What is the GameStop Short Squeeze?

What is the GameStop Short Squeeze?

2021 has certainly got off to an interesting start, uncertainty around the short term future continue as the ongoing pandemic sees many following the same daily lifestyle for another few months at the least, but certain sectors have found a huge boon from the increasing free time – online entertainment continues to surge with new users, newer players move in droves to the growing number of esports betting sites to fuel a new passion, and a select few have taken to gambling in a much different ways as they look to destabilize some of Wall Streets more established hedge funds.

One of those certainly seems different from the others – but the big short squeeze that’s happening against Wall Street has brought a lot of eyes to a community that is now over four million strong, and has seemingly taken a turn away from just securing some more money and into a movement against the establishment as a whole. Initially starting with the retail store GameStop, but since moving on to other options like BlackBerry and AMC – but what exactly is happening?

Understanding short selling – The first step is to understand what short selling is, and has been a tactic used by hedge funds on Wall Street for years. When a stock is predicted to fall in price, the short sellers will ‘borrow’ stock, usually from a broker-dealer, and then immediately sell that stock. As they only borrow the stock, they are expected to return these shares to the broker, but by selling in a large amount they can drive the price down and re-purchase at a much lower price before returning the shares, making a great deal of money in the process. This is short selling.

(Image from thesun.co.uk)

What is the short squeeze – Once the short sellers announce they believe the stock is going to fall, it often encourages further sales causing the price to tank further – but members of the Reddit community /r/wallstreetbets had noticed that this short selling approach was being taken against GameStop and decided to work against it – by pulling together as a huge conglomerate and buying the stocks, the price did the opposite and started to increase by over 1,800% from around $18 at the start of the year to nearly $400 now.  By inflated the price, the strategy employed by short sellers to borrow and sell high, and re-buy low, was no longer possible – this is the short squeeze.

This has caused some hedge funds to lose an enormous amount of money – some suggestions place Wall Street losses over $70 billion for the past few weeks with this counter to the short selling tactic, and shows no signs of slowing down – but as legal battles start to appear as certain platforms have begun to restrict trading, this could be much more impactful than many think – and it poses the question of just how far this could go.

Edward Powell