The Coronavirus pandemic and the devastating impact the confinement measures have had on retail and hostelry is well established. Yet, unimaginably, this horror story has presented the curious perfect storm for an unexpected and quite extraordinary digital Robin Hood story that is shaking the foundations of the established order in the financial trading sector. It could be argued that a small band of bulletin board users on Reddit have scored more success than the occupy Wall Street movement ever did in an astonishing fast moving story that almost certainly will be a major motion picture in the very near future.
The tale starts with a floundering high street retailer in America. GameStop had been trading for thirty seven years as a new and second hand video/computer game stockist. With online and streaming squeezing their business model they announced mass closures in April 2020, and were almost extinguished even before the pandemic measures started to bite. The stock price was tumbling as the company looked doomed and Ryan Cohen, founder of online pet food business Chewy, took a 13% stake in September 2020 and started to campaign for the retailer to move the business online to challenge Amazon.
Small investors flocked to buy the cheap shares, using online trading apps, such as Robinhood, seeing a buying opportunity. The big Sharks in the water, the Wall Street Hedge funds saw something very different, a chance to "short" an ambitious challenge to Amazon which seemed doomed to failure.
Shorting
Shorting is often seen as an unpleasant development in the world of stocks and shares, but it does have inherent risks. It effectively means you make a bet against the fortunes of a company, but you need to hold the stock to claim the bet. So in effect, you borrow shares in a company and sell them with the commitment to buy them back once again at a lower price, before returning them to the original owner. Shorting can make untold wealth on the back of company failure and, of course, the ethics of betting on failure and even potentially using influence to ensure such failure are a deep topic. Yet, if it goes wrong, it can backfire hideously.
And on this occasion it has done, quite spectacularly. A Reddit thread called Wall Street Bets saw the short early and moved in to buy GameStop stock early and cheap, creating what is called a short squeeze, as more stock is purchased, the price rises and more flock to buy, a self fuelled cyclone that escalates the losses of the companies betting on the stock falling.
Astonishing turn of events
The statistics are eye watering! Stock was trading at $3.25 a little over a year ago and Tuesday this week alone the stock soared 92% to $198. As of late Wednesday, Spanish time, the stock had escalated to $330. The Hedge fund Melvin Capital withdrew from their short position on Wednesday having lost 40% of their capital value already in three weeks. It was calculated on the Reddit board that every $11.95 share price increase was losing Melvin $1 billion dollars. Melvin Capital was forced to chase a $2.75 billion cash infusion from fellow hedge funds Citadel and Point72 Capital Management to cover their losses which vanished within minutes as the stock continued to soar. The fund was forced to liquidate its Alibaba interest to fund ongoing losses. Effectively this could be described as a substantial wealth transfer from the big guys to the little guys. Gamestop stocks were the most traded stocks on Planet Earth this week.
The reddit traders are described as "hobby traders", many of them have little or no experience in market trading. One Reddit user, under the name "DeepFu*kingValue" is claiming his option is now worth an extraordinary $13million. The users seem to follow a common strand in that they were all video gamers or had spent many a childhood hour in the store. Many have been very clear that their intentions were to "burn the bears", to punish the Hedge Funds for their shorting policy.
Chamath Palihapitiya, a venture capitalist and the founder of VC firm Social Capital, tweeted that he was buying GameStop calls. Tesla’s Elon Musk has also promoted the move alongside rogue market analyst Max Keiser.
Legal threats
Mainstream financial players are outraged, calling this move a conspiracy or manipulation to which the reddit users simply reply in a meme style "We like the stock". A twitter account named WallStreetBets Chairman was in defiant mood. "If they take down WallStreetBets, they better take down every single Wall Street hedge fund that has been endlessly using gangster tactics to make a quick buck". In an open letter to CNBC on the reddit thread, the mood was defiant. The full text can be read here, but the missive states that their position is unprotected and they accept the risk whilst the large players are rescued from their poor decisions and ends with the clear unambiguous statement "We want to see the loss porn"
Long term implications
The implications of this extraordinary event are far reaching. The NASDAQ have called upon regulators to intervene and the CEO Adena Friedman has even suggested a suspension of trading to enable the struggling hedge funds to "recalibrate" their position.
It is becoming clear that GameStop is not the beginning and end of the tale as analysts are highlighting similar stakes emerging with other stocks such as BlackBerry (BB) and AMC Entertainment (AMC) which have seen triple-digit percentage gains in the past couple weeks as WallStreetBet traders identify short positions. Even Eastman Kodak (KODK) shot up nearly 50% Wednesday, briefly trading near $14 after closing trading on Tuesday below $9.50.
Other companies including Tootsie Roll (TR) and National Beverage Corp. (FIZZ) are also among the most-shorted stocks by hedge funds, according to data from CNBC, making them possible candidates in the future.
Hedge Funds and market bosses are now monitoring the WallStreetBet Reddit board intensely to try and track the next potential moves or targets. It may well be that the WallStreetBet crowd have already had a recalibration of their own as they realise the market clout they have at their fingertips after the GameStop short squeeze posts are emerging drawing attention to potential short squeezes on the paper trades of precious metals. Trades are made on the price movement of metals rather than buying and selling the metals themselves, it is widely believed that the price of precious metals are artificially maintained low to mask the true impact of inflation. It seems things are about to get very interesting indeed. What is emerging is a potential online popular uprising against the large investment houses.
Updates:
00:30 28th Jan
The story will evolve over the coming days and Discord have confirmed they have removed WallStreetBets from their servers for apparent repeated violations of hate speech guidelines. It seems when the small people lose money everything moves forward but when the big boys take loses the game stops. The delicious eloquence of coincidence is ripe in the GameStop affair.
00:55 28th Jan
Reddit have shut down the WallStreetBets thread and there is already a noticeable decline in share value since the thread went silent with prices dropping below 300. WallStreetBets reopened on https://www.ruqqus.com/+wallstreetbets
05:00 28th Jan
The rogue hobby traders have regrouped and the @WSBChairman twitter account has told them to "HOLD THE LINE!!!!! DON'T LET THEM SCARE YOU!"".
14:45 28th Jan
As the New York Stock Exchange is preparing to open, it has emerged that Reddit has not shut down the WallStreetBets, the moderators had switched it to invite or existing members only as the board was flooded with over 2 million new users.
The GameStop prices has stabilised and returned to upward trajectory, expected to open at over $400 and it has also been confirmed that there is not only Citric and Melvin hedge funds that have been struggling with a short position on GameStop and other hedge funds are in trouble as well.
14:56 28th Jan
NASDAQ continue to threaten to halt stocks over social media "manipulation" and now trading apps are restricting trading prior to market opening. The WallStreet Bet crowd are calling "foul" on the app owners and threatening to close their accounts and remove their money and start a class action law suit. Those same apps have not suspended trading the shorts, therefore enabling the Wall Street position to be ongoing but not the hobby trader short squeeze position.
15:47 28th January
Despite what is being touted as naked and obvious market rigging the hobby traders have made it clear they are not in the game to make money but to "HOLD". GameStop price rallies after taking a a hit in the first hour
15:57 28th January
GameStop price continues to resist the pressure and it seems the Short Squeeze is set to continue as the price crests $450
16:38 28th January
The GME (GameStop) price stumbles back toward starting price for the day as a Bull v Bear battle continues.
16:55 28th January
The hobby traders are complaining across social media that they have been effectively locked out of their trading as GameStop starts a flush drop, sinking down to $265 with all indicators seeing the stock fall further. Merrill Lynch are now restricting trades on various stocks.
17:55 28th January
Online apps continue to block trade on GameStop which fell to below 200 over the past hour before starting to rally once more.
18:55 28th January
Despite activity attempted on other stocks it is still GameStop that holds the attention. Hovering around the $240 mark as WallStreetBets accounts claim the corruption has been laid bare for all to see today. "They just bailed out the hedge funds and screwed the people" the WSB Chairman account opines.
20:00 28th January
An extraordinary brief rally that saw a spike of price from $242 to $492 before collapsing back down to the mid 200s over a course of 15 minutes.
21:49 28th January
Class Action Law suits have been submitted against the RobinHood trading platform. Anger is palpable at the astonishing corruption in full view. Brokers and trading apps have denied buying of certain shares and allowed selling but the action has made the Reddit traders more determined. Even as the market manipulation sees the price tumble they refuse to sell. If this dogged determination is focused on something like the precious metals market, silver is considered the biggest short in markets history, this could be devastating to the large financial houses.
12:00 29th January
Major accusations regarding the RobinHood app have emerged. It has been noted a major investor in the firm is also financially committed to the hedge fund Melvin Capital. It has also been alleged that the RobinHood app was automatically selling client shares in GameStop without consent "for their own good".
14:00 29th January
Reuters report Wall Street firms have lost $70billion on their short positions. Far greater than the one firm reporting $5billion losses on one stock.
15:00 29th January
Biden's Secretary to the Treasury has come in for withering criticism for not recusing herself from any response to events after it became apparent she had received $800,000 in speaking fees from the parent company of Melvin Capital.
18:50 29th January
Despite the downward pressure GameStop shares have been restored to $355 during a hectic day trading. It seems the hobby traders have been "diversifying" their portfolios as impressive movement has been seen on some unusual stocks: AMC Theatres +230%, Blockbuster Video +181& and some growth for Nokia, Build-A-Bear, Blackberry, Bed, Bath & Beyond. Petitions to reopen trading apps are amassing signatures and Elizabeth Warren has sent a letter to regulators urging them to go after Reddit traders