Economic shutdowns in response to COVID-19 pandemic lockdowns have created fertile hunting grounds for Wall Street short-sellers, who bet that what they believe to be overpriced stocks will soon depreciate.
The New York Stock Exchange suffered a poor day on Wednesday, with the Dow Jones Industrial Average sinking by more than 600 points. However, for a select few companies, stock values have gone through the roof.
It was thanks, in large part, to a group of amateur stock traders with a vendetta against veteran corporate insider short-sellers betting on a company’s failure, with the video game store GameStop taking center stage. Before the drama was over, the company’s value had jumped by more than 1,700%, an investment firm had lost billions, and some small-time investors who gambled it all were able to afford some of life’s costlier necessities with their windfall.
GameStop Takes On New Board Members
On January 11, GameStop announced it was adding three figures to its board: Ryan Cohen, the founder of pet food maker Chewy, Inc., and two former colleagues. In November 2020, Cohen told GameStop that his venture capital firm, RC Ventures LLC, had acquired a nearly 10% stake in the company. At the time, that was worth $79 million, according to the Wall Street Journal.
In response, he urged GameStop’s owners to bring “the company into the 21st century” by shifting its emphasis from brick-and-mortar stores to online sales and to expand into e-sports, online gaming, and game streaming.
‘The Little Guy Figured Out a Different Way’
Two days after Cohen joined GameStop’s board, motion began in its stock, showing a 157% gain on January 13, to $31.40 a share, and increasing again to $39.91 on January 14, where it sat for several days.
That’s when things started to get weird.
A poorly-performing stock suddenly shooting up in value is red meat for the legions of short-sellers on Wall Street – stock traders who buy stocks when they’re high in value, gambling that they can sell them off at a lower value. It’s a dangerous bet. In contrast, someone who buys and holds onto their stock in a company is called a ‘long seller’ or referred to as a person with “diamond hands’.
Jaime Rogozinski, the founder of WallStreetBets, told Agence France-Presse that the subReddit group “is able to do what Occupy Wall Street was never able to do but on a completely different angle.”
“Occupy Wall Street was fed up with this saying ‘It’s a game we can’t play, you’re forgetting the little guy.’ Now the little guy figured out a different way around it,” he said.
Two of the institutional short sellers, Citron Research and Melvin Capital, became the redditors’ primary targets, after Citron tweeted on January 19 that GameStop’s stocks were likely to return to $20 a share “fast” and that people buying stock in the firm “are the suckers at this poker game.”
GameStop’s stock value has increased sharply, rising from $39.23 on January 22 to $347.51 on January 27, 2021
Movie theater company AMC Entertainment, another target of both parties, saw its stock value increase fourfold on Wednesday, reaching $19 a share.
Boom and Bust
Both Melvin and Citron were forced to close out of their short positions on GameStop on Wednesday, effectively declaring defeat, the Financial Times reported, noting Melvin alone lost some $3.75 billion in the incident. Citron founder Andrew Left said in a video posted to YouTube on Wednesday that he’d managed to cover nearly all his losses, but was also closing out his “small, manageable position.”
Cohen has done well, too: going into Wednesday, CNBC reported the episode has increased his wealth by $4 million every hour, with his $76 million stake in GameStop now a $1.3 billion moneybag.
In the end, however, this bubble is certain to burst.
Calls for Regulation
The whole incident has left regulators and brokers frazzled about what to do, with some calling for a temporary halt to trading GameStop’s stocks and others demanding an investigation.
Other experts took a more severe view. Massachusetts Secretary of the Commonwealth William Galvin told CNBC on Wednesday that the independent movement is dangerous because it “creates uncertainty in the marketplace,” calling for a 30-day pause on GameStop trading.
Some brokerage firms have taken matters into their own hands, with TD Ameritrade and Charles Schwab putting trading limits on GameStop stocks, as well as some other stocks targeted by activists, including the AMC movie chain.
US Rep. Alexandria Ocasio-Cortez (D-NY), a self-described democratic socialist, used the incident to criticize the illogical nature of the capitalist system.
WallStreetBets Discord Disabled for ‘Misinformation’
Wednesday evening, Discord announced that it had banned the WallStreetBets server for “hate speech, glorifying violence, and spreading misinformation,” adding, “we did not ban this server due to financial fraud related to GameStop or other stocks.”
However, some claimed that Discord’s move was politically motivated. Shadowproof journalist Kevin Gosztola tweeted that he believed Discord was “engaging in censorship to protect hedge fund firms from losing billions over risky short bets.”
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