GME to the moon

GameStop. Just over two weeks ago it was the most shorted stock in the market (138% of available shares). Since then, it has grown 1400% becoming one of the biggest and most controversial short squeezes in history.

Shorting a stock is betting that the share price will go down; the bettor borrows a share and sells it at its current price, agreeing to buy it back later. This presents large risks because the bettor has to repurchase the stock regardless of the new price. A short squeeze occurs when the price of a largely shorted stock rises, and people are forced to close their short positions and rebuy the stock sending the share price up even more.

This shortsqueeze is different from any that has preceded it though, in this case, an enormous band of individual everyday investors taking on institutional investors like hedge funds. The movement started on the subreddit r/wallstreetbets which has become famous for its aggressive investing strategies and love of Tesla. Users noticed the heavy short position of hedge funds and the idea of buying GameStop quickly gained traction through January as the share price rose from under $20 to over $300. The story doesn't end there though; many users are now holding their position so that hedge funds who renewed their short positions are set to face even further losses. Melvin capital lost 53% in January and other funds are also reported to have lost billions.

The situation became even more complicated when Robinhood, the most popular free brokerage app in America and the app where the largest amount of GME stock was being bought, limited trading of GME; a move described by Dave Portnoy as “criminal”. It meant users were only allowed to sell causing the share price to drop. This sparked outrage amongst investors who claimed they were protecting hedge funds from further losses. Robinhood cited financial regulation and investor protection as the reasons for the limit, however, not all brokerages have done the same and this had led to many calling it market manipulation with Robinhood now facing a bipartisan attack.

With law-suits having been filed, it is unclear how the situation will resolve or when the price will drop but the situation raises larger questions about whether this is a sustainable tactic.

Described by the founder of Social Capital Chamath Palihapitiya as ‘the largest hedge fund in the world’, the subreddit is now going after other shorted stocks, including AMC entertainment and Blackberry, seeking to achieve similar results although to varying degrees of success. He also remarked that it could spark a change in investing because the subreddit can act as a decentralised democratic group and prop up the price of any stocks they want while avoiding collusionary action. When questioned if this was unethical, he sided against Wall Street claiming that hedge funds have acted hypocritically throughout history and the problem with the short squeeze is the leverage that the market currently permits investors. Indeed, many echo this and suggest that the system is in need of reform if more than 100% of shares can be shorted.

While the situation has been enormously popular it seems the fairy-tale is coming to an end as all of Reddit’s so-called ‘meme stocks’ finished trading considerably lower on Tuesday. GME has dropped back to 90 and could be set to fall even further.