How GameStop agitated the U.S. stock market: an overview of the saga that upended Wall Street
Nobody could have predicted that a struggling video game shop would be at the epicenter of a stock market craze that enthralled the globe, bringing hedge funds to their knees.
The video-game retailer GameStop had the ride of its life at the beginning of 2021. The business’s stock soared from around $40 to over $400 in a couple of days, creating millionaires out of day traders and erasing billions of dollars in wagers against the company placed by institutional investors.
GameStop, which is not a profitable corporation, is in the center of the turmoil. The company lost over $500 million in 2019. A pandemic forced the closure of many of its stores in 2020, further eroding its revenue.
Institutional investors such as hedge funds “shorted” GameStop, or wagered that the stock’s value would fall. GameStop was a favored target for these hedge funds. According to one statistic, the company was one of the most-shorted stocks among almost 6,000 companies listed on the New York Stock Exchange and Nasdaq.
The phenomenon of short sellers being obliged to repurchase shares when prices increase, causing the price to climb, is not new, but the combination of people, technology, and unique trading platforms drove Wall Street and regulators to pay attention to retail investors as never before.
As short sellers targeted GameStop, online investors devised strategies to target the short sellers. For months, a group of Reddit users led by a trader known as “Roaring Kitty” on YouTube had been eyeing GameStop as a lucrative investment. Over the course of several months, they outlined a thorough plan to purchase GameStop stock, punishing hedge funds and forcing them to cover their position by racing to buy back shares, driving up the stock’s value even further.
As a result, huge hedge funds had to quit their bets and lost billions of dollars. By Wednesday, Jan. 27, the stock had surged more than 700% in four trading days, and astute redditors began targeting other heavily-shorted stocks.
Later that week, as calls for assistance from Wall Street grew louder, numerous online brokers used by individual investors blocked the trading of relevant stocks, allowing users to only sell their shares. Following a public uproar, many brokers, most notably Robinhood, overturned their decision and indicated that they will allow restricted trade of the targeted businesses on Friday, causing GameStop’s share price to rise again.
Perhaps the main long-term impact of the GameStop debacle will be that hedge funds will be more wary about creating massive short positions in cheap brand-name firms, and investors will learn that stock manias, like memes, fade as quickly as they emerge. Perhaps the only thing we’ll remember about the turmoil is that a few hedge funds’ greedy doltishness unintentionally helped manufacture some Robinhood millionaires.
