Nothing about the figures would indicate a bull run of any magnitude was on the horizon. Although the retailer reported a 4.8 percent increase in “total comparable store sales” over 2019 results, which is impressive considering GameStop is mostly a mall-based business trying to keep its head above water in the Novel Coronavirus pandemic era, they did report a net 3.1 percent decrease over 2019 numbers.
2020’s numbers were primarily bolstered by the release of Sony’s Playstation 5 and Microsoft’s Xbox Series X/S consoles.
GME opened at $88.56 Tuesday, with intraday trading of the video game retailer showing a 92 percent increase in value, making it the second-largest gainer on the entire market with a closing price of $147.98, forming a “double-top” chart pattern against Monday’s close. In comparison, GameStop finished 2020 at $18.84.
The retailer, which saw its market capitalization balloon by nearly $5 billion in a single day, ended Tuesday trading at more than double its previous all-time high set in December of 2007 of $63.77. A staggering 178 million shares exchanged hands.
According to SEC filings, GameStop Directors Lizabeth Dunn, James Kurt Wolf, Kathy Vrabeck, and Raul Fernandez all made substantial sales of their personal holdings between Jan. 13 and Jan. 15 after the share price doubled from $20.42 to a high of $43.06. James Kurt Wolf’s transaction was the largest, selling 810,000 shares between $19.99 and $31.08 in an approximate $17 million sale. No insider trading has been reported during the parabola.
Since there are no compelling developments from GameStop as a company to explain its massive increase in value, the prevailing theory leading the public’s view of why GME has gone parabolic relates to Reddit’s WallStreetBets sub-Reddit. According to a Jan. 22 CNBC report, GameStop was the most short-sold stock on the entire market, making it an attractive target for an engineered “short squeeze.”
Most investors are familiar with “long” trading, purchasing a stock or commodity, betting on its future success and longevity. Usually, an investor will purchase a stock at say $10 and hope for either short-term gains where they can sell at $11 or $12, netting 10 or 20 percent return on investment, or long-term gains where they hope the company, and its share price, will multiply in value.
In short-selling, it’s the opposite. Investors gamble on the company’s short or long term demise. A trader borrows stock from an existing owner in exchange for a lending fee, sells the stock on the market and hopes to buy back lower, pocketing the difference. However, the prospect is extremely risky.
In a long trade, your risk is limited to the size of your initial investment. If you buy a stock for $10 and the company goes bankrupt and is delisted, then the most you can lose is $10. However, when short selling, if you borrow one share for $10, sell it, and the company then experiences a seven-fold increase in value as GME did, then you will have to buy back your outstanding share, “covering” your trade at $70, losing $60, six times your original investment.
A “short squeeze” is where this phenomenon is exactly targeted by institutional traders. In summary, when they know a large number of stocks are being sold “short,” they will begin to buy up as much of the stock as they can, causing the price to increase. As supply decreases, price continually increases. Short sellers begin to cover their trades at higher and higher prices.
Since many short sellers are trading on leverage (i.e. holding a $10,000 trade on $1,000 in deposited capital) by definition, these positions are “liquidated,” which means as their paper profit-and-loss meets or exceeds their deposited capital, their brokerage’s risk-limiting algorithms forcibly close positions by buying at the next available market price, no matter how high it is, forcing short sellers to realize greater and greater losses.
These losses are re-distributed to the institutions who are executing the squeeze and have their sell orders for the millions of shares they purchased in the $20 range placed in advance at $80, $100, and $120+.
The popular theory is that posts on r/WallStreetBets, a community of more than 2.7 million subscribers, led to a stampede of retail investors buying up all of GameStop’s stock. However, with 178,588,127 shares traded on Jan. 26 and a median price of $115.10, more than $20.5 billion in GME shares traded hands in a single day. GME has experienced three consecutive days of similar trading volume.
According to PlexusMedia, the average retail stock investor’s total portfolio is approximately $12,000. While Reddit does not publish demographic data on its sub-Reddits, such as locale and account activity, it should be assumed that a large percentage of the 2.7 million subscribers of WallStreetBets are not actively trading on U.S. exchanges because Reddit is a global and anonymous social marketing platform.
Meaning, even if Reddit’s amateur investors were going all-in, the combined group would be equivalent to throwing a bathtub of water into the ocean.
A Google search of Reddit for “GameStop” between Jan. 11 and 12, before the retailer’s shares doubled in price, showed only 420 total results and 6 posts about GameStop on r/WallStreetBets, all banal in nature, casting serious doubt on the notion that the community organized any form of a raid on hedge fund short sellers. The total number of search results for GameStop went parabolic as price went parabolic, tripling from Jan. 13 to Jan. 15 and doubling again from Jan. 19 to 21 before reaching a peak of more than 23,000 between Jan. 22 and Jan. 26.
What is more likely to have happened is as the GME price began to moon, Reddit-savvy public relations companies contracted by the institutions and funds looking to sell their GME shares at a very high price began to utilize r/WallStreetBets as a platform to advertise the rocket ship to un-savvy retail investors, leading lambs to the slaughterhouse through a common psychological mechanic that plagues amateur investors known as “Fear of Missing Out” (FOMO).
In July, after the U.S. International Development Finance Corporation (IDFC) announced it would be providing Eastman Kodak with a $765 million capital market infusion to pivot from making printers to pharmaceuticals under President Trump’s America First manufacturing policy, the share price increased almost 3000 percent from $2.13 to a high of $60.00 in a three-day period.
According to data from Robintrack.net, a service that analyzed data from the widely popular amateur trading platform Robinhood, it found that while 9,300 traders held the stock before the announcement, that number had increased to over 72,000 before noon the day of the announcement. By the time Kodak began to return to Earth, that figure had increased to over 132,000.
Democrats accused Kodak of insider trading surrounding the announcement. Three days after the announcement, the IDFC halted funding pending an SEC review. The halt was announced on a Sunday, causing shares to fall from a Friday close of $14.88 to a Monday pre-market opening gap of $8.90.
Then White House Trade Advisor Peter Navarro called Kodak’s actions “probably the dumbest decisions made by executives in corporate history,” going further to say: “You can’t fix stupid… You can’t even anticipate that degree of stupidity.”
By mid-August, Kodak shares had fallen to slightly over $9 and Robintrack data showed almost 94,000 traders still held shares.
As of today, Kodak is trading at $9.43, and while Kodak’s own special committee completed an independent review of insider trading allegations on Sep. 15, finding no evidence of illegal conduct, the SEC still has not released their report and IDFC funding has not resumed.