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GameStop Shorts Explained: How Reddit Is Bankrupting Wall Street

by : Cameron Frew on : 28 Jan 2021 12:58
GameStop Shorts Explained: How Reddit Is Bankrupting Wall StreetPA Images

GameStop has become the battlefield of Reddit vs. Wall Street, with titanic sums being made and lost. Let’s dig into how the posters became the wolves. 

The stock market isn’t usually the plaything of normies. Sure, we have an awareness of it, either through the doom of 2008 or Jeff Bezos, Elon Musk and Bill Gates’ perpetual wealth increases, but it’s usually reserved for those with either a lot of money, or a fascination with cash.

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Retailers have all struggled during the pandemic, including GameStop. While benefitted by the launch of next-gen systems, historic digital entertainment revenue offers a stark future for in-store sales. As market value starts to drop, the wealthy see an opportunity to capitalise – that is, until the Redittors fight back.

In just 12 months, GameStop’s (known as GME) stock has surged by nearly 9,000%, with a large portion of the spike coming over the past two weeks. This isn’t the result of promising prospects inviting new investors – it’s the economic equivalent of a mass ‘f*ck you’ to hedge fund operators and major financiers.

Prior to this, market demand was low. So, as shareholders continued to sell, managers of hedge funds looked to ‘short’ the stock. Knowing what it means to short stock, or short selling, is crucial to comprehending this mayhem, so I’ll try and break it down simply. You’re essentially betting on a company’s failure.

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GameStopPA Images

Let’s say you borrowed 10 brand-new copies of a video game from a supplier. While borrowing them, you actually sell them for $60 a piece, giving you a sweet $600.

A week later, the critical consensus is poor, the audience reception is measly, so the value of the games drops to $25 each. So, you go back to where you sold them and buy them all back for $250. Then, you take them back to the supplier you borrowed them from, having pocketed $350 profit. That part is known as ‘covering’, regardless of gain or loss.

However, let’s say the game is a massive success upon release. So much so, in response to crazy demand from customers, the price of the games goes up to $80 each. After you buy them all back and return them to the supplier, you’ve lost $200.

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Now scale that up to millions upon millions of dollars, and that’s the risky game of serious investors. It’s the subject of The Big Short, in which a small group of Wall Street guys betted against the housing market prior to the financial crash, knowing it would fail.

Subreddit forums like wallstreetbets, armed with more than two million members caught on to this happening with GameStop and decided to buy up the stock. It had a ‘negative float’, which means more shares had been shorted than were actually in circulation.

As more Redditors bought shares, demand for shares increased, causing the price to keep ticking up and up and up. When Musk tweeted ‘Gamestonk!’, even more joined in.

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Seeing the amount of money they’d be losing – when it comes to shorting stock, it’s theoretically infinite – hedge fund managers rushed to sell their shorted shares to recoup some of their money and prevent insolvency. However, in doing so, share prices increased massively. This is known as a ‘short squeeze’.

For those with honest shares, they’re getting richer every day, with the top three shareholders seeing increases of more than $2 billion in total.

But for the likes of Melvin Capital, it’s very bad news. The hedge fund was forced to close its short position and incur massive losses, with its backers Citadel and Point72 forced to pump $3 billion into the fund to keep it afloat – however, any reports of a bankruptcy filing are said to be false.

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Feel free to take a break from the financial breakdown with this handy Lord of the Rings alternative: 

Also, a short squeeze is based upon ordinary trading behaviour. However, the Redditors and others who have bought shares are refusing to liquidate and take their fairly large sums of money, hoping to see the value continue to increase and, as a result, force hedge funds into heavier losses.

S3 Partners, a financial data company, has also found through its analysis that short sellers have lost $23.6 billion on GameStop this year alone. There’s no signs of slowing down either, with some users now turning their focus to other companies gripped by short sellers, such as AMC Theatres and Blackberry.

The reasons for doing so are two-fold: making some quick money and sticking it to the elites. Ben Patte, a 16-year-old high school student in Wisconsin who’s made $750 from GameStop stock, told The New York Times: ‘It’s a good opportunity to make money and stick it to the hedge funds. By buying GameStop, it’s kind of like beating them at their own game.’

BBC analyst Neil Wilson noted: ‘Among the many aspects of this story that are strange, what is so unusual is the peculiar vigilante morality of the traders pumping the stock… it’s a generational fight, redistributive and all about robbing the rich to give to the millennial poor.’

Alexandria Ocasio-Cortez tweeted: ‘Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino.’

As for whether this is all legal, it’s the subject of debate, with some believing it to be market manipulation. It has caught the eye of the White House, with the situation now being ‘monitored’.

However, Bloomberg’s Matt Levine wrote: ‘it might be illegal in all sorts of ways, but it is not obviously illegal, and if the US Securities and Exchange Commission were to go after WallStreetBets for this stuff they will be breaking new ground and going beyond their previous cases.’

Some experts believe the situation is a big balloon waiting to pop, while others think the shares will stabilise and reflect a more accurate value of GameStop. But ultimately, nobody knows. One sentiment above all is clear: ‘Eat the rich.’

If you have a story you want to tell, send it to UNILAD via [email protected]

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Cameron Frew

After graduating from Glasgow Caledonian University with an NCTJ and BJTC-accredited Multimedia Journalism degree, Cameron ventured into the world of print journalism at The National, while also working as a freelance film journalist on the side, becoming an accredited Rotten Tomatoes critic in the process. He's now left his Scottish homelands and taken up residence at UNILAD as a journalist.

Topics: News, GameStop, Now, Reddit, US, Wall Street

Credits

The New York Times and 2 others
  1. The New York Times

    ‘Dumb Money’ Is on GameStop, and It’s Beating Wall Street at Its Own Game

  2. BBC News

    Gamestop: 'Failing' firm soars in value as amateurs buy stock

  3. Bloomberg

    GameStop Is Just a Game