A Retail Investor Insurrection

GameStop, a short squeeze, and Occupy Wall Street 2.0?

By now you’ve probably heard about wild trading of publicly-traded gaming retailer, GameStop (GME). The stock is up an incredible 8,500% over the last six months and most of those gains have come in the last week.

There’s a lot to the story. Here’s a quick summary to help you understand what’s happening.

The price action is notable, but the story behind the explosive growth is much more interesting.

• The huge runup comes at the expense of hedge funds Melvin Capital and Citron Research who made a short bet on GME and got caught in a nasty short squeeze costing them billions and putting some firms at risk of bankruptcy.
  

• Short squeezes aren’t rare. One of the most famous short squeezes of all time is when billionaires Bill Ackman and Carl Ichan went toe to toe over Herbalife.

• This short squeeze is different though. This time it was executed not by a loaded wall street elite, but by legions of individual investors.
  

• The retail investors sticking it to the hedge funds are among the 3.3million members of a group on Reddit called wallstreetbets. The forum describes itself as:

  

• As more and more “unsophisticated” retail investors piled into the trade, Billions of dollars shifted from hedge funds into the accounts of average joe’s and jane’s.
  

The Response from Wall Street

• Wall Street is freaking out. According to CNBC, “The intense speculative behavior among retail investors is unnerving many on Wall Street as mounting losses by hedge funds could spill over to other areas of the market.”
  

• Some, like Mr. Greenberg really aren’t handling this well. In the video below, he speaks of being depressed. In another clip, he says that these folks on reddit could be “foreign powers at work trying to make chaos of our markets!” Russia?? What?

• Somebody, apparently, must do something to stop these hedge fund losses… er.. I mean, protect the mom and pop investors.

  • This is one of those times that, “SEC, FINRA, and Exchanges all come together” according to a former SEC counsel.

  • Nasdaq CEO Suggests Halt to Trading to Allow Big Investors to 'Recalibrate Their Positions' to Combat Reddit Users

  • TD Ameritrade announced "In the interest of mitigating risk for our company and clients, we have put in place several restrictions on some transactions in $GME, $AMC and other securities… We made these decisions out of an abundance of caution amid unprecedented market conditions and other factors."

More Than Money

Sure, the retail investors want to make money. Some investors have reported being up - no kidding - TENS OF MILLIONS of dollars. But, it’s not just about money for some on wallstreetbets. Here’s a sample of the not-uncommon sentiment I found on the message board this morning:

Deplatforming, Systemic Risk, and Occupy 2.0

I didn’t personally profit from the GME trade, but I do find the whole episode hilarious. Schadenfreude is real. It’ll be interesting to see what happens next.

• Will regulators look for a way to stop this crowd-sourced destruction of hedge funds with over-exposed short positions? Or, as in the private sector deplatforming of deplorables, can it be outsourced to companies like Schwab, NASDAQ, and, once again, Reddit?

• Talking heads repeatedly mentioned the idea of systemic risk today. At first, I assumed it was simply Wall Street suits trying to stoke fear so someone would put a stop to the retail investor insurrection. But maybe not? Could something like this really create risk throughout the system? If so, my god, our financial system is fragile.

• The legions of Reddit traders bagged a big win and with it the knowledge that the ‘Wall Street Game’ can be played a totally new way - on that gives them the advantage. How will they use it next?