Why Did GameStop Stock Go Up? The last week of January delivered a shock to the market. After starting the month under $20 per share, GameStop stock shot up to a peak of $483, then drifted down a bit to close just below $330 per share.
Hedge funds lost billions after betting that GameStop prices would go down, and the market as a whole had its worst week since October 2020.
Retail trades were coming in so quickly that commission-free investing platform Robinhood had to limit buys for many of its members, prompting furious responses – and at least a dozen lawsuits.
News agencies couldn’t keep up with the action, and social media was saturated with GameStop-related chatter. Even members of Congress weighed in as the drama unfolded.
So, what happened? Why did GameStop stock go up? And why did professional investors see massive losses as a result?
The Story Begins With Citron Research
Andrew Left founded Citron Research to provide retail investors with the information necessary to make smart decisions.
Among other accomplishments, the firm has successfully identified more than 50 companies with questionable business practices. In many cases, these companies have become the target of investigations by regulatory agencies, and many were forced to correct deficiencies or cease operations.
Citron is best known for its “short reports”, which demonstrate through research and analysis that specific companies are likely to lose value. The firm bet against those companies by short-selling shares, and many large investors like hedge fund Melvin Capital followed Citron’s lead.
In this particular case, Citron, Melvin, and others accumulated massive short positions in GameStop, but something unexpected happened. The stock didn’t go down – and in fact, it rose by more than 1,000 percent.
Why did GameStop stock go up so much and so quickly? The answer can be found on the social media platform Reddit.
How Reddit WallStreetBets Took On Wall Street
The Reddit forum WallStreetBets was integral to the rise of GameStop stock.
Though the group has been around for some time, it became more popular as the pandemic dragged on. People who were out of work, out of school, and under stay-at-home orders started dabbling in the stock market.
That served to increase membership numbers for no-commission trading platforms like Robinhood, along with interest in forums that offered real-world stock advice for novice and amateur traders.
WallStreetBets learned of the large short positions that major firms held in GameStop, and they rallied followers to push up the stock price through buying shares.
As the group continued to push this point, followers bought, bought, and bought some more. Firms with short positions were forced to buy at the higher prices to close out short positions, which pushed share prices up even further.
This technique – forcing investors in short positions to buy shares at higher prices – is known as a “short squeeze”.
Typically, only seasoned investors with substantial resources attempt it. In this case, a vast number of small retail investors made the strategy work for the masses.
WallStreetBets made it clear that while they were enjoying the financial gains, a big part of their victory was beating Wall Street at its own game. Many are working to repeat the experience with other heavily shorted stocks, including AMC (AMC), Bed Bath & Beyond (BBBY), and Blackberry.
It is worth noting that the WallStreetBets forum was shut down for about an hour on January 24th as the GameStop buying frenzy began to threaten large hedge funds. There has not yet been an explanation for the disruption in service, leaving many members to speculate that the move was a deliberate attempt to undermine the group’s message.
It appears unlikely that WallStreetBets will see another David and Goliath-style win, but it’s not out of the question. Group members are passionate about their cause – whether it is improving their financial situation, “punishing” Wall Street, or both – and if these new tactics don’t work, they may find an alternative that does.
Elon Musk Tweets, GameStop Soars
Tesla’s Elon Musk dove into the fray definitively on the side of WallStreetBets.
He has long been a critic of short selling – and really of the “establishment” in general – despite the fact that for a few days in January, he held the title of richest person in the world.
— Elon Musk (@elonmusk) January 26, 2021
Musk sent out a Tweet to his 44 million followers with just one word, “Gamestonk”, and a link to the WallStreetBets forum on Reddit. “Stonk” is a slang term for “stock” that is popular on forums like WallStreetBets, and his use of the term signified solidarity.
That Tweet electrified the crowd, and additional buys came pouring in. GameStop soared as high as $500 per share in after-market trading, and the overall volume was so heavy that large platforms like TD Ameritrade reported their technology was struggling to keep up.
Melvin Capital Gets A Bailout
Once the dust settled and all of its positions closed, hedge fund Melvin Capital emerged as one of the hardest hit by the GameStop roller coaster.
It lost more than 50 percent on its assets under management in the month of January. The situation was so dire that on January 25th, it needed a bailout from other firms to survive.
Citadel and Point72 Asset Management offered $2.75 billion to Melvin Capital in exchange for non-controlling revenue shares for three years.
Both Citadel and Point72 have lost money in their investment thus far, though they clearly expect Melvin to recover in coming months and years.
Robinhood Shuts Down GameStop Trading
Amateur retail investors couldn’t help but think that what happened next proved the “little guys” are at a disadvantage.
Robinhood removed the option for members to purchase more GameStop shares, along with a list of approximately 50 other popular stocks. In some cases, members reported that Robinhood forced the sale of their shares or cancelled outstanding orders.
Robinhood’s decision to restrict GameStop trading drew heavy criticism across the board, with complaints from traders, members of Congress, and a wide variety of big names in business and entertainment.
In an attempt to rehabilitate its image, Robinhood attempted to explain that the decision was strictly based on financial distress. The volume of trades exhausted Robinhood’s resources, and trading had to be restricted to stay in compliance with regulatory requirements.
However, it appears that the damage is done, and many detractors have sworn off Robinhood in favor of alternative platforms. What this means for Robinhood’s future is hard to predict.
What’s Next for GameStop, Cintron, and Robinhood?
The GameStop frenzy appears to be winding down, and social media has moved on to other stock targets.
AMC Entertainment enjoyed a nice bump, and many of the WallStreetBets Redditors are buying silver and related stocks, ETFs, and other derivatives.
For its part, Citron Research announced that it will no longer offer opinions on which companies are good candidates for short sellers. Instead, the firm will focus on research that shows which stocks are likely to be good buys.
It is not yet clear how the events of late January will impact Robinhood, both in the short-term and the long-term. Certainly, it has lost the trust of many clients, and the platform is likely to lose members.
Robinhood had planned an IPO for 2021, and prior to January, it was expected to be hugely successful. At the moment, there are a lot of questions on whether the company will move forward with its original plan or delay the IPO until the current negative sentiment towards its brand has been resolved.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.