A virtual earthquake has shook wall street in the US. Interestingly enough, it’s a short panicking situation for the hedge funds who took short interest in GameStop. An epic historic saga reckoned along the line, and as it seems the game is not stopping anytime soon.
GameStop has captivated Wall Street’s attention, last week. The stock price has been skyrocketing But the obsession isn’t just with the losers, it’s with who’s making money off of it. Group of small investors on social platforms like Reddit are going up against fancy, well-funded professionals. And it seems in the short run, the small investors had pinched the nerves of the giant-investors.
GameStop shares have gained over 6500 percent so far this year and around 400 percent in the past week. Professionals didn’t have any fundamental explanation for the stock’s success. GameStop hasn’t changed its business model or there wasn’t any upcoming hit business deal in the pipeline. Infact, GameStop lost 795 million dollars in 2019, and analysts estimate that the company lost hundreds of millions of dollars again in 2020.This stock has completely disconnected from the fundamentals. Stock price are running against the wind.
Small fishes in the pond i.e. individual traders on Reddit had attacked the big fish i.e Melvin capital by holding the position in the stock.
Melvin Capital which had taken the shorting position in the stock, exited his position and gulped the huge loss. GameStop reminds us of an old time favorite, Nokia which was taken down by the ever changing technology. GameStop first went public in 2002, it was once a huge brick and mortar retail market for PlayStation or Xbox games. But in recent years, most gamers now get their titles via digital downloads, not physical CDs. Game stop has been still running 15 years back in time.
In August, 2020, Ryan Cohen, an activist investor and entrepreneur who co-founded online pet store Chewey, spent 76 million dollars to buy nine million shares of GameStop, according to SEC filings, in November 2020.
He wrote a letter to the board urging them to shift their focus away from brick and mortar retail and toward building a robust e-commerce platform. About two months later, GameStop added Cohen, along with two of his former Chewy colleagues, to its board.The stock popped about 13 percent the day the announcement was made, but at that point, GameStop’s trading had little to do with Ryan Cohen.
However, for a company’s rise short seller’s are to be appreciated Short sellers sell their shares which they don’t own with a promise to buy it at a later stage. For example, 100 shares borrowed and sold in the market and when the price is right, the shares are bought. Difference between the sale and buy price is the gain or loss.
GameStop stock had been the most shorted stock at the time. It was in an oversold position, that means Over 130% of available shares were borrowed and sold in the market. Individual investors have increased severally in the market, an estimated 10 million new brokerage accounts have been opened in the past year alone, in the United States.
Numbers made it easier to gamble on the stock market, so as your phone and internet. Around millions of people interact on the apps, everyday. Thousands of people decided to hold a long position in the GameStop shares on the subreddit named Wallstreetbets on Reddit app.
With brokerage free apps opening an account on few taps, individuals were in line to become pro-investors and because it’s 2021, these 10 million stock traders can all talk to each other on subreddit. Wall Street Bets is one forum that has become pretty popular with day traders. They pick a stock, they run with it, they tell each other, hold, don’t buy or when to buy.
Elon Musk cheers them on twitter and even defends the act by tagging selling of shares that you don’t own, isn’t ethical. Their buying has driven the price up and the hedge funds had to bear the loss in billions. This army of retail Reddit traders has a larger purpose, which includes punishing the hedge funds who made billions of dollars in profit off a system which would be complex to understand for a normal person.
Hedge fund Melvin Capital closed its short position at a loss, according to reporting from NBC’s Andrew Ross Sorkin In short seller Andrew Left from Citron Research said his firm had to bail on its short position at a 100 percent loss. The phenomenon seems to extend beyond just GameStop. Other stocks appear to be targeted by the Reddit crowd as well. Bed, bath and beyond and AMC are other two stock which is on target list of Reddit Robinhoods.
Although, there are serious questions about the legality of the behavior on Reddit and if the collective targeting of hedge funds could add up to something like collusion, market manipulation. Analysts and finance professors said that whatever grabs the headline is likely what the SEC is looking into. Observers are also questioning if this is just the work of retail traders anymore or if the professionals are now playing both sides of the trade. 70, 80 million shares traded in one day and there couldn’t possibly have this much in the hands of small investors, that ought to be institutional money, but pointing fingers is nearly impossible.