Here is a brief synopsis of the GameStop Short Squeeze.
There are so many incredible things happening in the world of technology, biotechnology, and investing on a daily basis. Sometimes it can be hard to decide what to write about.
Today wasn’t one of those days.
A confluence of social media, a market distortion, and a desire to get the upper hand over Wall Street resulted in one of the most incredible market moments that I’ve ever seen in my 35 years as an investor.
Here it is in one chart:
For those that don’t know GameStop, it is the video game equivalent of Radio Shack for electronics or Blockbuster for movie rentals. The company has been in bad shape for a long time. And it’s floundering in a world where video games are now mostly downloaded online or purchased on Amazon.
How did this happen? Pretty simple actually.
Day traders on a social media forum called WallStreetBets on the Reddit platform noticed a massive short position taken by hedge funds in GameStop. They figured if enough people got together and bought GameStop, they could “squeeze” the hedge funds out of their positions. That would force a massive run-up in the share price.
And that’s exactly what happened.
GameStop was trading around $17.90 a share on the first trading day of the year. At its peak this morning, it traded as high as $483 a share. For those who simply got lucky and bought at the right time, that’s a more than 26x return within a month.
This has nothing to do with fundamentals, analysis, or the underlying assets of GameStop. Normal investors figured that they could beat Wall Street at their own game… and they did.
And what happened next was also interesting. Another social media platform that hosted the WallStreetBets server banned the group. The “justification” was that users engaged in hate speech and spread misinformation.
What is befuddling is that hateful, foul, crass, and crude language is everywhere on Reddit, Discord, and Twitter. It is so ever present that it is sadly normal.
These platforms are using double standards to pick and choose which individuals or groups they want to ban, censor, and ultimately “cancel.”
The White House took notice and commented on the GameStop situation. And the Securities and Exchange Commission (SEC) even had to step in to say:
We are aware of and actively monitoring the ongoing market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.
This really made me laugh. Why?
More than 100% of GameStop’s available float (the number of shares available for trading) was being shorted by hedge funds. How is that possible?
Technically, it’s not. Short selling requires the short seller to borrow shares from someone. The short seller sells those borrowed shares to someone else, with the liability of having to eventually buy back those shares.
But “naked short selling” is something that bad actors on Wall Street have done for years to fleece normal investors. By selling short shares that don’t exist, they ultimately drive down the share price, forcing retail investors to sell out their positions.
And then the short sellers buy back the stock for pennies on the dollar at a great profit. It is nothing but market manipulation. And it enables a transfer of wealth from normal investors to Wall Street.
It is a disgusting practice that should be impossible. But sadly, it is not.
And that’s why it is so ironic that the SEC is contemplating taking action against retail investors. Many from Wall Street are suggesting that this kind of activity needs to be shut down. They’re saying it’s pure market manipulation.
I guess from Wall Street’s perspective, it isn’t fair for retail investors to take the other side of the trade and screw up a perfectly good naked short sell.
How bad did it get?
Melvin Capital, a hedge fund that took a massive short position in GameStop, lost 30% of its funds just this month. The run-up in GameStop’s share price forced Melvin Capital to close out its short position at a massive loss.
The damage was so bad that two other famous hedge funds, Citadel and Point72, had to step up with $2.75 billion in capital to save Melvin Capital from collapsing.
Retail investors are joining together. They’re sharing investment ideas and beating hedge funds at their own game.
While I’m not a fan of pure speculation (gambling), there is nothing wrong with discussing investment ideas and buying a stock with the potential for a short squeeze.
And banning or censoring opinions about stocks on the basis of misinformation? You’ve got to be kidding me.