The Big Short Squeeze: Reddit day traders rocket Gamestop share price

February 11, 2021

Category:

3 min read

Sign up to our mailing list! 👇

What's going on here?

Reddit day traders have sent Gamestop’s share price soaring in an attempt to defy Wall Street investors.

What does this mean?

It has been a truly awful year for brick-and-mortar retailers. Lockdowns and social distancing have hastened the descent of the High Street and turned shopping centres into ghost towns. For Gamestop, a video game retailer with over 4,000 stores in the USA, last year played out in just this way, its share price slumping to a handful of dollars. A positive end to the year saw the share price reach $20 on 11 January.

Then, madness.

Two weeks later, on Wednesday 27 January, the company’s share price was $350, more than 17 times higher. Its market capitalisation had rebounded from a pandemic-induced low of $250m last year to a monumental $25bn.

This began with Gamestop being one of the most “shorted” shares on the market, indeed short positions were worth 140% of its market capitalisation. This means that there were more short positions than floated shares on the market; traders were essentially shorting other people’s shorts. Short selling is a method used by investors to bet against a stock. It involves borrowing shares in a company and selling them, with the hope of buying them back later, when the price has dropped and returning them to their original owner. 

For example, Tilly Trader rents a stock from Billy Broker for the month when the price of the stock is £10. When the month is over, Tilly must give Billy the stock back plus £1 for rent. Tilly does this because she thinks the price will drop, meaning she can sell the stock now for £10 and buy it back in a month for £5. After paying  £1 “rent”, Tilly nets a profit of £4 per share.

Day traders on a Reddit forum, r/wallstreetbets, caught wind of this and began buying shares by the thousands, sending the price skyrocketing. This meant that all the Tilly Traders who had already sold their shares had to buy back at a significantly higher price. The motive appears to be to cause the institutional investors on Wall Street to lose. This method of forcing a price rise to counter a short is known as a “squeeze”.

What's the big picture effect?

On Tuesday 26 January, Gamestop was the most heavily traded stock worldwide, traded more than the five biggest tech stocks combined. This almost certainly means that institutional investors had got in on the act. Many of the companies who had shorted the stock may well have bought shares in an attempt to prevent their losses from mounting.

At least two of the big funds responsible for the shorts, Melvin Capital and Citron Research, have already unwound their position and taken a loss. Melvin apparently required a $2bn bailout to cover its losses, which amount to 53% of the assets it had under management. This appears to be a success for the Reddit Davids railing against the Wall Street Goliaths

The price rise was so unprecedented that the White House felt it necessary to inform the American public that the Treasury Secretary, Janet Yellen, was monitoring the situation. This attention likely caused the price to spiral even higher, as more people piled in. It may have also begun a trend in the US and beyond, with greater attention being paid to other heavily shorted companies, like Nokia and Blackberry.

Much of the activity happened on low-cost trading platforms, such as Robinhood, which are aimed at bypassing the fees charged by institutional brokers on Wall Street. The resulting volatility caused Wall Street’s clearing houses to demand more money from brokerages, to cover their traders’ potential losses. Robinhood was forced to limit trading on the affected stocks, to allow it time to raise $1bn from its own investors. The share price of Gamestop promptly fell by 60%. Robinhood reopened trading after protests accused it of limiting trading to benefit hedge funds and other Wall Street elites. The share prices involved in squeezes then continued their climb.

The vigilante traders have turned their sights elsewhere, towards other heavily shorted stocks, from AMC, a beleaguered cinema chain, to out of fashion phone makers Nokia and Blackberry, to silver.

Report written by Joshua White

Share this now!

Check out our recent reports!