Retail investors all want to know. How soon will hedge funds get margin called?
I’m going to be updating this article with new information as it becomes available so be sure to bookmark it.
If you’re investing in AMC or GameStop, this article will prove to be of value to you.
You’ve done an outstanding job. You’ve bought the rips and dips but most importantly, you’ve held on.
Let’s go over the data that is currently available regarding margin calls and hedge funds.
There are some incredible things happening behind the scenes that you need to know.
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What is a margin call?
I published a piece fully dedicated to what a margin call is in the stock market world some time ago.
In short, a margin call occurs when the value of an investor’s brokerage account falls below the broker’s required amount.
This is when a broker demands that an investor deposits additional money into their account so that it meets the minimum requirement.
A margin call is usually an indicator that a security (asset) held in the margin account has decreased in value.
When a margin call occurs, the investor must either add funds to their account or liquidate (sell) some of their assets in that account.
Why does a margin call occur?
- It may occur when an account runs low on funds usually as a result of a losing trade
- A margin call occurs when a demand for additional capital is required to meet the minimum margin requirement
- Brokers may force traders to sell assets, no matter the current market price, in order to meet the margin requirement if the trader does not deposit the funds
If you’re a new retail investor and have recently joined the ape community then you’ve more than likely heard the term margin call before.
A margin call is basically a 50/50% chance a short squeeze may occur on the spot.
However, even if hedge funds are able to keep enough capital in their margin accounts to keep them afloat, at some point they’ll have to cave in.
Hedge funds have lost billions of dollars and this game is only costing them more money each day that passes.
Bloomberg News on Gary Gensler / Margin Calls
In this video, Bloomberg News discusses Gary Gensler, the new SEC chairman’s concerns of overleveraging and manipulation in the stock market.
This five minute video is important to log because it demonstrates and acknowledges the concerns in the market.
Perhaps the SEC was incompetent in the past to say the least. But it looks like we might be looking at some change here community.
And although this particular video was published on May 6th, below are some things Gary Gensler is already proposing in order to protect retail investors and the overall market in general.
This proposal from the SEC is massive if it gets approved.
The SEC has heard you and they’ve been looking into hedge funds overleveraging their positions in AMC stock and other ‘meme stocks’.
This proposal would allow an automatic margin call system to margin call hedge funds with overleveraged accounts.
This margin call system will essentially target short sellers on a daily basis and identify whether they are required to raise margin minimums or liquidate their positions.
SR-NSCC-2021-002 APPROVED 6/21/2021
This proposal was delayed after its initial approval date.
However, as of today the proposal has gone through and should be in effect in the coming weeks.
However, as long as short sellers are able to keep up with their margin requirements then this regulation is rather neutral.
A lot of these rules being put into place play in our favor the more money short sellers lose.
Total Return Swap AMC
The SEC and FINRA have gotten together to review the activity of ongoing overleveraging in the stock market.
Hedge funds could soon face total return swaps per Gary Gensler, SEC chairman.
In a total return swap, the payer (hedge fund) must pay the interest on the underlying assets, plus any appreciation in the market value of the asset.
This sounds a lot like shorts paying all short borrow fee owed on top of the market value of naked shares they’ve traded.
13-F filings and short selling disclosures
There’s a strong possibility that hedge funds also face 13-F filings. This filing will provide the SEC with insight on equity and dark pool disclosure.
Everything now seems to be falling right into place despite the continuous short laddering.
The SEC voted 3-1 and approved the hedge fund disclosure proposal on January 26, 2022.
When will hedge funds get margin called?
Charles Schwab has recently raised margin requirements for both AMC and GME stock.
This means that if they are unable to keep the minimum cash required in their margin accounts, they’ll be required to liquidate some or all of their positions!
This would create massive price action to trend in an upwards position.
We know that short sellers are losing millions of dollars every day.
Ladies and gentlemen, this is simply a waiting game.
The point is going to come where they can no longer afford to be negative each day.
This movement is about to get on a whole other level of excitement.
The fundamentals to this AMC short squeeze have not changed.
All retail investors will have to do is hold until short sellers cave in and close their positions willingly, or brokers margin call them.
Charles Schwab raises margin requirements
The broker is adjusting 100% margin requirements for AMC on all long positions, and 200% on short term positions.
As for GameStop, the margin requirement is 100% on all long positions and a whopping 300% on short term positions.
All this essentially means is that short sellers will be required to have more cash at hand as collateral.
So, not only are hedge funds losing a lot of money every day but are now being required to put enough cash into their accounts to cover their entire positions if need be!
You know what happens if they can’t cover right?
That’s right, margin call.
Instant liquidation of their accounts resulting in the MOASS we’ve all been waiting for.
Margin calls will result in a short squeeze
At first we might experience what’s known as consecutive gamma squeezes.
These are usually triggered by high volume in the market due to expiring call options in the money or very high purchasing days.
As more short sellers and hedge funds with larger short positions in AMC stock begin to cover, we will begin to experience the beginning of a short squeeze.
A short squeeze could last several days to several weeks.
During this timeframe, the stocks price will continue to skyrocket as more short positions are closed.
It really does feel like we’re coming to an end here.
This new beginning is going to change millions of people’s lives.
Proposition NSCC-2021-010 allows the NSCC to act as a third party lender to oversee every transaction between lenders.
It prevents short sellers from using naked shorting strategies and from creating FTDs.
This is one of the biggest AMC news yet regarding the stock.
It’s been delayed but should go into effect this new year.
The NSCC is also requiring that short sellers have more cash at hand to limit overleveraging their positions.
When should I exit my position in AMC?
I wrote an AMC exit strategy guide to help the community make a strategized decision on how to sell when AMC squeezes.
I do want to relay that this is only my take on it.
Many of you already have your own exit strategies, I understand this.
Regardless, it’s there if you need it and would like insight from a different perspective.
And lastly . . .
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Read: Here’s why people are buying AMC stock: Investors guide
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Granted by the time they have to cover the stock price will be so reduced or the companies out of business they will have little to no loss
What’s that I smell? MOASS?
Frank, I am a Canadian and I apologize for not knowing your system very well, but do these new rules have to be signed off by Congress and President? If so are we not then months away from them being effective? Will Wal-Street not fight these new rules?
Great content in all your blogs
Hey Rob, certain rules democrats are trying to approve regarding broadening consequences for Citadel are actually going through a committee and shouldn’t take longer than a month. Our government and brokers are seeing Wall Street is over leveraged so I don’t see how Wall Street can provide a rebuttal
You summarized it really well. Will share this on stocktwits and discord servers. You should share this on reddit yourself!
I am new to stock I can only hope you will help by letting us that are new to this when it’s time to cash out. I enjoy reading your articles. You have helped me understand alot more about stocks. Thank you.
Thanks for reading Terry. I published an article on an AMC exit strategy in efforts to help apes calculate their exit points: https://franknez.com/an-excellent-amc-exit-strategy-guide-short-squeeze/ hope it helps