Trading in Gamestop (NYSE:GME) has caught the worlds attention. The story has gotten everyone talking from richest man in the world Elon Musk ( who is against the hedge funds) to taxi drivers. It is soo engulfing that it has got Donal Trump jnr and hard left democrats on the same page for once. What started out an opportunity for some in the Redditt subgroup /r/wallstreetbets to make money has now morphed into something much more more.
The Gamestop story is the everyday Joe saying they don’t like a system geared to the already rich. The story is about about capitalism, class warfare, free markets, censorship, freedom of speech, the deep state, the have vs have nots, Wall street and the system. Its a revolution that started with people not trusting central authority. Its a call for transparency and fairness. In many ways its happening in parallel with the social unrest we see in recent times; the mob attacking the capitol, the BLM protests following George Floyd’s murder. These are all symptoms of a growing inequality that is leaving our markets, our political system, and civil society more fragile than they have been in a long time
First, for those unfamiliar with the business, GameStop is a video game retailer, operating 5.5k+ stores around the world, primarily in malls, across North America, Europe, and Australia. The business has struggled to modernize, hurting its financial and stock performance over the past few years.
For a variety of business reasons, a bull (i.e. optimistic) case regarding its future performance has formed. It really came to the forefront after RC Ventures, an entity managed by Chewy founder Ryan Cohen disclosed a large position and assumed three board seats.
Ryan Cohen summarized his case, stating: “We are excited to bring our customer-obsessed mindset and technology experience to GameStop and its strategic assets…expanding the ways in which it delights customers and by becoming the ultimate destination for gamers.”
Six months ago Gamestop shares were trading at $4 each. A week ago it was at $35. A few days ago it was over $400. This rise has been driven almost exclusively by a subreddit r/WallStreetBets which has 2.8m subscribers & describes itself as “Like 4chan found a Bloomberg Terminal” and in doing so captured the public imagination.
This is a once in a lifetime historical event. At least 1 hedgefund has gone bankrupt, thanks to a group of average joes on Reddit. By the end of the week, there will could be a lot more.
But how did it happen? Why did Gamestop price surge?
To understand this, you need to understand stock dynamics
Stocks are pretty simple, when they go up in value, you make money, because it’s worth more than you bought it for.
Stock goes up- you make money.
Stock goes down- you lose money.
Short selling, is the opposite. Short selling makes money when the stock goes down in value.
In the simplest terms, Short selling is when an investor borrows shares from someone currently holding them (long term investor) and sell them in the market today, with the agreement that they will buy back their shares at a later date, either when they want to or are forced to.
So for example: Tony borrows Mikes shares in GME, and sell them for $10, he pays Mike $1 to do this, and promises to give all of Mike’s shares back. Then, if the stock goes down to $5, Tony buys the shares back at a cheaper price. So Tony’s profit is $10-$5-$1 = $4 profit.
That’s how it all started. A hedge fund tried to force down the price of Gamestop, and short the stock. It usually works fine. It’s been done thousands of times, with no problems.
The hedge funds shorted Gamestop (GME) from $20, to $10, to $4. Their greed kept compounding. They kept doing it again, and again, for months. Making billions of dollars, and almost bankrupting this company. (side note: I don’t know how shorters live with themselves considering bankruptcy leads to people getting unemployed!)
This is where Wallstreetbet come in. /r/wallstreetbets is a trading/investing subreddit. Someone noted that these hedgefunds shorted 140% of all shares available. These hedgefunds were so damn greedy, they borrowed more shares than actually existed. That’s how arrogant and greedy they were.
Having shorted 140% of all the available shares, It would literally impossible for them to buy them all back.
The people at Wallstreetbets realized this and came up with a brilliant idea. Once they saw the short interest in Gamestop stock over 100%, and the price of the stock (about $4), and the low liquidity of the stock (47million shares available), they determined that if enough people bought the stock at around the same time, they could push the price higher and force short sellers to purchase their shares back to close out their positions (thus pushing the price higher) or post additional margin to keep their short interest.
Now, the rule with short selling is that ALL those shares that they borrow, MUST be paid back.
And so we reach our main story of how the hedgefund’s greed ruined them.
Realizing that these hedgefunds shorted GME by a ridiculous amount, these Redditors (normal people like you and me), started buying every share they could get their hands on. In the first few months this didn’t work out as well as planned. The shares would rally, but they never posed a serious risk to the hedge funds. It’s only a 180 million dollar company after all, so they could pretty much buy the company to cover their losses.
As GME moved higher, these funds simply kept putting up margin (short interest is still over 100%) thinking the momentum would stop and the stock would plummet. Meanwhile over on r/WallStreetBets people kept talking about holding the stock, not selling and buying more.
This coordinated buying of 10’s or 100’s of shares across millions of accounts kept driving the price up day after day.
Momentum was smaller at first, 10%-30% here and there, but the march upward kept triggering margin calls and short covering or mostly more margin deposits.
Day after day, hour after hour, funds kept doubling down on the fact that they were not going to be pushed out of their positions by a bunch of kids in their moms basements…. boy oh boy how wrong they were.
This constant buying drove the price up like crazy. Why? Because these hedgefunds eventually (within a few months) HAD to buy all those shares back, at whatever price they could get them. They didn’t have a choice.
So for example, if they borrow 10 million shares, and sold them for $10. They made $100 million in immediate profit. But eventually, they had to buy those million shares back. They didn’t have a choice. That was the deal they made when they borrowed the shares.
So these Redditors bought the shares, driving the price up, forcing these hedgefunds to buy back at crazy prices. Yeah, the hedgefund sold and made $100 million, but now they had to spend $1 Billion+ getting those same shares back. A huge Loss!
As the days go by, every attempt to crash the stock fails. Everyone knows what theyre trying to do, so people keep buying the stock. And with every additional bit of media attention, more and more people are buying the stock, destroying the greedy hedge funds in the process.
So eventually, the due date for when these hedgefunds need to return the borrowed shares comes closer. And what do they do? They double down. They short more. Because they’re sure that they can manipulate the stock enough to get it to crash, thereby saving themselves.
Melvin Capital for example needed a massive bailout (to the tune of nearly $3bn) in order to avoid bankruptcy. The bail out came from Citadel (more on this later). That was Monday. The stock price was $76.
On Tuesday, the stock ended at $147.98 per share. These hedge funds were still shorting the stock, at 130% of available shares. That’s how greedy these guys are. All those millions of shares still have to be paid back.
Hedge funds started crying on literally every platform they can get their hands on. They want the government to stop trading. They want this reddit forum investigated and banned. They’re screaming ”market manipulation”, when in reality these hedge funds were the ones manipulating the stock, but they got caught, and are now trying to take their ball and go home. While these hedge funds are on every news channel screaming about Reddit and Wallstreetbets, they inevitably draw attention to themselves, and what’s going on.
Enter the ”whales”- individual investors who can make a splash and impact the stock. Millionaires and billionaires that have a bone to pick with hedge funds and short sellers.
Elon Musk hates short sellers, because they tried to cripple Tesla so often. With a single tweet, Elon sent the share price skyrocketing from $147.98 to $230. And along with Elon Musk, a huge number of wealthy ”whales” started to jump in. Buying up huge amounts of stock. The stock went over $400!
It was all going good. Then Thursday happened and Wall Street and the hedge funds changed the rules of the games. Brokers such as Robinhood banned all buying of GME, but allowed all selling. This forces the price down, and is literally market manipulation. Which is illegal. And guess who handles the majority of Robinhoods orders… you guessed it Citadel!
Citadel is a massive hedge fund (founded by billionaire Ken Griffin) with three different firms: a tech firm, an asset manager, and a market maker. The market maker, Citadel Securities, pays Robinhood a pre-set fee for every trade they execute. (It’s worth noting that Citadel isn’t just any market maker. They’re massive: handling almost a quarter of all listed (aka, exchange-traded) stock options.)
So Citadel is a hedge fund whose Market Making arm is handling the majority of Robinhood orders. Meanwhile, another hedge fund, Melvin Capital, was one of the funds caught in the GameStop short squeeze. This week, they finally had enough, and had to close out their short position for a big loss.
Who stepped in to buy up a piece of Melvin Capital after that happened? None other than Citadel Securities’ parent, Citadel LLC. (Talk about a conflict of interest!)
With all these shenanigans, the price of Gamestop shares dropped from over $400 to under $450. This was textbook market manipulation to drive the price down and save these hedge funds.
There were also reports Robinhood was automatically selling people’s shares without their consent. If you’re wondering whether this is illegal, you’re not alone. Several class action complaints have been filed against Robinhood already, with politicians coming out against this activity and promising a Congressional hearing. We’ll see if anything materialises.
Twitter went in to meltdown. Politicians, celebrities, influencers and any person you can think off went on a rant on Twitter. Just do a search of $GME, #Gamestop or #robinhood to see the carage
On Thursday evening, on news brokers were to allow limited trading in Game shares, the stock price shot back up.
On Friday, the stock was trading at $350.
It’s now not just reddit against hedge funds. Its the world against the hedge funds. I’ve seen people from all over the world jump on the Gamestop bandwagon just to burn the hedge funds.
Investors don’t care. They don’t care how expensive they buy the stock for. It is now about sending a message. But they also know these hedge funds must buy the shares back. For many of them, they don’t actually care if they lose money. They just want to watch these hedge funds burn. They want a level playing field.
How will it end?
No one actually knows. But one thing is for sure, the story is not over. They will be lots of repercussions from this. And this story will go down in the history books as the day the hedge funds fell