GameStopGate
So, you’ve probably heard about this GameStop stock thing by now. For me, it really just highlighted how little I know about the stock market and how it functions. After doing a little digging, though, what really struck me is how what we are seeing is a GamerGate-like exercise in “troll power”, this time directed against Wall Street itself.
GameStop in 2020
In 2011, GameStop reported net income of $408 million on revenue of $9.5 billion; in the last 12 months, it had a net loss of $275 million on revenue of $5.2 billion. GameStop’s stock traded as high as $62.11 per share in 2007; it got as low as $3.50 in March 2020. It closed at $18.84 on Dec. 31, 2020, for an equity market capitalization of about $1.3 billion. 1
GameStop was failing due to its market changing and the pandemic shuttering malls. It was tanking, which is what led the hedge funds into shorting it extensively, like vultures circling in the sky.
Shorting
“Shorting” is a bet that a company's stock will become less valuable. This is done when an investor sells shares of a stock that they do not own. Essentially, they sell shares of a stock at a certain (high) price in the belief that sometime in the near future the price of that stock will go down. They will then be able to buy the stock at the lower price to “cover” their shorts, “closing” the deal and pocketing the difference between the price they sold at and bought at as profit. 2
It seems mean-spirited at best, predatory at the worst. I mean, technically, there doesn’t seem to be anything illegal about, or I guess even unethical, since everyone knows what you’re doing. But it feels immoral to bet on someone else failing, and even more so to profit from it, and then even more so do it with borrowed money.
2021, Week 4
Since the start of 2021, the stock is up 245%. It closed on Friday at $65.01 (a $4.5 billion market cap), up 51% in a single day. 1
That was last Friday, the 20th. Today, it’s at $227. That’s down $121 for the day. It peaked at $477 earlier this week.
GameStop in a Nutshell
What is going on is that GameStop, a company that sells physical copies of video games next to Auntie Anne’s pretzel shops in dying malls, is the most highly traded asset in the United States, a “meme stock,” and currently the primary front in a micro class war. GameStop’s stock price jumped from $4 last summer to $20 at the end of 2020, to $40 two weeks ago. It was worth $100-ish at times on Monday and Tuesday, and as I write this it is worth close to $300. Essentially, many normal-ish people have made a huge bet against gigantic financial institutions and are currently winning. In practice this means we are seeing one of the largest wealth transfers from the financial ruling class to the middle and middle-upper classes in recent memory, so it is, understandably, the only thing anyone is talking about. 2
It is interesting that a lot of the press seems to be spinning it as something like GamerGate and 4chan, but other than the methods and the memes, I’m not really seeing it. I see the word ‘nihilist’ thrown about a lot, but is that really true? Yes, it is the same sort of “troll” energy that’s powered things like GamerGate and QAnon, but it seems to be lacking the mean-spiritedness of those movements. They were trolls to justify their hate, while the WallStreetBets crowd seems to be trolling Wall Street in the name of the common man. It’s like left-wing trolling as opposed to right-wing trolling, though right-wingers like to get rich, too.
Shorted More Than The Float
First, a lot of people are short a lot of GameStop stock. (Notoriously, they are short more than GameStop’s entire float; Bloomberg tells me that short interest is 71.2 million shares, while GameStop has only 69.7 million shares outstanding. 1
This is apparently the big problem for the hedge funds, they shorted more shares than are actually available, and since the GamestopGaters are holding their stocks and not selling them, stocks aren't coming back on the market for the shorters to sell.
Also, I was really surprised that this is legal, that you can borrow money to sell shares that don’t exist.
Call Options
Second, a lot of people (on Reddit) who like GameStop don’t buy stock; they buy call options. If you are a retail trader looking to gamble on a stock, you can buy call options to get leveraged exposure to the stock. For instance, last Tuesday (Jan. 19), you could have bought a $50-strike call option on 100 shares of GameStop stock expiring this coming Friday (Jan. 29). Bloomberg tells me this option would have cost you about $3.35 per share, or about $335 for a 100-share option contract; the stock closed that day at $39.36. If you sold the options on Friday (Jan. 22), when the stock closed at $65.01, they were worth $18.16 per share. You put in $335 and got back $1,816; you made a 442% return in four days. If you had just bought 100 shares of stock instead, you would have had to put in $3,936 to get back $6,501, a 65% return. Of course if the stock had stayed flat instead of going up to $65.01, you’d have lost 0% by buying shares and 100% by buying the options. So options are great if you have a relatively small amount of money and want to take a lot of risk with it. If, for instance, you are a retail trader on WallStreetBets. 1
Call options allow you to invest a small amount of money, but has a higher risk of losing the money. But by gaming the system by dog piling on the stock, they made sure that the price went up. This might be the point where you maybe could say that they did something illegal, in that they, in a way, manipulated the pricing, but it really doesn’t seem that much different than selling the shorts.
All of this, call options, shorts, this was new to me this morning, and I’m still having trouble wrapping my head around it. Selling shares you don’t own, and buying the options to buy stocks; I’m not even sure what we’re buying and selling at this point. And then it gets weirder.
Delta and Gamma
Meanwhile the market maker who sold you the options would have hedged its option exposure by buying about 40 shares of GameStop stock, for about $1,575. (This—the fraction of the underlying shares that the market maker buys to hedge the option—is called “delta.” ) Your $335 of option premium caused $1,575 of stock buying. More important, as the stock goes up, the market maker will adjust its hedge by buying more stock—by the end of the day on Friday, the market maker would have owned about 80 shares. (The change in delta as the stock price changes is called “gamma,” and people who like this sort of technical explanation love talking about “gamma.” ) You haven’t done anything else—you bought the options on Tuesday, and then stopped trading—but the market maker kept buying hundreds of dollars more stock as the stock went up to keep the option hedged. Multiply that by the extreme popularity of GameStop options, and you get a lot of stock being bought as the price goes up—which, of course, pushes the price up more. 1
This is the mechanism the GameStopGaters used to push the stock price up. By using options, they caused the stock price to go up by forcing the market makers to buy more stock. If one person buys options, it doesn’t bump the price up that much, but if a thousand people, or a million buy it, it’s definitely going up.
Cover Their Shorts
The most important thing (as I understand it, at least), and a situation that happens only very rarely, is that short sellers shorted more shares of GameStop than actually exist. What this means is that even if every single short seller wanted to cut their losses and close their positions, they would be unable to do so because the shares don’t exist. Normally this isn’t that much of a problem because over time they’d be able to buy enough stock to close their positions due to people buying and selling stock back and forth. In this case, however, Redditors noticed what was going on and have royally fucked short sellers.
Crucially, Redditors on WallStreetBets are holding their stocks Because people haven’t been selling the stock, and because it’s continued to go up, short sellers have been unable to cover their shorts without locking in billions in losses and are unable to cover their shorts entirely because the stock has been over shorted. 2
This is how they’ve harnessed this weird, geeky, GamerGate, 4chan energy. I just can’t tell if it’s for good or for ill, or either or neither. There doesn’t seem to be the troll-ish energy of GamerGate and 4chan, beyond a “fuck capitalism” vibe. I’m not necessarily an anti-capitalism kind of guy, but I do think this idea of short selling and making money off essentially driving a company out of business seems a little ghoulish and deserves a bop on the nose.
Buy It and Hold It
The rallying cry of the entirety of the WallStreetBets subreddit and its extraordinarily chaotic Discord became: buy GameStop stock, hold it, and fuck over the big hedge funds, specifically Melvin Capital and Citron Research, which, throughout this entire saga, was publishing various YouTube videos about why it believed GameStop stock would go down. 2
The article later mentions that Melvin Capital recently took out a 2.5 billion dollar loan to cover its losses on this. That’s an amazingly huge sum of money. Who invests in hedge funds? Who is going to lose their shirts over this?
Overbought
“This is the thing, overbought can stay overbought, remain overbought, even get more overbought,” he says, which is as good a summary of the situation as anything else. 1
It doesn't matter that everyone knows that it's overbought, the fact that it is overbought has given it value, and continues to give it value. It doesn’t matter that the value is meaningless. I don’t know what GameStop’s numbers were like this holiday season, but given the pandemic, I would be willing to bet that they weren’t good.
In other words, GameStop hasn’t done a thing to justify the incredible rise in its stock, but that doesn’t matter. Outside forces made it valuable, and that value isn’t tied to anything physical or even real.
The Frustrated Favor Radical Change
In an essay published in The Ordeal of Change, Hoffer wrote “people with a sense of fulfillment think it is a good world and would like to conserve it as it is, while the frustrated favor radical change.” I think that obviously describes a lot of the angst we see here in the early 21st Century, particularly in relatively rich or westernized places, where most folks’ daily needs are met but their sense of purpose is not. Francis Fukuyama made a similar point in his seminal The End of History. 3
The Frustrated Favor Radical Change definitely seems to be the zeitgeist now since the election. The Trumpists are frustrated that they’re not allowed to hate who they want. GamerGaters were frustrated with what they saw as an incursion into their masculine space by other points of view. But I don’t feel like the folks of WallStreetBets are frustrated, and I don’t think that they are seeking radical change.
And while I would argue that Trumpists and GamerGaters both came to the table with a sense of purpose, I would say that’s lacking in GameStopGate. Maybe your reason to participate is to blow up a billion dollar hedge fund, but to what end? It doesn’t seem like a movement to end capitalism from within. It also doesn’t feel like ‘nihilism’. I don’t think that they’re doing it to watch the world burn.
They’re doing it to make money, and if Wall Street gets bopped on the nose while they’re doing it, all the better.