Being a retail trader is mostly being a sucker, hoping to best the markets while lacking the infrastructure, access, and information that professionals enjoy. Hell, most professional fund managers that regular folks can invest in fail to beat the market. That’s one reason why index funds and other passive investments that merely track aggregate performance have grown so much in recent years; why pay more to have someone make you less money than simply making the same returns as the S&P 500?
It’s an old saw that back in the dotcom boom traders would congregate in chat rooms to share tips, lie to each other, and try to pump their own equities higher. That all still happens. But what has changed is that the combination of mature social platforms and free trading has at once boosted access to the public markets while Reddit and other online congregation points have provided a simpler way for retail investors, the hoi polloi, to fuck around and make other people find out. (...)
This is what has happened with Gamestop, a company that until recently was unnotable, and stuck between a physical retail footprint, the pandemic, and its customers increasingly preferring digital game purchases. It was worth around $4 per share last summer. It started 2021 worth around $18. Now it’s $147.98 after rising 92.7% yesterday, and is up $69.02 this morning, or 46.6%.
How did that happen? No, the company did not get suddenly, radically stronger in short order. Instead, a coterie of Reddit users realized that Gamestop was shorted by more than 100%. That means that investors had bet more shares than existed in the company that it would lose value.
And mostly this would have been fine, a quirk of the market; other highly-shorted stocks can see a majority of their shares sold short, but to see a short-percentage of greater than 100% was eyebrow-raising.
Then came the wager: If big investors had bet more shares than Gamestop had in existence that it would lose value, what would happen if lots of individuals investors — retail interest, as they say — started buying the stock? That might drive its value up, forcing the hedge funds and other big capital pools to decide whether to hold onto their negative bet and take strong paper losses as Gamestop rallied, or cover their short, buying the stock at a higher price than they initially paid for it, losing money. Covering shorts would require buying the stock at high prices, perhaps boosting its value yet again.
It’s the wildest short-squeeze we can recall.
There’s always tension between short-sellers and investors who prefer to make positive wagers. Indeed, shorts are generally hated and the term perma-bear, slang for someone who is chronically worried about the price of assets to the point of distraction,1 is often levied at them.
But a boom in retail investing and social platforms allowing the congregation of disparate individual investors can do quite a lot, it turns out. So, users of the WallStreetBets sub-Reddit started buying Gamestop. And they kept doing so, pushing its price higher and higher.
The result was that big money got smacked in the shorts, literally. CNBC reports that short-sellers have lost more than $5 billion so far thanks to Gamestop’s rapid appreciation on the back of becoming an internet meme.
by Alex Wilhelm, Jonathan Shieber, TechCrunch | Read more:
Image: Eric BVD - Stock.Adobe.com
[ed. See also: GameStop Shares Surge Afresh as Short Sellers Start to Surrender (Yahoo); and (for more than you ever wanted to know): The GameStop Game Never Stops (Bloomberg).]
