GameStop Stock Drama Continues As Price Soars And Hedge Fund Blinks

GameStop Stock Drama Continues As Price Soars And Hedge Fund Blinks
Photo: Spencer Platt, Getty Images

GameStop’s stock price continued to soar in after-hours trading last night to over $US300 ($390). While many are waiting for it to come crashing back down, it might be too late for some major hedge funds. With the stock still sitting at well over $US250 ($325) a share (unthinkable just last year when it was trading at under $US5 ($7)) after the market reopened, Melvin Capital, one of the largest hedge funds betting against the company, is reportedly getting out of the game after suffering major losses, seemingly driven out by amateurs trading on their phones and joking on Reddit in what continues to be one of the most bizarre stories of 2021 so far.

“Melvin Capital closed out its short position in GameStop on Tuesday afternoon after taking a huge loss,” the fund’s manager told CNBC this morning.

The firm, which was worth about $US12.5 ($16) billion before the battle between short sellers and Redditors began, bet big against GameStop and a number of other companies, only to see 30% of the fund disappear over the last few days. That prompted other billionaires to swoop in and lend Melvin $US2.75 ($4) billion to help cover the losses. Andrew Left, a notorious short-seller activist, also announced in a new YouTube video today that his investment firm moved away from most of its bets against GameStop’s stock at “a loss of 100%.”

Another Wild Day For GameStonk

Last Friday, GameStop’s stock price closed at an all time high of $US65 ($85) ($US84 ($109)). Today, it shot up 18% higher, breaking records again after an even wilder day of Wall Street roulette thanks to finance redditors and enthusiast day-traders who have turned things into a meme war against elite investors.

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Those on Reddit who helped orchestrate GameStop’s recent record-breaking ride on Wall Street aren’t buying it, however.

“Melvin capital have not closed their positions!!” a user posted in one of today’s most upvoted threads on the WallStreetBets subreddit, “The volume is too low for it to be even possible. The short interest has not changed!”

The forum has been full of comments like this as Reddit traders try to rally one another to drive GameStop’s stock price even higher, rather than cashing out now.

Every time GameStop stock has looked poised to inevitably crash in recent days, it's gone up even higher instead.  (Screenshot: Google, Fair Use) Every time GameStop stock has looked poised to inevitably crash in recent days, it’s gone up even higher instead. (Screenshot: Google, Fair Use)

Meanwhile, the ensuing chaos caused GameStop stock trading to be temporarily halted yet again this morning and caused outages on the trading app Robinhood. Other companies like Blackberry and AMC are also seeing smaller, though still dramatic stock climbs, as Reddit traders attempt to go boost other companies massively shorted by big hedge funds.

All of this is the culmination of a long game that’s been brewing on the WallStreetBets subreddit for a while now as amateur day traders decided to turn the misfortunes of a floundering brick-and-mortar game seller into their cause celebre for dunking on professional investment firms. In some ways it’s a very complicated story driven by the weird mechanics of Wall Street, but in other ways it’s a familiar tale of extremely online people trying to stick it to someone, in part to make a buck, but also for the “lulz.” Here’s a quick rundown of how things got here.

  • In March of 2019, Reddit user delaneydi outlined their case for why GameStop was actually worth more than the stock market was saying. (See Bloomberg’s reporting for the full timeline).
  • Later that year, hedge fund operator Michael Burry, the real life character played by Christian Bale in The Big Short who managed to make mountains of cash betting on the 2007 housing collapse, gave GameStop a big vote of confidence, buying up 3% of the company when its stock was worth less than $US5 ($7) a share. This led soon-to-be WallStreetBets hero DeepFuckingValue to bring in a bunch of money and boast about it on the subreddit.
  • By the following April, a Reddit user called Senior_Hedgehog was pointing out that GameStop stock was one of the most shorted on the market, and had the potential to set up a “short squeeze.” To learn more about how short selling mechanics led to the current moment, I recommend Matt Levine’s most recent Money Stuff column. Basically, a stock as shorted as GameStop’s (meaning a lot of money was bet on it failing) has the potential to create feedback loops if it rises, allowing an army of small investors trading handfuls of individual shares using an app like Robinhood to send the stock skyrocketing. Macleans Andray Domise also has a great summary in TikTok form.

  • This laid the groundwork for weird stuff to happen with GameStop’s stock, but it didn’t really kick-in until earlier this month when co-founder of online pet food seller Chewy, Ryan Cohen, announced he and two of his allies would buy into GameStop and take seats on the company’s board. This gave the rest of WallStreetBets something to rally around. The subreddit nicknamed him “Papa Cohen” and started talking about riding $GME (the company’s stock exchange acronym) to the moon.
  • Fast forward to January 22, and GameStop’s stock was closing at an all-time high of $US65 ($85). It went even higher after a series of booms and busts the following Monday to close at just under $US77 ($100). Yesterday, it closed at nearly double that.
  • Whatever ultimately happens to GameStop’s army of Reddit backers, the fallout already has many Wall Street insiders freaking out. Even Michael Burry, GameStop’s original booster, called the stocks recent exploits “unnatural, insane, and dangerous.”
  • Others are already looking to the refs — the Securities and Exchange Commission — to step in and somehow regulate the WallStreetBets meme market. No one seems to know how that would work though. “It’s an enforcement nightmare for the SEC,” James Cox, a professor at Duke University School of Law, told Bloomberg yesterday. As no shortage of people have pointed out on Twitter, some Wall Street-types only seem to be against market manipulation when they are the ones who end up getting hurt by it.

Comments

  • Aside from kicking some soulless ‘elites’ in the teeth, maybe some other good will come from this if regulators step in to make changes that limit EVERYONE from exploiting markets like this… Well, one can dream at least.

    But the fact they want the Reddit crowd somehow regulated is incredible. The fucking gall of those people really is something else.

    • Yep, the financial services industry does not want any regulation, but as soon as a bunch of people work out a way to stick it too them, that needs to be regulated immediately.

  • Very interested in how The Powers That Be will act to try and protect the status quo without literally enshrining, “Rules For Thee And Not For Me” into law.

    The big brokers have already started blocking trades on WSB-favoured stocks. Financial analysts are tutting and shaking their heads and concern-trolling about the poor folks who are getting caught up in this and might be hurt. The market literally fucking closed to allow the biggest players to find a way to ‘recalibrate’ around the retail traders discovering that they’re stronger than they thought and can actually fight back. Fuck knows what kind of insidious shit they’re working on right now.

    The stock market is not the economy. It services precisely ONE useful purpose, which is to make capital available for productive businesses to grow, by rewarding those who take the risk on providing that capital. That is it. That this entity has grown into what it has, a game of perceptions and manipulation that always sees the less powerful get shafted is a perversion of that one useful purpose, and frankly if we could source capital for productive growth elsewhere, I’d be in favour of completely dismantling the fucking thing so that wealth comes from productivity instead of speculation.

    This movement, realizing that one of the powerful tools of the biggest manipulators can be subverted is a potentially a big step forward for improving equality.

    • You’re right, at this point the stock market is so disconnected from its original purpose that it is more akin to betting (with HEAVY manipulation of odds) than anything else. The glaring example of the economic woes vs stock market flourish during the pandemic tells you how ridiculous the situation has become.

  • Won’t somebody think of the rich?!
    How would you like it if you had to get a gold plated toilet instead of a solid gold one?!

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