THE BIG GAMESTOP SHORT: HOW REDDIT TRADERS DO?

Short interest in GameStop, at this GameStop situation is the craziest I think I’ve ever seen. We have some breaking news right now on what has turned into the soap opera and saga of the markets right now. And that is the story of GameStop. Gamestop has captivated Wall Street’s attention. The stock price has been otherworldly. But the obsession isn’t just with the rally, it’s with who’s making money off of it.

Legions of individual investors on social platforms like Reddit are going up against fancy, well-funded professional Wall Street traders. And the little guy is winning for now. GameStop shares have soared over 6500 percent so far, this year. Just in the past week, the stock jumped 400 percent. But experts can’t find a fundamental reason for the stock’s success, meaning there’s nothing about gameStop’s Business model that’s driving the rally. GameStop lost 795 million dollars in 2019, and analysts estimate that the company lost hundreds of millions of dollars again in 2020.

This stock has completely disconnected from the fundamentals. The company’s fundamentals are heading in the opposite direction of the stock price. Instead, the mob of traders on Reddit is now focused on going after one of the most elite insider clubs of all time Wall Street hedge funds, and they want to cause as much financial pain as possible. Melvin Capital is now out of the stock. They’ve taken a rather huge loss.

KING OF THE MALL

Gamestop first went public in 2002, it was once a brick and mortar mainstay of shopping malls, you could buy the latest PlayStation or Xbox games there and then trade them in for cash when you beat them. But in recent years, most gamers now get their titles via digital downloads, not physical CDs. There’s been basically a 15-year trend away from packaged video game distribution to digital game distribution.

Fast forward to August of 2020. That’s when Ryan Cohen, an activist investor and entrepreneur who co-founded online pet store Chewey, spent 76 million dollars to buy nine million shares of GameStop, according to SEC filings, in November 2020. He wrote a letter to the board urging them to shift their focus away from brick and mortar retail and toward building a robust e-commerce platform. About two months later, GameStop added Cohen, along with two of his former Chewey colleagues, to its board.

The stock popped about 13 percent the day the announcement was made, but at that point, GameStop’s trading. Frenzy had little to do with Ryan Cohen. However, the company’s rise can be attributed to something else short selling.

THE SHORT SQUEEZE

Short sellers come in and they borrow the stock, say 100 shares of GameStop, and then they sell it into the market, hoping that it’s going to drop because then if it drops, they can buy it back lower price and pocket the difference between what they borrowed it for and what they sold it for. And what’s the single most shorted stock on Wall Street? GameStop.

Over a hundred and thirty percent of its available shares have been borrowed, it’s so short. Enter the David of the David versus Goliath story. Individual investors, Wall Street calls them retail traders and their ranks have grown significantly. An estimated 10 million new brokerage accounts have been opened in the past year alone, and it’s become a lot easier to gamble on the stock market because you have a phone and you have apps on the phone that enable you to trade stocks almost instantaneously and day trading.

The practice of buying and selling stocks every day to profit off the daily market moves has shot through the roof with commission free apps like Robinhood, especially with so many people stuck at home while social distancing during the coronavirus pandemic. And because it’s 2021, these 10 million newly minted amateur stock traders can all talk to each other on social media like Reddit and one sub-Reddit in particular, Wall Street bets.

The Subreddit Wall Street bets has a colorful, not safe for work reputation, one it seems to revel in. The forum proudly bills itself as, quote, like 4chan, found a Bloomberg terminal and has a history rife with harassment and obscenities. Wall Street Bets is one forum that has become pretty popular with day traders. They pick a stock, they run with it, they tell each other, hold, don’t buy when to buy. And we’ve seen this phenomenon happen in the past year. GameStop is just the latest example.

So to recap, GameStop is the most shorted stock in the market. Certain hedge funds and professional traders have done their due diligence and believe the company’s business is suffering and therefore have placed sizable bets that the shares will fall. And now a ragtag team of average Joe Traders has decided on a sub-Reddit to buy the stock and send the price higher.

They’ve even gotten high profile billionaires cheering them on. So now we’ve got what the pros call a short squeeze. A short squeeze is when the opposite happens. Essentially, it goes against you. So you borrow that stock at thirty, you sell it into the market and you hope it goes to twenty five. Wait a minute. It doesn’t. It goes to thirty-five. Now you’re sitting there trying to decide, oh my God, what am I going to do. Well maybe it’ll go back down to twenty-five and I’ll make money.

Maybe it will, maybe it’ll go to forty and I’ll get really killed. It’s called buying it back. Now you have a loss instead of having that stock where you borrowed it and you sold it at thirty and you want to buy it back at twenty-five. Well now you’re buying it back at thirty-five. So what are you doing. You’re losing money. So the retail folks are buying GameStop stock which sends the price higher. There are enough buyers to, at least in this case, squeeze some of the short sellers.

So they are having this outsized impact on specific stocks and now the shorts have to buy in order to cover their losses, and that buying drives the price up even more. And while, yes, the Reddit retail traders do want to make money off the speculative bets, this army of ‘normal’, if you will, has a larger purpose. Target the hedge funds, punish the pros who made billions of dollars profiting off a financial system so complex that a regular person can’t compete.

In short, take down the man. You see it with, sort of villainizing in these short sellers where they kind of go after them. The effort has been somewhat successful. Hedge fund Melvin Capital closed its short position at a loss, according to reporting from NBC’s Andrew Ross Sorkin. In short seller Andrew Left from Citron Research said his firm had to bail on its short position at a 100 percent loss. The phenomenon seems to extend beyond just GameStop.

Other stocks appear to be targeted by the Reddit crowd as well. What’s going on is that the Wall Street that people are looking at, what the high short interest is, whether it be the short interest in GameStop, whether it be the short interest in Bed, Bath and Beyond, the short interest in AMC. Both of these stocks are up triple digits this month as well.

WHAT IS NEXT?

So the little guy is winning for now at least, so there’s an old saying on Wall Street, don’t mistake the market going up for you being a genius. GameStop is arguably a relic of a bygone era of shopping malls. There are serious concerns about the sustainability of its business model, but the stock is at an all-time high.

It’s very dangerous. People are using the word bubble because especially because the stock market is already at record high. A lot of strategists are saying we’re GameStop is trading, is not matching its fundamentals. It will eventually come back to Earth. In the interim, there are serious questions about the legality of the behaviour on Reddit. And if the collective targeting of hedge funds could add up to something like collusion, market manipulation.

Analysts and finance professors that I’ve talked to say that whatever grabs the headline is likely what the SEC is looking into. Observers are also questioning if this is just the work of retail traders anymore or if the professionals are now playing both sides of the trade. You talk about 70, 80 million shares traded yesterday alone. They’re not out there able to trade that much stock in one day.

That’s institutional money. Who do you think is manipulating the stock? Well, that’s the problem. How do you know who’s manipulating the stock at this point? I mean, people are liking to tell a David versus Goliath story, but are you entirely sure? That’s right. Are you entirely sure that there are wealthy people on both sides that hedge funds haven’t moved in on the side of the people who have bid up the price of game stock? And that’s what happens when you don’t have an honest market.

The retail brokerages, for their part, started responding to the frenzy on Wednesday when TD Ameritrade and Charles Schwab imposed trading restrictions on GameStop movie theatre chain AMC, as well as other names. Free trading pioneer Robin Hood followed suit on Thursday, only allowing customers to sell these specific stocks, but prohibiting them from buying it pains us to have had to impose these restrictions. And we’re going to do what we can to enable trading in these stocks.

Despite the unprecedented trading activity and volume that started, the whole phenomenon, along with the moves from Robin Hood, have all caught the attention of Washington regulators. The Biden administration says the SEC is monitoring the current activity. We, of course, respect the role of regulatory agencies. They are closely monitoring the situation. And now congressional lawmakers have called for hearings.

Incoming chairman of the Senate Banking Committee, Sherrod Brown, now says that he wants to hold a hearing on the current state of the stock market. We reached out to GameStop for comment, but the company didn’t respond in time for publication. No one knows for sure how or when this will end. Wall Street veterans are certain it won’t be pretty for the retail crowd. I’m not defending them. I’m just saying, from my experience, this will end in tears.