Kyle Park '24
AP News
You may have heard of the rise of GameStop stock and thought of it only as a cheap way for people to make money. However, you may not know the reasons why this extraordinary series of events occurred. There are two sides of the story: the traders buying and inflating the stock, and the financiers who lost money. To understand both sides, I interviewed my uncle, a financier, and asked questions about the situation to learn more. Additionally, I listened to people who contributed to the ordeal and their perspectives on the story.
This situation began with hedge funds, such as Melvin Capital, short-selling GameStop stock. Short selling is when traders borrow stock and immediately sell it at the current market price. They are hoping that by the time they are required to return the stock, the price will be lower. So when they purchase the stock back at the lower price, they pocket the difference as profit. For example, my dad has 100 apples and I think that the current price of apples will fall. So I borrow the 100 apples and I find someone willing to buy them for the current price of $2 dollars per apple, for a total of $200. By the time I promised to return the apples to my dad, the price had fallen t0 $1. So I spent $100 to buy and return 100 apples to my dad. I am left with $100 in profit. According to The Wall Street Journal, Melvin Capital and other hedge funds did this with GameStop stock. They were betting that the stock would drop, and short-sold the stock. These hedge funds felt that Gamestop was on the decline due to games being downloaded rather than bought in stores. In addition, the pandemic was decreasing foot traffic in these stores.
On the subreddit r/WallStreetBets, one member by the name of DeepF**kingValue, who was later revealed to be Keith Gill, saw that GameStop was being shorted severely by these hedge funds last year. In his testimony before a congressional hearing about the GME fiasco, he states, "that GameStop has the potential to reinvent itself as the ultimate destination for gamers within the thriving $200 billion gaming industry. The new console cycle proxy, GameStop can pursue new revenue streams including larger gaming catalogs, divides GameStop a unique opportunity to pivot from a traditionally brick-and-mortar mindset toward a technology-driven business that excels in gaming products, experiences, and services. By embracing digital economical content and community experiences, online trade-ins, streaming services, and Esports."
Other members of the subreddit community initially mocked his online posts about GameStop. But as more of the members realized that short-selling of the stock was greater than 100% of the stock float (number of shares readily available for trading), they saw an opportunity to cause a short squeeze. So the Reddit traders began buying up GameStop stock in order to cause the price to rise and decrease the supply of stock for short-sellers to buy back in hopes of triggering a short squeeze. According to Investopedia, “A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock's price.” As the price would skyrocket, they could sell the stock back to the desperate short-sellers and make a quick fortune.
The plan initially appeared to be working last January. The following numbers were recorded from Yahoo Finance: In mid-January, GameStop stock (GME) was trading at around $30. On Friday, January 22, the price had climbed to over $60. When the market reopened on Monday morning, GME was trading over $100. The squeeze seemed to have started. As the word spread through social media posts and memes about GME, more and more people began buying the stock. By Thursday morning January 28, GME was soaring past $400! But then the unexpected occurred. Brokerages such as RobinHood and TD Ameritrade halted the trading of GME stock. However, institutional investors were not prohibited from trading the stock, but only the retail traders, ordinary people. By the time the trading halt was lifted, the price had dropped below $200. This enraged many people who claimed this was market manipulation to stop the short squeeze momentum in the hedge funds’ favor.
In conclusion, I believe that it was unethical of RobinHood to temporarily ban the trading of GameStop stocks only for retail traders, putting them at a disadvantage against the wall street pros. However, short-selling by wall street traders does serve a crucial role for the free-market. If a company is dying due to poor management or market circumstances in the world, short selling can help separate the healthy companies from the weaker companies in the eyes of a free market. Many people involved in the GameStop stock rise did not buy because of an idealistic purpose but from avarice and the opportunity to make a quick buck. Due to this event, there may be calls for draconian laws of stock trading for the regular individual. As we step into 2021, one may look at this series of events as an inevitable face-off between the old guard of wall street and the next generation of traders fueled by social media.
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