Thursday 29 September 2022

'Eat The Rich! The GameStop Saga's' Short Squeeze: Explained

Netflix trailer

Everyone loves an underdog, so when news broke in January 2021 that Reddit users had flooded the market by buying shares in a low-rating company, causing many of the wolves of Wall Street to lose cash, it became a quirky global news story.

But the real story was far more complex than that. While some of the Reddit users saw themselves as rogue, everyman traders, the event came about as a result of a perfect storm: nations stuck at home during the pandemic, the rise of online crypto and groups surrounding it, and the desire to accelerate what people saw as the dying stages of capitalism.

Naturally, after this financial melee, Netflix commissioned a documentary series about it, Eat The Rich: The GameStop Saga. But what really happened in the amateur trading takeover, and how did it all end?

How did it all start?

Back at the beginning of January 2020, shares in the American gaming and electronics store, GameStop, were at a low of $3, and a subreddit group, r/wallstreetbets, decided to start investing in it.

Just as Wall Street hedge fund traders began to short the stock – that is, betting heavily on it dropping further, until it went out of business – a year later in January 2021, these Reddit users and other amateur online traders went harder. By hyping the stock up in these online communities (Elon Musk obviously got involved too, tweeting “Gamestonk!!”, a reference to the weird businessman meme) the price rose from $19.94 on 11 January to a record high of $347.51 sixteen days later. The Wall Street Journal reported that, according to Dow Jones market data, more than 175 million shares of GameStop were traded on January 25, the second largest total in a single day, surpassing its 30-day average volume of 29.8 million shares.

What was the effect of this bulk-buying of stock?

Unsurprisingly, the finance experts who lost out were incredibly pissed off. Bloomberg noted that short sellers had lost a total of $6 billion due to the squeeze.

Some brokerages, including Robinhood – ironically named after the man who stole from the rich to give to the poor – halted the sale of GameStop stock and other volatile stock that the Redditors were cashing in on on their apps, leading to claims of “market manipulation”. Alexandria Ocasio-Cortez tweeted at the time: “This is unacceptable. We now need to know more about @RobinhoodApp's decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit. As a member of the Financial Services Cmte, I'd support a hearing if necessary.”

This led some customers to file lawsuits against the brokerages, and demand that inquiries be set up to investigate what happened, as well as online financial regulation in general.

As The Guardian reported at the time: “A lot of people are crowing that this is giving large hedge funds and traders a taste of their own medicine. These funds have historically been able to shift the price of a stock for their own benefit, whether that is the “pump and dump”, or by openly and heavily shorting it”. It added that the big appeal - apart from shits and giggles for a population under lockdown - “is a form of wealth transfer – the only losers in this trade are large hedge funds, and the winners are lower-income internet users, some of whom are only putting up a few thousand dollars.”

Did the stunt end up pulling capitalism down for good?

Yeah, nice try… but no. John Cassidy wrote in the New Yorker at the time: “We can say that almost all speculative manias happen in four stages: displacement, boom, euphoria, and crash”, adding that the boom was indicative of “buying in the hope that you will be able to get out before everything goes to hell…This is the peculiar logic of collective action that I have called, in the past, ‘rational irrationality’.”

While we were in the boom and euphoria then, things have definitely pivoted to crash now – with the bottom of the crypto market falling out over the past year, leaving many first-time online players on the market severely out of pocket. Still, out of all of this, one positive is the online traders might have saved GameStop from going bust. As it stands today, their share price is $25.32.

Source: Esquire.

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