EKIP– Expert Club for Economics and Politics A Different Opinion
Hello, dear investors and traders. Have you been following the markets lately? Some of you may have already noticed that something strange is happening with GameStop (GME) shares. Over the past two or three days, financiers have been appearing in some media outlets complaining that a Reddit sub-forum ( r/wallstreetbets ) is almost manipulating the price.
Like most things on TV, this is bullshit. The reality is that an organized online community of traders, so to speak, "put it on" the big dogs in the financial sector and punished them for their short-sighted greed. Here's the story in a nutshell.
GameStop is a chain of physical game retailers that has been struggling for obvious reasons lately. First, more and more people are buying their games through digital portals (Steam), and second, Covid-19 has created huge problems for every physical store. Understandably, market sentiment towards GME shares has become even more pessimistic over the past year.
Because of this, short positions (bets that the price of GME will fall) have deepened. The problem is that they have deepened to unprofitable levels from a purely financial perspective. When you take a short position, you borrow a share, which you sell now at price X in the hope that later you will be able to buy it at a lower price, price X-N, and return it to the person from whom you borrowed it at a profit for yourself. Because it is a loan - you also owe some interest. The problem with short positions is that they can be quite risky.
In this case, hedge funds have flooded with short positions to such an extent that the total value of short positions in GME has exceeded the total value of GME shares available on the market. A ratio of short positions to available shares above 50% is in itself extremely high, but above 100% (up to 140% in the case of GME) is absolutely absurd. Such a situation is very unusual, but technically possible, because the same share can be borrowed and sold short multiple times.
The guys at r/wallstreetbets discovered this situation and, armed with a free Robinhood trading account, realized that it was an opportunity. With such high levels of short positions, there is the possibility of a "short squeeze." Our heroes take long positions, which means buying, (in this case, especially through call options), which pushes the price of GME stock up and forces short traders to close their positions (also buy) to avoid too big losses. In a market where there are so many short positions, this can lead to a mass closing of these positions, which requires buying to return the "short" shares to those from whom they were borrowed. And because there are so many short positions, it's a LOT of buying. Which can cause a literal explosion in the price and bring spectacular profits to those who initiated the "short squeeze." That's what happened with GME.
The fundamental reason such speculative trading is profitable is that hedge funds were too greedy. When you enter a short position in a market where there are already so many short positions, it is extremely easy to get into a "short squeeze" situation. And you should know this, there is no room for complaining. The whole story is a wonderful example of how the market should work - greedy and unprofitable positions of some are punished by others, who are rewarded with large profits for correcting the mistake of the first.
The important thing here is that this correction of the greed of certain institutional investors is not carried out by other large funds. It is carried out by the coordinated actions of individual investors. Before the era of the Internet and cheap trading platforms, this was completely unthinkable. Internet forums like Reddit provide a platform for coordination and exchange of valuable investment information between individual investors, and platforms like RobinHood have revolutionized retail investing by practically making it free for users.
Both information and the tools for retail investing and trading have never been more accessible than they are today. From an exclusive club for the wealthy and Wall Street professionals, the financial sector is now open to anyone with an internet connection. And that's great. Because that means more competition. And more competition means a more efficient market. That's exactly what we're seeing happening with the whole GameStop saga.
