Social Media Disruption of Institutional Investing Norms
So this is quite entertaining. U.S. retailer GameStop is a large chain that sells physical media of video games and related products. Since physical media is going the way of the Dodo with everything moving to direct digital downloads, its revenues have been negative, and its share price slumped as you would expect.
Short sellers, including fairly major hedge fund Melvin Capital backing the research of the well-regarded activist short-seller behind Citron Research, saw this and so sensibly bet massively against GameStop. Except at that point, a couple of things happened. Some new board members with good track records in online retail joined the GameStop board.
Also, the self-described basement dwellers on Reddit’s Wall St Bets sub noticed GameStop was massively shorted as its short interest was so high that the number of shorted shares was greater than the float (the number of tradable shares available), i.e. the short float was well over one hundred per cent. They started buying, hoping to squeeze the short-sellers.
Historically squeezing short-sellers isn’t something ordinary retail investors could do as they don’t have the buying power of an institution. But disruptive technology like social media to spread the message, no commission or low commission online trading, and the effect of hedging algorithms that mean anyone buying call options on a share create a feedback loop where the underlying shares are automatically purchased; mean in this case they now could contribute to a massive increase in the GameStop share price in a rapid amount of time.
So far, the unexpected sharp increase in the share price has hurt the short-sellers who have had mark-to-market losses of over $6 billion. The chaos doesn’t look to stop as there are still new disciplined institutional traders shorting GameStop, along with the self-described retards of Reddit acting like a horde of barbarians and attempting to keep the share price up with the volatility being as crazy as expected.
The squeeze of short-sellers took a personal nature early on as the Wall Street Bets users quickly realised that Melvin Capital was the main short-seller due to Melvin themselves having disclosed that they made a large short bet via listed put options which Melvin disclosed in filings with the SEC.
With Friday being payday when Reddit’s now self-organising horde get paid, also critically double witching hour when share options and futures expire, with the further possibility there could be a gamma squeeze; there could be even further large volatility of the GameStop share price and contribution to the general chaos.
