JackpotCity Online Casino: GameStop Squeeze

Street signs for Broadway and Wall Street

Source: Pixabay

In business headlines this week, one word has been popping up everywhere. The word is GameStop. What is GameStop? How does it relate to Wall Street and Reddit? Has the world gone mad? Well, maybe! But to understand any of this, first you need to know what shorting stock means.

Shorting stock or short-selling

I’m sure you know how the stock market works on a basic level, i.e. you buy a share for 10 dollars, the share increases in value (hopefully) and you eventually sell it for 15 dollars, making a tiny profit of 5 dollars. If the world could be so simple!

When traders short stock, they do it because they are convinced that the value of the stock is going to go down. They might believe it for one of many reasons: maybe the company is badly managed, has fallen out of fashion or their tech is becoming obsolete. When traders are certain that stock is losing value, they have another option available to them, which is called short-selling. Short-selling stock works like this: a trader can loan stock from their brokerage and immediately sell it at the stock’s market value, say 10 dollars, with an agreement to return the stock to the brokerage at a set time. The trader doesn’t have the stock anymore, but they are under an obligation to buy it back for their broker at an agreed time. This is called taking a “short” position.

The idea is that when the value falls to 5 dollars (as the trader is certain it will) they will buy the stock back as agreed (sell for 10, buy back for 5 = difference of 5 dollars). So, the trader made 5 dollars again, in a slightly more complicated way. As you can see, this constitutes a financial form of betting because the trader is really betting on the fact that the stock value will go down. It’s also an extremely risky practice.

Shorting stock is risky because when a trader is wrong, and the stock value increases, they still have to buy the stock back at the set time; and there’s no limit to how high the price can go. Imagine that the stock value becomes 400?! Instead of making 5 dollars they have lost 390 dollars, which is exactly what has happened in the case of GameStop. This isn’t a game for noobs or the faint of heart. It’s usually done by hedge fund managers and the like: people who can afford to take risks. You may have noticed that the practice is a LOT like an online casino. Traders are betting on the fact that the company’s stock value will fall.

A short squeeze

When the traders are wrong, and the value increases in value they eventually have to “buy-to-close” on the shorted stock. Large institutions are usually given some leeway about when they buy stock back because of their size and influence. However, at a certain point, if the value is skyrocketing, the brokers can demand that their shares are bought back to cover their own losses. Forced buying drives the value of stock up further. This means more and more brokerages demand their stock back, which in turn increases the value resulting in a “short squeeze”. It’s a sort of financial spiral of increasing value and a recognised flaw in the way financial markets work. If someone notices the opportunity for a squeeze, they can take advantage of the situation by buying up shares to push the price higher. Normally only large groups, like hedge funds, have this kind of buying power. This is where the Reddit forum comes into the story.

GameStop – the struggling video game retailer

GameStop is an American chain of brick-and-mortar video game stores that had been losing money for a few years because its business model, which relies on disc sales and in-store purchases, is obsolete. To stay competitive the company needs to transition to a digital model. The COVID-19 pandemic has made the situation even worse for GameStop because it has reduced in-store shopping further. This combination of factors meant the value of GameStop stock fell to US$3.25 a year ago. As a consequence, many of major institutional investors began to short sell their stock, convinced the company was at death’s door. In fact, GameStop was one of the most heavily shorted stocks in circulation in early 2020.

The GameStop short squeeze

Woman trading stocks on a smartphone app

Source: Pixabay

On a dedicated Wikipedia page to the GameStop short squeeze, it states that “On January 22, 2021, approximately 140 percent of GameStop's float (the portion of shares of a corporation that are in the hands of public investors) had been sold short, meaning some shorted shares had been re-lent and shorted again”. However, there was another rumour circulating among Reddit traders that GameStop stock was undervalued and might be a good target for a short squeeze. This idea was reinforced when the former owner of Chewy (a US pet store) disclosed that he had invested heavily in the video game chain. There were rumours the chain was about to be redeveloped and would be worth more soon.

People began to talk about this in the Reddit chat group, r/WallStreetBets. While many were convinced that the stock was undervalued and that there was potential for a short squeeze, others were just annoyed that the hedge funds were pushing one of their old favourite stores into the ground. The group launched a buying spree of GameStop shares. Since GameStop’s share prices were down so low at the beginning, it was quite easy for a large number of people to get in on the call for a squeeze on r/WallStreetBets. When the short squeeze was triggered even more people started buying the stock when they saw the value increasing. Even New Zealanders have been buying up GameStop stock through the kiwi app Sharesies.

Meme Stock

Many people are talking about meme stock in relation to the GameStop story. Meme stock, is stock that has a financial value that is completely disconnected from its real-world value. Zaid Admani, 29, a financial TikTok creator in Texas clarifies what meme stock is well: “You know how we have memes that become super popular and everyone uses them for a while, then they crash? […] Those stocks are like that”. So, imagine Bernie Sanders with his knitted gloves. GameStop stock has become the financial equivalent.

A great article on Medium by James Surowiecki, nicely explains the rise of GameStop by Reddit users who are egging each other on:  “It isn’t GameStop’s precipitous rise, impressive as that’s been, that has everyone fascinated. Instead, it’s what is fuelling that rise: concentrated buying by thousands upon thousands of small individual investors who are using sites like Reddit and Robinhood to drive up what are now being called ‘meme stocks’. GameStop is the best-known of these meme stocks, simply because its gains have become so outrageous. But it was preceded last year by Hertz and Kodak […] and now stocks like AMC, Nokia, and Blackberry (which is, yes, still in business) have also caught Redditors’ fancy”. Buying up large quantities of meme stock is also a cheeky slap in the face to Wall Street because it goes against best financial practices for individuals i.e. long-term investment and portfolio diversification. Many Redditers are putting all their eggs in one basket, so to speak. These Reddit “retail traders” have embraced the folly of large-scale investing in meme stock, which carries enormous risks but also the promise of enormous gains. They play the stock market the way other people play casino online. Their mantra being: I just like the stock. However, by using platforms like Reddit and Robinhood (the investment app) and taking advantage of their collective buying power, these retail traders may be able to beat the hedge funds at their own game.

Answering the call to buy GameStop stock on r/WallStreetBets, enough people have jumped on the bandwagon to trigger the short squeeze. The stock value increased 10,692% since April 2020 when it was only  worth US$3.25 (Naaman, The Guardian). The squeeze has been so effective that the future of many hedge funds is in jeopardy. This in itself has been enough to encourage a new kind of buyer: the activist trader.

Vulture capitalism

Hedge funds and private equity firms are the financial players commonly accused of vulture capitalism. Swooping in to prey on struggling companies in order to make huge profits for themselves and their clients. Needless to say, hedge fund managers don’t usually give people the warm fuzzies. Their aim is to make vast amounts of money and often with total disregard for the businesses that they’re buying and selling. When they short stock, they are accused of pushing share prices down artificially until they collapse. During the crash of 2008, shorting was seen as the cause of much of the damage, as it focused on profiting from failure at a time when many lost their homes and jobs. Critics accuse hedge funds of reinforcing downward trends in share prices and creating their own self-fulfilling prophecy. The hedge funds refute this idea by saying that a healthy company can’t be shorted successfully. Who’s right? Have the members of r/WallStreetBets proved the accusation to be true? Using their collective buying power and betting on GameStop’s success (instead of its failure) they seem to have achieved the exact reverse. Many of the companies targeted by r/WallStreetBets have shot up in value. The additional investment money this has created may actually be able to save these companies.

Nostalgia has a large part to play in this story too. GameStop is a retail store many people used to love visiting at the mall in the mid-2000s. Many of the stocks the Redditers are promoting fall into this category: Nokia, Blackberry, Blockbuster video and AMC Entertainment. The pandemic hit retail chains hard and many of these mall champions are now struggling, not to mention there are thousands of jobs on the line if these companies fail. The reckless disregard of institutional brokers to the fate of these companies has incensed many people since the stock market was born. Have Redditers found a way to achieve the reverse the short-sellers downward pressure and save companies, while also taking revenge on hedge funds? That’s an appealing idea, but many business journalists have been quick to point out that there’s a high chance other hedge funds are also profiting from the short squeeze.

Money-makers, gamers and activists

Bull statue on Wall Street

Source: Pixabay

For some GameStop shareholders, the “activist” traders, keeping their stock until the hedge funds collapse is the goal. A great redistribution of wealth. One of the hedge funds, Melvin Capital Management, has already had to close its short position after losing 30% of the US$12.5 billion it manages. Matt Phillips from the New York Times explains that, “Some [of them] reason that GameStop’s shares are a good value. Others are just riding the wave. And others want to squeeze Melvin Capital, a hedge fund that was shorting GameStop. They’re the ones quoting Heath Ledger’s Joker character from The Dark Knight: ‘It’s not about money; it’s about sending a message’”. Star Wars, Valhalla and other gaming references abound in what is presented as a war between Wall Street and small investors. Redditers repeating to each other: “hold the line”, “do not sell”.

The warnings being given by investment bankers to GameStop investors like these ones fall on deaf ears. Unfortunately, much of the advice being given reveals their misunderstanding of many of the driving factors behind the squeeze. Of course, while some people are always trying to get rich quick, others are buying stock in a concerted attempt to destroy Wall Street. Some of Redditers invest in stock the way kamikaze pilots fly planes. Bankers screaming at them from the ground that they’re going to “crash” is, well… , quite ridiculous.

Many Redditers want to expose the entire financial system for the game that it is using meme stock. Stocks are being hyped up for their novelty value, nostalgia for an old favourite store, or traded simply for entertainment. It has also been described as the gamification of the stock market and compared to a flashmob.

Elon Musk has drawn even more attention to the forum through his tweet: “Gamestonk!!” with a link to r/WallStreetBets. After tweeting this, GameStop prices soared even higher. Elon Musk is no fan of hedge fund managers and also has a strong aversion to short selling. In an interview with Business Insider he is reported as saying that “The stock market is a strange thing […] It’s like having a manic depressive who’s constantly telling you how much your company’s worth. And sometimes they have a good day, and sometimes they have a bad day, but the company is basically the same. The public markets are crazy”.

Reddit bois chat room – no girlz allowed

Are the Reddit traders serious? Of course, some of them truly believe in the possibility of making money through this short squeeze, others are in it for the entertainment value in a new form of community entertainment described in terms of a trip to the moon. If you decide to chat on r/WallStreetBets you will need to know the terms listed below and be ready for some phallocentric language.

r/WallStreetBets glossary

There are many more words that you can learn on the wallstreetbets shop. Yes! There’s a shop too.

r/WallStreetBets chat room: victim of its own success?

The popularity of the WallStreetBets Reddit forum is growing exponentially thanks to the extensive press coverage the forum received this week around the world. On Thursday, the group had 5 million subscribers and by Monday morning it had already jumped to 7 million. The result is that many of the old-time members are starting to get annoyed by all the new members and hope that things will return to normal soon. However, with people putting up billboards in Times Square it may be hard to reverse the phenomenon. Unfortunately, they may need to start looking for a new chat room. It will be very interesting to watch and see what happens in the next month with GameStop stock. While we’re waiting to see where the dice may fall, why not play a few games of your own at JackpotCity – the best online casino in NZ.

The Long History of Papal Betting Before Casinos Mobile Slots In Canada’s Favourite Online Casino