GME Short Squeeze

GME+Short+Squeeze

Written by David Hamady, Robbie Showers , and Ryan Wilkinson

GameStop Corporation’s stock value hit a 52 week high of $483 this month as hedge fund backed short-sellers lost an estimated $19 billion on their positions regarding GME (GameStop’s Ticker Symbol).

The center of this phenomenon is Reddit investing forum r/WallStreetBets. Users took notice that the share had been shorted 122% at the time of the spike. In layman’s terms, shorting a stock is when someone “borrows” shares from a shareholder and sells it. The short seller is on the hook for the shares they borrowed and buys them back, hopefully for a lower price and gives them back to the shareholder and pockets the difference as an easy way to profit from the stock market. Essentially, hedge funds’ positions were so they made their money as the stock lost value, but that didn’t happen. As a result of the over 1500% jump in price in the last month, firms such as Point72 and D1 Capital Partners took 15% and 20% losses regarding their position on GME, respectively. Melvin Capital and Citron Research also took substantial losses but did not disclose their figures. This is a dramatic example of a larger trend where short-sellers have sustained $70.87 billion losses so far this year. 

“This event might give others the idea that this is the way things are supposed to operate, which may lead to financial ruin for those that aren’t careful. It may have some very dire consequences,” said Personal Finance teacher Jeff Schutte.

Popular trading app Robinhood, which is used by investors to buy and sell, blocked trading of GME shares as well as other stocks such as AMC Theatres and Nokia on January 28. Citing “market volatility”, their decision drew heavy criticism from republican and democratic senators, who called for an open investigation into the actions of Robinhood, as well as other trading apps which followed suit in their decision. As of the writing of this article, multiple class-action lawsuits have been filed against the company, claiming that their actions are in violation of economic policy. 

It’s long past time for the SEC and other financial regulators to wake up and do their jobs,” said Senator Elizabeth Warren.

January 28 marked the high point of this event, with the r/WallStreetBets Reddit board and Discord server being temporarily taken offline, and many investors being encouraged to hold their stocks until the market reaches a higher value. However, in the days following, the value of GME and related shares began to fall, even as Robinhood opened up limited trading opportunities. 

“I don’t think we’ll see anything as drastic as this again for a while. Although, Reddit has become a powerful force, and those wanting to “make a point” about the stock market may want to keep this approach up. If so, who knows,” said Schutte.