Jan 29, 2021: Before attempting to understand the micro and macro elements of the GameStop (GME:NYSE) story, it is essential to understand the basics of “short selling” in the equity markets. Short Selling (also referred to as “selling short,” “shorting” and “going short”) is a trading technique that leverages the sale of a security, investment or financial instrument that the short seller borrowed initially in order to execute a short sale (in other words, the short sale involves the sale of the borrowed security in anticipation of making a profit by repurchasing that same security after its price has fallen). The short seller believes that the borrowed security's price will decline thereby creating an opportunity to buy back the security at a lower price for a profit. The difference between the price at which the security was sold short (‘borrowed”) and the price at which it is repurchased represents the short seller’s profit (or loss, in the event that the security’s price rises after the initial short sale date).
A related and equally important concept to understand is referred to as a Short Squeeze. A short squeeze occurs when a shorted stock/security jumps sharply higher, forcing traders to repurchase their shorted stock/security at a loss now in order to prevent even greater losses in the future. The scramble (stampede) to buy back a failing “short” adds exponential upward pressure on the stock's price thereby compounding the damage to the short sellers. Short seller panic ensues as the theoretical maximum loss of a failed short is unlimited (where the maximum possible loss equals infinity minus the price at which the stock was sold short).
With this as a basis of knowledge, the GameStop (GME:NYSE) story can now be placed into proper context. Consider this: 148% of available GME stock was sold short (known as the “short interest”) mostly by institutional traders including hedge funds - this is a massive ratio and represents enormous exposure in the event that the GameStop stock price rose. As the share price of GameStop unexpectedly rose dramatically, institutional traders and hedge fund managers panicked because (1) rapidly rising GameStop share prices produced mounting losses and (2) brokers demanded immediate repayment of the borrowed stock at dizzying high prices. The catalytic moment in the GameStop story occurred when the hedge fund named Melvin Capital got “caught short” and scrambled into a panic mode when an army of over 2 million subreddit WallStreetBets (WSB) members/retail investors poured into GameStop by buying long positions in the stock (thereby driving the stock price up quickly and dramatically!). The panic felt by Melvin Capital soon spread to many other major institutional traders and hedge funds locked in the GameStop short as the subreddit WSB investment community ballooned to over 4.2 million members (by January 28th) resulting in yet another surge in GameStop long positions and its price. The GameStop plot thickened when “Wall Street establishment firms” like Citadel* and Point72 conspicuously infused more than $3 billion to bail out Melvin Capital (*It should be noted that former Federal Reserve Chairman Janet Yellin was paid over $810,000 by Citadel for “speaking engagements’ from 2019-2020). On January 29, the situation reached a fever pitch of corruption when Robinhood (an online brokerage firm) blocked retail investors from trading GameStop and other heavily shorted stocks (NOK, AMC, BB) – a clear manipulation and SEC compliance violation. This rogue maneuver by Robinhood clearly interfered with the operation of what should be a strictly regulated market and covertly protected Citadel, a multinational hedge fund with a vested interest in Robinhood. Ken Griffith (Citadel CEO) and Wes Moore (Robinhood CEO) should both be hauled out in front of the SEC to explain their clear violations. And amidst these conspicuous actions of Wall Street’s powerhouses is a little known, under-estimated investment group called WallStreetBets (WSB). As WSB slays the Wall Street juggernauts by beating them at their own game, WSB finds no fair company within media, financial regulators or the government. Indeed, the establishment is placing their crosshairs on this humble group of retail investors and” regular every-day” Americans. As this story unfolds, you should ask yourself the following questions. Why is the SEC not addressing the clear SEC compliance violations of the banks, trading institutions and hedge funds? Why is the mainstream media throwing its full support behind the Wall Street powerhouses and not the common retail investor? Why is Biden and his illegitimate administration remaining so quiet? Why is the WSB right to buy shares (in GameStop or any other stock) being prevented by financial institutions? The answer in each case will point to the emergence of American populism and its threat to the wealthy and powerful establishment. The GameStop story is far larger than a singular investment victory or event in the stock market. It is a reflection of a growing and intensifying battle between American populists and the ruling elite of America - immensely transcending politics and equity markets. By: Extremely American Colin Wright.