Why the WallStreetBets crowd are able to profit from predatory trading | The Economist

Why the WallStreetBets crowd are able to profit from predatory trading

Textbooks say it can't happen. But there are times when front-running distressed traders pays off

“THERE ARE NO loyalties on Wall Street. When you smell blood in the water, you become a shark.” The sentiment-or lack of it-would not look out of place on r/wallstreetbets, the locus for a new breed of stockmarket hammerheads, which has helped push up the share prices of tech darlings and bombed-out companies to nosebleed levels, crippling professional short-sellers in the process. But the quote comes from a boomer, not a millennial: “Confessions of a Wall Street Addict”, by Jim Cramer, a trader-cum-TV-star. He is describing the remorseless logic of predatory trading.

It is something that is discovered anew by each generation of traders-the dark art of picking off investors who are in distress, for profit. Every big market meltdown is made worse by it. Every melt-up-including the current one-makes prey of those who are brave enough to sell it short. Those schooled in the idea of efficient capital markets will be puzzled by the latest goings-on. The textbooks say this sort of thing cannot happen. They assume there is abundant capital that can be put to work to correct prices that have got out of whack.

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