Can Anything Stop GameStop? (Published 2021) (2024)

Retail madness

Why is Wall Street obsessed with GameStop, the video game chain that until recently was known for middling performance? The company’s stock has soared to scarcely believable levels — its market cap as of yesterday was $10 billion, and its shares briefly doubled in premarket trading today — thanks to an army of small traders spurred on by a Reddit message board.

What’s happening: Traders on the Reddit message board, WallStreetBets, a community known for irreverent market discussions, made GameStock their cause du jour and rushed to buy out-of-the-money GameStop options. (A sample comment on the board: “PUT YOUR LIFTOFF DIAPERS ON ITS ABOUT TO START.”) Both Elon Musk and Chamath Palihapitiya also egged on the crowd via Twitter. The frenzy has forced market makers who sold the options to buy the underlying shares to hedge their risk. As more traders snap up options, the brokers have to buy up more shares. That’s driving the astounding rise in the company’s stock price, which began the year at $19 and at the time of writing was around $230.

• If you want to sound smart, traders call this phenomenon a “gamma squeeze.” And if this sounds familiar, it’s because SoftBank’s mass buying of tech stock options last year — earning it the moniker of the “Nasdaq whale” — worked in a similar way. (Extra credit: “Delta hedging” is also a factor in all of this.)

A big worry is that this has become a short-squeeze revolt. Short-sellers were down $91 billion for the month through yesterday, according to data from S3. (Such investors have lost $5 billion on GameStop alone.) While much of that was because of the overall rise in stocks, shares in other heavily shorted companies, like the headphone maker Koss, are up big. “I believe there is a systemic targeting of highly shorted stocks,” said Steve Sosnick of Interactive Brokers.

• Is there something else at play? Commentators are split: Matt Levine of Bloomberg Opinion reckons that this might all be a game to participants, while his colleague John Authers sees a populist uprising against establishment institutions

In any case, this is “an enforcement nightmare,” the Duke law professor James Cox told Bloomberg. Officials at the S.E.C. and elsewhere are closely watching internet chat rooms for signs of potential market manipulation, though they can do only so much without clear signs of fraud. If a big group of traders simply decides to buy options on a stock at the same time, out in the open, for the heck of it, proving malfeasance may be difficult. Still, “it suggests that there is something systemically wrong with the options trading on this stock,” William Galvin, Massachusetts’ securities regulator, told Barron’s, referring to the GameStop craze.

• While most attention is on WallStreetBets, we hear that some traders are starting to use encrypted messaging services — which are harder to monitor — to discuss new investment strategies.

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