The last time I headed into GameStop, a chain store selling a wide variety of games (software, board, role-playing), was about four years ago when my son participated in a “Magic the Gathering” tournament.
Imagine my surprise upon discovering that the chain, which has been hard-hit by the rise of online gaming and COVID-19, had stock worth more than Apple or Facebook.
And while I personally value Facebook very little, the GameStop share price is genuinely astonishing.
The stratospheric value results from millions of renegade stock traders “short squeezing” some of Wall Street’s most sophisticated investors.
[T]…hey apart of a frenzy that appears to have originated on a Reddit message board, WallStreetBets, a community known for irreverent market discussions, and on messaging platforms like Discord. (One comment from WallStreetBets read, “PUT YOUR LIFTOFF DIAPERS ON ITS ABOUT TO START.”) Both Tesla’s Elon Musk and the billionaire tech investor Chamath Palihapitiya have encouraged the crowd via Twitter.Egged on by the message boards, these traders are rushing to buy options contracts that will profit from a rise in the share price. And that trading can create a feedback loop that drives the underlying share prices higher, as brokerage firms that sell the options have to buy shares as a hedge.
Ace of Spades HQ has a summary of the fiscal complexities. In a nutshell, here is what happened:
1) Big firm investor borrows GSE [GameStop] stocks for a set price per stock with an agreement to repurchase it at some price at a specified period (e.g., $60/share in 3 weeks).
2) Big firm investor imagines selling the stock at $60/share but repurchases it in 3 weeks for substantially less money per share (e.g., $40/share). Big firm investor then makes $20/share, minus what he gives to the firm from which he borrowed stocks (which also made money on borrowing fees).
However, in this situation, the independent traders kept buying the stock, raising the price. Citron Research and Melvin Capital borrowed billions of dollars worth of GameStop stock, only to see Reddit Traders kept on buying (up to 471% over its valuation). That meant Citron Research and Melvin Capital had to buy at it at higher prices before it went any higher, and the cycle of escalating costs continued because the prominent investor had to keep on buying it. Hence, they had enough to return it at the specified period.
As noted in this beautiful video summary, “It was like 2008 in reverse”.
Having been “short squeezed,” Melvin Capital and Citron Research have closed their bearish bets after the stock’s climb fueled massive losses.
Melvin Capital and Citron Research closed their short positions on GameStop stock after the company’s massive rally formed an extraordinary short squeeze. The former ate a huge loss when it ended its bearish bet on Tuesday afternoon, CNBC reported.The Citron managing partner Andrew Left said in a video on Wednesday that most of the firm’s position was covered when GameStop traded at about $90 at “a loss of 100%.” He added that he maintained a smaller position in the stock.”We’ll become more judicious when it comes to shorting stocks,” Left said. “Doesn’t mean the industry is dead, but it just means you have to be more specific.”
And that is how a group of small investors made billions off of an elite investment firm. The independents are also eyeing Blackberry, AMC, and Nokia Oyjis for similar actions.
However, our corporate overlords’ plan stopped regular Americans from getting rich off of the elite and well-connected.
TD Ameritrade said it was restricting trading for GameStop GME, +134.84% and AMC Entertainment Holdings AMC, +301.21%, as well as other names, amid a triple-digit percentage surge in the price of those companies in recent days.“In the interest of mitigating risk for our company and clients, we have put in place several restrictions on some transactions in $GME, $AMC and other securities,” a spokeswoman for TD Ameritrade told MarketWatch, referring to the ticker symbols of the companies.“We made these decisions out of an abundance of caution amid unprecedented market conditions and other factors,” she said.Charles Schwab, which bought TD Ameritrade but is still operating as an independent retail brokerage platform, said that it has tightened margin requirements in some of those trading names, including GameStop.
Meanwhile, the response by the current administration is everything you would expect. They are “monitoring the situation“…likely to see how it can profit.
The White House and Treasury Department are monitoring the situation involving GameStop and other companies that have seen sharp gains on the stock market, White House Press Secretary Jen Psaki said on Wednesday.Shares of both GameStop and AMC Entertainment Holdings more than doubled on Wednesday, forcing hedge funds to take heavy losses and sparking calls for scrutiny of anonymous stock market trading posts on social media.
Many Americans are cheering for the Reddit “nerds” who got their revenge on Wall Street.
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