The worst outcome: aggravating stock market volatility

The worst outcome: aggravating stock market volatility

Photo: WSB friends actively share the war situation recently. /Internet pictures

[Ta Kung Pao] according to a comprehensive report by the Wall Street Journal and the Bloomberg News Agency, the dispute between retail investors and short sellers caused by the US game retailer Gamestop (GME) has attracted the attention of all parties, including the White House. Experts worry that retail investors’ strategy of “taking short positions” will force hedge funds to sell other stocks in exchange for funds to make up for losses, and may even lead to stock market shocks.

The principle of short selling is to borrow an asset from securities companies and other institutions for sale, and then buy it back when the price falls, so as to earn the price difference. Therefore, the rise of GME and other stock prices will lead to short losses. At present, the most desired outcome for short sellers is to negotiate with retail investors, who will no longer push up the share price.

However, there is no representative of the retail investors who can sit at the negotiation table, and most of them are in high spirits, bent on retaliating against the bears and have little hope of reconciliation.

The worst outcome was that a series of short stocks such as GME were fried and hedge funds went bankrupt one by one. Melvin capital, a hedge fund, has lost more than 30% of its capital this month. Recently, rumors of bankruptcy came out, but it immediately refuted the rumors.

However, there is more than one institution that has suffered heavy losses, and they are likely to be forced to sell a lot of other stocks, causing a sharp drop in the stock market. In addition, hedge funds use a lot of leverage, which will cause butterfly effect and aggravate the stock market shock in case of bankruptcy.

Some analysts believe that the U.S. Securities and Exchange Commission and other regulatory authorities will not let go, or will order GME and other companies to issue additional shares to short positions. Another possibility is that retail investors will eventually be held down by Wall Street and return to the state of professional institutions dominating the stock market.

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