In January 2021, a short squeeze of the stock of the American video game retailer GameStop (NYSE: GME) and other securities took place, causing major financial consequences for certain hedge funds and large losses for short sellers. Approximately 140 percent of GameStop's public float had been sold short, and the rush to buy shares to cover those positions as the price rose caused it to rise even further. The short squeeze was initially and primarily triggered by users of the subreddit r/wallstreetbets, an Internet forum on the social news website Reddit. At its height, on January 28, the short squeeze caused the retailer's stock price to reach a pre-market value of over US$500 per share, nearly 30 times the $17.25 valuation at the beginning of the month. Many other heavily shorted securities also saw price increases.
On January 28, multiple brokerages,
including Robinhood, halted the buying of GameStop and other securities, later
citing their inability to post sufficient collateral at clearing houses to
execute their clients' orders. This decision attracted criticism and
accusations of market manipulation from prominent politicians and
businesspeople from across the political spectrum, and dozens of class action lawsuits
were filed against Robinhood in U.S. courts. In reaction to brokerages halting
the buying of GameStop and other securities, the total market capitalization of
cryptocurrencies and metal futures increased.
Background on the Short Squeeze
GameStop, an American chain of brick-and-mortar
video game stores, had struggled in recent years due to competition from digital
distribution services, as well as the economic effects of the COVID-19 pandemic,
which reduced the number of people who shopped in-person. As a result,
GameStop's stock price declined, leading many institutional investors to short
sell the stock. However, in September 2020, Ryan Cohen (the former CEO of
online pet-food retailer Chewy) revealed a significant investment in GameStop
and joined the company's board, leading some to believe that the stock was
undervalued.
Short selling and short squeezes
Short selling is a finance practice in
which an investor, known as the short-seller, borrows shares and immediately
sells them, hoping to buy them back later ("covering") at a lower
price, return the borrowed shares (plus interest) to the lender and profit off
the difference. The practice carries an unlimited risk of losses, because there
is no inherent limit to how high a stock's price can rise. This is in contrast
with taking a long position (simply owning the stock), where the investor's
loss is limited to the cost of their initial investment.
Short sellers are exposed to a risk of short
squeezing, which occurs when the shorted stock jumps in value due, for
instance, to a sudden piece of favorable news. Short sellers are then forced to
buy back the stock they had initially sold, in an effort to keep their losses
from mounting. Purchasing the stock to cover their short positions raises the
price of the shorted stock, thus triggering more short sellers to cover their
positions by buying the stock. This can result in a cascade of stock purchases
and an even bigger jump of the share price.
Online discussion
The subreddit r/wallstreetbets is an
online community on Reddit, a social news website. The community is known for
discussion around high-risk stock transactions.
On January 22, 2021, approximately 140 percent of GameStop's public
float had been sold short, meaning some shorted shares had been re-lent and
shorted again. Observers congregating
around r/wallstreetbets believed the company was being significantly undervalued,
and with such a large amount of the shares being short they could trigger a
short squeeze, by driving up the price to the point where short sellers had to
capitulate and cover their positions at large losses.
Even before the short squeeze, there had
been interest in GameStop (ticker symbol: GME). Keith Gill, known by the Reddit
username "DeepFuckingValue" and the YouTube and Twitter alias
"Roaring Kitty", purchased around $53,000 in call options on
GameStop's stock in 2019 and saw his position rise to a value of $48 million by
January 27, 2021. Gill, a 34-year-old
marketing professional and Chartered Financial Analyst (CFA) from
Massachusetts, stated that he began investing in GameStop during the summer of
2019, after believing the stock to be undervalued. He shared information, as
DeepFuckingValue, regarding his investment on the subreddit r/wallstreetbets,
providing regular updates on the investment's performance, including times when
the investment had plunged. He stated on January 29, after the GameStop short
squeeze, that he "thought this trade would be successful" but
"never expected what [had] happened over the last week", adding that
he planned to continue his YouTube channel as Roaring Kitty and potentially buy
a house.
On January 27, technology news website Mashable
reported that the subreddit had broken pageview records due to the short
squeeze, receiving 73 million pageviews in 24 hours. r/wallstreetbets was the
fastest-growing subreddit – the community surged by more than 1.5 million users
overnight (to a total of 6 million members) on January 29.
Possible causes
Due to the COVID-19 pandemic, consumer
spending in general was drastically lower than normal. There was also more
money in the hands of investors as a result of historically low interest rates
and an inability to spend their money elsewhere. Other suggested factors included a culture of
taking massive gambles on the stock market in the hopes of making money
quickly, anger of some investors towards Wall Street hedge funds for their role
in the financial crisis of 2007 and 2008, or the general democratization of the
stock market coupled with the ability of retail traders to communicate
instantaneously through social media.
Timeline
Rise in stock price and volume
In January 2021, Reddit users on the
r/wallstreetbets subreddit built the foundations for a short squeeze on GameStop,
pushing up the stock price significantly.
This occurred shortly after a comment from Citron Research predicting
the value of the stock would decrease. The
stock price increased 1,500 percent by January 27 over the course of two weeks,
and its high volatility caused trading to be halted multiple times. According to Dow Jones market data, more than
175 million shares of GameStop were traded on January 25, the second largest
total in a single day, surpassing its 30-day average volume of 29.8 million
shares.
In conjunction with the short squeeze,
the resulting increase in options volume triggered a gamma squeeze as a result
of market makers needing to buy shares to hedge their increasingly short
exposure.
After GameStop's stock closed up 92.7
percent on January 26, business magnate Elon Musk tweeted
"Gamestonk!!" along with a link to the r/wallstreetbets subreddit. A brief, sharp rise in the share price to
over $200 followed Musk's tweet. As of
January 28, 2021, the all-time highest intraday stock price for GameStop
was $483.00 (nearly 190 times the record low of $2.57 in April 2020). In pre-market trading hours the same day, it
briefly hit over $500.
The r/wallstreetbets Discord server was
banned on January 27 for violating the company's restrictions on hate speech. However, users quickly formed similar servers
on the application, and Discord reversed its decision the next day, attempting
to help the community moderate its server instead.
On January 27, r/wallstreetbets
triggered a short squeeze on AMC Theatres (ticker symbol: AMC), a company in a
similar position to GameStop. The value
of AMC Networks (ticker symbol: AMCX) also increased significantly, which was
believed to have happened because of the stock's name being similar to AMC's. Disruptions and restrictions limiting trade
have been reported on multiple brokerages such as Charles Schwab Corporation,
its subsidiary, TD Ameritrade, and Robinhood.
According to Bloomberg, US trading volumes (by share count) on January
27 exceeded the peak set in October 2008 during the financial crisis, and was
the third-highest in dollar terms within the last 13 years on record.
Halting of stock purchases
On January 28, Robinhood halted purchases
of GameStop, AMC Theatres, BlackBerry
Limited, Nokia Corporation, and other volatile stocks from its trading
platform; customers could no longer open new positions in the stock, although
they could still close them. Other
brokerages soon followed suit. Many traders were furious, and called for
class-action lawsuits in multiple popular Reddit posts. After the markets closed, Robinhood announced
it would begin to allow "limited buys" of the affected securities
starting the following day, although it was unclear what "limited
buys" entailed. Trading platforms
such as UK-based Trading212 and Israel-based eToro blocked buys of GameStop and
other stock while continuing to allow sales.
Webull halted by orders for
stocks affected by the squeeze, but soon thereafter allowed orders to continue. Anthony Denier, the CEO of Webull, stated
that increased collateral requirements for their clearing house meant Webull
themselves were restricted from opening new positions. Some users alleged that Robinhood was selling
shares without consent; Robinhood denied these allegations.
Several brokerage firms, including Robinhood,
stated on January 29 that the restrictions were the result of clearing houses
raising the required collateral for executing trades. Because there is a two-day lag between the
moment when investors purchase a security and the moment cash and securities
are actually exchanged, brokerage firms have to post collateral at clearing
houses to guarantee the proper settlement of their clients' orders. Clearing houses include the Depository Trust
& Clearing Corporation (DTCC) for equities and the Options Clearing
Corporation (OCC) for options. Clearing
houses must have enough collateral on hand to settle a member’s outstanding transactions in the event any
particular member firm fails—to prevent cascading failures of other members — and
can demand additional collateral (i.e., margin calls) from members if market volatility
starts to increase. Brokerage firms
claimed that the increased collateral could not be provided in time, and, as a
result, trading had to be halted. The
DTCC, for instance, increased the total industrywide collateral requirements
from $26 billion to $33.5 billion, noting that the large trading volumes in
specific stocks "generated substantial risk exposures at firms that clear
these trades [...] particularly if the clearing member or its clients are
predominantly on one side of the market".
On January 29, it was reported that Robinhood had raised an additional
$1 billion to protect the company from the financial pressure placed by the
increased interest in particular stocks and meet the collateral requirements of
clearing houses.
As of January 29, Robinhood still
imposes limits on the trading of GameStop, AMC, and Blackberry stocks. On January 30, Robinhood announced it had
increased the restrictions from the sale of 13 securities to 50, including
companies such as Rolls-Royce Motor Cars and Starbucks Corporation. However, on January 31, Robinhood announced
it had removed several of these restrictions and would only limit the sale of
eight securities.
Decline in value
On February 1 and 2, the stock price for
GameStop declined substantially, losing more than 80 percent of its value from
its intraday peak price, recorded during the previous week. GameStop shares
lost 60 percent of their value on February 2, closing below $100 for the first
time in a week. Reports estimated that
about $27 billion in value had been erased.
Other assets affected by the short squeeze, and put under company
trading restrictions, such as AMC and Blackberry shares, also declined in
value. CNN reported that the drop was
partly due to restrictions imposed by Robinhood and other brokers on the number
of shares that could be purchased at once by their clients.
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