Gamestop, NYSE: GME, increased from $17.25 on Jan. 4 to $347.51 on Jan. 27 at closing after being fueled by Reddit traders from r/wallstreetbets, WSB.
On Jan. 28, Robinhood and other stock trading apps banned the buying of heavily shorted stocks, such as GME, causing a decrease to $63.77 as of closing on Feb. 5.
WSB’s investment into shorted stocks such as GME began when Keith Gill, known as u/DeepFuckingValue, began posting his gains and losses to the subreddit in mid-2019. Gill’s success in mid-December and the subreddit’s belief that GME was undervalued, prompted other members to begin investing and holding the stock. This increase in price was not only because millions of redditors bought the stock, but also because these stocks were heavily shorted.
On Jan. 22, 140% of GME stock was shorted by hedge funds, such as Melvin Capital. When a stock is shorted, investors borrow a share of a company and sell it. When the short contract expires and the investor must return the stock to the seller, he must buy the stock back. If he buys it back for less than he sold it, he makes a profit. However, if the price goes up, he suffers a loss. Short positions can provide a large amount of profit if successful, but if unsuccessful, the potential loss is infinite. When these stocks sharply increase, a short squeeze can occur.
A squeeze forces investors to buy their shorted stock back otherwise losses will compound. If sellers decide to hold, then the price will increase. Melvin Capital, the largest short seller of GME, has lost 53% of its assets since the stock increased and was bailed out by Citadel at a price of $2 billion. Citadel, Melvin Capital, and other hedge funds had to prevent an increase in GME stock.
Robinhood, the most popular trading app used by WSB, made nearly $700 million from selling user data to hedge funds and Citadel purchased 55.06% of Robinhood’s market orders, according to Robinhood’s 2020 SEC filing. To prevent their biggest customers from losing money, apps such as Robinhood forbade the purchase of shorted stocks like GME. When Robinhood finally lifted their ban on GME, the damage was already done.
Last week when WSB lost millions, fear, uncertainty, and doubt began to plague these traders. WSB still has faith that the short squeeze has not occurred and they are holding fast claiming that GME will still go to the moon. Friday gave them hope as GME increased 24.3%. In addition to Friday’s gains, GME’s upcoming short interest report is scheduled for publication on February 9th.
While the future of GME remains unclear, WSB continues to believe its research is correct. If last week has proven anything, it is that hedge funds will do everything in their power, legal or otherwise, to prevent losses.
Only time will tell how GME stock will fare.