Gamestop Drama
You have probably read about this Big Drama concerning GameStop, but you may have had a hard time understanding what happened in general terms. I was impressed by the story and thought a short recap might be an educational and an entertaining post.
Trade Set Up
Basically, the company GameStop, which sells video games in stores and online has been wrecked by Covid-19, and some reports indicate it was in poor financial shape before Covid-19.
So the company’s stock price has been falling for a while and recently hit $39.00 USD.
At some point a couple Big Wall Street Firms decided to make some money on this downward trending stock by Shorting It, which basically meant they sold stock today at thirty-nine dollars, and intended to buy it back later when the stock price fell further, at a lower price like 20 dollars and then fill their previous sell orders.
They would then profit off the difference between the previous high price and the later lower price.
The Math
GameStop is selling for 39.00 USD November 1st
The Shorter sells the stock at 39.00, but doesn’t have to own the stock until a future date, and at that future date the shorter buys it for 19 and then gives it to the people who bought it for 39.00. That’s a bit of a simplification, but it points out the math basics.
They are called shorters because they don’t actually own the shares they are selling, so they have a shortage of the stock. Additionally they are sometimes disliked because they often spread F.U.D. = fear, uncertainty and doubt. Plus they sell so much stock they create fear, which leads to many others selling and dropping the stock price as investors hurry to sell the stock, like rats fleeing a burning ship.
Risky Play, and bad outcome
Technically this is a very risky trade, but if your big enough to move the market, not so much risk. Unfortunately, this behavior can severely damage the company they are shorting, and cause it to lose investor confidence, and bankruptcy and ultimately business failure can occur. GameStop employs an estimated 50,000 people. But the shorters didn’t care about those people.
Greed and Reddit Investors intervened
However in this case GameStop fans on a Reddit Community who are also investors noticed unusual stock sales activity in GameStop Stock. They ultimately figured out that a few large Wallstreet Stick funds were shorting GameStop Stock and driving the price down. In fact they noticed the amount of shares shorted were more then the number of shares in existence.
More then the number of shares in existence
Now that technically shouldn’t be possible, and probably is against some rules. And it definitely is a sign of greedy behavior.
Reddit Investors Reverse the price action
So these Reddit Investors decided to fight these Wallstreet Shorters by buying the stock up at and thus drive the price up, instead of down. This price action is a disaster for shorters, who now have to go into the market to buy stock at higher prices to fill their previous sells.
Wall Street Shorters Double Down on a bad trade.
Now normally, the shorters would buy the stock, close their positions, suffer small losses and move on to the next target. But in this instance they didn’t. They instead kept shorting the stock to dry to use their size to push the market price down again. But they were selling into an organized group of investors who kept buying and pushing the price up.
Now other investors like Sharks smell blood in the water
Source Bloomberg
At this point other large investors who were not a part of the Reddit Community saw what was happening and they got involved to make money. So they also bought GameStop stock and further pushed the price up. Soon many wealthy investors were involved and a buying frenzy issued which pushed this 39 dollar stock price up over 378 dollars.
Big Loss turns into a huge loss
This meant the the Wallstreet Shorters had to go into the market and by the stock for over 10 times what they paid for it. The problem was that there was over 600 million shares shorted and that means 6 billion dollars to buy back. In a true Robin Hood story, some Reddit Community investors made millions of dollars as the price jumped from 39 dollars to 100, 200, 300 and 378 dollars.
Do I feel sorry for the Shorters?
The Shorters didn’t care about the 50,000 GameStop employees, so I don’t feel sorry for them.
They have only their greed and hubris to blame
The true irony is the Wallstreet firms are partially to blame for being both greedy for selling over 130% of the stocks shares in existence, thereby creating huge upward price pressure through scarcity. And for being stubborn, and not getting out of this losing trade earlier, but they instead doubled down to save the trade and lost several multiples more.
The reaction and censorship
Now news outlets are reporting on this fiasco, and ironically some are blaming the Reddit Community for the financial losses of the Large institution Shorters, instead of the Shorters. The Shorters are adults who placed risky trades, in the Stock Market and attempted to manipulate the market for financial gain. They got wrecked placing very risky trades. Surprisingly, Reddit Shutdown the Reddit Subreddit where the #wallstreetbets investors were discussing their strategy. I think it’s interesting that Shorting a Stock is as old as the Stock Market, and is a legal means of manipulating the market for personal gain. Interestingly enough 5 people with 100 million dollars each, who collaborate in private to manipulate a stock are called Smart Investors. But one million people with 500$ each, collaborating on a public forum are called Economic Terrorists. Hmmm...double standard much? They both are manipulating the stock price.
The Moral of the story
Bulls get rich, Bears get rich, but Pigs get slaughtered!
See my next article about attempts to silence the #wallstreetbets , the group who saved GameStop. Article
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