Gamestop short squeeze basics

In April, GameStop was a struggling video game and electronics retailer trying to sort out its future as the pandemic worsened consumer trends that were already working against it. The chain was losing money and staring down a long-underway shift in the gaming industry that pushed business away from GameStop’s brick-and-mortar model. (It turns out people don’t like walking into stores during a pandemic to buy games they could just download from home.) The company had posted $470 million in losses in 2019, eight years after reporting a $340 million profit. Right as the pandemic hit, it announced it would close 300 locations permanently. GameStop’s stock price on April 1 was $3.25…

GameStop has not, as far as anyone knows, completed the greatest comeback story in the history of free enterprise. But it has had one of the most memorable runs on the stock market ever. It’s a story that encapsulates quite a lot about life in 2021: the democratization of financial markets, the mobilization of a giant online community, and the ability of obsessed amateurs to alter reality when they put their minds to it, especially when there isn’t much else to do.The tale of GameStop’s stock price will be taught in business schools one day, no matter how it ends.

The tale of GameStop’s stock price—and the central role of a subreddit called r/WallStreetBets—will be taught in business schools one day, no matter how it ends. The stock had been in steady decline since late in 2015, when the company reported disappointing earnings. GameStop, which was founded in 1984, had a simple business model: selling video games and equipment out of its physical locations. That became less lucrative as it became more common for gamers to buy games online, generally from non-GameStop sources, and download them directly to their consoles or PCs. The pandemic crash in March brought the stock to an all-time low, and a slight rebound over the spring and summer lagged behind the major indexes.

Hedge funds had been shorting the stock for a while when an investor bought a huge stake and took three seats on the board of directors with the intention of restructuring the company. Redditers using their 600 dollar stimulus checks colluded to buy the stock and drive the price up–squeezing the short sellers, now holding contracts to buy stock at many times the discount expected.

Unsurprisingly, someone at Barron’s is arguing this should all be stopped because the innocent short selling hedge funds are getting creamed by a bunch of shitposters on Reddit. Though that’s not the way he put it

The top securities regulator in Massachusetts said the New York Stock Exchange should halt trading in GameStop stock for 30 days so it can “cool down.” Retail traders—often using options–have helped propel the stock more than 1,000% this year. On Wednesday alone, shares were up more than 100%.

“I really think at this point it calls upon the regulators, in this case, the New York Stock Exchange, to consider simply suspending it for a month and stop trading it,” William Galvin, the Secretary of the Commonwealth of Massachusetts, told Barron’s. “These small and unsophisticated investors are probably going to get hurt by this.”

The idea of novices coming in late and getting wrecked never seems to bother them when they’re profiting from it.

White House Press Secretary Jean Psaki adjusted her red hair and said in press conference Joe “turn on the radio” Biden is monitoring the situation. We continue to do so as well.

Update: r/WallStreetBets has been shut down and the sock price is falling. Reddit’s statement:

The server has been on our Trust & Safety team’s radar for some time due to occasional content that violates our Community Guidelines, including hate speech, glorifying violence, and spreading misinformation. Over the past few months, we have issued multiple warnings to the server admin.

Today, we decided to remove the server and its owner from Discord for continuing to allow hateful and discriminatory content after repeated warnings.

To be clear, we did not ban this server due to financial fraud related to GameStop or other stocks. Discord welcomes a broad variety of personal finance discussions, from investment clubs and day traders to college students and professional financial advisors. We are monitoring this situation and in the event there are allegations of illegal activities, we will cooperate with authorities as appropriate.

One realizes there probably aren’t any platforms out there that couldn’t be shut down by citing a past of “occasional content” violating community guidelines. All must be virgins.

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