This GameStop stock fiasco is getting out of hand

By Carli Velocci
published

What is a short squeeze and why you should care.

GameStop
GameStop (Image credit: GameStop)

What you need to know

  • The U.S. government is monitoring the situation with GameStop's stock, which has been the subject of booms in day trading.
  • Brokerage firms like TD Ameritrade have also restricted trading.
  • GameStop's stock has skyrocketed over the past week thanks in part to subreddits like WallStreetBets and other platforms, which noticed how shorted the stock was.

The GameStop stock market fiasco has gotten so bad that the U.S. government is monitoring the situation.

White House press secretary Jen Psaki told reporters on Wednesday that, "our economic team, including Secretary Yellen and others, are monitoring the situation." She added, "It's a good reminder, though, that the stock market isn't the only measure of the health of our economy."

Senator Elizabeth Warren agreed with Psaki's comments, writing on Twitter that "it's not news that the stock market doesn't reflect our actual economy."

"For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price," she continued. "It's long past time for the SEC and other financial regulators to wake up and do their jobs – and with a new administration and Democrats running Congress, I intend to make sure they do."

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GameStop has been at the center of business news this week, not because of anything the company did but because of booms in day trading that began on the subreddit r/WallStreetBets, other platforms like Robinhood, and people like Elon Musk on Twitter. It's hard to explain for people who don't follow markets, but here's the rundown on why this began happening. Essentially, WallStreetBets noticed how shorted GameStop's stock (traded as GME) was thanks to financial firms like hedge funds, which would sell stock they didn't have and then buy them back at a lower price.

This is where it gets tricky. If the stock doesn't drop when the traders have these shares that don't exist (they're typically borrowed), they get "squeezed" since they have to cover the shares they sold. They'll end up owing money instead of earning it. GameStop is at the top of MarketWatch's recent most shorted stocks list, followed by companies like Bed Bath & Beyond, AMC Networks Inc., and fuboTV.

According to Motherboard, which has a great explainer up, GameStop was a specific target because the company issued more shares than were available, so short sellers took the stock hostage. Then, WallStreetBets saw an opportunity. It's become so popular that WallStreetBets has had to monitor traffic. Reddit has also been experiencing some technical issues on Wednesday, but Reddit hasn't confirmed if it's related to increased traffic due to the GameStop story.

Gamestop Stock Google Screenshot

Source: Windows CentralThe stock has skyrocketed over the past five days, although it's leveling out as of late Wednesday. (Image credit: Source: Windows Central)

Now we're here just over a week later, and Gamestock is the biggest story in video games. Even CNBC commentator and Mad Money host Jim Cramer is weighing in, telling people not to invest in GameStop.

"I've never seen the guns like this. They can break shorts," he said.

It's tough to say whether this was a deliberate attack on hedge funds and other venture capital firms or if it was mostly a troll by a subreddit. One redditor said it was to send a message to "market manipulators, and others agreed. It's likely a combination of both. It's already had some impact, though. One of the hedge funds that was shorting GameStop, Melvin Capital, confirmed that it was closing out after suffering a huge loss. Gabe Plotkin had to raise billions in bailout money amid the squeeze and has since left his position.

Brokerage houses like TD Ameritrade and Charles Schwab also announced Wednesday that they are restricting trading for GameStop, AMC (another shorted stock), and others to mitigate "risk for our company and clients."

Meanwhile, there have been testimonials all over WallStreetBets from people who claim to have benefited greatly from the situation. One said that it was able to help them get through a "very rough year."

GameStop itself has not yet commented on the situation.

Carli Velocci
Carli Velocci
Gaming Lead, Copy Chief

Carli is the Gaming Editor and Copy Chief across Windows Central, Android Central, and iMore. Her last name also will remind you of a dinosaur. Follow her on Twitter or email her at carli.velocci@futurenet.com.

18 Comments
  • That's too complicated for me.
  • Welcome to the wild world of legal stock manipulation. Short selling was part of the crap that caused the housing bubble collapse.
  • Try this:
    A - short selling
    1- Company A is in trouble.
    2- Investors think the stock will drop to a given level by a specific date so they "borrow" stock from the future and sell it at the current price. They make XXX dollars.
    3- If they're right, when it comes time to pay back the stock they sold, they buy it at the then current price. The profit or loss is the difference between what they took in in the past minus what it costs to make good on the sale. Yes, it is wonky. Time travelling stock. B - What actually happened this time was: 1- The shorted stock was dropping and the make good date was approaching.
    2- A bunch of people coordinated online for each to buy some stock removing it from the pool the short sellers could buy. As more and more people got with the program the supply went down and (supply vs demand) the price went up instead of down.
    3- The people who started the buying frenzy cashed out. But enough prople jumped on the bandwagon that the price kept rising and by then it was time for the shorters to buy but there wasn't enough stock going around to cover their bets so they had to bid higher, raising the price even more so the second tier and third tier buyers made their profit and the bubble got bigger. This was/is a classic pump and dump market manipulation.
    But where classic pump and dump is by one or two manipulators fleecing the masses, this time it was a horde of small investors manipulating the stock to fleece big players. Cue the world's tiniest violin. The problem is the bubble didn't stop with the short sellers; it looks to have enticed smaller players into gambling on "the bigger fool" theory: that no matter what they paid they would find a fool to pay a higher price before the bubble bursts and there's no more shorters buying, just speculators. Sooner or later somebody will take a bath. Many somebodies. Bubbles have happened before and they'll happen again but this one was started on purpose. Preventing a repeat will likely require the end of short selling. Or at least regulating the profitability out of the practice. Cue up the tiny violins again.
    At this point there are no clean hands in the mess.
  • @fjtorres Well Said.
  • The people who started the snowbal rolling got out while the getting was good. Figure the 25th or 26th. Anybody left after the 26th is a speculator with no right to sympathy.
  • @fjtorres I'd imagine they did sell around those dates as it was best to get out before one of largests Gamestops stakeholders dumped all their stocks. Therefore causing a massive spike downwards. True, it's always best not to be greedy lol... ultimately greed will always come back and bite you in the rear end.
  • The problem is the "flash" crowd model of stock manipulation has been validated.
    The SEC normally foes after individuals who pull of pump and dumps but they don't have the resources to go after thousands, tens of thousands... They'll go after the trading apps but as long as "retail" stock sales are possible flash crowds can do it over and over. Most cases there isn't much profit in pumping up a stock but with shorters in the game its just a matter of picking a target and a date. Muzzling the day traders on Reddit will have the same effect as muzzling Parler did; they'll just go underground and then there will be no public awareness of what's going on. If anything, it'll make the job easier for the pumpers.
  • That's the best explanation on this move I have heard. Thanks.
  • It seems to be a problem only when the walls street dem's friends loose money
  • Wait so only big billion dollar funds can game the system. And if somebody else does it legally (follows the same rules) it is a problem? Why? Because the billionaires who drive the stock price down on short may lose money when a network of individual small investors are making moves, like they are doing here as they are betting against the hedge fund short who had bet 100% full stock value of GME? At least these reddit users bet using their own cash and that is what they will lose at the end of the day if the stock drops down. These hedge funds will just get bailed out again, like during housing crisis, and by the same cronies in Washington. You think I am joking? I have seen mentions of this being done to right the ship and make these funds whole. Neverminded the damages (jobs, financials) these hedge funds cost betting against the companies and the billions they have already been paid out. Too big to fail arguments will be there to lean on. And of course the establishment will come in a change the rules to restore the balance where it rightfully should be back in the arms of the elitists again. /s
  • Problem is, the bubble has grown beyond the shorters. Not everybody losing their shirt can afford it.
    The scam got out of hand.
  • Not understood Elizabeth Warren.
  • It's Reddit !!!
    Understand.
    Apple will open a bank.
    Who know the exchange rate China Usa currencies ? Thanks.
  • This just rips the mask off of the Stock Market proving it's nothing but a Casino.
    It does NOT reflect the Economy in any way and is now controlled, not by people, but by Trading Algorithms, and just like video games, algorithms can be GAMED (just watch any MMORPG.)
    What these guys did was actually VERY simple.
    1) Find a stock that has been intentionally depressed in value due to Short-Sellers betting against it.
    2) Buy up lots of the depressed stock to increase it's share VELOCITY.
    3) The resulting upwards increase in share VELOCITY triggered the auto-buying algorithms of the HSTP (High Speed Trading Programs) that dominate the Stock Market.
    4) This results in a postive-feedback loop of increasing share movement triggering more auto-trading programs triggering more share velocity.
    5) The short-sellers then take a bath on this due to margin-calls. This USED to be called a Pump-N-Dump scheme, but by "baiting" the HSTPs into pushing the stock FOR THEM, nobody has done anything illegal at all, and they have exposed the FACT that humans don't run the stock market anymore, Sophisticated Algorithms do, and any gamer can tell you the Algorithms, no matter how sophisticated, can be GAMED.
  • some people were looking to make huge gains, but instead took huge losses. the govt wants to step in and mitigate the risk for hedge funds against the every day investor? seems fishy...
  • @Dush Ku Unfortunately, many hedge funds have also leveraged pension schemes to buy or in this case to short stocks... So sadly, the companies and departments who signed over their pension schemes to hedge funds to "profit" the scheme are the ones getting fleeced as well. So effectively these hedge funds are holding many people's retirement hostage. The entire system is lopsided to benefit hedge funds thanks mostly due to lobbyists and corporate "donations" to political campaigns.
  • Big funds seem to be upset when us little people game the system exactly and legally they same way THEY do it. When it backfired in them, they got all butthurt. They managed to get the reddit and discord shut down... Temporarily. Ha
  • She's a twitter warrior. All talk and no action.