How to explain Gamestop’s recent spikes and high volatility between January 11 and February 5 ? Although almost every financial media and even bloggers have more or less addressed this phenomenon, we cannot miss the opportunity to explain what may be known through different key steps. Let’s start with last year, when everything began.

 A new vision for Gamestop

     Last year an entrepreneur and individual investor Ryan Cohen, co-founder of an e-commerce company Chewy, bought 9 million shares at an average price of $8 to acquire his stake that represents roughly 10% of the company. He had been planning to digitalize the company and create an « Amazon video game », meaning a giant e-commerce retailer. On January 11, after he had taken a 13% stake, him and two associates from his time at Chewy were appointed to GameStop’s Board. Given, Cohen’s success with Chewy, the retail investors appeared confident in their earnings growth. The expectations led a group of day traders on the WallStreetBets subreddit to prop the stock, encouraged by influencers such as Keith Gill from Roaring Kitty.

 The Social Media Reddit joins the party, via the WallStreetBets forum 

   A clash emerged confronting a group of individual day traders  and heavily short-sellers hedge funds such as Melvin capital and Citron – both identified as the primary antagonists – running the highest level of average daily rolling 10-day volatility in the nearly two decades the stock has been trading. In a movement of protest against these funds and the practice of short selling (a principle that consists of earning money by betting on the decline of an asset) and more broadly, in  a contestation of the stock market and capitalism – echoing the Occupy wall street movement we saw after the subprime crisis –  the members of Reddit are buying the share massively. In fact, retail traders on Reddit decided to ransack their opponent by driving the stock price way up.). However, some of them were just fans who were displeased by the downfall of a major player in geek culture.

     Their anger had been further fed by statements from Citron. The short seller criticized shares in a tweet on  January 19, followed by a Youtube video posted by the company’s managing partner Andrew Left the day after. The video detailed why he thinks the stock price is overvalued and will go back to $20. But the pinnacle of this blunder was reached on Friday when the hedge fund said it will stop commenting on the stock resulting from the actions of “an angry mob.” That “angry mob” took it as a challenge and sharply sent the stock soaring, piling up losses for anyone who held a short position.

     Though this motion may look like a new pump and dump – that is to say a scheme that attempts to boost the price of a stock through recommendations based on false, misleading, or greatly exaggerated statements, and sell the shares after the hype has led to a higher value –  the social media users motto was “buy and hold” so that the value of the share remains high and does not collapse.

 How did the market react  ? The short squeeze effect

    On the 22nd of January, more than 193 million shares were traded, marking the most active day of the company since it went public in 2002.

 Panic and short squeeze effect 

     « The basic premise behind a simple short sale is quite simple. Investors initially borrow a certain number of shares through a broker, promising to return the exact number of shares but not necessarily at the same price per share. The borrower then sells the stocks at market value and waits for the stock to drop to a certain threshold, during which they will repurchase the shares at a lower price. They then return the shares, netting in profit the difference between the stock’s initial price and the eventual purchasing price. In “short”, short sales offer an opportunity for investors to profit when stocks go down in value. Shorts might seem like the go-to option for any stock that may have the potential to decrease in value, but the catch for short sales lies in the increased risk. Although you can never lose more than your invested capital when purchasing a regular stock, shorting a stock places the holder at risk of theoretically unlimited losses » 1  

     This unlimited risk had been observed during the Gamestop frenzy, as short-sellers had to close their short positions, buying back much more shares. This led the stock to pursue its upward trend at an even faster pace.

A systemic trend – the phenomenon becomes global

    The Gamestop rush had been highly contagious, as Redditors were setting their sight on dozens of U.S. stocks such as the movie theater chain AMC, BlackBerry, Best Buy, Express, Koss and Naked Brand. Which are profitless companies that mysteriously go from obscurity to viral sensation. Some financial players faced such liquidity constraints that they had to close long positions on some blue-chips stocks. By doing so they were fuelling unjustified declines of indexes related to fundamentals. Wall Street’s three major stock benchmarks reported their worst weekly performances since October : the Dow Jones, S&P 500 and Nasdaq fell more than 3%.

Brokers’ reactions

     In response to that crazy volatility, brokers such as RobinHood have had to limit volumes to cover themselves in the event of their clients’ insolvency. Indeed, since transactions on this platform are often leveraged, losses can be considerable. RobinHood said the central Wall Street clearinghouse mandated a tenfold increase in the firm’s deposit requirements to ensure smooth settlement in trades that involve the securities that are subject to unprecedented volatility.

Winners & Losers

    As the frenzied winds seem to get at their end, January can certainly be considered as a nightmare for some short-selling hedge funds (losses of $70.87 billion from their short positions in U.S. companies so far this year), while being a dream for others. Even if we cannot provide a precise toll of the turmoil, we can say that Reddit Day traders won their war regarding the losses of hedge funds betting against the company. Some of them may have lost a lot influenced by the Fear Of Missing Out (FOMO), as often happens when bubbles develop in the markets.

Here are figures we can provide (Bloomberg) : 

Winners :

  • Glenview Capital Management: January Gain: 6.4% AUM: $3.5 billion
  • Falcon Edge Capital: January Gain: 4.2%, AUM: $4 billion
  • ExodusPoint : January Gain: 1.2%, AUM: $13.3 billion
  • Chewy co-founder Ryan Cohen added to his fortune $1.8 billion; 
  • Chinese billionaires Larry Chen and Wang Jianlin added $4.2 billion and $773 million, respectively;
  • Tootsie Roll CEO Ellen Gordon added $185 million ;
  • Blackrock added $2,4 billion (Reuters)

Losers :

  • Melvin Capital: January Loss: 53%
  • Maplelane Capital, January Loss (through January 27): 45%
  • Greenlight Capital: January Loss: 11.1%
  • Citadel January Loss: 3%
Focus on Melvin Capital

  According to the Wall Street Journal, Melvin Capital has stopped shorting Gamestop, but other funds started to do so. The fund of billionaire Gabe Plotkin had to be urgently bailed out by a loan from Citadel and Point72, which lent around $2.75B. Melvin’s assets under management decreased to almost $8 billion from roughly $12 billion at the beginning of the year after the bailout. The company, which had established itself as one of the largest hedge funds at Wall Street, had a high proportion of “short” in its portfolio.  Overall, according to Goldman Sachs and Morgan Stanley, most of the large investment funds have significantly reduced their short position exposure. This can be seen as a form of victory for those fighting against short selling.

 The regulator

     This crusade against short sellers, which the general public may not be familiar with, raised numerous questions about short selling practices, as well as Reddit users and platforms such as RobinHood. From Dick Fuld ,final Chairman and Chief Executive Officer of Lehman Brothers, to Elon Musk, short-sellers have often provoked hatred or contempt. “Short-sellers are value destroyers. Should definitely be illegal”.

      In contrast, short-selling specialists such as Geo Investing, Citron Research, Fraser Perring, and Muddy Waters defend themselves from being the financial-capitalism-doomsday riders they are portrayed as. Moreover, they see themselves more as whistle-blowers, who would enable to adjust elements of the market. As an example, in 2016, Muddy Waters caused Casino’s stock to plummet by about 28%, claiming that the company was using financial engineering to hide the deterioration of its activity. Thus, short sellers can be useful to burst bubbles, as their  intuitions are often right. Here are a few examples : Nikola in 2020 and Luckin Coffee or Gowex in 2014, or very recently Wirecard. Should short sellers be seen as undercover financial policemen ?

     Nevertheless, the tremendous surge in GameStop’s shares has caught the regulator’s interest. It has happened that when certain stock market crises are announced, such as in March, for example, regulators simply prohibit short-selling from having procyclical effects. The U.S. Securities and Exchange Commission (SEC) is supposed to punish price manipulation and other market fraud. The question is whether this kind of speculative frenzy is a form of market manipulation and should therefore be punished or prevented. On Thursday, February 4, U.S. Treasury Secretary Yellen met with officials of the Securities and Exchange Commission (SEC), the Federal Reserve (Fed), and the Commodities and Futures Trading Commission (CFTC), the futures market authority (Reuters), to discuss these recent events. It said it was ready to intervene, but not before knowing more about the case.

     Given such a security boom, profit-taking was numerous. This was illustrated  by the stock’s value depreciation that followed. From January 27 to February 12, the stock sank from 85 % to approximately 52$. These recent phenomena of activism or pump and dump tend to distort the market. Whether we like or dislike the GameStop, Blackberry, or Nokia brands, these are companies that are in trouble, so, logically, this is reflected in their share price. Hence the importance for regulators to find an imminent answer.

         From Redditors viewpoint, these events seemed to be a buy and hold failure but a pump and dump success. “It is always hardly not recommended to short a share which has an important fanbase”, reported an analyst from Carmignac, at a time when a lot of people had the unfortunate intuition to short Tesla.

Arnault de Pontonx and Charles YOUWO  – Skema Finance Paris




GameStop (GME) Is Old News After Reddit Discovers Silver Future – Bloomberg


Speculative Trading Frenzy – Bloomberg


Elon Musk’s GameStop Tweets Are Now a Hedge Fund Signal // Elon Musk’s GameStop Tweets Are Now a Hedge Fund Signal – Bloomberg


Forbes :

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