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GameStop short squeeze

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Closing price and trade volume of GameStop Corp. (GME) from January 4, 2021, to February 5, 2021[1]

In January 2021, a short squeeze of American retailer GameStop stock and other securities took place on various stock exchanges, causing major financial consequences for certain hedge funds. The short squeeze increased the stock price of American video game retailer GameStop by almost 190 times from its record low to nearly $500 per share on January 28, 2021, causing large losses for short sellers. Approximately 140% of GameStop shares had been sold short, and the rush to buy shares to cover those positions as the price rose caused the price to rise further. The short squeeze was initially triggered by users of the forum r/wallstreetbets on Reddit through commission-free trading apps such as Robinhood and Webull.

On January 28, multiple brokerages, including Robinhood, halted the buying of GameStop and other securities, citing their inability to post sufficient collateral at clearing houses to execute their client's orders. This decision attracted criticism and accusations of market manipulation from prominent politicians and businesspeople from across the political spectrum. Class-action lawsuits were also filed against Robinhood in the U.S. District Courts for the Southern District of New York and the Northern District of Illinois.

Apart from GameStop, many other heavily shorted securities saw increases in their prices. In reaction to brokerages halting the buying of GameStop and other securities, the total market capitalization of cryptocurrencies also increased.

Background

Short selling and short squeezes

See also: Short (finance) and Short squeeze

Short selling is a finance practice in which an investor, known as the short-seller, borrows shares and immediately sells them, hoping to buy them back ("cover") later at a lower price, return the borrowed shares (plus interest) to the lender and profit off the difference. The practice carries an unlimited risk of losses, because there is no inherent limit to how high a stock's price can rise. This is in contrast with taking a long position (simply owning the stock), where the investor's loss is limited to the cost of their initial investment (i.e. the loss can be at most 100%). For an example, if a short-seller borrows shares at $20, and then covers at $50 (i.e. the stock rose 150%), they would have lost $30 per share, representing a loss of 150%.[2][3]

Short sellers are exposed to a risk of short squeezing, which occurs when the shorted stock jumps in value, due, for instance, to a sudden piece of favorable news. Short sellers are then forced to buy back the stock they had initially sold, in an effort to keep their losses from mounting. Purchasing the stock to cover their short positions raises the value of the shorted stock, thus triggering more short sellers to cover their positions by buying the stock. This can result in a cascade of stock purchases and an even bigger jump of the share price.[4][5][6]

On January 22, 2021, approximately 140% of GameStop's float (the portion of shares of a corporation that are in the hands of public investors) had been sold short, meaning some shorted shares had been re-lent and shorted again.[7] Observers congregating around r/wallstreetbets believed the company was being significantly undervalued, and with such a large amount of the shares being short they could trigger a short squeeze, by driving up the price to the point where short sellers had to capitulate and cover their positions at tremendous losses.[6]

GameStop

Main article: GameStop
A GameStop store in 2014

GameStop, an American chain of brick-and-mortar video game stores, had struggled in recent years due to competition from digital distribution services, as well as the economic effects of the COVID-19 pandemic, which decreased the number of people who shopped in person. As a result, GameStop's stock price declined, leading many institutional investors to short sell the stock. However, in September 2020, Ryan Cohen (the former CEO of online pet-food retailer Chewy) revealed a significant investment in GameStop and joined the company's board, leading many to believe that the stock was undervalued.[6]

Possible causes

See also: Financial crisis of 2007–2008, Causes of the Great Recession, and Economic impact of the COVID-19 pandemic in the United States

Due to the COVID-19 pandemic, consumer spending in general was drastically lower. There was also more money in the hands of investors as a result of historically low interest rates and an inability to spend their money elsewhere.[8] Other suggested factors included a culture of taking massive gambles on the stock market in the hopes of making money quickly,[9] and even anger from some investors towards the Wall Street hedge funds for their role in the financial crisis of 2007 and 2008.[10][11][12][13]

r/wallstreetbets

Main article: r/wallstreetbets

r/wallstreetbets is a Reddit community, or subreddit, known for high-risk stock transactions.[14] Even before the squeeze, there had been interest in GameStop (ticker symbol: GME) on r/wallstreetbets. One user, Keith Gill,[15][16][17] known on the site as u/DeepFuckingValue[15] and on other social media accounts as "Roaring Kitty",[16] had purchased around $53,000 in call options on GME in 2019 and saw his position rise to a value of $48 million in January 2021.[11][18] Gill, a 34-year-old marketing professional and Chartered Financial Analyst from Massachusetts, stated that he began investing in GameStop during the summer of 2019, after believing the stock to be undervalued. Gill shared his investment on r/wallstreetbets and provided regular updates on its performance, including the times when the investment had plunged. Gill stated on January 29 that he "thought this trade would be successful" but "never expected what happened over the last week," adding that he planned to continue his YouTube channel and potentially buy a house.[15]

On January 27, Mashable reported that the subreddit had broken pageview records due to the short squeeze, receiving 73 million pageviews in 24 hours.[19]

Timeline

GameStop Corp. (GME) closing share price
Day Price (USD) Change Volume
Net %
January 11 19.94 +2.25 +12.72% 14,927,612
January 12 19.95 +0.01 +0.05% 7,060,665
January 13 31.40 +11.45 +57.39% 144,501,736
January 14 39.91 +8.51 +27.10% 93,717,410
January 15 35.50 −4.41 −11.05% 46,866,358
January 19 39.36 +3.86 +10.87% 74,721,924
January 20 39.12 −0.24 −0.61% 33,471,789
January 21 43.03 +3.91 +9.99% 57,079,754
January 22 65.01 +21.98 +51.08% 197,157,946
January 25 76.79 +11.78 +18.12% 177,874,000
January 26 147.98 +71.19 +92.71% 178,587,974
January 27 347.51 +199.53 +134.84% 93,396,666
January 28 193.60 −153.91 −44.29% 58,815,805
January 29 325.00 +131.40 +67.87% 49,470,371
Source: New York Stock Exchange[20]

In January 2021, Reddit users on the r/wallstreetbets subreddit built the foundations for a short squeeze on GameStop, pushing up the stock price significantly.[21] This occurred shortly after a comment from Citron Research predicting the value of the stock would decrease.[22] The stock price increased 1,500% by January 27 over the course of two weeks, and its high volatility caused trading to be halted multiple times.[21][23]

In conjunction with the short squeeze, the resulting increase in options volume triggered a gamma squeeze as a result of market makers needing to buy shares to hedge their increasingly short exposure.[24] Basically, market makers seek to profit via arbitrage, by ensuring the prices of stocks and options are linked, thereby keeping the market efficient. One role of market makers is to write (i.e. create and sell) options to investors seeking to buy them, and buy shares of the stock to maintain delta-hedged position overall, thereby profiting off price discrepancies between the options market and the stock market while remaining agnostic regarding price fluctuations.

After the GameStop stock closed up 92.7% on January 26, 2021, business magnate Elon Musk tweeted "Gamestonk!!" along with a link to the r/wallstreetbets subreddit.[25] A brief, sharp rise in the share price to over $200 followed Musk's tweet.[26] As of January 28, 2021, the all-time highest intraday stock price for GameStop, excluding extended-hours trading, is US$483.00 (nearly 190 times the record low of $2.57).[27]

On January 27, 2021, r/wallstreetbets triggered a short squeeze on AMC Theatres (AMC), a company in a similar position to GameStop.[28] The value of AMC Networks (AMCX) also increased significantly, which was believed to have happened because of the stock's name being similar to AMC's.[29] Disruptions and restrictions limiting trade have been reported on multiple brokerages such as Charles Schwab Corporation, its subsidiary, TD Ameritrade, and Robinhood.[30][31] According to Bloomberg, US trading volumes (by share count) on January 27 exceeded the peak set in October 2008 during the financial crisis, and was the third-highest in dollar terms within the last 13 years on record.[32]

On January 28, 2021, Robinhood halted GameStop, AMC Theatres, BlackBerry Limited, Nokia Corporation, and other volatile stocks from its trading platform; customers could no longer open new positions in the stock, although they could still close them.[33] Other exchanges soon followed suit. Many traders were furious, and called for class-action lawsuits in multiple popular Reddit posts.[34] After the markets closed, Robinhood announced it would begin to allow "limited buys" of the affected securities starting the following day, although it was unclear what "limited buys" entailed.[35] Trading platforms such as UK-based Trading212 and Israel-based eToro blocked buys of GameStop and other stock while continuing to allow sales.[36] Webull halted buy orders for stocks affected by the squeeze,[37] and soon thereafter allowed orders to continue.[38] Anthony Denier, the CEO of Webull, stated that increased collateral requirements for their clearing house meant Webull themselves were restricted from opening new positions.[39] Some users alleged that Robinhood was selling shares without consent; Robinhood denied these allegations.[40]

Several brokerage firms, including Robinhood, stated on 29 January 2021 that the restrictions were the result of clearing houses raising the required collateral required for executing trades.[41][42][43] Because there is a lag between the moment when investors purchase a security, and the moment cash and securities are actually exchanged, brokerage firms have to post collateral at clearing houses to guarantee the proper settlement of their client's orders.[42] Clearing houses include the Depository Trust & Clearing Corporation (DTCC) for equities and the Options Clearing Corporation for options.[41] Brokerage firms claimed that the increased collateral could not be provided in time, and, as result, that trading had to be halted.[41][42][43] The Depository Trust & Clearing Corporation (DTCC), for instance, increased the total industrywide collateral requirements from $26 billion to $33.5 billion.[44] On January 29, it was reported that Robinhood had raised an additional $1 billion to protect the company from the financial pressure placed by the increased interest in particular stocks and meet the collateral requirements of clearing houses.[45][46]

Impact on hedge funds

As of January 28, 2021, Melvin Capital, an investment fund shorting GameStop, had lost 30 percent of its value since the start of the year.[47] Citadel LLC funds and firm partners then invested $2 billion into Melvin, while Point72 Asset Management's investment added $750 million, for a total investment of $2.75 billion,[48][49][50][51][52] before Melvin stated to CNBC that they covered (closed) its position on January 26. The exact amount was not disclosed.[53][54] Reportedly Citron Research, another hedge fund, had also shorted the stock and claimed to have closed the position as a total loss.[12][55] According to Morgan Stanley, a number of hedge funds covered their short positions and sold shares in their portfolio to reduce leverage and market exposure, in some of the largest such actions within 10 years.[56] On January 26, 2021, it was reported that short sellers lost a total of $6 billion due to the squeeze.[57] Although, as of January 29, it was noted that most shorts had not actually caved, and that the market stood at 113.31% availability; the managing director of predictive analytics at S3 Partners told CNBC that stocks were being re-borrowed and shorted by other investment funds.[58]

Losses on short positions in U.S. firms topped $70 billion. Ortex data showed that as of January 27, there were loss-making short positions on more than 5,000 U.S. firms.[59]

Link between Robinhood and Citadel Securities

See also: Citadel LLC § Regulatory issues
Citadel's Chicago headquarters. Users alleged conflict of interest between the company and Robinhood.

Bloomberg previously reported that 40% of Robinhood's revenues were derived from selling customer orders to market making (a.k.a. liquidity providing) firms including Citadel Securities and Two Sigma Securities, in a practice known as payment for order flow.[60] Citadel Securities is the sister company to Citadel LLC, which invested along with Point72 Asset Management 2.75 billion into Melvin Capital.[48] As Robinhood restricted trading of GameStop shares, thereby limiting the growth of the stock's value, users alleged that Citadel Securities directed Robinhood to do so. Citadel Securities stated that they did not instruct any brokerage to suspend or otherwise limit trading.[61][62][63]

Lawsuits

File:United States District Court - Southern District New York - Class-action lawsuit against Robinhood.pdf
Class-action lawsuit against Robinhood filed in the United States District Court of Southern New York[64]

A Robinhood customer filed a class-action against the company on January 28 for halting trading on GameStop.[65][66] The lawsuit, filed in the United States District Court for the Southern District of New York, claimed that Robinhood "purposefully, willfully, and knowingly removing the stock 'GME' from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market".[65][66]

Attorney General of New York Letitia James confirmed in a press release that her office would look into the matter, saying "We are aware of concerns raised regarding activity on the Robinhood app, including trading related to the GameStop stock".[67][68]

Texas Attorney General Ken Paxton said he would also investigate the decision of brokerages to limit the buying securities related to GameStop and other stocks, saying that it "stinks of corruption." His investigation extends to 13 entities, including Discord, Robinhood, the trading platforms Interactive Brokers and TD Ameritrade, and the hedge fund Citadel Financial.[69]

A second class-action was filed in the Northern District of Illinois claiming the Robinhood's decision to halt trades of BlackBerry, Nokia and AMC was made "to protect institutional investment at the detriment of retail customers".[70][71][72]

Other affected assets

Stocks

This is a dynamic list and may never be able to satisfy particular standards for completeness. You can help by adding missing items with reliable sources.

Apart from GameStop, many other heavily shorted securities (as well as securities with low short interest) saw increases in their prices:

Security (Symbol) Price high[a] Jan 22 % chg. Ref.
AMC Networks (AMCX) 59.83 49.38 21.2% [29]
AMC Theatres (AMC) 20.36 3.51 480.1% [73]
American Airlines Group Inc. (AAL) 21.77 15.82 37.6% [74]
BB Liquidating Inc. (OTC Pink: BLIAQ) 0.24 0.10 140.0% [75]
Bed Bath & Beyond (BBBY) 53.90 30.21 78.4% [76]
BlackBerry Limited (BB) 28.77 14.04 104.9% [77]
Build-A-Bear Workshop, Inc. (BBW) 8.40 4.52 85.8% [78]
Eastman Kodak Company (KODK) 15.15 9.46 60.1% [79]
Express, Inc. (EXPR) 13.97 1.79 680.4% [77]
Fossil Group, Inc. (FOSL) 28.60 9.87 189.8% [80]
Genius Brands (GNUS) 3.36 1.57 114.0% [79]
iRobot Corporation (IRBT) 197.40 98.94 99.5% [81]
Koss Corporation (KOSS) 127.45 3.34 3,715.9% [82]
The Macerich Company (MAC) 25.99 14.58 78.3% [83]
Naked Brand Group (NAKD) 3.40 0.44 672.7% [84]
National Beverage Corp. (FIZZ) 196.43 98.44 99.5% [85]
Nokia Oyj (NOK) 9.79 4.20 133.1% [86]
Palantir Technologies (PLTR) 45.00 32.58 38.1% [79]
Siebert Financial (SIEB) 18.50 3.70 400% [87]
Tootsie Roll Industries (TR) 58.98 30.14 95.7% [88]
Virgin Galactic Holdings (SPCE) 59.43 34.28 73.4% [81]

a Prices may be higher during extended-hours trading.

GME Resources, an Australian mining company, saw their shares increase significantly over 50% during intraday trading, closing with a 13.3% increase on January 28. This was speculated to have occurred as a joke given the identical ticker symbols on different exchanges.[89]

Amateur traders in Malaysia were inspired by the GameStop short squeeze to target shares for Malaysian latex glove makers on Bursa Malaysia as a countermove against the devaluation of the sector by institutional investors following the lifting of a ban on short selling in the country earlier in January 2021. Top Glove, Hartalega and Supermax respectively recorded increases in shares as high as 15%, 10% and 9.2% during intraday trading on January 29, before closing with increases of 8.5%, 5.4% and 3.7%. The rally call was reportedly organized from r/bursabets, a Malaysian offshoot of r/wallstreetbets named after the Malaysian stock exchange.[90][91]

Cryptocurrencies

In reaction to brokerages halting the buying of GameStop and other securities, the total market capitalization of cryptocurrencies increased to over $1 trillion as Dogecoin's value surged by 500%.[92] In addition, the price of Bitcoin, the world's largest cryptocurrency, surged to more than $37,000 after Elon Musk endorsed it in his Twitter bio, partially related to the surge of GameStop share price by Reddit users.[93]

See also

References

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