Whether you read it on Bloomberg, or saw mention of it in a meme on Instagram, you’ve probably heard about how Redditors recently took on Wall Street and sent shares soaring, and hedge funds plummeting. As the dust settles on what has been one of the more bizarre overlaps of two vastly different worlds, we thought it time to delve into what happened, how it happened, and why.
But wait, what is GameStop?
GameStop is the world’s largest videogame retailer, headquartered in Dallas, Texas. They operate over 5,500 stores worldwide, but have had their share of peaks and troughs in recent years. Then the pandemic hit, and over 3,500 locations had to be closed – despite online sales growing by over 500%, the company took an overall hit of a >$100 million loss in Q2 last year.
A year ago, $GME, which has been trading on the NYSE since 2002, was trading at just under $4. Last week, shares hit an all-time intraday high of over $480; at time of writing, $GME sits around $90.
How did this happen?
Wall Street hedge funds have been shorting $GME for a while, however, the community over on the subreddit r/wallstreetbets realized that about 140% of public $GME shares had been shorted, i.e. more than what actually exists.
Short-selling in the stock market isn’t as straight-forward as it is with CFDs where you’re merely speculating without shares ever “changing hands”; instead, these hedge funds essentially borrow and then sell shares in hopes of pushing the price down. While a common practice, Reddit caught onto this, and collectively decided to stick it to the man, buying $GME and driving its price up by ~1,000%, subsequently costing these hedge funds billions because demand outweighed supply.
The why is important here. These hedge funds have the capital and power to move the market in the direction that suits them, putting companies out of business and costing thousands of people their livelihood. That didn’t sit well with Reddit, so they beat Wall Street at their own game. Others followed, most notably cinema chain AMC Entertainment, which spiked over 300% in a single day.
Melvin Capital was one of the biggest losers out of this; the hedge fund closed their trades, taking a loss of $7 billion – equivalent to almost half of their total assets under management. While all of this may make other institutions think twice, there are knock-on effects that impact blue-collar people too, as explored in this CNBC article. For most $GME buyers, it was an act of rebellion, but as the Wolf of Wall Street himself noted, anyone looking to trade long-term needs a more sustainable approach, adding that $GME was a falling knife, and that the real danger lays in being the last person on the bandwagon.