Coup d’état
Dear Trader,
As many of you know, Wall Street is on fire and the short squeeze of GameStop ($GME) is now on the desk of the President and the politicians. The White House has announced that they are monitoring the situation and the Senate Banking Committee announced this afternoon that they will be holding a hearing into the matter.
What happened?
Melvin Capital and Citron Research shorted GameStop (over 120% in short interest) in order to benefit from its declining price and lack of potential in the new market of streaming games. Word got out through a Reddit forum called WallStreetBets, which has over 2,700,000 traders in their Discord channel. They all shouted BUY GME, and HOLD the line, and made ample use of rocket emoji.
The result?
GME squeezed to over $500 today. Melvin Capital lost over $4 billion dollars and Andrew Left, the head of Citron Research, publicly announced on Twitter that he had closed out his position. Citadel, which is one of the main clearing firms in Wall Street, came to the rescue of the short-sellers, and then suddenly news broke that Robinhood and some other brokers will not let traders open a new position on GME. What does that mean? It means no more retail trader buy orders will be allowed. Thus, the price will not be pushed higher. By separating out the buy orders coming from retail traders, GME collapsed, and now I see on my screens the most interesting chart of my lifetime:
Is it legal to squeeze the short-sellers by shouting HOLD THE LINE in a forum post? One might argue it is a pump and dump activity, but short squeezing on Wall Street goes back a very long time, albeit not through online forum posts. For example, in 1902, Northern Pacific Railway stock soared from $45 to $1,000 in a massive short squeeze. On the other side of the argument, is it legal to stop retail traders from buying or opening a new position? Brokers can of course limit the trading activity for volatile stocks, but to what extent? These are the hot topics in the trading community right now.
From Elon Musk and Mark Cuban to AOC and many others, it seems like everyone is raising concerns. Some say that you cannot suddenly change the rules of the game to favor the traditional firms of Wall Street. But can you then pump a stock like this in a Discord channel and create an imbalance? The politicians have promised to hold hearings in Congress and it will be very interesting to see how this mess will turn out.
For now, we sit on our hands and do not trade these stocks.
The problem with trading stocks like GME and AMC is that these moves are not consistent, and it is very hard to manage risk in them. Those who want to make a living from trading should avoid them, because consistency is the key factor for any long-term career.
I’m not saying though that it is not possible to make money on them. On the contrary, tons of money can be made on them, but fortunes can also be lost, because with this type of volatility, it is almost impossible to manage a risk.
What you do as a trader is up to you, but for myself, as a trader, day in and day out I stick to higher float, higher liquidity stocks. That is how to day trade for a living. And if I am tempted to trade them, just for fun, I take a very small size and do not expect to win the lottery. I just enjoy being in the game.
To your success,
Andrew
PS: My colleague at Peak Capital Trading, Ardi Aaziznia, and I recently co-published a current and up-to-date book on stock market investing and trading that reviews the fundamentals of investing, swing trading, and day trading. It’s called: Stock Market Explained: A Beginner’s Guide to Investing and Trading in the Modern Stock Market. Should you be interested in purchasing a copy, I’d appreciate it very much if you would send me your feedback after reading it.
