Why did GME go down from >$400 to <$50 in one week of trading?
In my last post I stated that the government probably wouldn’t let the short squeeze come to full fruition, but I didn’t know how that would happen. Now, we know.
On February 23rd Robinhood, Ameritrade and a few other retail investor stock brokerages halted buys of GME. Sells were still allowed. Most of the retail investors who were squeezing the short were trading on these platforms because it is easier than through something like Vanguard. This had the effect of artificially depressing the price, which fell over a hundred points in one day. By Friday they were allowing one buy per customer who did not have any shares. On Monday or Tuesday they increased it to a total of 5 shares owned per customer. These were irrelevant amounts to affect a stock change.
On The 28th when this happened, I transferred funds to my existing Vanguard account. It took several days for the transfer to clear and then, unusually, they required another 7 days delay before stocks could be purchased, by which time the stock price had dropped to $50 in after-hours trading Thursday night. I imagine something similar happened to most retail investors. During this period of low volume trading, the hedge funds sold small numbers of shares back and forth at lower and lower prices – because nobody else could buy them.
On Friday GME climbed back up to $66.50. Whether the momentum we had can be recovered is not known. It is unlikely that the hedge funds have been able to deleverage and it seems like most people are holding their shares. Which means that the hedge funds don’t have a large pool of shares to buy from and repurchasing shares would drive the price back up. So we may yet bankrupt several of these guys with people like Ben Bernanke as advisors.
Allegedly, the Depository Trust & Clearing Corporation was requiring a hefty deposit from Robinhood to continue purchases of GME because of the risk imposed by margin purchases, but if that is so, they could have simply disallowed margin buys. In fact, it was a privately run regulatory entity enforcing biased rules to benefit the banks represented by the board of the DTCC.
Breaking the Law!
#1 Naked Short Selling
It appears that the brokers who lent the shares to the hedge funds broke the law by selling more paper shares than physical shares exist. The evidence is the many market reports showing up to 150% outstanding shares shorted. This can only be so if laws were broken.
#2 Market Manipulation
The DTCC clearly enforced rules that created a huge drop in price that hurt retail (non-professional) investors and helped the largest banks and hedge funds in the nation. This is not only illegal, but it is also clearly unethical in a Scrooge sort of way, stealing from the poor to give to the rich.