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GameStop and the ‘Meme Stock’ Phenomenon
Over the last couple of days, a group of cheap stocks has been pushed to the moon and back by speculative investment. Collectively known as “meme stocks,” GameStop et al., or all those short stocks, or anything else the internet thinks is clever. Here’s a brief history of the phenomenon.
About a week ago, a few hedge-fund guys were galivanting around the internet bragging about all the short positions they had on Gamestop stock. Gamestop is a brick-and-mortar video game store that sells game consoles, new releases, and resells used games. Gamestop has seen better days; they’re getting murdered by direct shipping and direct downloads through Steam.
A short bet seemed to be a sure bet, but other day traders, commoners, and people with a bit of stimulus money took exception to these rich fellows trying to drive a business they have some fondness for into the ground. They decided to run the stock price up, forcing the short sellers to cover for significant losses. The genesis for this was apparently a subreddit called r/wallstreetbets.
As the stock jumped in price, many daytraders, casual investors, and internet squatters took notice and joined the buying frenzy. At this point, a bit of nostalgia turned into a full-on speculative bubble. The primary purpose of the options and stock purchase began to be making scads of money as opposed to just giving a black eye to rich people who brag about being rich.
As the bubble began to inflate, various Wall Street institutions jumped into action attempting to halt runaway trading. Trading in Gamestop was paused, but other stocks took up the mantle through Twitter and Reddit, among them AMC, Blackberry, and Nokia. Overnight these meme stocks became a full-on phenomenon with investors, dabblers, and people who had no experience whatsoever placing buy orders for when trading resumed in the morning.
One of the most popular ways to do this was by an app called Robinhood which allowed regular everyday people to trade commission-free in about five minutes after setting up an account. Robinhood, along with many brokerage firms, disallowed the buying of new shares this morning.
So here we sit. Wall Street, as a collective, has decided to pause these bubbles till they can figure out “what the heck is going on.” The brokerage firms won’t let people trade, some won’t even let people sell, and boy, are people mad about it. Robinhood is taking the brunt of the ire.
Anyway, Dems will call for more regulation. Investing will have higher costs and more barriers to entry. Voters will lose any faith they had left in free markets.
Hopefully, the summary helps. I’m sure people have opinions.
Published in Finance
My trading days are over, but I’m pretty surprised that these folks could buy in enough volume to cause this kind of run-up. I realize short-covering will kick-in, but I’m still surprised.
And what reputable “hedge-fund” goes on the internet to brag about short positions?
If you won’t let people trade, it means that you won’t let people sell.
I get it. Everybody hates short-sellers.
But shorts are not a sure thing nor is taking a short position ‘trying to drive the stock into the ground.’ Whether or not Gamestock survives or fails has precious little to do with this weeks share price.
A healthy market requires an even mix of fear and greed. Take away the fear … you get bubbles … “irrational exuberance”. A big reason for the financial crisis of 2008 was the fact that you can’t short those asset backed securities. So if you – correctly – thought lots of those securities were way overpriced there was no way for short-sellers to relieve any of that upward pressure. It was a one-way bet. (Yes, you could still buy the credit-default swaps to bat against that market but that didn’t relieve any of the upward price pressure)
And before anyone starts thinking it’s David v Goliath and David is winning … it would not surprise me one bit to find out that lots of the Davids are really Goliath incognito. “You thought I was making too much money when I shorted Gamestock at $30? Wait until you see how much I make shorting it at $300!!!!”
Yeah, has to be a fireable offense to talk about stuff like that on the internet, but I gather that’s what happened. There was a tiff on r/wallstreetbets and then the stock took off. Pretty sure the short Gamestop debate has been going on for awhile though.
It is certainly wild watching all this unfold. It’s funny because the behavior of the hedge fund (Melvin?) and reddit are both very rational. Gamestop is basically worthless. But the hedge fund gets in way over its head shorting Gamestop. Someone who had been holding way too much Gamestop for too long encourages redditors to attack the company’s short position. The hedge fund has more shorts than the company has shares. Elon Musk gets involved. Hedgefund(s) lose billions of dollars as aggressive investors ride what it surely a bubble using Robinhood to trade stocks. People make fun of hedge funds and short sellers. Robinhood and a few other banks stop sales of Gamestop and cut the price by at least half as of this morning. In the end… shorting Gamestop was still the right position. It’s amazing.
I don’t know the industry very well, but I’m pretty sure that there are hedge funds and there are hedge funds. People leave the big guys, raise a little capital, and think they can play too in their own “hedge funds.”
As one @kevinFarzad wrote, “I know this Gamestop stuff is funny, but you have to remember this is hurting real people who own multiple boats.”
And baseball teams.
One of my understandings is that Melvin had such an extreme position shorting Gamestop with 140%-150% “short interest” (not a finance guy) that basically there was no way they couldn’t not be forced to buy as the price went up to keep a hedge. So as Reddit bought Melvin had to buy as well. The Gamestop push strikes me as very sophisticated. I don’t think this event can be recreated by a bunch of people “wanting to band together.” A couple of people on both sides of this were in very unique situations.
As I understand it, they were letting people sell but not buy.
This seem to be part of the beef. A hedge fund takes a short position, and then they go on CNBC or wherever to talk the stock down.
The SEC and Big Tech sure jumped into action when the hedge fund billionaires began to cry out for protection from the proles. The message is this: “Making money from the Stock Market is for billionaires. You peasants aren’t allowed to play.” Congress and their Wall Street pals will make sure the peasant class knows its place.
Meanwhile . . .
I don’t watch CNBC but they used to be pretty scrupulous about having commentators disclose positions in what they’re talking about. Probably not so much on the internet.
If one person sells x shares, then another person buys x shares at the exact same moment.
Robinhood was letting people sell but not buy. I don’t know who was buying them, but it wasn’t other people on Robinhood.
I don’t know…5 million people buy a couple shares each…the stock jumps $100 ( it has actually jumped over twice that much) and you’ve got half a billion in market capitalization. It’s not exactly peanuts.
Makes sense, I guess. It appears that I’m way out of touch with the influence of reddit. And the number of shares outstanding is probably a significant factor.
These hedge funds are supposed to be the “big boys” who understood the risks and were equipped to handle said risks. Seems to me when you short 140% of the outstanding shares and brag about it, you might want to buy a few calls to hedge your bet.
Yes. I’m not up on the funds involved here, but I thought the whole point was to compile a more or less “market neutral” portfolio and pick up a penny here and a penny there over lots and lots of trades.
Thanks for clarifying.
But it’s still true that if one person sells x shares, then another person buys x shares at the exact same moment.
The person who buys the shares is a market maker, in this case.
This is a clarifying moment. It is now easy to see where people are by how they respond.
* Elizabeth Warren — “we should regulate somebody” — that is how a captured politician talks
* Joe Biden (via spokeshole) — “we have the first female Sec. Treasury” — that is someone who is clueless and trying to push neo-Marxism
* Ted Cruz — reTweating AOC calling for hearings — these two know what voters are thinking
GameStop is not worthless. It has a well known brand and there is a market for video game nostalgia. If they can add a download service, they could become the Netflix of PC video games.
Why is it never a beef when guys who are long a stock go on CNBC to talk the stock up?
Yeah, did you see AOC’s response to having Ted Cruz agree with her?
She’s a lunatic.
I guess I’m one of the privileged because I’ve made just about all my money from the stock market.
The real market corruption is that Nancy Pelosi’s most recent financials show that she purchased 25 Tesla call options with a $500 strike price and an expiration date of 3/12/2022 on December 22, 2020, paying between $500,000 and $1 million for the options.
Conflict of interest? Sure looks that way to me.
They’re not worthless, but their name has been mud in gamer circles for several years now now…..ironic that they are the epicenter of a populist revolt in stock trading.
This is going to make an interesting case study in five years when we learn what happened.
For now, I’m not accepting anything at face value. As if on cue, all the good and bad guys have been identified. But I prefer to invoke the “Goldman Rule”, nobody knows anything.
The populist left is controlled opposition.
The SEC has regulations to prevent stock market manipulations by individuals or groups acting in concert. For example, a pump and dump operation, or as this case, a person or group of people conspiring to drive up the price of a stock with the intent of harming or even ruining other investors.
Contrary to your belief that they do this as part of a secret conspiracy against the little guy–acting only when the injured party is part of their cabal of billionaires, or only when the criminal is of the social class of their cabal’s enemies–the SEC is required by law to take these actions whenever a violation occurs.
Many of them. It’s not illegal, immoral or unethical to “talk your book”. It’s good tactics. It’s important to remember that people in the short selling business don’t care who or what the target is. The only thing they care about: the price of the target is more likely than not to go lower.