A children's book explanation of what's happening:

1. If you are "smart money" you are allowed to take your $1 and leverage it up to $15+

2. You can now buy $15 of stock AND if you promise to short companies, you can short $15 of stock as well

3. In finance language, this means that you are $30 "gross" ($15 of longs + $15 of shorts) but $0 net (+$15 of longs -$15 of shorts). This makes everyone feel good because it feels like you are taking zero risk...but in reality, your $1 is exposed to $30 of risk.
4. Now you go around and tell your friends about both your longs and your shorts and when you do it at a restaurant vs on Reddit, its called an "ideas dinner".

5. You also publish your longs on a quarterly lag via an SEC rule. You don't have to tell anyone about your shorts.
6. Now the less cool people who weren't invited to the ideas dinners, start copying your longs based on your report.

7. You realize that publicizing your shorts is also a good idea so instead of only selling stocks, you also BUY options (puts) which has to be reported.
8. Now everyone can see both your longs and your shorts and if you have a hot hand, you can likely predict that the cool people from the dinner as well as the less cool people monitoring your filings will copy you.

9. But then an outsider notices that the math is way off!
10. Apparently, some of these shorts that you own represent more than 100% of the entire stock of the company. Huh?

11. So he grabs his chicken fingers and champagne and buys, starts a massive short squeeze.

12. Other's see what's happening and they jump in.
13. Now a massive short squeeze starts. You have to cover your shorts ASAP. But the banks also notice that you don't have enough credit to cover the $30 they lent you and ask for more collateral. You now also have to sell your long positions. It looks like this:
14. What happens next is that a cascade of short covering and long selling starts driving some stocks to the moon and others way down. Which stocks went up? Basically the ones that were the most heavily shorted by you and your buddies in the first place.

So the outsider won?
It's not clear. You and your buddies are strong, rich and have a lot of influence so you need to do whatever you can to keep the rules in your favor.

Maybe the SEC will ask for an open inquiry?

Maybe Congress will hold hearings?

Let's see...now go to bed.

More from Culture

Best books I read in 2020

1. Atomic Habits by @JamesClear

“If you show up at the gym 5 days in a row—even for 2 minutes—you're casting votes for your new identity. You’re not worried about getting in shape. Youre focused on becoming the type of person who doesn’t miss workouts”


Good Reasons for Bad Feelings

https://t.co/KZDqte19nG

2. “social anxiety is overwhelmingly common. Natural selection shaped us to care enormously what other people think..We constantly monitor how much others value us..Low self-esteem is a signal to try harder to please others”


The True Believer by Eric Hoffer

https://t.co/uZT4kdhzvZ

“Hatred is the most accessible and comprehensive of all unifying agents...Mass movements can rise and spread without belief in a God, but never without a believe in a devil.”


Grandstanding

https://t.co/4Of58AZUj8

"if politics becomes a morality pageant, then the contestants have an incentive to keep problems intact...politics becomes a forum to show off moral qualities...people will be dedicated to activism for its own sake, as a vehicle to preen"


Warriors and Worriers by Joyce Benenson

https://t.co/yLC4eGHEd4

“Across diverse cultures, a man who lives in the house with another man’s children is about 60 times more likely than the biological father to kill those children.”

You May Also Like

"I lied about my basic beliefs in order to keep a prestigious job. Now that it will be zero-cost to me, I have a few things to say."


We know that elite institutions like the one Flier was in (partial) charge of rely on irrelevant status markers like private school education, whiteness, legacy, and ability to charm an old white guy at an interview.

Harvard's discriminatory policies are becoming increasingly well known, across the political spectrum (see, e.g., the recent lawsuit on discrimination against East Asian applications.)

It's refreshing to hear a senior administrator admits to personally opposing policies that attempt to remedy these basic flaws. These are flaws that harm his institution's ability to do cutting-edge research and to serve the public.

Harvard is being eclipsed by institutions that have different ideas about how to run a 21st Century institution. Stanford, for one; the UC system; the "public Ivys".