GameStop Short Squeeze

In January 2021, a short squeeze of the stock of the American video game retailer GameStop () 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, although a number of hedge funds also participated. 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 ($125 split-adjusted), nearly 30 times the $17.25 valuation at the beginning of the month. The price of many other heavily shorted securities and cryptocurrencies also increased.

On January 28, some brokerages, particularly app-based brokerage services such as Robinhood, halted the buying of GameStop and other securities, citing the next day 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. Dozens of class action lawsuits have been filed against Robinhood in U.S. courts, and the U.S. House Committee on Financial Services held a congressional hearing on the incident.

The unusually high price and volatility continued after the peak in late January. On February 24, the GameStop stock price doubled within a 90-minute period, and then averaged in the neighborhood of $200 per share for another month. On March 24, the GameStop stock price fell 34 percent to $120.34 per share after earnings were released and the company announced plans for issuing a new secondary stock offering. On March 25, the stock recovered dramatically, rising by 53 percent.

Background

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.

GameStop

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. 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. Analysts at Goldman Sachs later noted that short interest exceeding 100 percent of a company's public had only occurred 15 times in the prior 10 years.

However, in mid-2019, investor Michael Burry's Scion Asset Management acquired a 3.3-percent stake in GameStop and wrote to the company's board of directors, identifying overlooked value in the company and urging them to buy back shares. In August 2020, Ryan Cohen (the former CEO of online pet food retailer Chewy) revealed a 9-percent investment in GameStop, leading some to believe that the stock was undervalued.Nick Turner and Gregory Calderone
"GameStop Soars After Founder of Chewy Acquires a Stake,"
''Bloomberg News'', August 31, 2021. In January 2021, Cohen joined GameStop's board, triggering a stock rally.

Online discussion

The subreddit r/wallstreetbets is an online community on Reddit, a social news website. The community is known for discussion around meme stocks and high-risk stock transactions. 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 regarding his investment on r/wallstreetbets, providing regular updates on the investment's performance, including times when the investment had plunged. He stated on January 29, 2021, after the GameStop short squeeze, that he "thought this trade would be successful" but "never expected what adhappened over the last week", adding that he planned to continue his YouTube channel as Roaring Kitty and potentially buy a house.

Another user, ''Stonksflyingup'', posted a humorous video on October 27, 2020, explaining how a short position by Melvin Capital could be used to execute a short squeeze, using a scene from ''Chernobyl'' to illustrate how the hedge fund would blow up similarly to a nuclear reactor.

On January 27, 2021, 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 at the time – the community surged by more than 1.5 million users overnight (to a total of 6 million members) on January 29.

Possible causes

Suggested factors included 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. Some of those investing into the stock were young teenage investors.

Later analysis by a cyber security company of social media posts suggested that thousands of automated bots may have hyped GameStop stock, Dogecoin, and other stocks, on social media. However, it is unclear the extent to which the suspected bot accounts influenced trading.

After GameStop's stock closed up 92.7 percent on January 26, business magnate Elon Musk tweeted "Gamestonk!!"—a reference to the "stonks" meme rising in popularity at the time—along with a link to the r/wallstreetbets subreddit. A brief, sharp rise in the share price to over $200 followed Musk's tweet. , the all-time highest intraday stock price for GameStop was $483.00 (nearly 190 times the low of $2.57 reached 9 months earlier in April 2020). In pre-market trading hours the same day, it briefly hit over $500, up from $17.25 at the start of the month.

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, U.S. 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.

On January 28, more than 1 million GameStop shares, then worth $359 million, were deemed failed-to-deliver. On that day, GameStop's total market cap reached $33.7 billion which made it temporarily the highest valued company on the Russell 2000 index.

According to the ''Financial Times'', a "gamma squeeze" also took place in addition to the short squeeze: as traders bet on the rise of stocks by purchasing call options, options sellers hedge their positions by purchasing the underlying stocks (here, GameStop and the related securities), thereby driving their prices even higher.

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 buy 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 was still imposing 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 Holdings 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. The short squeezed securities' prices continued to decline during the week.

Despite the decline, some r/wallstreetbets users rallied to convince other users to hold on to the shares, arguing either that they would increase in value or that such an action would send a political message. As the stock prices continued to decline, some of the recent investors held on to their shares, and suffered significant losses.

Resurgence from February 24

On February 24, GameStop share prices doubled in heavy volume in the final 90 minutes of trading, with the company's stock halting twice, shortly before closing at $91.70, a 104-percent gain. Gains continued in after-hours trading, nearing an additional 100 percent. Similar gains, although not as high, were reported with cinema operator AMC, clothing retailer Express and communications software group BlackBerry. Reports could not identify a specific cause for the surge. The jump came a day after GameStop announced its chief financial officer Jim Bell would resign to help 'accelerate GameStop's transformation'.

On March 8, the stock saw continued rising of 41 percent to $194.50, and with around 25 percent of the stocks being shorted at this time. On March 9, the stock surged to its highest point since January, resulting in a market capitalization over $17 billion. Shares closed at $246.90, and increased a further 3 percent in after-hours trading. On the morning of 10 March, the stock rose as high as $348.50, before being paused for volatility, and then dropping 40 percent by 12:30 pm EST to the previous day's close.

On March 24, the GameStop stock price fell 34 percent to $120.34 per share after earnings were released and the company announced plans for issuing a new secondary stock offering worth up to $1 billion.

By March 24, short interests had dropped to 15 percent, compared to the 141 percent level at its peak in January.

On March 25, the stock rose 53 percent from its previous day's decline of 34 percent.

Impact on involved entities

Losses by short sellers

Short sellers who had bet against GameStop suffered large losses as a result of the short squeeze.

By January 28, 2021, Melvin Capital, an investment fund that heavily shorted GameStop, had lost 30 percent of its value since the start of 2021, and by the end of January had suffered a loss of 53 percent of its investments. Citadel LLC and firm partners then invested $2 billion into Melvin, while Point72 Asset Management's investment added $750 million, for a total investment of $2.75 billion, before Melvin told CNBC that they covered (closed) their position on January 26, although the exact amount was not disclosed. On January 27, a Melvin Capital spokesperson stated that the fund had closed its position after repositioning its portfolio. For the month of February, Melvin posted a 22-percent gain, but it would need much more to break even from their earlier losses; they were reported to have suffered further losses during the GME's continued resurgence in May 2021. Melvin ultimately shut down on May 18, 2022.

According to a report by Bloomberg, Andrew Left, an activist short seller and head of Citron Research, had also shorted the stock and claimed to have closed the position as a total loss. In an interview, he claimed that the company had covered the majority of its short positions in the range of $90 per share at a loss of 100 percent, retaining a small, manageable position. Due to the enormous losses, Left stated that Citron Research would stop providing short-sell analysis, and instead focus on "long side multibagger opportunities for individual investors". Other firms that incurred large losses include D1 Capital Partners, which lost $4 billion (20 percent of its capital).

On January 26, it was reported that short sellers had lost a total of $6 billion due to the squeeze. According to Morgan Stanley, a number of hedge funds covered their short positions and sold shares in their portfolio to reduce leverage and market exposure, in some of the largest such actions within 10 years. On February 1, GameStop short interest fell to 39 percent of free-floating shares, from 114 percent in mid-January, according to IHS Markit. The data was described by Bloomberg News as "potentially an early sign that the short squeeze that propelled GameStop... has progressed." Trading on March 8, specifically, caused $609 million in losses from short sellers.

According to ''The New York Times'', the short squeeze has called into question the viability of short selling as an investment strategy.

After GameStop's share price spiked again in May 2021, it was reported that Light Street Capital, run by so-called "tiger cub" Glen Kacher, was down more than 20 percent during 2021.

On June 22, 2021, White Square Capital, a London-based hedge fund that was reported to have suffered "double-digit" losses betting against GameStop, announced that it would be shutting down.

Companies with increased stock value

As of January 31, executives at BlackBerry and GameStop had sold more than $22 million in stock since January 1. There is no allegation of insider trading among BlackBerry executives, according to CBS News. Three BlackBerry executives sold nearly $1.7 million of the company's stock, with one of the executives, Chief Financial Officer Steve Rai, selling all of his shares in the company excepting unvested employee stock options.

GameStop Chair Kathy Vrabeck and board member Raul Fernandez sold shares from January 13 to 16, making $1.4 million, and likewise, board member Lizabeth Dunn cashed in $156,700. GameStop CEO George Sherman owns over 2.3 million shares in the company, according to Bloomberg News. These shares were worth $44 million on December 31, but reached $1.1 billion when GameStop's stock reached $469, briefly making him a billionaire, before the value of his stock dropped to $901 million on January 29.

Gains by existing shareholders and third parties

While the short squeeze was initially reported as being driven by retail investors, it later emerged that a substantial part of the market activity surrounding GameStop and the related securities was conducted by hedge funds, who had made substantial profits from the short squeeze. An analysis by Reuters concluded that some of Wall Street's largest asset managers were able to realize gains both from their share stakes, as well as from lending out stocks to short sellers. Similarly, an analysis by investment bank JP Morgan Chase suggested that institutional investors were heavily involved in the trading activity related to the short squeeze. Brokerages, trading systems and market makers have also gained from higher-than-average volume of transfers.

Hedge fund manager Senvest Management, which had previously bought a five percent stake in GameStop when shares were at $10, made a profit of $700 million, exiting its position after Elon Musk tweeted "Gamestonks!". Asset manager BlackRock had a roughly 13-percent stake in GameStop, which was worth $2.6 billion at the peak. Mudrick Capital Management made a profit of close to $200 million in January 2021 on its holdings of AMC debt, and a profit of $50 million writing call options on AMC and GameStop stock. The mutual fund Morgan Stanley Institutional Inception saw a 30-percent rise in its value based in part due to the 346,943 GameStop shares it had purchased in September 2020. The Church of Jesus Christ of Latter-day Saints, through its investment manager Ensign Peak Advisors, bought 46,000 shares of GameStop in 2020, and saw the value of its investment jump 900 percent.

The trading led to increase in the stock of the Koss Corporation, and by selling stock the executives and directors of the company were able to earn $45 million, which was greater than the company's valuation in 2020.

Losses by retail investors

Many retail investors and r/wallstreetbets users bought shares of GameStop and other affected securities as they were reaching their peak prices or shortly afterwards. Other investors held onto their long positions while the stock prices were declining rapidly, amid widespread calls on r/wallstreetbets to hang on to the failing shares. In an " ask me anything session" on r/wallstreetbets, entrepreneur Mark Cuban also encouraged GameStop buyers to hold on to their stock if they were able to. As the stock prices continued to decline, many retail investors suffered significant losses, with some r/wallstreetbets users losing a majority of their savings.

Other affected assets

Stocks

Apart from GameStop, many other heavily shorted securities (as well as securities with low short interest) saw increases in their prices:

Prices may be higher during extended-hours trading.

The shares of GME Resources, an Australian mining company with Australian Securities Exchange (ASX) symbol GME, increased more than 50 percent during intraday trading, closing with a 13.3-percent increase on January 28. This was speculated to have been due to a joke or mistake, as the ASX symbol was the same as GameStop's NYSE ticker symbol (GME).

Amateur traders in Malaysia were inspired by the GameStop short squeeze to target shares for Malaysian latex glove makers on Bursa Malaysia as a countermove against the devaluation of the sector by institutional investors following the lifting of a ban on short selling in the country earlier in January 2021. Top Glove, Hartalega and Supermax respectively recorded increases in shares as high as 15 percent, 10 percent and 9.2 percent during intraday trading on January 29, before closing with respective increases of 8.5 percent, 5.4 percent and 3.7 percent. The rally call was reportedly organized from r/bursabets, a Malaysian offshoot of r/wallstreetbets named after the Malaysian stock exchange. On March 2, Rocket Mortgage saw a more than 70 percent spike in its stock price due to a surge in trading following discussion of the company on r/wallstreetbets, but the Rocket Mortgage stock price reverted to its pre-surge level the next day.

Cryptocurrencies

After brokerages halted the buying of GameStop and other securities, the price of several cryptocurrencies also began to increase substantially, with Dogecoin's value increasing over 800 percent. Users of the subreddits r/CryptoCurrency and r/SatoshiStreetBets attempted to pump up Dogecoin to make it "the next GME/Bitcoin". In addition, the price of Bitcoin, the world's largest cryptocurrency, increased 20 percent in value to more than $37,000 after Elon Musk endorsed it in his Twitter bio, partially related to the surge in the GameStop share price by Reddit users. Robinhood then began limiting the trading on Dogecoin.

Metal futures

Following the stock market surge, futures for silver began to rapidly increase as well, although later news reports clarified that it was unclear who was behind the rise. On January 28 and 29, the price of silver rose 10 percent. The surge also had an effect on the prices of gold and copper on the London Metal Exchange. On February 1, the price of silver hit an eight-year high as GameStop shares continued their volatile tendency, with trading being halted at least once as the price fell by double-digit percentages. Users on r/wallstreetbets deny involvement in the increasing price of silver, instead blaming the increase on institutions and hedge funds with positions in silver, such as Citadel, seeking to offset losses on GameStop.

Aftermath

Investigations

On January 27, 2021, White House press secretary Jen Psaki said that Treasury Secretary Janet Yellen and others in the Biden administration were monitoring the situation. Yellen convened a meeting of financial regulators, including the heads of the U.S. Securities and Exchange Commission, Federal Reserve, Federal Reserve Bank of New York and the Commodity Futures Trading Commission, to discuss the volatility surrounding the short squeeze. Because Yellen had received speaking fees from Citadel before becoming treasury secretary, she sought and received permission from Treasury Department ethics lawyers before convening the meeting. The regulators were not seen as likely to view the volatility as creating any systemic risks.

Speaker of the House Nancy Pelosi said that Congress would also be reviewing it. Senator Sherrod Brown announced that the Senate Banking Committee would hold a hearing on the state of the stock market and the alleged market manipulation surrounding the GameStop short squeeze. Representative Byron Donalds called for Congress to launch "an immediate investigation into Citadel, L.L.C. and Robinhood".

On January 29, 2021, the U.S. Securities and Exchange Commission announced it was reviewing the incident with the aims "to protect retail investors" from "abusive or manipulative trading activity" and "to identify and pursue potential wrongdoing".

Attorney General of New York Letitia James confirmed in a press release that her office would look into the matter, saying "We are aware of concerns raised regarding activity on the Robinhood app, including trading related to the GameStop stock".

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