my take on Gamestop (GME)

the bare bones

GME is a mall-based videogame retailer. Its business has been badly hurt both by the movement of gaming online and the pandemic. This has made the company’s stock a favorite target of professional short-sellers.

In the simplest terms, these are stock market players who borrow shares of a company’s stock and sell it, hoping to make a profit by buying it back at a lower price. There are other players who also short stocks. A traditional hedge fund would have a number of short bets but would also invest the proceeds in “long” positions, stocks it thinks would go up. It makes money on the spread between the performance of its longs and its shorts. In the GME saga, though, the big forces putting downside pressure on the stock appear to be exclusively or predominantly short players.

In fact, the short GME trade has been so popular that at the end of last year many more shares of GME had been borrowed and sold short than there are available for trade (current “short interest” figures are publicly disclosed a couple of times a week). That’s because some shares have been borrowed and sold more than once.

This is an inherently unstable situation. The short-selling pros appear to have been betting that GME’s future is so bleak, and that it is therefore is so uninteresting as an investment, that there was zero chance the stock could begin to rise. They had to know that if they were wrong, someone could set off a gigantic “short squeeze.” a mad scramble to unwind the massive short positions that shortsellers had built.

Enter Reddit. It promoted, very successfully, the idea that lots of small investors buying GME at the same time, either the stock itself or call options, would have enough heft behind them to set the short squeeze in motion.

yesterday

Yesterday a number of brokers–Merrill, TD Ameritrade, Interactive Brokers and Robinhood are the ones I’m aware of–announced they would not take buy orders for GME and similar stocks, although they would take sells. Some basically said they would no longer recognize GME et. al. as collateral for margin borrowings, potentially forcing account holders to put more assets into their accounts to keep them above water.

The results were what you would have expected–panic selling and a collapse in the GME stock price.

my take

–I think the crowdsourcing of investment ideas, long or short, through Reddit or other forums is going to be a big deal and eventually a serious threat to the research departments of establishment brokers. There may be questions about whether in this instance the Reddit movement has 100% complied with securities laws (the SEC is now investigating). But I think this is something that can be easily fixed.

–I was shocked by yesterday’s brokerage house bans on purchases of Reddit stocks. I can’t remember anything like this happening before in any world stock market during my working career. My hunch is that this, too, will be investigated by the SEC.

My Wall Street experience is that firms rarely, if ever, do stuff like this for the greater good. My cynical guess is that the brokers who placed the bans will turn out to have proprietary trading desks that had very heavily shorted GME and similar stocks and were losing their shirts. It could also be that their stock lending operations (whose job is to put stock lenders and borrowers together) were unable for some reason to unwind the deals they’d put in place.

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