Gamestop Games!

 

In the US, there is an interesting battle going on between a group of redittors and the Wall Street. It has to do obviously with booking profits in the market. In pursuit of research on this battle where a group of redifftors are bringing down the Wall Street hawkish hedge fund to their knees, there appeared an inquisitive thread on Twitter. The tweet and the thread is available here. It would be interesting to understand what is happening through a perusal of this thread and the explanation given.

 

Short selling is not unusual nor something new. It has existed for years in the market. It is about booking profits through the reverse. Even in the great financial crash of 2008, there were quite a few who made money by shorting them something captured in the book Big Short by Michael Lewis. Traditionally, the speculators in the market would buy shares at lower prices and seek to sell them at higher prices. Yet, there are speculators who opt for the reverse. They sell securities without even owning them and then seek to buy them at lower prices. In other words, they are engaged in what market jargons would term it as short selling. They are selling securities even before purchasing them. In the Indian context, short selling is something permitted during day trading and there are investors or speculators who seek to make money out of the same. Going forward, there is a provision of borrowing shares for the purpose of short selling. Having borrowed shares from the existing shareholders, the speculators would engage in short selling leading them to a crash in prices and then buy back at lower prices. After booking profits, they return back the shares to the shareholders. In theory this sounds good and has been practised by many without violating any legal provisions. Yet, there would be diminishing returns at times. Some other times, the gamble would fail big time leading to severe losses. The story of what is happening in the US perhaps has to do with this.

 

There is a firm called Gamestop (GME) engaged in retail of video games and game merchandise. A hedge fund decided to make money by shorting the shares of this firm. the stock price of GME was $20 and was brought down to $4 to satisfy the thirst of the hedge funds interested in making money. They were able to make billions over the months irrespective of the damage GME faced over the squeeze. Its valuations would have crashed and naturally would have impacted in credit worthiness. Yet this would hardly make any difference to the speculators. In terms of letter of law, perhaps noting wrong was done. These tactics have been employed in the past till such time they were confronted by a resolute counter-party. One such instance in the Indian context was discussed in this post. A bearish cartel had taken on Dhirubhai Ambani who brought it down. In the current instance, there was no Dhirubhai Ambani of course but the hedge funds ran into a group of sub-redittors who were ordinary investors stumbling into something big. They decided to play the game, the counter of which was not available to the hedge funds. They might be crying foul but what happened was the super extraordinary brains in the hedge fund industry seem to meet their match in ordinary investors discussing and co-ordinating in a Reditt sub groups on investing. Wallstreetbets, an investing subreditt found on investigation that the hedge fund has shorted 140% of the shares. In other words, for every 100 shares in existence, the hedge funds have sold 140 shares. The number of shares sold are more than number of shares in existence, which means if they had to return it to their owners, they would have discovered 40% excess shares or ghost shares.

 

The subreditt decided to exploit the situation as would any rational economic agent would do. There was a cash on the table and all that Wallstreetbets decided was to capture the same. It decided to buy the shares and thus the share prices began rising. The prices began increasing crazily. Since the short selling was on borrowed shares, the hedge funds had to basically repurchase the shares. This means they would have no choice on the price. They might have shorted the shares to $4,  but now they might have to buy at even $1000 if the price were to increase so. This was exactly what happened. The hedge funds closer to the due date decided to short more and attempt crashing the stock price. In a matter of few days, the attempts to bring the price down failed. Melivin Capital needed a bail-out and all it did was to borrow from another hedge fund in attempting to short further and bring the price down. The price of the share which was $4 not long back reached upto $147 per share with millions of shares being shorted. Apparently, the short is still 130% of the total shares. Yet it goes without saying that the hedge funds will have to purchase back all the shares they have shorted.

 

Interesting however the reaction of the hedge funds was. They have tried to stop the trading and demanded investigation into what they term the shenanigans against them. However all that happened was it arose further interest, the news spread wider and more investors have jumped into the bandwagon. These include Elon Musk out perhaps to take a revenge on a similar exercise against Tesla as are many other high net worth investors. It is not about valuations of Gamestop but about the dislike for hedge funds and the schadenfreude that one gets in bringing the hedge funds to their knees. There is a good possibility of the hedge funds going bankrupt. There is a good possibility of some investors making huge money taking advantage of the same. Yet there could be possibility of crash in GME at some point of time.

 

While it would be difficult for forecast the future trajectory in this instant case, the speculative motives continue to pester around. This certainly not the first instance of trying to damage a company for speculative and profit-booking purposes nor would it be the last. Yet, what is remarkable, is a group of average investors are playing and taking on huge giants in the David vs Goliath game. If David were to win this round, this perhaps would be one of the many rounds that Goliath might have to lose. The near undisputed run of Goliath might be coming to an end. This is something best that can be hoped for in the current crisis.