Wall Street short-sellers lose $5 billion to Redditors over GameStop
Short-selling video game retailer GameStop's stock has cost investors and hedge funds $5 billion in losses (once you apply some fancy financial calculations) in 2021. On Tuesday alone, losses totaled $867 million as the share value soared 95% higher compared to Monday. The incredible price rise can be largely attributed to retail traders, Reddit's r/WallStreetBets community, and an Elon Musk tweet.
Short-betters Gabe Plotkin's Melvin Capital and Andrew Left's Citron Research are being forced to buy against their own advice in order to book their losses and potentially recoup some by trading in cash. S3 Partners said the squeeze is being witnessed on older GameStop shorts. Short sellers are now capitulating by closing their positions and returning stock borrows to stem their losses.
GameStop's shares initially spiked on January 11 after activist investor and Chewy co-founder Ryan Cohen recommended changes to the business, including the addition of three new directors to the board. Since January 11, the company's shares have risen more than 500% in value. This has attracted more retail traders looking to make some easy money off the institutional investors' losses.
GameStop rose 50% in extended trade on Tuesday after Tesla CEO Elon Musk tweeted, "Gamestonk!!" and linked the WallStreetBets sub-reddit discussion. Earlier, Musk's tweet recommending privacy-centric messaging service Signal in the light of the recent WhatsApp ToS controversy also sent stock prices for an unrelated "Signal Advance" skyrocketing. For the unversed, the Musk-endorsed messaging service is non-profit and doesn't have an NYSE listing.
Michael Burry gained 1,500% on Gamestop. Burry's company, Scion Asset Management owned 1.7 million Gamestop shares worth $17 million as of September. Scion's stake was worth $271 million at its peak on Monday. Burry was portrayed by Christian Bale in The Big Short. He could have made bigger profits had he not reduced his position (3 million shares) by 38% since March.
The WallStreetBets sub-reddit shows how individual investors trading in cash instead of futures, can cripple much larger institutional investors. The community is also responsible for sending Nokia and Blackberry stocks soaring in the recent past. The community's top post warns members against believing short-sellers who are now using burner accounts to mislead the community members.
Former Securities and Exchange Commission (SEC) enforcement attorney Jacob Frenkel explained that volatile trading fuelled by opinions, and little to no corporate activity to justify the price variation, is exactly where the SEC likes to get involved. The SEC declined to officially comment on the matter. The magnitude of the short-sellers' losses reflects their overconfidence and lack of timely corrective measures.
GameStop is a brick-and-mortar retailer for physical video game media and associated hardware. The company valuation dropped after physical game media fell by the wayside due to both PC and console gaming platforms preferring digital distribution channels, thereby sending its stock price plummeting. The stock market dynamics seem to have changed since January 11 and it'll be interesting to see where the price plateaus.