Don't think that it's not going on Remember in 2021 Game Stop
At the beginning of the COVID-19 pandemic, no serious investor would have predicted that a struggling chain of brick-and-mortar stores reliant on mall traffic would become the most talked-about stock of 2021. Certainly not the managers of Melvin Capital, one of several hedge funds that began placing multi-billion dollar short trades against GameStop (GME) in the lead-up to the 2020 holiday season.
However, short traders overplayed their hands. Retail investors on Reddit and other online communities began to notice the unusually high short interest against GameStop and suspected that some of the hedge funds had engaged in naked shorting—the predatory practice of selling nonexistent shares in order to bet against a company. Knowing the hedge funds would soon have to cover their shorts, online traders began heavily investing in GameStop stock and options.
The result was a spectacular short squeeze that reverberated throughout the market. In January 2021, GameStop shares soared from about $17 to a high of over $500, before several brokerages limited buys of GameStop and other meme stocks. The hedge funds were forced to close their short positions, with billions of losses. A few months later, Melvin Capital shut down.
This was not the end of the GameStop saga, as brokerage firms were accused of manipulating the market in favor of their institutional clients. Several federal and state regulators initiated investigations of short sellers, and multiple class-action lawsuits were filed against the brokerages that had halted trading.
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Still, while an initial short squeeze may have initiated the rapid rise in price in the stock, it is less certain that closing short positions are what sustained the high prices for months following the initial event. According to an SEC on the topic, "Whether driven by a desire to squeeze short sellers and thus to profit from the resultant rise in price, or by belief in the fundamentals of GameStop, it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock."
At the beginning of the COVID-19 pandemic, no serious investor would have predicted that a struggling chain of brick-and-mortar stores reliant on mall traffic would become the most talked-about stock of 2021. Certainly not the managers of Melvin Capital, one of several hedge funds that began placing multi-billion dollar short trades against GameStop (GME) in the lead-up to the 2020 holiday season.
However, short traders overplayed their hands. Retail investors on Reddit and other online communities began to notice the unusually high short interest against GameStop and suspected that some of the hedge funds had engaged in naked shorting—the predatory practice of selling nonexistent shares in order to bet against a company. Knowing the hedge funds would soon have to cover their shorts, online traders began heavily investing in GameStop stock and options.
The result was a spectacular short squeeze that reverberated throughout the market. In January 2021, GameStop shares soared from about $17 to a high of over $500, before several brokerages limited buys of GameStop and other meme stocks. The hedge funds were forced to close their short positions, with billions of losses. A few months later, Melvin Capital shut down.
This was not the end of the GameStop saga, as brokerage firms were accused of manipulating the market in favor of their institutional clients. Several federal and state regulators initiated investigations of short sellers, and multiple class-action lawsuits were filed against the brokerages that had halted trading.
15
Still, while an initial short squeeze may have initiated the rapid rise in price in the stock, it is less certain that closing short positions are what sustained the high prices for months following the initial event. According to an SEC on the topic, "Whether driven by a desire to squeeze short sellers and thus to profit from the resultant rise in price, or by belief in the fundamentals of GameStop, it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock."
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