Back in the day, Gamestop (ticker $GME) was a popular video game store similar to Blockbuster. But with the digitization of games, it’s been falling behind with the times…
All that changed when a Reddit forum known as Wall Street Bets recognized extreme short interest on the stock from institutional hedge funds. Short interest means that large funds were betting on the stock going down.
But these funds were extremely leveraged in their short positions of $GME in something known as a naked short.
This means they shorted the stock without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale.
This Wall Street Bets forum realized these hedge funds were taking advantage of the stock declining and decided to short squeeze them by creating a revolutionary effort to pump the stock up.
This would cause the hedge funds to need to cover their short positions by buying the stock which would then drive the stock price even further up.
Over the course of just a few days, the Reddit forum was able to pump $GME up 746% at the time of this writing.
With the support of people like Elon Musk and Chamath Palihapitiya the stock flew for no reason beyond a crazy group of retail investors looking to crush Wall Street at their own game.
This cascade of events led to firms like Melvin Capital, Citadel and Point72 losing billions of dollars in their short positions. These firms are known to take short positions on stocks and even try to put out negative press causing the stock to decline and rigging the market.
These funds were also known to short Tesla which is why Elon was keen to add a little fuel to the fire with his tweet.
These hedge funds are now being crushed at their own game in the most millennial type of way.
A mighty group of retail investors on a Reddit forum leveraging the Robinhood trading platform just showed the world what can be done when the people act together!
This is a monumental event in stock market history.
The Reddit forum is now boasting other stocks to pump next including $AMC which is up 228% today (1/27/21).
What we are witnessing will fundamentally change how these hedge funds short stocks in the future. But more importantly, the world will now respect the voice and power of retail investors.
The SEC may try to come for Wall Street Bets, but I don’t think what they did is illegal. They are simply talking about a stock just like any media or social media outlet.
I am still in shock about the events that unfolded.
What people were already considering a stock market that wasn’t based on reality, has now become completely true with $GME rising for no reason whatsoever. This massive short squeeze on the billionaires pumped by tweets, memes, and other online forums was incredible to witness.
I am not sure what this means for the stock market as a whole, and how we value companies in the future when they can be artificially pumped like this, but time will tell.
As a reminder, the stock market isn’t based solely on companies performance but on the behavioral economics of money on a massive scale.
These events that transpired are a first class lesson on how the stock market is a human behavior experiment unfolding in front of our eyes.