GameStop and Wild Wild Wall Street!

In early 2021 a viral battle erupted in the most unlikely of places; the stock market. And was publicized as a conflict between investors on the internet and large hedge funds . 

It all started in September of 2019 when an armchair investor by the name of Keith Gill noted something interesting in the stock market. He sat down at his computer signed into youtube and started talking about what he saw. Keith also took to reddit and would start posting about his observations which would  bring multi-billion dollar hedge funds to their knees and spark a social uprising between the public and wall street.

But what’s the full story ? What consequences will we have? And…… How did we do it?

First, let’s learn about shorting; our heroine in this epic saga

In short selling, a position is opened by borrowing shares of a stock or other asset that the investor believes will decrease in value by a set future date—the expiration date. The investor then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed shares must be returned, the trader is betting that the price will continue to decline and they can purchase them at a lower cost.

Basically shorting investors bet on a stock doing badly. The worse the company does there is more profit for them. For example, an investor who believes the price of a particular stock is going to go down borrows some shares from a company at 1 $ and sells them for 1 $ to another investor. The price of the stock goes down to 50 cents as expected. So the investor buys that stock for 50 cents and gives back the 1$ share they borrowed, making a profit of 50 cents. This is like gambling. The more specific you get the more is your chance for a bigger pay-out. But the risk of loss on a short sale is theoretically unlimited since the price of any asset can climb to infinity.

This is where GameStop came in

GameStop is a small video game seller. The company was not doing that well because of the pandemic as almost all businesses. Some of the finance investors saw an opportunity here and started betting against it. Subsequently driving the price of the stock down. This continued and more investors and shorting firms got in, driving the price further down. By December of 2020 the shares that were borrowed were more than available.

The online Reddit community of small retail investors called Wallstreet bets also saw an opportunity. They started betting for the company assuming if the price of the stock goes up they can sell the stocks to these big-time Wall Street investors for a much higher price.

This idea caught up with the retail investors which led to the stock price surge from under 20$ to 325$. Now the big Wall Street hedge fund investors and firms are on a tightrope and have to give back the money with sustaining up to 99% loss. This led to a frenzy in Wall Street. This is the first time in over a decade where Wall Street manipulators were not in control of the market.

Melvin Capital, an investment fund that heavily shorted GameStop, had lost 30 percent of its value since the start of 2021, and by the end of January had suffered a loss of 53 percent of its investments.There is no doubt the price of the stocks of GameStop went down but only after they drowned  firms like Melvin Capital and Citadel LLC in enormous debts.

The reason a large portion of the population celebrated was that  small retail investors winning big is that  they were ordinary people who paid off their student debts and mortgages.The very system that loots ordinary hard working men every day has to pay some price. This story does not indicate a change in the whole system. Every system has big players and small ones. However, the gamestop rebellion has set a precedent- this is the very first instance of the intersection between social media and the financial system the idea has since gone global. 

Bloomberg in February reported the targeting of shorted stocks from Amsterdam to Sydney. In Europe some of the most shorted stocks jumped 20 or more and in Tokyo, short sold stocks jumped by about seven percent or more .

On another note there could be implications for the wider market in the future- if another short squeeze was organized and a big firm was to blow up, it could end up being deemed too big to fail by the government and once again another taxpayer-funded bailout could occur, this isn’t to mention systemic risks the financial system is completely entangled complex and fragile as hedge funds need capital to cover their shorts this could cause some selling elsewhere.

The gamestop rebellion was a wake-up call. Average people aren’t happy with the way the markets are operated .Most of the people in that 2020 September forum laughed at Keith but nobody understood what he was doing . Yet, his decision would set in motion ,one of the most insane moments in financial history …..And we are here for it!

-Manya Pandey
FY (BSc Economics)

Leave a Reply