NEW YORK, NEW YORK – JANUARY 27: GameStop store signs can be seen on January 27, 2021 in New York … [+]
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GameSto
GME
At this point the GameStop stock chart looks more like a kind of theoretical mathematical curve than any stock move. However, there are a number of reasons why this does not necessarily disrupt effective markets. Here are three of them.
Fully efficient markets are not real
Even strong advocates for effective markets, they generally do not believe that proper markets are everywhere all the time. There needs to be some disruption in markets so that investors can take advantage and make money.
Who would make effective markets if there were no benefits to doing so? If hedge funds, or indeed r / wallstreetbets members can’t find inefficiencies, why should they bother with price analysis? And if prices aren’t scrutinized, why should markets ever trade effectively?
So even the proponents of efficient markets cannot dispel the notion of market friction. The fact that such complaints make headlines when they may occur supports effective markets rather than breaking it. We don’t see this kind of thing every day, or even every decade.
Relatively small
Even at its current high value GameStop is around 0.1% of the value of the S&P 500 and has been at prices that could be seen as 2 weeks, if possible. So trading very little stock offline for a week or two contradicts the idea that markets are generally efficient.
Currently, GameStop is about the size of Delta Airline
DAL
AAPL
So yes, there are all sorts of GameStop looks and names like ‘short squeeze’ right now, but this is a fraction of the markets over time. If we are still in this position come 2022 maybe we should reconsider, but temporary blips in small corners of the market, however that does not really mean that all prices broken property.
There can be risk / reward in balance
Another test is if the markets are not efficient, then where is the free money to be made here? I’m afraid, GameStop doesn’t seem to have free money today. Would you shorten it when others who have done the same have seen all of their hedge funds closed and the costs may have risen substantially? There are even suggestions that those who stopped the weak hedge fund now could be in trouble too. If a trade that wins in the long run ends your hedge fund, and even then disturbs the business looking to sponsor, it may not be a trade that wins.
Similarly, it is clear that there is also a risk of going far at these levels. If the path from here is uncertain and there is no free money on board for either longs or shorts, then where is the inefficiency?
Somehow the eye-popping results we see are necessary for long positions to take the big risk. I think most would argue that they don’t last, which is why results have to be high as this continues, and, of course they are.
We may look back on this program and say that the decline in the stock from here was obvious. However, timing is crucial, you may be asked to advance that trade today. It is very important to your profits whether you choose to go short today or even the day before. If there is no obvious path to financial gain here, where is the inefficiency? If you think the short term is obvious, tell Melvin Capital.
Ultimately there are prices where buyers and sellers meet
Finally, prices are where buyers and sellers meet. No one is arguing that effective markets are shattered when a company that is about to be privatized at a fixed cash price does not see their stock collection because it reports a strong quarter before the deal closes.
In this case, the equipment is similar. The question is whether the stock is emergency buyers, rather than more traditional emergency sellers. GameStop’s recent interest in data was very high at over 100%, and many of these shorts are being traded out for reasons ranging from risk management to margin calls. If you need to buy a lot of stock over a very short period of time, it is economics at the simplest level to see a stock rise in price.
Today the market is penalizing those who decided, in total, to shorten more than 100% of the shares of GameStop. That seemed like a very inefficient move. Looks like they won’t be in a hurry to do that again, at least for a while. Of course, the other side of the trade came from an unexpected place, but that’s just how markets would work in a self-correcting way over time.
The market is probably a far more efficient tool than we realize.