The Iconoclasm of the GameStop Short Squeeze
Dramatis Personae:
Citron Research: A team of investors led by Andrew Left.
r/WallStreetBets: A subreddit of self-described “retards and autists.”
Melvin Capital: An investment firm.
Citadel LLC: A hedge fund and one of Robinhood’s biggest clients.
Robinhood: A day trading app.
Alexandria Ocasio-Cortez: The Democratic congresswomen representing NY-14.
Rafael “Ted” Cruz: The Republican junior senator representing Texas.
Elon Musk: Entrepreneur and CEO of Tesla and SpaceX.
Elizabeth Warren: The Democratic senior senator representing Massachusetts.
—
The general adage of stock investing is to “buy low, sell high,” expecting the price of the stock to rise. Shorting a stock works in reverse. Expecting the price of the stock to fall, investors will borrow stock and sell it, hoping to buy it back for a lower price and pocket the difference. In terms of risk, one can already identify why the latter strategy is much more dangerous. If one buys the stock and it plummets to zero, they’ve lost their investment — but the price of the stock is bounded below. However, it is not bounded above. If they sell the stock and it skyrockets, they are forced to buy it back at an arbitrarily high price. For this reason, short selling can be described as “infinitely risky.” When the price goes up not only do the investors lose money but when they buy back the shares they borrowed this drives the price up even more in a chain reaction. This is what’s called a short squeeze.
On January 20th, 2021 investor Andrew Left published a report through his organization Citron Research speculating that GameStop’s stock, $GME, was overvalued and would fall — meaning it would be ripe to short. However, members of the Reddit community r/WallStreetBets read this report and deduced that investment firms such as Melvin Capital and Citadel LLC would be targeting $GME hoping to make a windfall. They decided to fight back by buying up $GME, the artificial increase of demand driving the price up starting on January 22nd. Thus began a financial clash between a large group of organized hedge funds and a ragtag group of retail investors.
About a week later, January 28th, Robinhood announced that they would no longer process buy requests from users for $GME or other stocks (dubbed “YOLO stocks” on r/WallStreetBets) such as $AMC, $BB, and $NOK, as well as preventing them from being searched. As VICE Motherboard reported, over half of Robinhood investors owned $GME stock. The result of this was a massive decrease from an opening price, $GME’s peak, of $469.42, to $132.00, a 71% reduction within an hour and a half. This resulted in Alexandria Ocasio-Cortez (D-NY14) tweeting that Robinhood’s block of trading for retail investors was “unacceptable” and needed investigating, to which Ted Cruz (R-TX) responded “Fully agree.” Additionally, the same day a class-action lawsuit was filed in the Southern District of New York accusing Robinhood’s practices of constituting “market manipulation,” The Hill reports.
And here we are now. While a full post-mortem cannot be complete while this is still ongoing, it’s not too early to ask how this event came about. What would motivate a Reddit community to take matters into their own hands in such a financially volatile way? A theory put forward by Dr. Usman Chochan is anger about COVID, the 2007 subprime mortgage crisis and the ensuing recession, and the general state of late-stage American capitalism which have seen the rich get richer and the poor get poorer. This sentiment is verified by several posts on r/WallStreetBets: one poster saying that this was his revenge for how his family lost everything during the housing crisis. Putting fuel on the Reddit fire are tweets from a figure popular on certain subreddits: Elon Musk. He spurred on the assault with one tweet reading “Gamestonk!!” and linking to r/WallStreetBets; a couple days later he attacked hedge funds and stock short selling calling it a scam. Elizabeth Warren stated that financial instability is the result of Wall Street investors treating the stock market like a “casino,” and r/WallStreetBets seems to agree. Perhaps this is the vitritol that they have — after seeing companies like GameStop being screwed over by investors trying to make a quick buck for over a decade, the masses are more than willing to play the same game against them. Reddit co-founder Alexis Ohanian weighed in on these regards, stating that r/WallStreetBets represents a democratization of the stock market and a “shift of power to small investors,” going as far to liken r/WallStreetBets holding shorted stocks to Occupy Wall Street.
This could simply be karma for the last fourteen years, or it could be something more. Alex Webb writes for Bloomberg that investment in Nokia, a Finnish telecommunications company, could have repercussions for the global market and, given competitor Huawei’s relationship to the Chinese government, may go so far as to affect national security. Additionally, because most of the increase in Nokia’s stocks comes from American investment rather than Finnish, this could affect the volatility of the Finnish market. Either way, the GameStop short squeeze is nowhere close to done, and it remains to see what sort of cataclysmic changes both the American and the global economy may see in the coming years.
