First, I am not arguing that WSB is engaging in fraud or misrepresentation, as is alleged with Ackman. That is entirely different from the activity I am alleging is being done on WSB (by a subset of posters).
> This is essentially Reddit saying "This stock is going up, so buy options to exacerbate that and to profit." No misrepresentation.
I see threads where WSB is saying "This stock is going up, and if we make it go up more, hedge funds & market makers will have to buy more stock to cover their short positions, and therefore it will go up even further [and we will make more money]." That's the manipulative part — creating artificial prices to induce even more demand.
I think it's the "manipulative" that's debatable here, because the manipulation is effectively being done by a second party.
Is it manipulation if you're so predictable that an action by me causes you to always act a certain way? And I profit when you take that action?
If hedge funds refused to cover their shorts (I'm probably using the wrong terminology) and left them open, this wouldn't be an issue, no? Or, conversely, if market makers refused to sell options on overly volatile stocks / stocks being manipulated?
The rationale is that markets are better for participants when their prices are accurate and reflect true supply and demand. Price manipulation subverts that, so the SEC disallows it (except in some cases where manipulation is explicitly allowed for historical reasons).
> refused to cover their shorts (I'm probably using the wrong terminology) and left them open, this wouldn't be an issue, no?
This is imprecise; hedge funds might cover short positions to hedge further losses, or because their prime broker might require them to maintain a certain margin (to reduce counterparty risk). I have no experience in institutional investing, so that's a guess.
> Or, conversely, if market makers refused to sell options on overly volatile stocks / stocks being manipulated?
Market makers will increase a premium for options on "overly volatile stocks." If the risk is too high, then they may stop selling the options altogether. But the problem is — it's difficult to predict which next stock WSB might start manipulating. That's another issue. If regulatory agencies don't step in and prevent this type of manipulation, the premiums on all retail-adjacent options will be higher because of the increased risk and fear that a capricious WSB crowd might turn on a MM. That's bad for people who use options "correctly" — not for gambling, but as a way to hedge and reduce risk.
> This is essentially Reddit saying "This stock is going up, so buy options to exacerbate that and to profit." No misrepresentation.
I see threads where WSB is saying "This stock is going up, and if we make it go up more, hedge funds & market makers will have to buy more stock to cover their short positions, and therefore it will go up even further [and we will make more money]." That's the manipulative part — creating artificial prices to induce even more demand.