WallStreetBets Gaming GameStop; Explained

You know a business story has turned into something else when it attracts the attention of people who never normally follow the stock market and the ups and downs of corporations. GameStop has been truly something to behold; shares which were as low as $4 last summer and around $16 as recently as December, have been on a meteoric rise with stunning volatility in January, with #GME share prices hitting $380.00 today.

Many people are saying, "But isn't GameStop that video game retailer that used to be in our malls where I used to trade my games in?" Yes, it is the very same. They are trying to fix the business, have signed some interesting business deals and seem to be trying to find a way forward in the new economy. Is this enough to make the stock rise 12 fold in a month? I think most of us would say that would be a pretty big stretch.


What we have is something called a short squeeze.

People normally buy stocks hoping they go up; short sellers look for stocks they think will go down. This may seem antithetical to most people, maybe even amoral to some. Still, short sellers can provide a real check on bad players in the capital markets; think about the fraud perpetrated at Enron or even more recently with Nikola Motors and its faked truck video. Often times short sellers can do some of the work of regulators, helping reveal flaws (or fraud) in the underlying fundamentals of a company. I'd argue they are doing most of the work with one of the most passive regulatory regimes in recent memory in place.

Short sellers make money by borrowing a stock "short"; they then repay this borrow at a later date, hopefully (for them) when the shares are worth less. Here is a quick video explaining what the hell short selling is all about:

In the situation with GameStop, however, short sellers got greedy and sold far more shares than they could afford; they sold almost more shares than GameStop had even issued. This excess of borrowing is in line with governments, companies and people throughout society so it shouldn't be a surprise it happened even among short sellers. A "short squeeze" happens when shares start to go up; short sellers need to buy shares in order to settle their position as they will have to come up with money to pay for the shares; the higher they go, the more money they need and the more desperate they become to acquire the shares. This leads to a "squeeze" higher. They normally aren't dramatic but are a risk to short sellers.

Enter the glorious troll investors at r/WallStreetBets - a subreddit community on the website Reddit.com. WallStreetBets (WSB) is, essentially, a group of individual retail investors who like to talk about investing, make investing memes and speculate on potential stocks purchases. Well, the people at WSB noticed the nefarious things happening with shorting the GameStop stock and decided it was an opportunity sow chaos and make a lot of money in the process. In a truly inspired move - members of the WSB community - banded together and started buying up as much GameStop stock as possible - thus making the price of the stock go through the roof and majorly screwing over the people who were shorting the stock - putting them in a "short squeeze" scenario. Or, as they explained it on WSB:

So basically, boiled down - the WSB have organized and maintained a community wide effort to actively to drive shares higher through the purchase of shares and derivatives on GameStop at a greater rate, forcing the share price higher - and they're not cashing out just yet. The current rallying cry on r/wallstreetbets is ""we can remain retarded for longer than they can stay solvent!", - basically bragging that they're going to bring down billion dollar hedge funds by forcing them to pour money into a stock for a virtually worthless company. It has been truly a wonder to behold and has produced surreal quotes and statements from the business community writ large - such as Elon Musk:

and Dave Portnoy:

This entire episode is also very emblematic of a stock market that has been flooded with currency from the Federal Reserve and stimulus from the government while locking people up in their homes.

Many are decrying this behavior - "it's manipulation! It's perverse!" However, this has been going on in financial markets for years. There is a reason why the top 41 Billionaires in the world now have the combined wealth of the bottom 50% of the world. The difference in GameStop is that it appears a community of smaller players have banded together to manipulate a small company's share price by taking advantage of a reckless short position and the market structure tools available to them. These players, who Goldman Sachs has so lovingly referred to as "Muppets" in the past, have been able to harness the power of social media and the financial tools made available to them through free trading platforms like Robin Hood to do what hedge funds and governments have done for years.

We can argue the morality of it until the cows come home; the rapid rise in the stock market during the economic devastation of the last year has seemed positively perverse. But these are the current rules of engagement which regulatory bodies and governments around the world have condoned for the wealthy for decades. The difference is that this time it is regular people who are profiting.

Can't have that, can we?