GameStop Rollercoaster

The GameStop rollercoaster ride is coming to an end, but it’s unlikely to be the last rebellion-
fuelled rally. The GameStop run forced the hand of hedge funds that shorted the stock and they
will suffered large losses as a result. However, so will many of the individuals who bought into the
subReddit-promoted scheme.

The mob mentality of the individuals hyping the anti-Wall Street movement led to sizeable profits for
those who bought in early, but the individuals who joined too late will sustain losses as the price
inevitably plummeted.

While there’s nothing illegal (so far, although the SEC is working on it…) about the GameStop operation, and some believe it to have been a
noble cause, the sky-rocketing prices are unsustainable as demonstrated by the GameStop
crash, and those of other targeted stocks including AMC Entertainment and Blackberry. Stocks
that are shorted are inherently flawed and on the verge of collapse regardless.

Hedge funds commonly short the stocks of companies they believe to be significantly overvalued
or that are headed towards bankruptcy. Regardless of which side of the argument you’re on, the
numbers speak for themselves: GameStop was in its death throes, closing 462 stores in 2020 in
the face of declining sales. A large number of hedge funds recognised the signs and went short.

Enter Reddit’s Wallstreetbets and its passionate community members. They started buying,
hoping to drive the stock price up to impose large losses on those hedge funds, forcing them to
close shorter, further pushing the price upwards. Astonishingly, they succeeded and forced a
large hedge fund, Melvin, to realise a reported 50% loss.

The momentary success of the GameStop rally is likely to inspire similar activity, aided by social
media and other platforms when matches are occasionally lit among passionate communities.
The overall effects, however, are likely to be minor.

Other than signs of collusion between individuals buying up GameStop stocks, there’s nothing
illegal in the activity itself. Buying and selling shares, posting about stock trades on public
websites and recommending or even urging others to trade are all legal actions.

The fallout from the GameStop fiasco is that brokerage firms and custodians will increase the
margin requirements on trading activity for individuals and hedge funds, which isn’t unusual or
unexpected. Volatile stocks will be subject to limited trading, so brokerage firms can be
confident they have the capital required to meet regulatory requirements.

When the next guerrilla trading movement will be attempted is unknown, but it’s now a known
strategy and will likely happen again.