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Indira Rossetto
In January 2021, a short squeeze of the stock of the American video game retailer GameStop and other securities took place, causing major financial consequences for certain hedge funds and large losses for short sellers. Approximately 140 percent of GameStop's public float had been sold short, and the rush to buy shares to cover those positions as the price rose caused it to rise even further. The short squeeze was initially and primarily triggered by users of the subreddit r/wallstreetbets, an Internet forum on the social news website Reddit, although a number of hedge funds also participated. At its height, on January 28, the short squeeze caused the retailer's stock price to reach a pre-market value of over US$500 per share ($125 split-adjusted), nearly 30 times the $17.25 valuation at the beginning of the month. The price of many other heavily shorted securities and cryptocurrencies also increased.
On January 28, some brokerages, particularly app-based brokerage services such as Robinhood, halted the buying of GameStop and other securities, citing the next day their inability to post sufficient collateral at clearing houses to execute their clients' orders. This decision attracted criticism and accusations of market manipulation from prominent politicians and businesspeople from across the political spectrum. Dozens of class action lawsuits have been filed against Robinhood in U.S. courts, and the U.S. House Committee on Financial Services held a congressional hearing on the incident.
The unusually high price and volatility continued after the peak in late January. On February 24, the GameStop stock price doubled within a 90-minute period, and then averaged in the neighborhood of $200 per share for another month. On March 24, the GameStop stock price fell 34 percent to $120.34 per share after earnings were released and the company announced plans for issuing a new secondary stock offering. On March 25, the stock recovered dramatically, rising by 53 percent.
Short selling is a finance practice in which an investor, known as the short-seller, borrows shares and immediately sells them, in the hope that they will be able to buy them back later ("covering") at a lower price, return the borrowed shares (plus interest) to the lender, and profit off the difference. The practice carries an unlimited risk of losses, because there is no inherent limit to how high a stock's price can rise should the short-seller be proven wrong in their belief that the stock price was going to fall. This is in contrast with taking a long position (simply owning the stock), where the investor's loss is limited to the cost of their initial investment.[1][2]
Short sellers are exposed to a risk of short squeezing, which occurs when the shorted stock jumps in value because, for instance, there is a sudden piece of favorable news. Short sellers are then forced to buy back the stock they had initially sold, in an effort to keep their losses from mounting. The market demand they create by purchasing the stock to cover their short positions further raises the price of the shorted stock, thus triggering more short sellers to cover their positions by buying the stock. This can result in a cascade of stock purchases and an even bigger jump of the share price.[3][4][5]
GameStop, an American chain of brick-and-mortar video game stores, had struggled in the years leading up to the short squeeze due to competition from digital distribution services, as well as the economic effects of the COVID-19 pandemic, which reduced the number of people who shopped in-person. As a result, GameStop's stock price declined, leading many institutional investors to believe it would continue falling, thus short-selling the stock. On January 22, 2021, approximately 140 percent of GameStop's public float[a] had been sold short, meaning some shorted shares had been re-lent and shorted again.[6][7] Analysts at Goldman Sachs later noted that short interest exceeding 100 percent of a company's public float had only occurred 15 times in the prior 10 years.[6]
However, in mid-2019, investor Michael Burry's Scion Asset Management acquired a 3.3-percent stake in GameStop and wrote to the company's board of directors, identifying overlooked value in the company and urging them to buy back shares.[8][9] In August 2020, Ryan Cohen (the former CEO of online pet food retailer Chewy) revealed a 9-percent investment in GameStop, leading some to believe that the stock was undervalued.[5][10] In January 2021, Cohen joined GameStop's board, triggering a stock rally.[11]
Dude everyone thinks I'm crazy, and I think everyone else is crazy. I've dealt in deep value stocks for years but have never endured bearish sentiment this heavy. I expect the narrative to shift in the second half of the year when investors start looking for ways to play the console refresh and they begin to see what I see.
I'll post the update tomorrow as I always do after data readouts. It will be ugly, and everyone will mock me as usual, but I expect GME to bounce back just as it did after the two previous earnings readouts.
Even before the short squeeze, there had been interest in GameStop (ticker symbol: GME). Keith Gill, known by the Reddit username "DeepFuckingValue" (often referred to in more formal contexts as "DFV" for short to omit the profanity) and by the YouTube and Twitter alias "Roaring Kitty",[14][15][16] purchased around $53,000 in call options on GameStop's stock in 2019 and saw his position rise to a value of $48 million by January 27, 2021.[16][17][18] Gill, a 34-year-old marketing professional and Chartered Financial Analyst (CFA) from Massachusetts, stated that he began investing in GameStop during the summer of 2019, after believing the stock to be undervalued. He shared information regarding his investment on r/wallstreetbets, providing regular updates on the investment's performance, including times when the investment had plunged. He stated on January 29, 2021, after the GameStop short squeeze, that he "thought this trade would be successful" but "never expected what [had] happened over the last week", adding that he planned to continue his YouTube channel as Roaring Kitty and potentially buy a house.[14]
Another user, Stonksflyingup, posted a humorous video on October 27, 2020, explaining how a short position by Melvin Capital could be used to execute a short squeeze, using a scene from Chernobyl to illustrate how the hedge fund would blow up similarly to a nuclear reactor.[19]
The shares of GME Resources, an Australian mining company with Australian Securities Exchange (ASX) symbol GME, increased more than 50 percent during intraday trading, closing with a 13.3-percent increase on January 28. This was speculated to have been due to a joke or mistake, as the ASX symbol was the same as GameStop's NYSE ticker symbol (GME).[43][44]
Amateur traders in Malaysia were inspired by the GameStop short squeeze to target shares for Malaysian latex glove makers on Bursa Malaysia as a countermove against the devaluation of the sector by institutional investors following the lifting of a ban on short selling in the country earlier in January 2021. Top Glove, Hartalega and Supermax respectively recorded increases in shares as high as 15 percent, 10 percent and 9.2 percent during intraday trading on January 29, before closing with respective increases of 8.5 percent, 5.4 percent and 3.7 percent. The rally call was reportedly organized from r/bursabets, a Malaysian offshoot of r/wallstreetbets named after the Malaysian stock exchange.[45][46] On March 2, Rocket Mortgage saw a more than 70 percent spike in its stock price due to a surge in trading following discussion of the company on r/wallstreetbets,[47][48] but the Rocket Mortgage stock price reverted to its pre-surge level the next day.[49][50]
After brokerages halted the buying of GameStop and other securities, the price of several cryptocurrencies also began to increase substantially, with Dogecoin's value increasing over 800 percent.[51][52][53] Users of the subreddits r/CryptoCurrency and r/SatoshiStreetBets attempted to pump up Dogecoin to make it "the next GME/Bitcoin".[54] In addition, the price of Bitcoin, the world's largest cryptocurrency, increased 20 percent in value to more than $37,000 after Elon Musk endorsed it in his Twitter bio, partially related to the surge in the GameStop share price by Reddit users.[55] Robinhood then began limiting the trading on Dogecoin.[56]
Following the stock market surge, futures for silver began to rapidly increase as well,[57][58] although later news reports clarified that it was unclear who was behind the rise.[59] On January 28 and 29, the price of silver rose 10 percent.[60] The surge also had an effect on the prices of gold and copper on the London Metal Exchange.[58] On February 1, the price of silver hit an eight-year high as GameStop shares continued their volatile tendency, with trading[which?] being halted at least once as the price fell by double-digit percentages.[61] Users on r/wallstreetbets deny involvement in the increasing price of silver, instead blaming the increase on institutions and hedge funds with positions in silver, such as Citadel, seeking to offset losses on GameStop.[62][63][64][65]
On January 27, 2021, White House press secretary Jen Psaki said that Treasury Secretary Janet Yellen and others in the Biden administration were monitoring the situation.[66] Yellen convened a meeting of financial regulators, including the heads of the U.S. Securities and Exchange Commission, Federal Reserve, Federal Reserve Bank of New York and the Commodity Futures Trading Commission, to discuss the volatility surrounding the short squeeze. Because Yellen had received speaking fees from Citadel before becoming treasury secretary, she sought and received permission from Treasury Department ethics lawyers before convening the meeting.[67][68] The regulators were not seen as likely to view the volatility as creating any systemic risks.[69]
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