Today, a war over the value of video game retailer GameStop’s stock has caused what market guru Jim Cramer called “the squeeze of a lifetime.” Howling with glee along the way, traders on the chaotic and obscene subreddit WallStreetBets helped push GameStop’s stock price up from $20 on January 11 to $73 after traditional analysts deemed the stock a clunker.
While this isn’t the first time WallStreetBets has contributed to a surprising market shake-up, GameStop’s unlikely trip to the moon is unique in both its velocity and the allegations of harassment and hacking that accompanied it.
Like other physical retailers, GameStop’s business has suffered in the past year. Few gamers would rather hit the mall than Amazon’s significantly safer Buy Now button. But GameStop was in dire straits even before the pandemic struck. Its thousands of store locations couldn’t compete with the digital marketplaces offered by the game consoles and PC titans Steam and Epic Games. GameStop laid off dozens of regional managers in mid-2019 after a precipitous, years-long decline in its stock price. To remedy the situation, GameStop announced it would pivot to a social-hub model, like a modern LAN cafe. Then the pandemic hit.
As GameStop foundered, some analysts suggested short-selling the stock to profit off the price going down. Investors borrowed shares of GME and then sold them in the hope that, once they bought the stock back, they’d make money off the difference. But in August, pet food site Chewy.com founder Ryan Cohen purchased a large number of GameStop shares and began strongly advocating for the company to build out its ecommerce presence. Cohen ascended to its board of directors earlier this month, and as Ars Technica reported earlier this week, analysts and investors responded positively to the news. As the stock climbed, short sellers found themselves having to buy more stock to cover their borrowing. Within a couple of days, GameStop’s stock had doubled.
“It was a huge, massive short position,” says Corey Hoffstein, chief investment officer of quantitative investment and research firm Newfound Research. A significant amount of money was caught in what’s known as a “short squeeze,” which happens when investors who have bet against a rising stock have to buy it to cover their losses. When the price goes up, so does the loss risk for short sellers. They may then buy shares to cushion that risk because they theoretically face, as Hoffstein says, “unlimited losses as the price goes up and up and up toward infinity.” The price skyrocketed.
So-called retail investors—individuals rather than institutions—began sniffing around, especially those orbiting the hugely popular subreddit WallStreetBets, which has 2 million members and describes itself as “like 4chan found a Bloomberg terminal.” As a collective, the subreddit has previously amassed enough bodies and enough funds to drive unlikely rallies in the stocks of companies like Lumber Liquidators and Plug Power. “It was a meme stock that really blew up,” said WallStreetBets moderator Bawse1. “The massive short contributed more toward the meme stock.” GameStop seemed so utterly doomed that the current situation was actually sort of funny to the subreddit’s denizens. Banded together, WallStreetBets members bought in big enough to move the stock.
Then came war. On Tuesday, Citron Research founder Andrew Left, an activist investor and short seller, tweeted that he’d share five reasons why GameStop’s stock would plummet to $20 fast in an upcoming livestream. (The stock had by then climbed to $41.) “We understand short interest better than you and will explain,” he wrote. In a YouTube video, Left argued that GameStop is “a failing, mall-based retailer,” and that its value is “not based on any fundamentals, [which] just shows the natural state of the market right now.”
On Friday, Left set up a second Citron Research Twitter handle, claiming that several people had attempted to hack the main account, potentially in an attempt to disrupt his livestream. In a note tweeted from that backup account, Left wrote that “an angry mob who owns this stock has spent the last 48 hours committing multiple crimes,” alleging that the same group harassed “minor children” as well. He says in his YouTube video that someone ordered pizzas to his house and signed him up for Tinder.
