GameStop Is the Black Swan of Wall Street

Anupam Chugh

Regardless of how the endgame pans out, the stock market won’t be the same again

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Image by Holger Detje from Pixabay

Less than a year ago, nobody was talking about GameStop. The well-known company was struggling to pivot its physical game store business as the Big Tech was capitalizing on online game sales.

With the stock price dropping to $2 during the March-April lows of 2020, Wall Street was all but bullish towards the dying retail firm. GameStop was shutting stores across the globe in the light of the pandemic and was staring at an imminent bankruptcy.

Little did anyone know that the same internet which was alienating GameStop’s “brick and mortar retail selling” would act as a catalyst in propelling the stock’s value towards the stratosphere.

Not so surprisingly, GameStop has now become the biggest talking of Wall Street after witnessing the largest single-day trading volumes for the past week — even beating the S&P 500 exchange-traded fund by a distance.

At the time of writing, GME’s stock price has soared from the mid-30s to an all-time high of $500 in almost one week only to get back to under $200 at the closing bell on Jan 28th, 2021(though, it got back up above $300 during the after-market hours).

To top it all, a group of amateur retail traders united on Reddit’s popular subreddit, r/WallStreetBets, were responsible for started this frenzy movement in a bid to take down billion-dollar hedge fund managers that were heavily shorting stocks.

GameStop’s Gigantic Short Squeeze Is Unprecedented and Might Not Happen Ever Again

To understand what’s a short squeeze you first need to know what selling short actually means.

Buy low, sell high has been the mantra that most people are aware of. But you can inverse that as well. Shorting a stock basically indicates that you borrow shares from the broker, sell them today, and buy them back when the stock falls to pocket the difference.

While there is a promise of higher returns, you can potentially lose an infinite amount of money if the stock continues to rise. Largely, people view this technique as a scam to suck money from small-time traders by forcing them to panic sell.

But, shorting had been introduced into the system to ensure the market’s equilibrium stays intact. Sadly, when a few large institutions start exploiting it to make fortune, things get ugly and biased towards the retail investors.

Coming to a short squeeze, it’s a situation that occurs when the short sellers are forced to buy more shares at a higher price just to cover their losses. This causes a parabolic movement since everyone is buying.

We’ve seen it happen a lot in the past with the likes of Volkswagen experiencing a squeeze in 2008. Back then, Porsche was looking to buy enough shares to gain voting rights into the company. Their buying volume caught the eyes of fund managers who thought the stock was overvalued and decide to short it. Surprisingly, Porsche later disclosed a separate 32% in options holding that they owned. This led to a frenzied buying rally that soared Volkswagen stock to over $1000 and made it the most valued firm for a few hours. That squeeze alone had cost short-sellers a $30 billion loss.

However, it’ll be naive to draw parallels between Volkswagen and GameStop’s current gigantic short squeeze. For one, the short ratio of Volkswagen was just 20%. In comparison, GameStop’s last reported short ratio was over 130%. That means the number of borrowed shares is way above the total available shares — which is the primary reason of the infinitely looking short squeeze.

Secondly, unlike 2008 where Porsche generously bailed out the short-sellers, r/WallStreetBets doesn’t seem to be backing down — despite the (unfair)criticism they’re receiving. For starters, the popular subreddit has over 4 million subscribers today. Most of them are amateur traders or hobbyists looking to “YOLO” their money based on memes. They perceive the stock market as a casino game and don’t really care about losing thousands of dollars if it manages to send across a message to the large fund managers.

Through a coordinated effort and hundreds of discussion threads, the WSB subredditors have been exhorting one another to: “hold the line”, “keep buying options or shares”, and “have diamond hands” — which led to an insane squeeze that’d cost Melvin Capital a $3 billion loss in a single day before reportedly closing their position.

As the icing on the cake, Elon Musk whose Tesla stock had always been on the radar of short-sellers has gotten involved in the GME euphoria through his tweets — causing more people to pump up the squeeze.

Regardless of what the future beholds for GameStop and other similar stocks, going forward, hedge fund managers will always be more precarious and vulnerable when taking up short positions. We probably won’t see a short interest exceeding 100% ever again.

While the Endgame Is Not in Sight, GME Has Shown Us a Dark Side of the Stock Market

The tug of war between retail traders and large fund managers brings back the memories of the classic David vs. Goliath tale. However, the current fight is still far from over.

As the GME share price continues to wildly oscillate on each trading day the world can finally see the dark side of the stock market. For once, it’s pretty obvious that the stock prices are disconnected from reality and is just a video game controlled and artificially pumped by some people. Undervalue assets of stock have little to do with its current price as people buy and sell on the hype until they are bored.

Moreover, we already saw how the top financial media agencies are siding with the large financial institutions. CNBC, the most popular one has been happily siding with large fund managers and giving them a platform to speak. It’s such hypocrisy that the same people who were using borrowed money at high leverages to drive the prices are now calling out WallStreetBets for market manipulation and asking for a need for regulations.

Worse, Robinhood and other interactive brokers decided to restrict new buy orders on stocks like GameStop, AMC, BlackBerry, and other shorted stocks. GME was surging towards $500 dollars when Robinhood decided to limit purchases.

For a long time, Big Tech has been trying to censor content and deplatform people when they think the content won’t suit their audience. Fin-tech companies pulled off a first on Wall Street by halting a few stocks mid-day — thereby highlighting that the stock market isn’t free for all and we’re mere puppets.

This would’ve been less infuriating if they’d cleared the air much in advance. Ideally stating at the start of the day that they “won’t be accepting any new positions in the few-selected stocks”. However, by pulling the plug abruptly, Robinhood and the rest of the brokers were largely responsible for the GME stock to plummet — which according to many was done to protect institutional investors from Reddit’s retail trade army.

Ironically, the commission-free trading app was supposed to stand up for small traders. Instead, it did the very thing we all feared: “Stealing money from the poor to help the very rich”.

In the pre-internet era, Wall Street was a place where only the wealthy people thrived. The dawn of the internet and an influx of trading apps promised to alter that by giving some power back to the retail investors.

Sadly, the current GameStop narrative shows that the stock market is still rigged and hugely favors the elite. And when the young dumb investors with no prior experience in Wall Street start making too much money, the big guys fear and do anything to cut us out.

Final Thoughts

GameStop’s saga isn’t over. Not yet at least. Nevertheless, it’s certainly going down in the history books as a Black Swan event of Wall Street since it ticked all the boxes: was unpredictable, too huge in magnitude, and can be easily explained retroactively.

It’ll be interesting to see how the endgame plays out and if there are some twist remaining. Such short squeezes might just be the start of something even more dangerous — new traders collectively going against shorted stocks thereby making the whole stock market a pump and dump place where the last buyers end up holding the bags.

Or perhaps the recent developments might just have made the case for having a decentralized marketplace a lot strong. This definitely is a positive sign for Bitcoin and other cryptocurrencies.

This article was originally published on The Big Bull.

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