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Gamestop Short Squeeze: Retail Investors vs. Wall Street Hedge Funds

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  • Gamestop Short Squeeze: Retail Investors vs. Wall Street Hedge Funds

    Here's a decent overview of incident(https://www.forbes.com/sites/rmiller...h=762e2feb3fc7), but I’ll summarize it myself because there’s a lot of moving parts, and most of these news articles fail to include information I think is highly relevant.

    Gamestop – A videogame dinosaur in a digital marketplace

    Basically, Gamestop (GME) is a chain of brick-and-mortar retail stores catering to people who play video games. Back when malls were still a thing, Gamestop typically had a presence in major malls. It was sort of THE place buy video games and video game consoles. They have a membership program and avid gamers would (do?) take advantage of the ability to sell back their old games and consoles for in-store credit towards new games on consoles. They also have a pretty decent monthly gaming magazine for their members. But now, as online purchase of video games has accelerated, Gamestop’s revenues and share price as been in a long decline. They’re a brick-and-mortar retail chain operating in an increasingly digital space (even more so for their niche than other forms of retail).

    It’s worth noting that near the end of 2020, Ryan Cohen invested over $70 million in Gamestop, earning him control of 3 board seats. Cohen is the founder and former CEO of Chewy.com, an online pet supply retailer. He’s a 35-year-old online retail entrepreneur who became a billionaire when PetSmart bought Chewy. And now he’s trying to modernize Gamestop and turn the company around.

    r/wallstreetbets – “Like 4chan found a bloomberg terminal”

    For the unfamiliar, on social media website Reddit, there is a subreddit (forum) called Wall Street Bets (WSB). It’s a wild and chaotic place where people talk about investing (or, mostly, speculating) in the stock market. I’ve been a member of the forum for years. Key attractions include totally epic memes about the stock market, a unique style of non-politically correct humor, some legitimate discussion and thorough research on stocks, and lots of “gain porn” and “loss porn” (where people post screenshots from their online brokerage account showing how much money they gained or lost on trades). People are regularly rewarded for losing money on risky investments. The community has its own evolving lingo – for example, “tendies” is a play on chicken tenders, referring to money (e.g. “GOTTA GET THEM TENDIES BRO”).

    WARNING: I’m not linking to the actual subreddit because the language there tends to be pretty crazy. The mods use foul language in the official rules, and there’s lots of (potentially) offensive terminology members use to described each other and other people. If you’re curious to explore the subreddit, knock yourself out – but if you’re easily offended by foul language and non-PC verbiage, don’t waste your time.

    How r/wallstreetbets is involved

    Between 2017 and 2019 there were some scattered discussions of Gamestop (GME) on WSB. WSB investors tend to target risky trades with a large payout if their bet is right. Many are using options contracts on margin accounts – basically they’re borrowing money to take risky bets. Some get rich, many lose a ton of money.

    In September of 2019, one WSB member (whose actual name on Reddit I can’t post here because the language) posted a screenshot showing a $53,000 bet on GME stock price to rise. His name his Keith Gill (Roaring Kitty on YouTube). Here is a 5 minute YouTube clip of Gill’s recent opening statement in a hearing by the House Financial Services Committee (https://www.youtube.com/watch?v=ukXQGBpXaVM ).Gill had thoroughly researched this stock play and he was convinced that the stock price would rise as Gamestop transitioned to a larger online presence. He made numerous posts about it and talked about the company on his YouTube channel.

    More recently, degenerates (the self-appointed term for WSB members) on WSB noticed that GME was being shorted ( https://en.wikipedia.org/wiki/Short_(finance) ) a massive amount. The short interest was nearly 140%, meaning that about 140% of the public float had been sold short. In other words, so many people were shorting the stock that the number of shares being shorted exceeded the number of shares in the hands of public investors by nearly 40%.

    Some enterprising degenerates realized that if they bought enough shares of GME, they might be able to trigger a short squeeze ( https://en.wikipedia.org/wiki/Short_squeeze ). Basically, a short squeeze happens when high demand for a stock causes a lack of supply of available shares, forcing short sellers to buy the stock at rising prices in order to cover their short positions. It’s kind of a snowball effect. As the price rises because people are buying the stock, more short sellers have to buy the stock at higher prices to cover their short positions, which in turn drives the price higher. As more people observe the short squeeze happening, other parties tend to pile on by buying the stock with the intention of selling it soon for a quick profit – ideally at some point near the peak price, and before the share price comes tumbling back down to earth.

    So, what happened to GME’s stock?

    At the beginning of January 2021, GME was trading around $17.25 per share. As WSBers and other retail investors began to buy the stock, the price rose rapidly, and a short squeeze began. On January 28th, the price reached over $500 per share. The price tanked afterwards, and the last I checked it was trading around $30-40 per share.

    David vs. Goliath (Retail Investor Activism)

    In all the chaos, people on WSB identified some of the big players on the short side of the bet. Melvin Capital, for example, had a massive short position in GME. Because of minimum margin requirements to maintain their short position, Melvin started hemorrhaging cash. They were losing billions of dollars, and so were other hedge funds with heavy short positions in GME. Melvin had something like $12.5 billion under management and at one point they were down 30%. On January 25th, Citadel LLC and Point72 Asset Management invested $2.75 billion into Melvin as a sort of emergency funding round to keep Melvin from imploding (and probably cash they needed to exit the short position).

    At one point, there were (unexplained?) dips in the overall stock market and significant speculation on WSB this was caused by hedge funds unloading their long positions in other stocks to raise funds to cover their short positions in GME. WSB investors were urging each other to buy more GME and to hold onto the stock – because if everyone bought and refused to sell, they could keep driving the price higher. Further, the tone shifted to something like an online version of the Occupy Wall Street movement. The little guys (retail investors/WSB members) were taking on hedge funds at their own game and APPEARED TO BE WINNING. Some legitimately wanted to drive these hedge funds in bankruptcy.

    Elon Musk even Tweeted about “Gamestonk”, a WSB reference to stocks (stocks = stonks). Granted, Elon was interested because some of these same hedge funds shorted one of his companies (Tesla) previously and nearly drove the company under, so Elon probably thought the whole thing hilarious.
    There was a real undercurrent of making Wall Street pay for their collective sins against Main Street by intentionally forcing the short squeeze further. Some users posted they were buying GME stock just to watch Wall Street bleed.

    In typical WSB fashion, members began renting billboards along busy highways telling people to buy GME (with WSB-related memes and emojis). Someone hired an airplane to fly a banner around Robinhood's headquarters urging people to buy GME. In a interesting counterpoint to the rough-and-tumble, anything-for-profits reputation of the sub's members, prominent members encouraged people to give back to their community with the profits they were making (or not making) off of GME and other stocks. WSB members began buying gaming consoles at their local Gamestop stores and donating them nonprofit groups. I saw several posts where people spent thousands of dollars (one guy easily spent north of $5k) buying handheld gaming devices and videogames to give to local children's hospitals.

    Some photos of the activity, just for fun: https://imgur.com/a/WE94uni

    Pump and Dump?

    As the finance news industry and Wall Street in general tried to collect their wits and understand what was happening, there were accusations against r/wallstreetbets about this being a “pump and dump” or an illegal conspiracy to artificially raise a stock’s price for personal profit. You "pump" the stock by encouraging people to buy it, then "dump" the stock by once the price rises by selling it.

    On the other hand, many WSB-types maintained they were buying the stock because they believed the company’s share price would eventually rise. Some (probably a lot) were buying the stock because they thought the share price would continue to rise and they could cash out for a quick profit.

    Mr. Gill, mentioned earlier, became a multi-millionaire, and actually bought more of the stock as the price dropped (around the $40 mark). Interestingly, he posted an update on his GME holdings a few days ago and he’s still got about $6 million tied up in GME. I saw reports that he made around $50 million from the trade, but I don’t recall the specific amount. I did notice he had a couple million dollars in cash in his account, aside from his GME position.

    Wall Street fights back

    But of course, no one really expected Wall Street to take this without fighting back. Trading in GME was halted in the middle of the trading day. I saw some interesting (though lengthy and technical) analysis that market makers might have used the 15-minute trading halts to set up naked short ladders to slow the price rise. Which is something that is normally illegal.

    Hedge funds were making statements that seemed designed to make WSB investors think they had exited the short positions when they might not have (as a way to slow/stop the short squeeze).

    There were calls for the SEC to investigate r/wallstreetbets for illegal market manipulation, and counteraccusations that hedge funds do the same thing all they time (by taking massive short positions and then publicly advertising this fact, essentially creating a self-fulfilling prophecy and profiting from it by wrecking innocent companies).
    There were allegations of bot accounts on Reddit downvoting GME-related comments within the subreddit. Millions of people joined the subreddit (I’ve been a member since there were less than 1 million subscribers and they’re close to 10 million now). There were posts complaining that Robinhood (RH) forced some traders out of their option plays, in circumstances that were against RH’s terms of service.

    Then, on January 28th, Robinhood blocked users from buying GME (and other ‘meme’ stocks like AMC, Nokia, and Blackberry). Several other major brokerages followed suit.

    Robinhood

    Robinhood has made waves in the online investing community by offering commission-free trades to their customers. Controversially, the company does this by selling order-flow information to big Wall Street firms. Basically, the firms use this information for algorithmic super-fast trading. They can see that the order has come in and with their faster market access, buy the stock before the retail investor does, then turn around and sell it to the retail investor – scalping a few cents or fractions of a cent off of the trade. So, while Robinhood’s goal is to empower small time investors – their business model actually helps big Wall Street firms at the expense of the small investors. Further, some of these large firms on the short side of the GME bet are paying customers (and/or have strong ties to paying customers) of Robinhood’s for this order flow information (sorry, I’m running out of time to source this, so I’ll just carry on with the info dump for now).

    Robinhood explained that they were forced to take this step because of the daily deposit requirements by the NSCC. Basically, they’re saying the volume of shares being traded and such prices (while it takes a few days to settle the trades) were going to force Robinhood to splash out $3 billion just to keep operating. Robinhood danced around trying to say so, but it sounds like they faced a real liquidity crisis because they were seeking additional/increased lines of credit at the same time.

    On the other hand, many on Reddit saw this in a more cynical light. Essentially, they think Robinhood and other firms halted buying of GME in order to protect the investments of the firms with whom they have business relationships (and in Robinhood’s case, their TRUE customers – the people actually paying them for services). There's a lot random tidbits floating around that give some support to the more conspiracy-like theories - like the one that firms were literally forging stock certificates to fill orders. Another tidbit, supposedly Michael Burry's brokerage spent WEEKS trying to locate his GME shares when he gave them instructions regarding them (the guy famous for betting against the housing bubble pre-2008, as featured in the move The Big Short). Basically, there was a lot of shady stuff going on.

    r/wallstreetbets goes dark and Discord pulls the plug

    In this midst of all this chaos, the mods over at r/wallstreetbets had to basically take the subreddit offline to get caught up with all the moderation chaos. Rumor has it that the moderation bots were having bandwidth issues keeping up with the number of new posts and comments in the subreddit (initially their were allegations of bots deployed by hedge funds downvoting and spamming content, but I think that’s mostly been disproven).

    Additionally, r/wallstreetbets had a Discord ‘server’, which is basically a channel or large chat group. Discord is a chat/social media app popular among gamers. Discord corporate decided that the content of the conversation in the WSB server violated their rules and so they pulled the plug on the server. This was in spite of the fact that the WSB mods on Discord were using advanced server settings, moderation tools, and automatic moderation bots to ban/censor prohibited content. Discord claimed they had warned the mods several times and because they didn’t fix the problem, they banned the group from Discord. The WSB mods countered that it was a publicly available server with a lot (I think it was hundreds of thousands) of members, that anyone could join it, and they were doing their best to moderate the content according to Discord’s rules. Users had also paid for thousands of “nitro boosts”, so Discord was making some income from the server. (Side Note: Since all this, WSB is back on Discord – I guess the mods and Discord worked something out.)

    The Result

    The sum total of all this was the undeniable appearance (emphasis on appearance), that Wall Street firms pulled some strings and put a book on the necks of the WSB community as soon as their community tried to do what the big hedge funds routinely do.

    A lot of interesting questions have been raised as a result. Is the SEC/U.S. government doing enough to regulate financial markets? Should it be legal to short sell more than the public float? Is Robinhood’s fractional share mechanism (and others at other companies) allowing brokerages to literally forge stock certificates to fill orders, as has been alleged? Should there more restrictions on hedge funds when they short sell (and the corollary – should short selling even be legal)? Should brokerages be allowed to prohibit individuals from buying stocks?

    In light of all that’s happened, the House Financial Services Committee held a hearing on February 18th ( https://www.youtube.com/watch?v=RfEuNHVPc_k ).

    So, my question to you lot is – has anyone else been following this? And do you have any thoughts on all this?

    A disclaimer: Nothing in this post should be considered financial advice. I do not provide financial advice to others, and you should do your own research before making any investment decision. You should not invest more money than you can afford to lose.

    Another disclaimer: I do currently own GME stock. I am a Robinhood account holder. I do not currently own any TSLA, AMC, NOK, or BB shares. I am a long-time lurker in r/wallstreetbets.
    "If you believe, take the first step, it leads to Jesus Christ. If you don't believe, take the first step all the same, for you are bidden to take it. No one wants to know about your faith or unbelief, your orders are to perform the act of obedience on the spot. Then you will find yourself in the situation where faith becomes possible and where faith exists in the true sense of the word." - Dietrich Bonhoeffer, The Cost of Discipleship

  • #2
    Sorry, tried to edit spelling a error....but Tweb is having none of it.
    "If you believe, take the first step, it leads to Jesus Christ. If you don't believe, take the first step all the same, for you are bidden to take it. No one wants to know about your faith or unbelief, your orders are to perform the act of obedience on the spot. Then you will find yourself in the situation where faith becomes possible and where faith exists in the true sense of the word." - Dietrich Bonhoeffer, The Cost of Discipleship

    Comment


    • #3
      All I know is it'll be interesting to see what happens when this next stimulus is released and WSB has a fresh round of capital.
      "I was the CIA director. We lied, we cheated, we stole, it was like... we had entire training courses. It reminds you of the glory of the American experiment." - Mike Pompeo, Secretary of State (source).

      Comment


      • #4
        Originally posted by seanD View Post
        All I know is it'll be interesting to see what happens when this next stimulus is released and WSB has a fresh round of capital.
        To quote the infamous Mr. Gill in his testimony to Congress: "I am not a cat" and "I like the stock". I need to go watch his opening statement again to see exactly how many meme references and r/wallstreetbets slogans he managed to sneak into his sworn statements. Pretty entertaining for one familiar with the lingo.
        "If you believe, take the first step, it leads to Jesus Christ. If you don't believe, take the first step all the same, for you are bidden to take it. No one wants to know about your faith or unbelief, your orders are to perform the act of obedience on the spot. Then you will find yourself in the situation where faith becomes possible and where faith exists in the true sense of the word." - Dietrich Bonhoeffer, The Cost of Discipleship

        Comment


        • #5
          The irony is, that if you could get a short in while the stock was artificially inflated, you coulda made alot of money.

          GME might have been worth more than it's initial $17 or so share price, but it was certainly not worth it's >$500 share price at its peak.

          Comment


          • #6
            Originally posted by CivilDiscourse View Post
            The irony is, that if you could get a short in while the stock was artificially inflated, you coulda made alot of money.

            GME might have been worth more than it's initial $17 or so share price, but it was certainly not worth it's >$500 share price at its peak.
            Most people agree it wasn't worth that much, but value is subjective. At the time it was trading, it was worth that much if you had the stock for sale and people wanted to buy it for that much, right?

            But yeah, if I had a margin account and enough capital, I'd have shorted it around $400. Other hedge funds did, I'm sure.
            "If you believe, take the first step, it leads to Jesus Christ. If you don't believe, take the first step all the same, for you are bidden to take it. No one wants to know about your faith or unbelief, your orders are to perform the act of obedience on the spot. Then you will find yourself in the situation where faith becomes possible and where faith exists in the true sense of the word." - Dietrich Bonhoeffer, The Cost of Discipleship

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