The Reddit-driven GameStop stock spike isn’t going to end well

    
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(We’re continuing to update this piece on the latest at the end!)

If I had told you last year that GameStop, the retail business that was already struggling even before COVID hampered its plans for rescue, would make headlines in 2021 for a massive stock surge involving Elon Musk, Reddit shitposters, and hedge fund villains, you would’ve laughed at me, and rightly so. But here we are and it’s happening.

Let’s recap a bit. The internet daytraders over on the Wall Street Bets subreddit apparently got a burr up their butts to start pumping money into the flailing GameStop stock, driving it from around $17 at the beginning of the month to over $340 as of this afternoon as I write this. The immediate effect has been to devastate the hedge funds that were short-selling GameStop.

The funds most deeply affected, like Melvin Capital Management, were likely writing uncovered calls for GameStop stock, which is to say, they were betting they’d be able to buy GameStop stock cheaply in the future to cover those calls, which they cannot do without losses now. Melvin’s $12.5B in managed funds was down almost a third and provoked additional rescue investment to combat the short crunch, all seen as a sign by the Reddit daytraders that their guerilla trading is working to defeat whom they see as the bad guys. The situation was compounded today when two of the main hedge funds announced they had covered their calls, which might be true, or it might be an attempt to dissuade continuing buys.

None of this is illegal, mind you, and yes it’s how the stock market has always worked – it’s just some people are just now figuring it out. And they’re currently on Reddit trying to convince each other not to sell or let it all come crashing down. Worth noting is that even if GameStop were a great company to begin with (and it’s not), it isn’t actually benefiting from any of this, since it’s unlikely to have any lasting impact – except for some of the investors who happened to jump in and out at the right time and are now sitting on piles of real money, again egged on by no less than Elon Musk and people on Reddit who’ve been advocating a short squeeze of GameStop since at least 2019.

I am not a professional investment broker, so you should probably not listen to my advice on stock trading. But that also goes for pretty much every other non-expert on the internet, especially anons on a Reddit who may or may not be finding new ways to dupe newbie investors and pump stocks for their own profit. It’s fun to stick it to the worst scum on Wall Street, but do make sure you’re not the dupe left holding the bag when the pump is inevitably over.

Source: Kotaku, CNBC, Reddit
1/28 Update #1
Overnight, Melvin Capital has denied claims that it’s nearing bankruptcy and has repeated claims that it has exited GameStop trading. GIbiz says it’s now accepted $3B in investment from other companies to keep afloat. But don’t get too excited: Yahoo Finance compiled a list of some of the billionaires who made more billions this week off the GME surge and other pumps into similar heavily shorted stocks (like AMC). After-hours trading has seen the price of GME fall from $347 to $292 this morning. Discord did indeed shut down Wall Street Bets’ chat channel yesterday, not over GME but because of longstanding issues like hatespeech, misinfo, and encouraging violence. Rumors that the subreddit was banned are untrue; the sub simply flagged itself private temporarily.
1/28 Update #2
CNBC is reporting that retail trading apps like Robinhood are now restricting trading of GME and specific other stocks. “In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AAL, $AMC, $BB, $BBY, $CTRM, $EXPR, $GME, $KOSS, $NAKD, $NOK, $SNDL, $TR, and $TRVG,” Robinhood wrote. “We also raised margin requirements for certain securities.” As of 10 a.m. EST, GME was up to $469 but has now fallen to $196 at 11:10 and $153 by 11:17, getting as low as $126 before creeping back up towards $200 by 11:40.

The WSB subreddit is on fire, talking class-action lawsuits and begging Canadians to help.

Politicians are getting pissed too.

1/28 Update #3
The price has continued to bob around all day, sinking as low as $126, then getting back up to $308 before trailing off; as I type this, it’s sitting at $238. The first lawsuit against Robinhood has also been filed – thanks, Smithwicks!

Update 1/29
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styopa

Let’s note also that Robinhood – suspending activity on gme trades – also happens to have Citadel as a major investor.

Citadel has/ had major short positions on gme.

But I’m sure that’s coincidence.

Reader
Adam Russell

You’re right – trading halts usually do not end well.

Reader
Bryan Correll

Note: For anyone speculating that congress will make this sort of thing illegal, they don’t have to because it (subject to some interpretations) probably already is under section 9 of the Securities Exchange Act of 1934.

Actually tracking down and prosecuting people who put a couple thousand bucks in this isn’t going to be worth the SEC’s time and effort. But any large transactions are probably going to be looked at very closely. And I hope the mods of WSB (for their own sake) were very careful in wording any posts they made regarding the situation.

Reader
Adam Russell

Conspiracy to buy stocks?
Honestly, Id rather they go after the shorters.
More shorts than shares outstanding is just asking for volatility.

Reader
Bryan Correll

No, conspiracy to manipulate stock prices per section 9(a)(6)
————-
(a) Transactions relating to purchase or sale of security

It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange, or for any member of a national securities exchange—

(6) To effect either alone or with one or more other persons any series of transactions for the purchase and/or sale of any security other than a government security for the purpose of pegging, fixing, or stabilizing the price of such security in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
_____
Now, actually PROVING this is why I said I hope the mods were careful in wording any posts they made.

umdiddly
Reader
umdiddly

There’s nothing illegal about colluding to buy equity with publicly available information. That’s called…. “the stock market”.

Reader
Utakata

On the side though: AOC telling Ted Cruz to go stuff himself kinda made my day over this… <3

Reader
Adam Russell

Class action lawsuit has been filed against RobinHood for restricting buys but not sells. And while those restrictions are helping shorts, the shorts are doubling down.

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McGuffn

I like how yesterday it was all about reddit manipulating the market and how awful that was and today Robinhood pulls out the hold my beer line and some of those same people think its fine.

Reader
Bruno Brito

BTW, i don’t recommend anyone to check Twitter about this. At least on my TL, most of the people ( who tend to be left-minded ) are cheering on this like it’s some sort of victory, and saying “i will not sell” with pride. So many of them poor people with good intentions not realizing they’re being manipulated by trust fund babies and malicious assholes.

It’s really sad and i felt myt heart break at this. Manipulating outrage became this easy.

Reader
Travis In Canada

As a Brokerage I would think it would be a good idea to continue the trading of these stocks. I can only assume A LOT of people are looking for a service that will allow them to get into $AMC or $GME

flatline4400
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flatline4400

Yep. Fundamentally, these stocks have about as much actual value as a BitCoin at this point, i.e. functionally zero, but worth whatever someone else is willing to pay for it.

Reader
IronSalamander8 .

This has been so interesting to watch. Gamestop is done for regardless of this stock war, but I love seeing these hedge fund jerks get some comeuppance from the Redditors involved with this. This is laying bare underlying issues with the entire system that many of us have been complaining about for years.

Reader
laelgon

If you got in, now may be the time to get out. Most of the brokerages are flat out stopping retail investors from buying shares, which naturally caused a panic and the price to plummet. So basically they manipulated the market, the same thing they’re accusing a bunch of reddit trolls of doing. As always, rules for thee and not for me.

Reader
Jon Wax

im probably wrong but it feels like once the smoke clears somebody is gonna get in some sec type whitecollar paperwork shenanigans trouble for this.

hopefully the kids that bandwagoned had the disposable to ride it out.
buncha cats are gonna get glassed.