September 27th, 2019
GameStop “tendies” redefine stock trading
SAT. | 02-06-21 | OPINION
If you have been even remotely keeping up with the stock market lately, you are aware of GameStop’s historic stock price climb. In just a matter of days, the most shorted stock available in the New York Stock Exchange (NYSE) has climbed from a measly $4.57 per share to a high of $483.00 per share. This unprecedented spike has sent billionaire hedge fund managers scrambling for a foothold in the economic money casino that they are now, for once, losing favor in. Isn’t it ironic that those same billionaires who are begging the government to regulate the GameStop situation, are the very same billionaires who spout “just invest and you can be like me one day!”?
But for those who aren’t as clued in, you may be wondering things like— What happened? How did it happen? Can I get in on it? Or maybe even— What’s a stock?
Photo courtesy of NYSE:GME Stock Price Chart
Stocks are shares of a company that everyday people can purchase. They hold a monetary value and represent a fractional ownership of a company in proportion to the total number of active shares. So, one could go and buy an Apple share, and claim that they own part of Apple (which is true, but only on the order of one 2 trillionth, so you won’t be Steve Jobs any time soon).
The stock price is the fluctuation of the monetary value of a stock which acts as the relationship between the average cost that someone is willing to buy a stock for, and the average cost that someone is willing to sell a stock for. This means that someone can buy a stock, or a share of the company at a specific value, and then hold on to it in hopes that the stock price will increase over time so that they will be able to sell the stock for a higher value, thereby making profit.
Infographic by Zach Rogers
However, the stock price can decrease as well, which causes the stockholder to lose the difference between the cost at buy versus the cost at sell. This means that there is always a risk present when deciding to trade stocks. It’s typically a good idea to have a set amount one is willing to lose, just to make sure you don’t end up on the side of the street with a tin cup because you decided it would be a good idea to bet on MySpace going up.
When a stock price is consistently declining, such as in the case of GameStop (GME) during most of 2020, it may be more beneficial for those aiming to make money off of the stock, to short it.
Shorting a stock is a rather simple concept, but the ramifications of mass shorting can be catastrophic. Imagine the following (Let “worm”= “stock”) —
A bird who wants to borrow a worm, which in the current market is worth ten dollars. When the bird obtains the worm from the worm lender, it immediately moves to sell the worm for ten dollars (the market price) to another bird. It then keeps the money with the intent to buy a worm back later so it can return the worm to the lender at a set time— say 30 days. During that 30 days, the market price of a worm falls to five dollars per worm. The bird then buys the worm back at a price of five dollars, and then returns the borrowed worm back to the lender, keeping the margin of five dollars as a profit. However, should the price of a worm rise to $20, the bird is still required to buy back a worm to return to the lender, but this time at a ten dollar loss. The more worms borrowed, the more money there is the potential to gain or lose depending on how the market price of worms fluctuates. This is what is considered shorting a stock.
Now imagine bird millionaires and billionaires borrow a total of 70 million worms of a specific variety to short them to make a profit, and by extension, treat a company, and subsequently the economy, as a tool for their financial gain because they have zero care for the working class.
What would happen if the market price of that variety of worms went up by just $10?
Those very same bird millionaires and billionaires would now owe $700 million to the worm lenders in worms that they are no longer in possession of, but per the rules of the lend, they are required to return.
That would be bad.
This very same scenario is playing out in the NYSE over GME shares, forcing hedge fund managers to buy back shorted stock at losses in the magnitude of billions of dollars.
So, how did this happen?
Starting all the way back in September of 2019, social media platform Reddit user u/DeepF******Value (DFV) began pouring thousands of dollars into GameStop shares in a bid that the price would inevitably go up due to the fact that the stock was undervalued. He posted his bets on the subreddit r/WallStreetBets, a forum for stock market enthusiasts who often post investing advice as well as investment wins or losses, referring to them as “tendies.” The general reaction was that DFV was mental, and would lose everything trying to bet on a dying company, but DFV was certain that GameStop would shoot upwards at any sign of good news.
That good news wouldn’t come for a while.
As the pandemic raged on through 2020, GameStop’s business threatened to finally go under as their stock price scraped below $2.60, and stores closed nationwide. DFV, however, did not budge. He continued pouring more money into the company, amassing a total investment of $54,000 in shares, and holding his position despite the calls for him to sell by r/WallStreetBets.
The summer of 2020 came and went, and GameStop would finally have its first good news— a new console cycle. Brick-and-mortar video game stores like GameStop naturally have their stock price rise during new console cycles due to the influx of new customers. With the introduction of the new Xbox and PS5, GME would double its stock price to $10.20, a price GME hadn’t seen since March of 2019, except this time, the price was rising. This was good news for DFV, whose total investments had now also doubled to ~$100,000.
Photo courtesy of thecollective.finance
GME stayed steady above $10, and by early December it had reached nearly $17 a share. But that wouldn’t last for long, as the company failed to meet Wall Street’s expectations for their quarterly estimates (a reflection of nationwide store closures and an inability to keep up with online competitors causing revenue to drop) and the price of GME sharply dropped three dollars in response to rest at $13.66. Major hedge fund managers saw the writing on the wall, and attempted to mass short the stock to force the price even lower in response so they could make money, which became problematic as the amount of shorted stocks exceeded the total number of available stocks GME had to offer.
In the stock market, companies are able to have more shorted shares than the total of actual shares they are in possession of. Imagine bird A from the earlier scenario
borrows a worm, and then sells it to bird B. Now picture another bird C borrowing that same worm from the bird B that bird A sold the first worm to, and sells it to a different bird D. The market now has two shorted worms in existence even though only one worm exists, and now both birds owe a worm back at a specified date. This scenario is exactly what happened to GME shares, except on a much larger level.
But we’ll get back to that.
On Jan. 11, 2021, GameStop announced that Ryan Cohen, founder of Chewy.com, an online pet food and accessory distributor, along with two other individuals of the original Chewy.com board would take a seat on the GameStop board, and would help to begin managing an online e-commerce version of the brick-and-mortar store. Cohen had spent a large portion of his net worth to buy up shares of GameStop prior to this, and had amassed a total of nine million shares, which was equivalent to about 13% of the company, making him a primary consultant for any decisions the company wanted to make. Cohen aimed to turn the company around, and hopefully save the chain from bankruptcy and closure by moving it online in addition to some of the in-person stores so that it had an ability to keep up with competitors.
This was good news for GameStop, because as they move online, more customers will make purchases, which in turn will raise the value of the company, and subsequently, the stock price.
And that’s exactly what happened.
GameStop began to explode, racing from $19.94 a share to $39.91 a share in the span of three days. Hedge fund managers held their short bets, and in an attempt to counter the rising price, bought more, soaring the total number of shorted GME stocks to ~71 million, 140% more than the total number of available GME stocks in existence.
Meaning that if someone happened to notice the short ratio, and decided to attempt to buy as many GME stocks as possible, shorters would not be able to buy back stocks at the end of their lend periods due to shortage, and would have to pay massively to convince someone to sell.
And if no-one sells…
DFV and r/WallStreetBets
Remember how earlier I talked about DFV and how he posted his GME investment (otherwise known as a YOLO) on r/WallStreetBets (WSB)?
Well, around the same time Cohen was announced as a board member, DFV continued posting his daily gains from GameStop stocks on WSB, which at this point were now worth ~$5.8 million, more than 100 times the value of his initial investment; almost a middle finger to the people who told him to sell back in September. It was also around this time that DFV began gaining a large amount of attention from people on the forum, who navigated to both his account and his YouTube channel where he hypothesized short squeezing GME to make massive gains. The video itself is long and convoluted and is filled with vocabulary terms that would make an econ student feel dizzy, but can basically be summed up as “Lot stock short. We buy stock. Stock price go up. We make money. Apes together strong.”
u/DFV’s Return Summary for Jan 15th, 2021
Photo courtesy of u/DeepF******Value on Reddit
Short squeezing is the response to massive numbers of shorted stock. If one will recall from earlier, one will remember how I talked about how shorting stock can have catastrophic effects if the scale at which it is done becomes too large. When short squeezing takes place, large numbers of shares are bought of a company in order to anticipate a rise in the stock price as a result of the belief that a stock is undervalued. When this happens, shorters are left without easy accessibility to buy back the stock that they owe lenders since companies only have a set number of shares in their company, and as a result of that, the stock price will rise as they are willing to offer more and more money in order to gain possession of stock so they can return it to avoid taking penalties for not returning it.
GameStop was the perfect storm for short squeezing. More than ~71 million GME shares had been shorted, despite there only being ~30 million shares available in the market (excluding shares owned by board members like Cohen and others), and DFV knew that.
As did a growing number of other people.
And so it began.
Tens of thousands of r/WSB members as well as thousands of market speculators surged the market, buying and holding as many GME shares as they could, and ultimately short squeezing the market, leaving the corporate hedge fund managers high and dry with no ability to buy back the stock they were required to return, which if you ask me, sounds like they finally received their just desserts— something long overdue. As a result, those same managers scrambled to offer a higher price, driving the stock price up. But r/WSB was smarter than that. They already knew that the longer they held onto their GME shares, the higher the price would go, theoretically “to the moon,” as r/WSB would say. By the 25th of January, GME broke $100 a share, up more than 270% from where it sat at $37 just one week ago.
Help from “Papa Musk”
With r/WSB holding on GME, and hedge funds left with no ground to stand on, one would consider this to be a done deal, and that not much more could happen, right?
The day after GME surpassed $100, Elon Musk, referred to as “Papa Musk” on r/WSB, tweeted “Gamestonk!!” on his personal Twitter account, with a link to the r/WSB subreddit and the thread from which the short squeeze theory originated. Musk’s tweets have historically been known to cause mass market swings, and lo and behold, the trend continued here as well. After market closure at 4 p.m., GME rose another $200 to settle up at $351.96 the next morning.
GME price for the 27th of January remained rather stable, hovering around the $300-$350 mark for most of the market day, shortly before both Melvin Capital and Citron (hedge funds) closed out the vast majority of their shorted GME stocks at a loss of tens of billions of dollars.