GameStop (GME) short squeeze

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The GameStop (GME) "short squeeze" refers to an incident in which amateur traders drove up the price of stock for GameStop, a video game retailer, using popular retail trading apps like Robinhood. This eventually created a short squeeze, or widespread losses for investors or firms that had taken short positions on the stock, including several hedge funds, causing substantial losses.[1][2]

Timeline

There were a number of events leading up to the GME short squeeze that contributed to it. In October 2019, several retail brokers including the Charles Schwab Corporation, TD Ameritrade, and E*TRADE changed the pricing models for their retail trading apps, adopting payment for order flow as their primary source of revenue. This eliminated the need for fees associated with trading commissions, effectively beginning a paradigm of "free trading" for retail investors. This movement was likely due to the rising popularity of Robinhood at the time, which boasted a similar business model. The widespread adoption of the so-called "free trading" business model for retail trading apps led to a boom in retail trading.[3]

In March 2020, the coronavirus pandemic became an international crisis as people all over the world were urged to self-quarantine, or "shelter in place" to avoid spreading the disease, causing unemployment rates to skyrocket as many workers who were unable to work from home lost their jobs.[4] This further contributed to the retail trading boom; because of the quarantine, many found themselves stuck at home with few, if any, means of income. This led to many turning to retail stock and options trading to help themselves remain financially stable.[5][6]

In July 2020, a YouTuber named Keith Gill, username "Roaring Kitty," began posting a large number of videos arguing that GME was underrated as an investment despite - and in fact because - the stock was being heavily shorted. Gill was also a prolific poster in an investment community within the social media site Reddit called /r/WallStreetBets, in which he posted under the username "DeepF***ingValue." In December, stock prices for the video game retailer GameStop (GME) fell when the company failed to meet Wall Street estimates for its quarterly revenue.

In mid-January of 2021, the stock price of GME gradually began to increase. By the end of the month, its price had exploded, peaking on January 27 before plummeting on January 28, then spiking again on January 29. Much of this volatility was caused by retail traders, many of whom were driven to buy GME stock by posts published on /r/WallStreetBets. Posts on social media from high-profile figures like Elon Musk, CEO of Tesla, helped to spur this trend further. A number of hedge funds, including Citadel LLC, suffered losses from short positions on the stock.

At this point, trade volumes for GameStop and many other securities became such that regulation-mandated deposits for the settlement of those securities spiked. On January 28, Robinhood and several other brokerages restricted trading for stocks for GameStop and a few other companies. Robinhood began easing its trading restrictions for stocks related to the so-called "Reddit Rally" on January 29. By February 4, it had removed the rest of its trading restrictions put in place in January.

On February 1, Robinhood raised $2.4 billion in capital after raising $1 billion during the last week of January.

On February 2, U.S. Treasury Secretary Janet Yellen called for a meeting of U.S. financial regulators to discuss the GameStop rally and market volatility resulting from retail trading activity. On February 18, the U.S. House Committee of Financial Services held a panel called, "Virtual Hearing - Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide." The panel included a number of private-sector figures representing organizations that played a key role in the GameStop rally, such as Vlad Tenev, CEO of Robinhood Markets; Ken Griffin, CEO of Citadel LLC; Gabriel Plotkin, CEO of Melvin Capital Management LP; Steve Huffman, CEO and co-founder of Reddit; Jennifer Schulp, director of financial regulation studies at the Cato Institute; and Keith Gill, AKA "Roaring Kitty."[7][8]

References

  1. Robinhood backlash: What you should know about the GameStop stock controversy. CNET.
  2. How Reddit users sent GameStop stock soaring, upending the market. ABC News.
  3. No such thing as a free trade: How Robinhood and others really profit from ‘PFOF’—and why it harms the markets. Fortune.
  4. 'A huge, huge toll': For households reliant on two incomes, Covid job loss changed everything. NBC.
  5. How Robinhood and Covid opened the floodgates for 13 million amateur stock traders. CNBC.
  6. Nasdaq Weathered A “Perfect Storm” In 2020, Led Exchanges In Single Stock Options Volume. John Lothian News.
  7. Timeline: The GameStop battle - how it unfolded for the key players testifying. Reuters.
  8. Virtual Hearing - Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide. U.S. House Committee of Financial Services.

Categories: stocks Categories: volatility Categories: risk Categories: retail trading