Redditors vs Wall Street: Who Will Win the Game?

On Monday, 25 January 2021, the New York Stock Exchange (NYSE) halted trading in GameStop shares (GME) at least nine times for volatility on the same day.

Earlier this month, GME prices averaged at about US$20. Its prices skyrocketed by 144 percent on Monday, opening at US$96.73 and closing at US$76.79, with almost 178 million shares traded.

GameStop is the world’s biggest video game retailer, but due to a string of poor business decisions and its reluctance to transition from its brick-and-mortar stores to an online business model, it had been steadily losing market share in the past few years. GME prices slipped to just under $5 in January 2019.

The sudden surge in GME prices is a ‘short squeeze’ as short sellers – investors that sell stocks that they don’t yet own; they will buy the stocks that will be presumably cheaper at a later date and profit from the difference in share prices – are frantic to close their positions and cut their losses upon seeing GME prices soar so rapidly. This accelerated the surge of GME prices as it added to the demand for GME stocks. Such cases are very rare, and two widely-known incidents in financial history are the VW squeeze in 2008 and the Blue Appron squeeze in 2020.

Retail investors have been discussing the purchase of GME stocks on Reddit groups (or subReddits) on investments, namely r/WallStreetBets. Some investors have banded together to invest in stocks of struggling companies such as GameStop, Macy’s, BlackBerry and AMC Entertainment Holdings. If these investors continue to hold their GME shares and drive up demand for the stock, they are betting against short sellers, as GME prices will increase, causing short sellers to suffer huge losses and investors of GME to profit greatly. Nevertheless, some investors who are more risk-averse have opted to sell their shares early to reap whatever profit they can, for fear that the price will eventually come crashing back down.

As a result, this has culminated in a battle between Redditors (regular investors), and Wall Street (short sellers). Whether GME prices will continue multiplying or be reduced to the price it was at the start of the year, remains to be seen.

Read more at: https://www.nytimes.com/2021/01/28/business/gamestop-stock-market.html