Video game retailer GameStop found its names multiple times in the headlines this past week, despite failing as a company for many years. Thus, we decided to offer you a more detailed insight into what happened and why this company’s share value increased to record highs in a very short period.
GameStop, which is a retail chain that sells physical copies of games for PC and consoles, has been struggling for a few years. Thanks to the rise of platforms such as Steam, Origin, Galaxy, and the PlayStation store, digital downloads have dominated the video game industry in recent years. The coronavirus pandemic only made things worse, with GameStop stores, being non-essential businesses, either staying closed during the lockdowns or not having any visitors due to stay-at-home orders.
Some prominent hedge funds, most notably Melvin Capital, have been trying to make a profit out of the misfortune of companies like GameStop by shorting their stock. As of January 11, GameStop shares traded at just under $20. At the time, traders suspected that the stock was significantly undervalued.
This prompted a coordinated attack that started on Reddit boards r/WallStreetBets. Users interested in trading banded together to start buying the shares of GameStop and a couple of other heavily shorted companies. With the sharp increase in the demand for these shares, their values started going up.
Hedge funds and other short-sellers then had to also join in the buying spree in order to limit their losses. They were rushing to buy back the shares they shorted since they had to pay back the original lenders, and they wanted to do it at as small of a loss as possible. However, this only meant an even greater demand for shares and the price kept going up. As of last night, the value has gone as high as $195 per share, down from $347 the day before.
Melvin Capital, the biggest name involved in the shorting of GameStop stock, alone lost 30% of the hedge fund value before closing its position. The companies and funds that had shorted this stock reportedly lost 6 billion US dollars this week.
Other companies involved include AMC, BlackBerry, and Nokia, among others.
Besides the conflict between individual traders from the likes of the redditors in r/wallstreetbets and hedge fund managers, another scandal started brewing. Robinhood, a major broker that was used to carry out the short-squeeze, delisted GameStop and several other companies involved yesterday. Robinhood works with liquidity provider Citadel Securities, part of Citadel LLC, which is one of the investors in Melvin Capital. Thus, it is suspected that the broker delisted the stock to protect its clients from suffering further losses, which is a form of market manipulation.
Now the government of the United States and the Federal Reserve are getting involved. They are following the developments and investigating all the parties who were at fault. It seems highly possible that the short-sellers and brokers involved will face an investigation and new legislation may be introduced to prevent such extreme short-selling in the future. This issue is still developing.
