A Roaring Menace — Episode I

Malt Liquidity 139

Sometimes, external events make you contextualize how much time has actually passed in your life. This blog, for example, started out in November, 2020 with the purpose of documenting statements I was frequently repeating to my friends, both online and off, so I could stop repeating myself to them, and because Money Stuff was on hiatus due to Matt Levine’s parental leave, so I didn’t have my normal morning reading. When I had moved off my private circles into slightly less private trading servers, the demand grew just enough such that I started actually sharing the posts (instead of sending an ungodly amount of chat messages.) This, of course, coincided with pandemic markets — in particular, the GME short squeeze — which marked the first “moment” I wrote for people who I didn’t know personally. It’s quite odd to see the naïve words of my early 20s compared to how it spiralled into one of the most impactful examples of my postmodern-markets thesis that is the basis of my market philosophy.

Quite simply put, this is the greatest trade I’ve ever seen:

as of Friday close

The position was originally opened with $50000, and as of today’s market open, I estimate this has been turned into close to $25-30 million at time of writing (depending on IV staying out of whack and not accounting for slippage while exiting.) But every step of this has been incredible. Every month (17 now!!) since the position has been opened, an update has been posted…

and u/DeepFuckingValue called the squeeze over a year in advance to the month:

This is, without a doubt, the greatest market call ever. This is truly borderline time travel level.

What started out as a great trade morphed into an entire retail moment, congressional investigations, the postmodern market state, the complete detachment of “price” from “value”, and a myriad of other things that will be summarized in a cool personal project that’s yet to come.

After years of silence (and a pretty atrocious movie), the Earth stood still once more on June 2nd, 2024:

It appears that Gamestop Jesus took 3 years, not 3 days, to resurrect, but the impact was the same: GME-ezus rose again due to Roaring Kitty posting a single Uno Reverse Card on X.

I noted at the time that this was just a result of postmodern markets, where a single image could move a stock price billions of dollars:

I ask this all the time: “why do things trade?” The only correct answer is because other people are trading it. This is the root of “postmodern markets” as I call it, or “simulacra” as Baudrillard does:

First, you have the core business. It creates a product that is valued by society. Next, the abstraction of money comes in. This allows liquidity creation — if I sell socks, what am I going to do with unlimited socks? After currency comes the cap stack. We “value” the business to allow ourselves to offload risk on others. There’s no real way to properly value this risk: “fundamentals and valuations” exist as marketing, as every banker knows you price the deal at what you have to to get it done. Finally, we have the security as it’s traded now, where the activity is totally abstracted away from any sort of reality whatsoever and collectively trades in a manner that resembles a toy model GTA stock market rather than as a reflection of reality: a pure simulacrum. Is it any wonder when, in the high skill meta where you have to have extreme technical skills to be valued highly from a “salary” point of view, normal people obsessively buy crypto and trade zero days? How else is a median individual supposed to exponentiate their wealth?

Note that this is exactly why I talk about DJT so much — that ticker was the endgame,

The phrase “attention economy” gets bandied about a lot, so it’s worth thinking about it more precisely given the context of this post. If we think about the old basis of “fundamental value”, we come to something along these lines:

The vast majority of money that moves in and around the market is based on the philosophy that whatever is invested in will create future cash flow rewarding current shareholders, who hold a right to their share of the output… Investing is driven by valuation — taking snapshots of a company’s performance over time and stringing them together to estimate future outlook. The question valuation asks is very simple: given an investment in a company, what do I own now, what am I expected to own in the future, and how much is it worth at present value?

But when dollars are untethered from productivity, we get a different form of thinking, where Paris Hilton is more of a pioneer than Benjamin Graham. No longer is future cash flows the driver of valuation, but rather how much attention paid convert to bid? When we look at it from this purview, we arrive at my concept of “tradable hype”…

and, let me tell you, the only person with the comparable attention-bid conversion ability of Donald “the universe revolves around me” Trump is Roaring Kitty in markets-land.

You notice something about that 2024 update, though?

It seemed fairly obvious to me, and I’m sure others arrived at the same conclusion, that the account balance could not possibly have been his own money. I had his earnings pegged at ~30mm at best after taxes in 2021, a tidy sum, but this dude somehow had $175 million at a 70/30 split between stock and short term calls? There ain’t no way any sane person makes that trade, particularly because owning so much of the OI at a single strike creates a massive liquidity issue. Since everyone after his post knew that he was the vast majority of the OI at that strike, consequently, everyone would know as soon as those calls started hitting the offer that DFV was cashing out, which naturally would cause people to frontrun him, both on stock and equity, unless he was buoying the price otherwise (which strikes me as too complicated and too unprofitable a trading strategy to execute through a retail brokerage account.)

It’s rare that I can’t get at least a pretty good idea of what’s going on after the information is public and contextualize it, but man, this is confusing. It would make sense why there was such a significant timeline between posts if he was raising money to buy GME, because the legality of this type of trade is certainly a novel question (which we will analyze in a bit.) But who would possibly allocate money to a retail trader to purchase this many options in a single strike (because legging into these options is not a trivial task at all — block execution trading is still a pretty tough problem if you can’t just VWAP equity)? My hunch is that this backer either a) transferred some of the position into DFV’s account so he can post his screenshots and/or b) has hedges across other strikes and/or c) is looking to exercise these options to build up a significant enough stake to force some sort of takeover or activist board fight, because the notional on those options is massive. Almost certainly, there is no possible way to cash out these options at anywhere near their theoretical intrinsic + extrinsic value — it is likely that any sort of liquidation would either kill the stock or the extrinsic value of the options. Which, given the amount DFV can push the stock, is not a bad trade if it lands in the money, but it’s certainly unprecedented territory.

I’m not going to link posts and discussions on X, but clearly, many people were salty about this; some called it insider trading, some called it illegal manipulation, and his brokerage even put out a press release stating that they were considering booting himself from the platform (which would obviously start a “Capital Riot”, what a terrible idea.)

We’ll take a look at the insider trading argument first, given that the (unrelated!) longform I published earlier has some very salient discussion points. It’ll be much clearer if you spend the half-hour reading the full thing, but I’ll try to do the best I can to make this a standalone post.

All trades are made with some amount of information asymmetry present. On an individual scale, one’s perspective that develops an intention to trade is totally internal until it is shared, either incompletely by the placing of an order or explicitly detailed to others. Generalized, this means that every market participant, large and small, trades off non-public information. Put simply, why would you rationally take risk without having an edge, real or illusory?

Insider trading revolves around “material nonpublic information” (MNPI). Obviously, this considers two elements: materiality a.k.a. how much will it hit the stock, and nonpublic. Herein lies the issue: if I know my own intentions to make a trade and I know it will pump the stock, as DFV obviously does, my intent to post memes on the main account does constitute MNPI. But, since everything is “NPI” about one’s own thoughts, why would I have to communicate that I plan to do this in advance? The threshold for whether MNPI can be traded thus becomes the “duty to disclose the information or abstain from trading”. There is nothing illegal about trading on my own research, theories, intentions to start a board fight, whatever. Otherwise activist hedge funds and discretionary portfolio managers a la Buffett couldn’t exist. The other consideration is whether the MNPI was misappropriated — whether it’s someone else’s proprietary info (earnings, tender offers, etc.) that I shouldn’t have access to/use to trade. Here, it’s obviously his own intention to post memes, which theoretically has no relevance to Gamestop as a company whatsoever. It’s solely due to the postmodern market state that everyone knew it would pump as soon as they saw his post, creating a self-fulfilling prophecy. There is also (obviously) no obligation to disclose whether the money is his, a hedge fund’s, Gabe Plotkin’s, or anyone else’s that funded this trade. The disclosure requirement comes in the form of a filing a quarterly 13-F (if you have over $100mm AUM as a manager) or a 13-D (if you own over 5% or a publicly traded company). If DFV is staked, we won’t hear about it for a while, and I suspect the portfolio is structured such that the exercise of the options would trigger a 13-D, not the notional.

The 13-F and the existence of financial media is essentially why I think there is no possible way this is (illegal) insider trading. When Ackman or Soros or Buffett are shown to have taken new positions (as 13-F tracking is quite common to figure out who owns what, albeit on a delayed basis), the stock gets a bit of a “halo” effect. This is, in effect, a reflect of the institution’s/PM’s reputation — Softbank used to get a halo, but they don’t anymore (because they don’t pump up the entire US equity market single-handedly anymore.) This is the precursor to postmodern market attention/bid conversion, isn’t it? As an X follower of mine suggested, over time, it’s kind of a Discounted Clout Flow (riffing off the DCF model that is the basis of “valuation”, and frankly, I’m a little miffed I didn’t come up with this delightful term myself) when the information that one holds a position doesn’t pump the stock as much, if at all. If one’s own thoughts of placing a trade even with the knowledge that one has a halo effect constitutes MNPI and create a duty to abstain, all of financial media would cease to exist. It’s been perfectly legal to have “idea dinners” (an old hedge fund trope), “idea conferences”, say insane shit on CNBC, Bloomberg, or anyone who will give you a microphone (cc: Cathie Wood), post on stock forums (which is what got us here in the first place), and more. There is absolutely no way in hell this should ever be prosecuted as insider trading.

Let’s take a break to talk about Discounted Clout Flow for a second though. I don’t think this is particularly good for DFV’s image as a “retail folk hero” who took on the hedge funds and won. Like I said, it’s blatantly obvious to experienced market practitioners that there’s a high likelihood of outside money being involved here. If it’s not handled correctly, this could totally bust the legend of Roaring Kitty in a Darth Vader-esque betrayal of the retail punter. Largely, I think this can be ignored. My DCF model here considers two things: DFV had a very valuable social media presence that was a) extremely illiquid (selling the accounts would haircut the extrinsic value of his reach significantly) b) had this odd property in that he could draw a ton of volume to a single ticker. But let’s look at the stark reality here: GME has been doing share offerings every time the stock has pumped since the original squeeze to raise cash for, objectively, what is still a dead end business. The stock has already split and has been absorbed into the ETF complex. The short interest simply isn’t anywhere close to the setup that existed during the original squeeze. In essence, DCF indicates that the stock can’t short squeeze and the retail attention is simply nowhere near what it was during lockdowns. So how long, exactly, does this pump last, and where can it go?

I was a bit delayed in writing this post due to wanting to link it to my insider trading longform, but my original prediction was that it would last a couple of days at most. And certainly, a lot of money was made (on paper) in the past couple trading days.

The real question is whether this constitutes illegal market manipulation. Certainly, we have all heard about Webistix by now, but outside of deliberately pumping and dumping a stock into exit liquidity that was created with that specific intent (which will be more closely examined in the next part of the “trilogy”), it’s unclear to me how this is any different from talking your book. You don’t need to be honest in what your position is if there’s no direct conflict, though it’s best practice to avoid compliance lopping your head off if you’re in media, a firm, or in a client advisory role to prevent any chance of being sued. The aforementioned Bill Ackman himself went on CNBC at the peak pandemic and cried about how the world was ending before we all found out from his 13-F that he had bought the bottom precisely at that moment.

FWIW, I don’t think Ackman did anything wrong. In poker, we’d call this an angle shoot, and as I wrote about the hypothetical “nuclear war”, what else can you do in a disaster scenario other than get long?

However, for mere mortals, this is why trade blacklists exist in firms, most legitimate traders and PMs don’t post on social media sites/blogs, and why you should always take people with a massive dose of salt that talk about positions and trends but don’t ever clearly disclose their positions. This is why the disclaimer “this is not financial advice”, “past performance does not indicate future results”, and “this is not legal advice” exist, though obviously you cannot declare yourself immune from the law (unless, potentially, you are the President of the United States. But let’s not open that conlaw rabbithole.)

Thus, I will give you one expert piece of advice. If anyone is trying to sell you stock picks, hot tips, or any sort of signal, just ask them to fill out this form and get back to you:

I promise they won’t get back to you.

If I had to posit one thing (disclaimer: no position in GME), I think a fair chunk of the people really complaining are bitter about the fact that this is a perfect, immutable edge created by the postmodern market state, perhaps because a random FA who didn’t go through the target school/elite trading firm/hedge fund/PM model got one up on everyone else. I have seen far more depressing trends in the race to the bottom since 2021, with much more egregious violations in sports betting and crypto (imo). It’s a core American right to be able to cash out on your name, though that comes at the expense of authenticity (but that’s a fools game, isn’t it?) It’s a novel trade, but aren’t all great trades novel ideas? Is using clout to drive flow worse than dumping endless SPAC garbage on retail? Is leveraging a trade to the point that it breaks a central bank thought about as anything other than a moment of greatness in the canon? I won’t fault DFV for the market state that was created by the confluence of ZIRP and a pandemic. I also truly believe that retail has a much better chance at trading profitably through meme stocks and crypto than trying to play by “the greeks” that institutional traders and the like quanted out.

As to the stock movement, this pump strikes me as very temporary, as highlighted by my DCF analysis. While the funniest outcome is the most likely (which would probably reveal Gabe Plotkin as the secret backer of DFV), I just hope this second saga doesn’t end with Revenge of the Melvin. The only way out of the postmodern state is when the good guys always win.