The Great Gamestop Squeeze

Jace Goudreau, Contributor

The year 2021 may not live up to the hype that 2020 put on display, but this year has had a few remarkable events occur that will have a lasting impact on world history and our society. Bitcoin has started making its way into big business, Conor McGregor got his ass kicked by Dustin Poirier, Tom Brady proved that he is still the goat with his 7th Superbowl championship victory, and the wild Wall Street bets traders outsmarted large hedge funds. All of which led to thrilling outcomes for a select group of individuals. Let’s just say if you’re a gambling degenerate or an uneducated hype investor, you’re probably having a great year so far. 

If you haven’t heard by now, the “degenerates” that fuel the subreddit r/wallstreetbets pulled off the unthinkable. Not only did they manage to rake in millions of dollars by attacking a  few heavily shorted stocks, GameStop ($GME) and AMC Entertainment Holdings ($AMC) among others, they brought to light the power of retail investors during this technical revolution. These retail investors were able to assemble and perform some of the largest short squeezes in the history of the stock market. The extent of the GameStop squeeze is comparable to the 2008 Volkswagen ($VWAGY) short squeeze, which caused their company to briefly be the most valuable company in the world. 

The difference between these two squeezes is that the GameStop squeeze was initiated by a vast amount of retail investors backed by the 9 million member subreddit, r/wallstreetbets. These eager and uneducated investors purchased a large volume of far out of the money options as well as $GME common stock in roughly 2-3 days. This caused a panic from bearish hedge funds to pull out of their short position, aka buy back the common stock they sold off at the high. This ripple effect caused the share price to shoot up nearly 1,000% in a day. Whereas the Volkswagen squeeze took part because a larger company, Porsche, announced their plans to buy the majority of the company. This announcement caused a similar panic from short selling hedge funds and a similar jump in share price. Both squeezes resulted in billions of dollars of losses for the hedge funds.

Another difference between these two historic events is still panning out, and it could lead to some detrimental changes to the market. The market has always been forced to adapt to technological advancements as well as other societal changes, and as of 2019, there have been many. Commission free online trading, financial blogs with enough power to manipulate stock price, the overuse of after-hours trading, and the lack of respect for retail investors all contributed to the massive GameStop short squeeze. We are yet to see how the market will adapt to these changes. The SEC will surely step in and make some big changes regarding this situation. What they will do is what should scare you. There has been discussion around the SEC changing the rules around hedge funds no longer having to disclose their assets to their investors. This would give hedge funds more control of the market than they already do (current market split is roughly 80% institutional, 20% retail). 

Another potential effect of this event is the dismantlement of commission free trading. Robinhood was bashed by retail investors after they limited the purchase of many high-volume stocks to their users, thus changing the direction of the stock price and ending the amazing wallstreetbets run. But believe it or not, the retail investors weren’t the most upset by this fallout. The U.S. Security and Exchange Commision (SEC) actually got the worst of it all. They are now faced with some of the biggest changes to the market since the digital revolution. You can expect some massive changes to come from them in the coming year.

To learn more about the GameStop short squeeze, check out this video from CNBC’s Jim Cramer on his show Mad Money (jump to 3:09).