When GameStop was at the peak of its trading in January, widely used brokerages like Robinhood, Charles Schwab, E-Trade and Webull took restricted trading of the stock that became the catalyst for conspiracy theories, social media outrage — and ultimately an escalation of the GameStop stock pop into a war between regular investors and giant funds on Wall Street.
“It might have been my worst, but most profitable investing decision,” said Dylan Kim ’23, who made around $2,500 off of the stock in late January.
GameStop’s price soared around 1,700 percent in the last month, despite reporting an $18 million loss in its recent quarter and closing 15 percent of store locations in the past two years. However, like many other investors, students at Cornell didn’t invest in GameStop because of fundamentals.
“When my friend first told me about GME, I was kind of skeptical,” said Michael Zhang ’22, “I usually put my money into exchange traded funds, because I’m more risk-averse.” Zhang made around $2,000 from buying and selling the stock.
The students’ primary rationale for investing was something called a short squeeze — a sharp increase in price that forces short-sellers to close their positions, which pushes the price even higher. Hunter Kahn ’23, who made $30,000 on GameStop, referred to a post that started circulating on r/WallStreetBets back in September.
This fall 2020 Reddit post pointed out that a lot of hedge funds were shorting GameStop to the point that short interest was at 120 percent — this means that more stocks were being borrowed and sold short than existed in the market.
“Investors short a stock when they think the stock price is going to fall,” said Prof. Vicki Bogan, applied economics and management. “The plan is to wait for the share price to fall, buy the shares back at the lower price, return the borrowed shares and keep the difference between the price they sold the shares and the price they bought the shares.”
This post argued that investors could push the price up, this would make it more expensive to short sell, and eventually pressure short-sellers to buy back the shares they sold short — the process of buying back is called “closing the short.”
“Closing their short positions required them to buy GameStop stock, which pushed the price even higher,” Bogan said.
Because the short interest was over 100 percent, that means if every short seller wanted to buy back their stock, there would be demand to buy more stock than is available, drastically increasing the price.
Because of Reddit’s coordinated short squeeze, hedge funds like Melvin Capital and Maplelane Capital lost around half their investments in just the month of January. When questioned about these losses, Kahn, Kim and Zhang said that they felt no sympathy for these hedge funds.
For a period of time, the Reddit strategy worked. Since the debut of the short squeeze argument last fall, GameStop rose over 4000 percent to its highest level in January. And r/WallStreetBets grew from just 1.5 million users to 9 million.
However, on January 28, 2021, Robinhood — the app many Redditors use to buy and sell stocks — halted all buying of GME on their platform. Users could only sell, and the stock fell 73 percent in a single day.
This move by Robinhood was followed by similar actions from other brokerages, as well speculation about a potential conspiracy where brokerages are hindering retail investors to prevent further losses to hedge funds.
Executives from Robinhood, Citadel and Melvin Capital will testify in front of Congress on Thursday as part of a probe into Robinhood’s trading ban.
This backlash for brokerages like Robinhood catalyzed even more buying. GME opened 96 percent higher at around $380 the very next day after Robinhood’s trading suspension.
Kim, who had previously sold GME for a profit, bought back in. “I have to admit, I believed the cause had some steam left, particularly when RobinHood and the other brokerages imposed largely one-sided trading restrictions,” Kim said. “So, then I bought in again.”
The resentment between Wall Street and retail investors has a long history, some redditors buying GME as a gesture of retribution for their parents who lost money in the 2008 mortgage crisis.
“At one point I did feel a slight sense of community,” Kim said. “There was the hype of a bunch of decentralized retail traders cooperating in an unprecedented way under that hope of, ‘We’re going to profit off of the same types of hedge funds that caused 2008.’”
Short-focused equity research firms such as Citron Research and Hindenburg Research have met this unrest on social media by calling the retail investors on Reddit “suckers” and publishing a report defending short-sellers.
“The only difference between you guys on Wall Street and us retail traders is when we make a bad mistake, we go back to our nine-to-fives to raise some more funds,” Kahn said.
After losing $4.5 billion from GameStop, Melvin Capital received a $2.75 billion cash injection from hedge funds Citadel and Point72.
“Short squeezes are nothing new,” Bogan said. “However, what is unusual in this case is that retail investors, not institutional investors or hedge funds, were driving the short squeeze.”
This reversal has been labeled by some as the “revenge of the common man.” This makes the role of charity especially important. By donating trading profits to charity, retail investors can distinguish themselves from the institutions they’ve bet against.
“[Shortsellers] end up screwing over innocent retail traders and just taking the money for themselves,” said Kahn, who donated his profits to a children’s hospital, “Whereas, I want to be like, ‘Hey, look at what us retail traders do when we make money, we do good with it.’”
GameStop stock has since dropped down to $52.40, but Kahn is still holding his shares.
“I’m still holding on to shares just as a middle finger to the hedge funds. I’m completely willing to go down in a blaze of glory,” Kahn said. Kim and Zhang have both exited their positions.