like you and I who are trying to carve out a little piece of profit from the market each day for ourselves but it feels like we're fighting a losing battle with hedge funds and investment bankers that somehow get to play by a different set of rules it doesn't sound all that much different from what happened in 20072 2008 we're going to talk about this important subject here naked Short Selling we've got a lot to get into I'm going to go full screen on this slide deck here and first I want to help differentiate naked Short Selling which is illegal from just traditional regular short selling now Short Selling itself has been around for a long time in fact 1609 it emerged with shorting of the Dutch East India Company in the Dutch Republic but following a stock market crash in 1610 it was temporarily banned now the way Short Selling works it's just a crash course for those that aren't familiar with it you create a negative position in your account so negative 1,000 shares for instance now typically when we buy a stock we buy and we have a positive position of a th000 shares and when we buy a stock for instance at 20 if it goes up to you know $22 $23 we profit as the price goes higher but with shorting it's the exact opposite you short a stock for instance at 20 and you want it to decline now I borderline think it's unethical to profit from the decline of a company but nonetheless it is allowed and so let's just say for instance the company goes all the way down to $2 a share if it does it's dropped $18 a share from your entry so your profit is8 $1 a share time ,000 that would be an $188,000 profit on the drop now let's try another scenario what happens if you short a stock at 20 and it goes up to let's just say for the sake of argument we'll choose a random number like 500 that's a reference to GameStop well you would be down $480 per share times ,000 that's $480,000 and here's the really interesting thing with short selling you can actually lose an infinite amount of money that's true and you can lose far more than you could stand a gain because in this scenario the most you could have made is if a stock went to zero you would make a full $20,000 $1,000 time $20 a share but if it goes to 500 you could lose $480,000 so it seems your risk to reward there is not inbalance and of course what we know now is that well Short Selling can get some Traders and investment bankers and hedge funds into really big trouble so short selling isn't anything that's new but in order to short a stock you have to be able to borrow the shares so how does that work well there's somebody of course that owns shares so let's just say for instance we'll make an example here where the company has sold 100,000 shares onto the market we'll just say for the sake of argument and let's just say all those Shares are owned by one person now you have someone uh you've got your broker so that person has all their shares with their broker and then let's say you have another Trader who says you know I think the price of this company is too high I want to short 5,000 shares so they go to their broker and they say hey can I get 5,000 shares and the broker says well I've got this client here with 100,000 I'm sure I could lend you 5,000 of their shares so you could go sell them on the open market now that doesn't seem right but that's exactly how it works they borrow the 5,000 shares from this client they lend it to this client he shorts them into the market and now he's short the stock and the stock now has what's called a short interest of 5% 5% of the shares are currently short the stock now if we go back to GameStop what you might remember is that GameStop at one point had a short interest of nearly 140% which means somehow for 100,000 shares as an example there were 140,000 shares that were short the stock how can that possibly happen that there would be more shares short than Act actually exist H interesting indeed well we're going to talk about that in more detail in a second but one of the things that you'll notice with a lot of stocks and this is true with a lot of large cap stocks is that because there are so many shares available so many people own the stock it's very easy to short them so actually right now GameStop is easy to borrow when a stock is easy to borrow and that's referenced by this e right here that e means a stock is easy to borrow what it means is that the broker has so many clients that have shares they can lend them out willly nilly there's no shortage of shares now sometimes when there's a stock that's very hard to borrow the broker will tell you well you know I'll look and they'll they'll put a little L and they'll say we'll try to locate the shares I don't know if we can find them and if they do find them they'll say you can have them but it's going to cost you some money maybe it'll cost you for a 5,000 share position 250 bucks and you pay the broker the money you get to now short the shares and take your position so the broker makes a little bit of money on that and they do pay a little bit of that back to whoever they borrow the shares from so when you have a stock that is easy to borrow you're not going to see a high degree of naked Short Selling because these are stocks that are not hard to borrow anyone can borrow shares there's a ton of shares available so right now GameStop is easy to borrow and what you might notice is that GameStop right now has very high short volume some people think that this means it has high short interest this is actually the short volume over a 5year chart and so if we go back to 2021 you'll see in October 2020 there was a spike in short volume and then a massive spike in 2021 right here this was when we had that epic squeeze short volume just refers to the number of shares that were traded each day to the short side so that means all of the active Traders potentially day traders who were just getting in getting out getting in getting out but we're possibly doing all of those trades to the short side so here you could see um on this particular day just uh this was just the day before yesterday we had the highest amount of short volume in fact that we've ever had on GameStop but that doesn't mean that the short interest is particular H particularly High it just means that there's a lot of Traders actively trading it to the short side because Shares are easy to borrow now there are a couple ways that you can change that and this is something that was a topic of conversation um several years ago but it's still true today most retail Traders don't know that you can actually disable stock lending you could tell your broker do not lend my shares to short sellers I don't want to help short sellers make money don't lend out my shares and so you can actually say that when you open an account you can say disable lending don't lend your shares out lend my shares out now what some people will do to take it even one step further is they'll actually take their shares away from their broker and they'll do a direct it's it's a a direct registration with an agent and so your Shares are almost like offline they're not even with a broker now that gets a little bit complicated but if you do that your Shares are now removed essentially from being actively traded in the market and what that does is it effectiv removes liquidity it takes away shares that could be traded and that an algorithm could be trading that people could be borrowing Trading long short so it actually makes the stock less liquid and it can create bigger moves if well and in the case of GameStop millions of Traders and millions of shares have been taken off of the market because Traders uh felt so strongly about this this exact concern that their broker was letting other people trade with their shares so there's this other concept called the short sale restriction and actually uh right now GameStop is on short sale restriction so short sale restriction is CB right here GameStop is currently down 14% right now in 1938 in the United States the short sale restriction rule was created and it's called SSR for short it was called the uptick rule at that time because it only allows short sellers to sell short at the ask price when the stock is moving up in other words if I wanted to short this stock rather than selling at the bid to a buyer and if I did that it would create a red transaction on the tape right I would only be able to sell by putting my shares on the offer which means I would have to wait for someone to come and buy my shares that are for sale this prevents bare raids where Traders are aggressively hitting the bid to try to force the price down so even in 1938 this was a concern and of course this was you know less than a decade after the Great Depression so they were trying to prevent stock market crashes so the uptick rule prevented bar raids in 2010 they revised the uptick rule to only take effect when a stock was down at least 10% in one day now with small cap stocks that can happen very easily but even on a stock like GameStop it can happen uh very easily as as well because it's so volatile so right now GameStop is on short sale restriction which is very common short interest as I already mentioned is a record that's maintained for all stocks and it reports the number of shares that are currently held in short positions against the company so if a company has 10 million shares outstanding and 1 million shares have been Borrowed by short Sellers and sold short against the stock then this creates a short interest of 10% as you know at its peak GameStop had short interest of 41% and obviously it should not be possible for short interest to ever exceed 100% but it did now this is the current reported short interest for GameStop this was updated today at 14.68% now uh there's about 45 um 45.9 million shares that are short there shares on loan right here of 48 million and it doesn't have a particularly High short score according to ortex uh I think that's something that's worth noting here with the short interest is that the company has just sold 120 million shares of stock onto the market over the last 30 days so they've diluted the value of the company and and increased the number of shares and so I think that that has as a result decreased um the short interest because the total number of shares has gone up so much um just recently but let's get into naked short selling now that you've had a crash course on what Short Selling is and how it works a naked short is when the shares are sold short in the market without actually borrowing them first from a seller wait a second so you're saying this person goes short 10,000 shares or whatever it is and the broker said yep here you go there's the shares you can short it but they never actually made sure that they had the shares from someone who was holding them that's correct how does that work that shouldn't work it shouldn't be like that well it it it shouldn't in fact it's it's illegal have naked Short Selling but due to the nature of digital markets it's actually easy with the click of a button for one of these big investment Banks or a a firm to assign shares to an account even if they don't actually exist okay it's called the F3 autoloc button and in 2016 Goldman Sachs paid a $15 million um paid $15 million to settle allegations made by the SEC about the F3 button used to autoloc shares let's jump to this little video here I think you'll find this interesting so I'm going to put this up on the screen and I'm going to play it here for you this is a um a former Morgan Stanley employee talking about naked short sell I think that this type of thing has been going on for a very long time and this is the way the financial system has worked it's the incentive is to make money and if they have to bend the rules a little B then they bend the rules so um there were 32 enforcement actions um that The Regulators took against naked Short Selling and they totaled $64 million in fines $64 million but when you think about the billions of dollars that were lost on some of the Epic short positions that hedge funds took on GameStop $64 million you know I just don't know that that even really is a drop in the bucket for these big firms I think it's just a it's a it's not even a consequential amount of money so one of the ways that we can track uh naked Short Selling is through a system called failure to delivers so the failure to deliver specifically on GameStop reports the number of shares that failed to deliver so when you have a trade like this and someone shorts shares in order to settle that position you need to be able to make sure you have a counterparty for those shares so you need to make sure you've got the 10,000 shares over here so if you don't have them it's called failure to deliver all right stocks this gets reported and so some stocks have very high levels of failure to deliver as you can see again here on ortex for GameStop and these are hundreds of thousands of shares that they're reporting failed to deliver now if a company fails to deliver enough times and this is by the way these uh numbers are updated only twice a month so right now we're waiting on um on the the latest batch of data to show the number of shares the price the quantity Etc but these are really huge numbers that we're seeing right here $30.45 a share 344,000 shares right I mean $10 million it's a lot of money this is from fintel so how do we prevent naked Short Selling well there are a set of regulations and there's a reg show list it's designed to regulate Short Selling and prevent naked short selling a stock will be placed on the reg show list if for five consecutive settlement days failure to deliver the failure to delivery exceeds 10,000 shares so this list is supposed to allow for a closer examination by Regulators the stocks are supposed to be able to get flagged but gamestock was on the red reg show list for a long period of time and you know it's just one of these things that it it was on it but what happens it doesn't feel like anything happens so um so this was a GameStop SEC data shows $350 million of GameStop shares failed to deliver right this was this was back during um during the big surge in 2021 and this was a this was by Bloomberg so is naked Short Selling really bad what's the big deal all right well let me explain the impact that this has let's just imagine for instance think of GameStop think of any stock let's just say that the total number of shares for the whole company is 10,000 shares and then someone goes and is able to borrow 20,000 shares and then on the level to you've got the bid you've got the ask right here so you've got buyers but remember the buyers the people that are putting out orders they're just going to be lined up here you've got some sellers people who are taking profit you can only have people taking profit that equal certainly not more than the number of shares available and when you now allow someone to short 20,000 shares the result is that they're able to bury the stock they're able to keep hitting and hitting and hitting and hitting it's it's unrelenting selling pressure there's no letting up and there's no amount of buying that can overcome it which means essentially naked Short Selling can drive companies into the ground and so when you have brick-and-mortar companies that you know many people are very bearish on some of these big hedge funds and investment Banks felt like it was a layup this was easy stuff these companies are gone so they just short them short them short them short them short them AMC Bed Bath Beyond GameStop well as it turns out as we know um GameStop it it it it backfired on them so naked Short Selling is illegal and it's a it's not a good practice because it allows this unrelenting selling now there's something different um that's called cfd trading cfd trading and you may have heard of it it's not allowed in the United States but is allowed internationally cfd trading allows you to sell as much as you want you can buy and sell buy and sell but you're on you're not actually trading the market so your orders don't go through the market you're not actually selling shares on the market you're not buying from buyers you're not selling to sellers You're basically trading on a separate exchange and trading cfds is almost like paper trading because if you make money the broker pays you out like a casino and if you lose money then they get to keep your money so I think it's considered kind of too much like Gam ging in the United States and if you want to gamble you have to go to Las Vegas you can't do it in the stock market so cfds are not allowed in the US which is fine but if you wanted to just short something with huge amounts of size more than is available you could use cfds but with cfds you wouldn't be able to move the price and I think that one of the tactics here is to put out these really big sell orders in order to move the price so as we know allowing Market particip to sell short in excess of the float short sellers were able to drive the stock to record lows what the big hedge funds didn't expect was the army of retail Traders on social media banding together to Stick it to the Man with regular Americans opening their Robin Hood app right retail Brokers all of a sudden everyone's pressing the buy button and suddenly volume surged 150 million shares a day when from $19 to $500 a share buying shares of GameStop became a political statement a chance for the little guy the underdog to finally get in one good punch and you know we've seen it on Reddit we've seen it on Twitter we've seen it everywhere all of the memes everyone just finally feeling like we got we got one chance this GameStop sitting among Tesla and Amazon as a Fortune 500 company um you know and and I think that Wall Street um was frustrated how dare you use uh my own spells against me right uh and but that's what happened so the problem is naked Short Selling creates widespread Market risk the GameStop short squeeze placed short Sellers and Prime brokers who allowed naked Short Selling with unrealized losses they had losses in excess of billions of dollars dtcc which is used for clearing trades reportedly waved $9.7 billion of collateral deposit requirements on January 28 2021 prevent and they did that to prevent systemic risk to the financial system that would have resulted from large institutions defaulting on their obligations and that's why Robin Hood said they took away that buy button because they couldn't allow people to continue trading because they wouldn't be able to meet the collateral obligations with their clearing firm short sellers became too big to fail and in in a sense they got a bail out so at the peak of the squeeze many Brokers including Robin Hood removed that buy button only allowing sell orders so who you know what I mean like who who got off the hook there it was the people who were getting squeezed now if they hadn't taken away that buy button I can only imagine what would happened but option trading during 2021 and again today amplify volatility in a speech in 2002 I think it was 2002 Warren Buffett said um that um he said options are Financial weapons of mass destruction and he said that they could they could cause systemic serious economic destabilization even if it wasn't that that particular stock but just their the use of Leverage in that way can be very dangerous and and he's not wrong and this was certainly true with um options trading on GameStop because the market makers once again these big Brokers these big investment uh banks these big hedge funds they were selling the option contracts so they were selling contracts that they thought didn't have a single chance in the world of ever being in the money but when Gamestop went up to $500 a share every option contract to buy the stock at every strike price below 500 was in the money and it was in the money by a lot and we're talking about billions and billions of dollars that all of a sudden the people who wrote those option contracts were on the hook for and they weren't expecting it and they weren't prepared for it so we can only imagine what would have happened if the buy button didn't disappear in January of 21 or what would have happened if dtcc hadn't waved the $9.7 billion in collateral obligations or what would have happened if GameStop had gone to $1,000 a share because if they hadn't changed the rules in the middle of the trade things could have gotten pretty crazy but they changed the rules naked Short Selling in that sense brought the financial system to its knees for a moment it allows the price of a stock to become incredibly disconnected from the true market value of the company now GameStop the value the book value it never made sense for it to be at $500 a share and if you didn't have naked Short Selling and you didn't have Reckless Short Selling even if it's not naked if you didn't have unsecured short selling that didn't have a hedge to manage the risk we wouldn't have seen that type of explosive short squeeze 140% short interest that's reckless now we're going to talk in a second about how these Investment Bank Banks and hedge funds are now avoiding this uh this issue of short interest because now they want a short but they don't want people to know about it because high levels of short interest attract attention fintel ortex many of these companies now maintain list of stocks that have the highest likelihood of experiencing a short squeeze so if you're a short seller and you're a hedge fund or an investment banker and all of a sudden you're in one of those positions and you realize that that stock that you're short just made it to the top of one of those lists you're in big trouble and you might not have time to unwind the position so now you're stuck so they don't want to show their hands to the market they want to kind of keep it a secret so what do you do when you want to short a ridiculous amount of stock and you want to keep it a secret so historically investment Banks and hedge funds have accumulated large positions as they did with GameStop in 2021 and so many other stocks but now retail Traders have learned to pay close attention to these stocks with high and increasing levels of short interest funds are using different ways to take large positions without increasing the reported short interest the alternatives to short for to shorting stock without doing traditional uh shares is to use options or to do Equity swaps now the thing with options the downside is that taking large options positions it requires a counterparty on the exchange to write the options contract and large options transactions are also reported and really at this point a attract just as much attention as a large stock transition uh transaction would so options trading is effective for maybe a retail Trader like a roaring Kitty who wants to take a really big position and doesn't mind his cards being out there on the table but for these big banks that want to take really big positions and the big hedge funds it's not working so now we're hearing more and more about Equity swaps um so I sort of think of of an equity swap as being like a side bet on the performance of a stock an equity swap can also be on uh you could do swaps on um an index an index on interest rates on currencies Futures but these swaps don't have to be backed by underlying stock for the buyer or the seller now it depends on the risk profile but by themselves a swap will not move the market because it's off Market it's a OTC uh it's over-the-counter agreement finding the details of these individual swap agreements is difficult even though they are reported it's still difficult to decipher them and to really understand them so I want to explain how these work in a little bit more detail D options and swaps are derivatives and derivatives are priced based on the price of an underlying asset they're derived from the price of an underlying asset so buying positions in derivatives by it self does not typically have price impact on the market right so just like trading a cfd if you take a a massive position but it's not going through the actual Market it's not going to bury the stock it's a it's a side BET right it's a side it's on the side it's over the counter now they can there are some instances where large options transactions can create Market volatility but uh but but just to keep it simple so when it comes to Equity swaps this has been a topic of conversation with GameStop an equity swap is an exchange of cash between two parties typically these parties are a hedge fund on the one hand and an investment Bank on the other so for instance when um Michael bur uh the from The Big Short he did swaps on um let's see it was um it was CDO credit but uh it was the credit default swaps that he was doing um and it was with a collat I debt obligations during 20072 2008 so he was betting on the housing crisis you know in the housing market to collapse and he felt that going directly to an investment bank and getting this um CDs was the was the best way to do it and they wrote it for him they if you watch the movie they were like you really want this we're taking money from you are you sure like you're going to lose the money but but he was right so in a swap a hedge fund uh like Michael bur's fund can go to Investment Bank and purchase a synthetic long or short Equity position via what's called an equity swap it's synthetic because it's not actually owning real stock it's it's owning an agreement so let me show you how this works it's it's complex but these types of complex derivatives are what have in the past brought the market to its knees and I I'm concerned it could happen again so in a swap you have a hedge fund in an investment banker let's just say for instance that the fund manager at the hedge fund wants to Short $100 million a GameStop at $20 but they don't want to short on the open market because of short interest they don't want to have short interest reporting and maybe they don't want to have disclosures so they go to the investment banker who agrees to write a swap agreement now swap agreements can be highly customized to whoever's whoever wants it it's an agreement between the investment bank and the hedge fund so they have a lot of ability to make design these how they want so let's just say in this uh instance that the the asset is GameStop and that it's a short so the notional amount which is the amount that they're putting uh up is $100 million now remember they don't actually have to buy $100 million a stock this is just the agreement we'll talk about how much this cost in a second so it's for $100 million a stock it's to the short side and the hedge fund will receive the total return Equity or uh of profit or loss whether it goes up or down and what they pay to the Investment Bank is Benchmark interest rate which right now is like 5% plus an amount that they decide they agree to let's say 1% so that would be 6% total so that's not insignificant uh the frequency of payments would be every 3 months so quarterly and let's just say the maturity is one year so this is a relationship between the investment bank and the hedge fund so let me give you an example of how this payout would work so let's say that GameStop goes down 10% if it goes down 10% now the hedge fund is happy cuz they're in $100 million short effectively and now it's gone down 10% so their position is up $10 million but remember they have to pay their interest payment it's $6 million 6% of 100 million 6 million a year but divide that by four is $1.5 million a quarter so they get uh a net payment from the Investment Bank of $8.5 million they would get 10 million but they have to pay pay the um the interest so the Investment Bank in this case pays out $8.5 million to the hedge fund but if the stock goes up 10% uhoh well the Hedge fund's down 10 million right that was the this is the notional amount 10% they're down 10 million and they still have to pay that $1.5 million of Interest so now they have to pay net 11.5 million from the hedge fund to the Investment Bank so the amount of money moving here each quarter in these in this scenario is between 8 and 10 million one way or the other and each quarter based on the current price they'll have a payment that goes through so it's an exchange of cash flow uh the thing that's important to recognize though and well the benefit to the hedge fund is that this allows them the ability to profit from a directional bias on the stock without actually putting up the capital to invest in the stock they didn't have to put up $100 million do you see they didn't have to put up $100 million here this was the agreement these are the terms so each quarter they have to make their payments if the stock goes the wrong way and they have to pay interest but they don't have to pay put up the Full 00 million in the stock that allows them a lot more leverage Leverage is dangerous giving hedge funds this amount of Leverage means that they can control a lot more shares than they would be able to afford otherwise there's also no requirements for disclosure and well that now that may not be entirely true again you may not know this about me but I'm not an investment banker so my understanding is that they're not required to make disclosures on Equity swaps and I know that they don't have short position reporting so short position is not reported towards short interest so these are the benefits for the hedge fund now the risk for the hedge fund if we're going to think about the risks for a second is that if this blows up and goes up to $30 a share $40 a share they're down 100 million plus interest 106 million if it goes to $200 a share $300 a share holy smokes we're talking about billions of dollars of losses and the investment Banks they take that money in now the Investment Bank does carry the risk that the hedge fund could default right uh and that would be a problem so and they also carry the risk that if the stock goes in the direction of the hedge fund that they lose money but how so you might ask well why would the Investment Bank even take on this risk so first of all they get guaranteed interest payments whether it's fixed or variable rate they get guaranteed interest payments from the hedge fund and they can go ahead and hedge the position with the purchase of stock or options or they could hedge with an existing position if they'd like so they can choose to hedge the position to manage their risk and if an investment Bank wants to do that that's fine for them to do that so that's their choice it depends on their risk profile how much risk they want to take but they can hedge the position to the point where really they're getting the fixed income of the interest payments so they're getting the interest payments they're paying some money possibly for the Hedge depending on what it is and that's all they're risking so for them they just sort of look at that Delta and as long as there's profit in there with the interest payments then for them they're happy to write those contracts so these Equity swaps are now being used by some of these big funds to acquire essentially the equivalent of a short position without really being officially short and this allows them to skirt the short interest um requirements so there are people that are saying well geez how can you figure the short interest right now in GameStop says it's 14% but we don't there's a lot of things we don't know and you're right there's a lot of things we don't know we don't know about naked Short Selling we don't know to the extent it's happening today we don't know to the extent that these Equity swaps are going on we don't know how big they are there are regulations around them in terms of how big these uh sort of side bets can be they're not it's not like they're unregulated but they're a confusing area of the market that most people don't understand certainly not retail Traders at large and and and honestly even I'm sure even some Regulators don't fully understand them because it's very complicated stuff so what this results in is a battle around certain prices because when we think here um well when we think about the hedge fund and the invest investment banker let's just say the Hedge funding the investment banker they've got their agreement and we know that you know four times a year they've got to make their payments right so each time of year around that time there might be an extra battle around the price of the stock maybe the investment bank has other people has these have these swaps and they want to try to keep the stock below certain levels so they don't have to make a payment or maybe they want to keep the stock above certain levels so they don't have to make a payment depending on which direction the swap goes right now they may be they may not have a strong opinion depending on the size of it but this is these are areas where we see a battle we see this on option expirations we see it on um quad witching which we actually have uh coming up on GameStop quadruple witching is when you've got four different contracts that are all expiring on the same date and that creates a tremendous battle between the people that are trying to keep the stock above a level if they want they want to keep it above a level so all the strike prices Below in the money and then the people that want to keep it below a level so those other strike prices to the upsider in the money so there becomes this battle and in those areas where we see a battle we see all these buyers and sellers lined up this is a heat map showing the depth of the market where you can see these sort of like um you know like tranches of orders up here and up here they're just it's like they're all battling at these very particular levels so one of the problems here is that when you have a side bet essentially and I call it a side bet because it's the easier way for for me to understand it um you've got the lit market and the lit market is when you're sending your orders bid and offer you're sending them through NASDAQ right so this is nsdq NASDAQ ARA this is the lit Market but then you have the OTC sort of side bet market and orders that go through here don't affect the actual trading price because this is separate but let's just say you've got a$1 billion side bed over here would it make sense to take 10 1520 million to slam the price of this stock down maybe through the use of naked Short Selling to push it below a certain price so it affects what you're going to pay on this deal if you're coming up at the end of that uh term right and this gets into something that um we learned about in an interesting uh 2006 interview with Jim Kramer so there was an interview uh from the street it's you can see it on YouTube right here um and he said this is a quote he said when I was positioned short at my hedge fund when when I was positioned short meaning I needed it down I would create a level of activity beforehand that would drive the Futures doesn't take much money similarly or if I were long and I wanted to make things a little bit Rosier I would go in and take a bunch of stock and I would make sure that they're higher maybe commit 5 million in capital to do it and that could affect it but it's a fun game it's a lucrative game and you can move it up and then fade it and often creates a very negative feel I would encourage anyone who's in the hedge fund game to do it because it's legal and it's a very quick way to make money it's very satisfying I don't know if it's legal by the way no one in the world would ever admit but I don't care uh and then he goes on to say what I used to do what called um if I wanted to go higher I would take the bid uh take and bid take and bid take and bid and if I want to go lower I would hit and offer hit and offer hit and offer it would be fabulous because it would bager all the longs what does that mean so when you see this big sell order here so if you hit an offer hit an offer hit means you're selling at the bid so if a stock is not on short sale restriction you can hit the bid and you can slam the bid here and at the same time you put up a big sell order here so now what you're doing is your your sell orders are going through the tape it's called painting the tape you're putting these huge sell orders through on the bid so you're slamming the bid then you're putting up an order right here you're slamming the bid putting up an order here and what that does is it creates a huge amount of selling pressure it creates huge amount of negative sentiment and people were talking about this during GameStop because you would see this you see these burst of selling and then a huge sale order burst of selling and a huge sale order now it can go the other way where you have a burst of buying and a huge buy order a burst of buying and a huge buy order and when you see that you feel there's some psychological support but some of this as we now know are games are being played by hedge funds are they legal I'm I'm not the the expert on that so I can't tell you but it feels to me like these big hedge funds and banks are playing a game where we as retail Traders can't compete I mean it's just as simple as that we can't compete at that and and so it's not really an even or Level Playing Field and that has always been one of my problems with trying to trade the stocks that so many of these big hedge funds are trading the Teslas the nvidias the S&P cuz that's where the the they're coming out and battling and I feel like the little guys like us just get chewed up and spit out now when it came to GameStop that was a little bit of an exception what I didn't expect with GameStop was that the little guy was actually going to get in a couple of really good punches so we did we got in a couple of good punches when it came to GameStop this was back in 2001 but you know we got a few here just in this last um this last move now the only thing that I'll say that concerns me is that I feel like there was only one real winner when it comes to GameStop and I feel like it was GameStop the company and I feel like retail Traders got thrown under the bus and and and just again kind of chewed up and spit out because we look at this move and the fact is GameStop just sold 120 million shares on the open market and who's buying those shares it's retail Traders so basically the money just came out of retail Traders pockets that's how I feel and it went into GameStop now if there's still shareholders GameStop then they own it but if they own it at $65 a share or 70 or $80 a share whatever the case is you own it at a really high price and the company has now just duded their Equity their their the number of shares by 25 30% maybe more I have to just check the numbers so the float has gone up a ton the total number of shares have gone up they've done two back-to-back offerings in like six weeks they did the 45 million share offering in may they closed that within a couple days they just another 75 million shares it dumped the stock and roran kitty I feel like he's collateral damage the company made $3 billion now he was up at one point like 700 million on his position but right now well when we check the current price as of right now his option contract is basically more or less break even as far as I could tell so at $26 his break even was 267 on the option contract on that option contract he was up um if we go back here to his biggest day he was up a total value $324 million right now it's basically back to break even the stock at one point he was up an incredible 200 well he was up the total gain it was um uh let's see 20 126 million and that you know I mean he's still up on it but he's not up nearly as much because all of a sudden the company comes out with this big earnings Miss and starts selling shares now GameStop um if we look at their um their quarterly or we look at their shelf registration let's see um I believe yeah their Charter authorizes them to issue up to 1 billion shares total so so far they've issued as of May 4th 306 million but then they just sold another 120 million so for what it's worth GameStop if the price does go back up and I'd like to see it go back up but then the company could just sell more shares and so it feels like the company is giving the short sellers the easy layup when they just sell more shares on of the market but you know I understand at the same time that the company has a fiduciary obligation to its shareholders they are you know taking advantage of the fact that the price is up so much even though there isn't any fundamental news to support it so I'm not saying it's the wrong thing for the company to do but it feels like it's the retail traders who are getting kicked in the teeth again and it it feels like are are we actually just dumb money like these guys are just printing money and you know the investment banks that sold those shares they made millions of dollars the company now has four billion of of cash on hand at least and and where are we you know I didn't I didn't make that much money on this R and kitty he was up a lot but I don't know what's going to happen maybe it's going to who knows maybe this is going to go to the Moon maybe there's something that's going to happen that I'm not aware of you know and I I can't see the future so we we'll see but this just feels like another example of big money winning and here we are dumb money just getting you know abused by the market and it's really frustrating so you know for me today the stocks that I traded I I didn't even touch I I didn't even touch GameStop I touched I traded some other stocks but I didn't even touch GameStop because I just felt like you know what for all I know the company could do another offering I mean they just did two backtack if the stock stays up at this price I don't know why they might not do another I mean why not see how much money they can print maybe they could raise 10 billion right I mean if if retail Traders are going to keep propping it up and keeping it above $20 a share it's like they could just continue sell selling and one of the things that I was sort of hypothesizing in um one of my last episodes is what is GameStop going to do um because now they have a tremendous amount of cash but what we know about their business model is that it you know the brick and mortar business model is is struggling their uh earnings for q1 2024 were down 29% year-over-year so you know things are things are not progressing in the way that um that I think many people were hoping that they would so you know it's it's just one of these things that it it feels kind of I don't know I'm not sure what we're going to see now this is um what I kind of talked about uh roaring Kitty's 2020 2021 thesis based on today's data he said in 2021 the risk to digitalization is overblown sentiment is overly bearish value is overlooked I don't think you could say any of these things today sentiment I mean I I just don't think you could say any of those things today right a possible thesis for 2024 really at this point is they've got a really strong cash position digitalization of gaming right and trying to the new console cycle did not significantly improve financial performance for them in 2020 but they still have the potential to transition they've got Ryan Cohen leadership position he's now got4 to5 billion of cash and one of the things I said is if they invested that just at 4% fixed income they' get $400 million a year so that would be making more than they're making during in in net profit than the current business model so I sort of was like What if they become a you know a holding company and start doing strategic Investments maybe Acquisitions that are a little outside you know this the space but they could become the birkshire hathway of Our Generation and they've got so much money now I could see that happening I think some people are hoping maybe they will buy Bitcoin um you know these are things that I'm not sure but there is also an argument to be made for the fact that the value of the company there's a certain Share value tied into the price of to how much cash they have the actual cash asset they've got a lot of cash but how they spend that cash is going to be really important because if they take speculative um you know make speculative Investments like Bitcoin and things like that then well it could go up a lot it could also go down and there's a lot of risk there so I think you know at this point for me I'm just sitting on the sidelines and I'm hoping to see GameStop break certain critical levels but what we know is that roaring Kitty has $20 strike calls we haven't seen a post from him for a couple days so we don't know if he sold any we don't know what the situation is there so he's probably still holding but we just don't know he's got the $20 strike calls we know that we have some pivots up here around $67.50 that was our uh pre-market level on Thursday the 6th I believe it was right up here so from a technical perspective you know these are the levels that we want to see break but I don't know if there are enough buyers that are going to be able to send it up to these levels I think what you need are short sellers to start covering but right now what's the Catalyst that's going to force them to cover now maybe we'll get some news from the company I think we're going to get some updates tomorrow um so you know maybe we'll get some news that changes the game and if we can start holding these levels and making our way you know holding 30 making our way back up to 40 to 50 to 60 that gets really exciting and for what it's worth we moved really fast on this day from $30 to $67 it happened in a few hours so we know it can move fast and one of the things that I think is really interesting is that when it moves fast right you've got the bid and you've got the offer moving really quickly this is on the lit Market but what's happening over here on with all these side bets is their unrealized p&l is going crazy and those are people that are going to be motivated to come out and participate in the lit markets to try to maybe push it one way or the other depending on how that affects their swaps so you know you've got the the equity swaps you also of course have um people that are taking options positions but those are more transparent because we can see the positions that have been taken now as always I would say that if you are interested in this type of stuff keep studying there's so much more to learn when it comes to financial markets you don't have to stop here so um if you want to keep learning I'm going to put a link um right down in the description of this video it'll be also posted in the comments where you can download some free resources these will help you keep going on your journey to learning more about the markets I'm of course an active Trader so if you want to check out my micro pullback strategy PDF my small account worksheet you want to check out some live trading archives showing my order execution my pre-trading checklist and a special video on holding losers too long and selling winners too soon you can download all of that all right so I'll put a link that'll be posted in the top of the comments and the description for you to check out and for those of you guys that enjoyed this episode I hope you guys hit that thumbs up I hope you share with some friends I hope you're subscrib the channel and I'll remind you as always in case you didn't know trading is certainly very risky and it does feel risky when we're battling against big hedge funds and investment banks that seem to have all the advantages that you and I will never have but it doesn't mean that there aren't areas in the market where we can find little pockets of safety that's what I've been doing for more than 10 years I don't trade GameStop every day I trade different stocks I trade what's moving I focus on trading catalysts so I'm a news focused Trader if something has news and it's moving I'm interested those are the the days where we see these you know that where we see height and volatility where we see liquidity where we see volume and those are the days where I feel like the little guys like us maybe have an edge maybe it's just because we're riding in the Wake created by the big whales and the big sharks out there but I'm okay okay with riding in their wake if I can make a little bit each day I feel pretty good about that one of the things that I really hope is that the financial system is stable for the long term because I want to be doing this for a long time and I would hate to see something like a GameStop literally bring the entire Market to its knees because some greedy hedge funds were just recklessly shorting shorting shorting got completely buried and then needed a bailout the bailouts feel so unfair they come from our tax dollars at our expense when do we get bailouts we don't get a refund we screw up our trading account it's gone right we we're trading in Robin Hood we're trading in thinker swim whatever it is we make a mistake that's it we don't get a refund we don't get an undo button but it feels like you get to this point where you're too big to fail and we saw it in 20072 2008 during the financial crisis seeing that going through that experience and watching that unfold it was terrifying and it was so disheartening and the amount of hostility and resentment that so many people had at that time towards the investment Banks I mean it was palpable and I feel like today uh because it was at this point so long ago people have just forgotten about that and these things happen in Cycles where you know you'll have a big blow up and then things kind of Regulation gets tight and then things start to get a little looser and then 8 10 15 years and then all of a sudden it happens again so you know it's just something that I think about a lot and I hope that this issue of naked Short Selling is not something that we continue to deal with because I know for the regular Traders like you and I it puts us at a real disadvantage you know I still have concerns about other things in the market that also put us at a disadvantage there's just this challenge that we are the little guy and then there are these really big firms you've got the pay pay for order flow you know the market making the algorithms it's tough out there so at the end of the day being a successful Trader at least in my opinion comes down to two things number one having a strategy a set of rules that you follow every single day in your trading and number two having the discipline to follow those rules when I talk to traders who have blown up their accounts and lost money most of them they never even have strategy they were shooting from the hip doing a little this a little that and so losing you know it's it's not really a surprise cuz they didn't have a technique but I also know of a group of traders who have the strategy but they lack the discipline to follow the rules and you may fall into that boat you know fall into that camp where you've got the rules but then you keep deviating you get frustrated you get emotional things start to unravel and next thing you know you're trading from Pure emotion so when I think about these big hedge funds I feel like one of the advantages that they have is that they're trading other people's money and it takes some of the emotion out of it but you and I when we trade with our own money and the money that we make has the ability to pay our rent next month or our mortgage payments to pay actual bills the emotion it gets pretty big so I know for me when I started trading I began at a time where the money that I used when I was starting was from my father he gave it it was from when he passed away so I had this real incredible emotional attachment to that money and every time I lost I felt like I was letting him down and of course when I would win I felt like I was making him proud and so the emotion that came with the win and the loss for me was really intense when I was getting started and even after doing this for more than a decade I still find it hard to separate that emotion one of the ways that I've been able to sort of deal with it is by doing things like meditation by focusing on trading with relatively small sizes and by understanding what my triggers are that for me become a point of emotional like no return like when I just get to a certain point in the day where I've lost so much that I start to really spiral I call it a spiral or a snowball day it's just where everything just starts to get really bad so when I cross a certain amount of red on the day certain Max loss there just certain triggers that I have if I cross it I need to walk away learning to recognize those is huge and these are things that I talk about out of course in my classes I talk about them a lot right here on YouTube but I also talk about them in my classes so I hope you guys do download these free resources and check them out I think they'll only benefit you in your journey to learn more about the markets I wish that there was more of an e emphasis on financial literacy in the school programs I feel like this wasn't something that I learned as much about as I wish I had in school but I was fortunate that I did pick up um a bit of it in the late '90s during the com bubble that for me was where I kind of got my taste to the market and then I opened my first account in 2001 and you know just kind of I guess at that point um decided this was something that I wanted to do took a break for a little while came back but um anyways I want to thank you guys as always for tuning in for these episodes I know this was a long one we had a lot to cover today but I think we did a good job of it so hit that thumbs up I hope you subscribe the channel and I'll remind you again as always hey trading is risky my results aren't typical so manage your risk take it slow and for warrior Pro members I will see you back here first thing tomorrow morning live streaming all right I'll see you guys in the morning