Taking on Wall Street shorters at own game

Perhaps the best way to see the ‘counter-shorting’ is as a new form of crowd-funding.

Picture: AFP

The delicious imbroglio over GameStop on and indeed “off” Wall Street is taking place at a fascinating and clearly quite unexpected three-way intersection of short-selling, the digital world in all its aspects, and the zero-interest rate and QE money printing of central banks in general and the Fed obviously in particular.

The QE/zero rates that have sent the Dow to 30,000, the Nasdaq to over 13,000 and individual stocks to dizzying, mind-numbing heights — Tesla to a market cap of nearly $1 trillion, Amazon to over $2 trillion and Apple, most staggeringly of all, to $3 trillion — sits at the core of it all.

Bluntly, simply, the QE/zero rate rising tide — tsunami would be more accurate — has lifted all asset values, but those of (almost) all shares in markets around the world has lifted a lot of “leaky boats”, along with “over-lifting”, so to speak, even the good ones.

It’s not merely an invitation to short-sellers, it’s all but a demand — with so many stocks now dramatically overvalued even in this world of central bank-created asset inflation, which leaves traditional bubble markers like the South Sea Bubble or Tulip Frenzy look almost pedestrian in comparison.

In a rather counterintuitive way, the very cheap money liquidity that fuels a stock’s overvaluation, making it so succulent a target for a short-seller in the first place, then works against that stock when the selling drives down its price.

If so many stocks have rocketed or are rocketing to prices of, say, 100-plus times earnings — or indeed even revenue if there are no earnings — when one stock is sold down to, say, only 50 times revenue, it doesn’t then look cheap but rather just “yesterday”. So the shorters are left unchallenged from any counter-buying.

That’s to say, left unchallenged, on Wall Street. Before GameStop.

What we’ve seen with GameStop, and it’s the first time this has happened on this scale and with this countervailing power, the off Wall Street space can, literally, buy into the games that Wall Street’s been playing, also using the “free money” provided in abundance so generously by the Fed.

Again, it’s all so 21st century. The very nature of GameStop is its own digital mobiliser: the users who are outraged at the short attack on their family, with the digital means, Reddit, to instantly build the power of thousands of aggregated small players.

It wouldn’t be happening if the shorting target was a conventional business or indeed many digital businesses which didn’t have the deep equity in them that GameStop has among gamers.

I suggest the best way to see the “counter-shorting” is a new form of crowd-funding.

Instead of posting a website and a meme and asking for money; we see the same digital dynamic at work in enthused, indeed enraged, wired enthusiasts encouraged to buy rather than donate; and out of those small individual actions came a tidal wave of buying in aggregate.

It’s particularly delicious to see the shorters bitten by exploitation of exactly the sort of gaps in market process and regulation that they, the shorters, are themselves exploiting, but they could not use: a form of co-ordinated trading, precisely enabled by the online digital world.

This in turn sent the shorters, pleading to be bailed out by the very institutions they are themselves exploiting; to be saved from “off-Wall Streeters” playing uninvited at their game.

As with most implosions on Wall Street — think Bernie Madoff, think Lehman Bros, indeed think the whole goddamned GFC — there’s always major components of market and regulatory failure and just good-old fashioned stupidity. The greed, of course, is taken as read.

It seems clear that the basic rules of shorting were ignored. It appears that over 100 per cent, perhaps as much as 150 per cent, of GameStop was sold.

This means there’s been naked short-selling — when you sell a stock without having borrowed scrip — as you self-evidently cannot borrow more than 100 per cent of a company’s issued stock, and naked short-selling is illegal, even on Wall Street.

Apart from anything else, this “over-shorting” superchargers the power of counter-buying, as it means there’ll be buyers desperately trying to buy well over 100 per cent of a stock. This in turn was instantly leveraged into even more buying power because of the digital dynamics.

We saw exactly the same thing happen in Australia nearly 50 years ago, in a much more primitive (both regulatory and operational) context when shorters sold close to 150 per cent of the stock in a penny-dreadful called Antimony Nickel. It led to the banning of naked short-selling, but so-called “covered” short-selling is allowed. This is where the seller borrows the stock from an institution.

Except the stock isn’t borrowed. It is not well known — and those, seemingly few, who do know don’t want to talk about it for obvious financial self-interest — but short-selling is only possible in Australia because in 1990 the (Hawke Labor) government specially changed the Tax Act.

When you sell a share, you have to be able to deliver title in that share to the buyer; and you can only do that if you “own” the share. You can’t sell a “borrowed” share on the ASX; and a short-seller doesn’t. They sell a share they have acquired from an insto — albeit in a complicated “form” contract where they are obliged to sell it back. But there’s the problem: the insto has disposed of the share to the short-seller; it has disposed of an asset and has thereby triggered a tax event.

Enter the — happy to scratch the big end of town’s collective backs — government to change the Tax Act. So when an insto disposes of a share under a buyback contract, it is generously and uniquely deemed not to have disposed of the share. Thus, apart from anything else, is how we get a Tax Act passing 100,000 pages.