Gamestop Short Squeeze

Approximately 140 percent of GameStop's public float had been sold short, and the rush to buy shares to cover those positions as the price rose caused it to rise even further. The short squeeze was initially and primarily triggered by users of the subreddit r/wallstreetbets, an Internet forum on the social news website Reddit, although a number of hedge funds also participated. At its height, on January 28, the short squeeze caused the retailer's stock price to reach a pre-market value of over US$500 per share ($125 split-adjusted), nearly 30 times the $17.25 valuation at the beginning of the month. The price of many other heavily shorted securities and cryptocurrencies also increased.

On January 28, some brokerages, particularly app-based brokerage services such as Robinhood, halted the buying of GameStop and other securities, citing the next day their inability to post sufficient collateral at clearing houses to execute their clients' orders. This decision attracted criticism and accusations of market manipulation from prominent politicians and businesspeople from across the political spectrum. Dozens of class action lawsuits have been filed against Robinhood in U.S. courts, and the U.S. House Committee on Financial Services held a congressional hearing on the incident.

The unusually high price and volatility continued after the peak in late January. On February 24, the GameStop stock price doubled within a 90-minute period, and then averaged in the neighborhood of $200 per share for another month. On March 24, the GameStop stock price fell 34 percent to $120.34 per share after earnings were released and the company announced plans for issuing a new secondary stock offering. On March 25, the stock recovered dramatically, rising by 53 percent.

Short selling and short squeezes

Short selling is a finance practice in which an investor, known as the short-seller, borrows shares and immediately sells them, in the hope that they will be able to buy them back later ("covering") at a lower price, return the borrowed shares (plus interest) to the lender, and profit off the difference. The practice carries an unlimited risk of losses, because there is no inherent limit to how high a stock's price can rise should the short-seller be proven wrong in their belief that the stock price was going to fall. This is in contrast with taking a long position (simply owning the stock), where the investor's loss is limited to the cost of their initial investment.

Short sellers are exposed to a risk of short squeezing, which occurs when the shorted stock jumps in value because, for instance, there is a sudden piece of favorable news. Short sellers are then forced to buy back the stock they had initially sold, in an effort to keep their losses from mounting. The market demand they create by purchasing the stock to cover their short positions further raises the price of the shorted stock, thus triggering more short sellers to cover their positions by buying the stock. This can result in a cascade of stock purchases and an even bigger jump of the share price.

GameStop

 

GameStop, an American chain of brick-and-mortar video game stores, had struggled in the years leading up to the short squeeze due to competition from digital distribution services, as well as the economic effects of the COVID-19 pandemic, which reduced the number of people who shopped in-person. As a result, GameStop's stock price declined, leading many institutional investors to believe it would continue falling, thus short-selling the stock. On January 22, 2021, approximately 140 percent of GameStop's public float had been sold short, meaning some shorted shares had been re-lent and shorted again. Analysts at Goldman Sachs later noted that short interest exceeding 100 percent of a company's public float had only occurred 15 times in the prior 10 years.

However, in mid-2019, investor Michael Burry's Scion Asset Management acquired a 3.3-percent stake in GameStop and wrote to the company's board of directors, identifying overlooked value in the company and urging them to buy back shares. In August 2020, Ryan Cohen (the former CEO of online pet food retailer Chewy) revealed a 9-percent investment in GameStop, leading some to believe that the stock was undervalued. In January 2021, Cohen joined GameStop's board, triggering a stock rally.

Online discussion

The subreddit r/wallstreetbets is an online community on Reddit, a social news website. The community is known for discussion about meme stocks and high-risk stock transactions. Observers congregating around r/wallstreetbets believed the company was being significantly undervalued, and with such a large amount of the stock being short they could trigger a short squeeze, by driving up the price to the point where short sellers had to capitulate and cover their positions at large losses.

Even before the short squeeze, there had been interest in GameStop (ticker symbol: GME). Keith Gill, known by the Reddit username "DeepFuckingValue" (often referred to in more formal contexts as "DFV" for short to omit the profanity) and the YouTube and Twitter alias "Roaring Kitty", purchased around $53,000 in call options on GameStop's stock in 2019 and saw his position rise to a value of $48 million by January 27, 2021. Gill, a 34-year-old marketing professional and Chartered Financial Analyst (CFA) from Massachusetts, stated that he began investing in GameStop during the summer of 2019, after believing the stock to be undervalued. He shared information regarding his investment on r/wallstreetbets, providing regular updates on the investment's performance, including times when the investment had plunged. He stated on January 29, 2021, after the GameStop short squeeze, that he "thought this trade would be successful" but "never expected what [had] happened over the last week", adding that he planned to continue his YouTube channel as Roaring Kitty and potentially buy a house.

Another user, Stonksflyingup, posted a humorous video on October 27, 2020, explaining how a short position by Melvin Capital could be used to execute a short squeeze, using a scene from Chernobyl to illustrate how the hedge fund would blow up similarly to a nuclear reactor.

On January 27, 2021, technology news website Mashable reported that the r/wallstreetbets subreddit had received 73 million page views in 24 hours –– breaking all-time traffic records. On January 29, the community surged by 1.5 million users overnight –– to a total of 6 million users –– making it the fastest-growing subreddit at the time. Reddit moderators temporarily closed the subreddit to the public, and Discord moderators temporarily banned the server for "hateful and discriminatory content." Apart from GameStop, many other heavily shorted securities (as well as securities with low short interest) saw increases in their prices:

^a Prices may be higher during extended-hours trading.

The shares of GME Resources, an Australian mining company with Australian Securities Exchange (ASX) symbol GME, increased more than 50 percent during intraday trading, closing with a 13.3-percent increase on January 28. This was speculated to have been due to a joke or mistake, as the ASX symbol was the same as GameStop's NYSE ticker symbol (GME).

Amateur traders in Malaysia were inspired by the GameStop short squeeze to target shares for Malaysian latex glove makers on Bursa Malaysia as a countermove against the devaluation of the sector by institutional investors following the lifting of a ban on short selling in the country earlier in January 2021. Top Glove, Hartalega and Supermax respectively recorded increases in shares as high as 15 percent, 10 percent and 9.2 percent during intraday trading on January 29, before closing with respective increases of 8.5 percent, 5.4 percent and 3.7 percent. The rally call was reportedly organized from r/bursabets, a Malaysian offshoot of r/wallstreetbets named after the Malaysian stock exchange. On March 2, Rocket Mortgage saw a more than 70 percent spike in its stock price due to a surge in trading following discussion of the company on r/wallstreetbets, but the Rocket Mortgage stock price reverted to its pre-surge level the next day.

Cryptocurrencies

After brokerages halted the buying of GameStop and other securities, the price of several cryptocurrencies also began to increase substantially, with Dogecoin's value increasing over 800 percent. Users of the subreddits r/CryptoCurrency and r/SatoshiStreetBets attempted to pump up Dogecoin to make it "the next GME/Bitcoin". In addition, the price of Bitcoin, the world's largest cryptocurrency, increased 20 percent in value to more than $37,000 after Elon Musk endorsed it in his Twitter bio, partially related to the surge in the GameStop share price by Reddit users. Robinhood then began limiting the trading on Dogecoin.

Metal futures

Following the stock market surge, futures for silver began to rapidly increase as well, although later news reports clarified that it was unclear who was behind the rise. On January 28 and 29, the price of silver rose 10 percent. The surge also had an effect on the prices of gold and copper on the London Metal Exchange. On February 1, the price of silver hit an eight-year high as GameStop shares continued their volatile tendency, with trading^[which?] being halted at least once as the price fell by double-digit percentages. Users on r/wallstreetbets deny involvement in the increasing price of silver, instead blaming the increase on institutions and hedge funds with positions in silver, such as Citadel, seeking to offset losses on GameStop.

Investigations

On January 27, 2021, White House press secretary Jen Psaki said that Treasury Secretary Janet Yellen and others in the Biden administration were monitoring the situation. Yellen convened a meeting of financial regulators, including the heads of the U.S. Securities and Exchange Commission, Federal Reserve, Federal Reserve Bank of New York and the Commodity Futures Trading Commission, to discuss the volatility surrounding the short squeeze. Because Yellen had received speaking fees from Citadel before becoming treasury secretary, she sought and received permission from Treasury Department ethics lawyers before convening the meeting. The regulators were not seen as likely to view the volatility as creating any systemic risks.

Speaker of the House Nancy Pelosi said that Congress would also be reviewing it. Senator Sherrod Brown announced that the Senate Banking Committee would hold a hearing on the state of the stock market and the alleged market manipulation surrounding the GameStop short squeeze. Representative Byron Donalds called for Congress to launch "an immediate investigation into Citadel, L.L.C. and Robinhood".

On January 29, 2021, the U.S. Securities and Exchange Commission announced it was reviewing the incident with the aims "to protect retail investors" from "abusive or manipulative trading activity" and "to identify and pursue potential wrongdoing".

Attorney General of New York Letitia James confirmed in a press release that her office would look into the matter, saying "We are aware of concerns raised regarding activity on the Robinhood app, including trading related to the GameStop stock".

Texas Attorney General Ken Paxton said he would also investigate the decision of brokerages to limit the buying of securities related to GameStop and other stocks, saying that it "stinks of corruption". His investigation has extended to 13 entities, including Discord, Robinhood, the trading platforms Interactive Brokers and TD Ameritrade, and Citadel Financial.^{[needs update]}

Congressional hearing

On January 28, 2021, the House Financial Services Committee announced that it would convene a hearing to discuss online trading platforms. On February 18, 2021, the committee, chaired by Representative Maxine Waters, held a remote hearing titled Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide. Witnesses at the hearing included Reddit user and investor Keith Gill, Citadel CEO Ken Griffin, Reddit CEO Steve Huffman, Melvin Capital CEO Gabe Plotkin, Cato Institute financial regulation expert Jennifer J. Schulp, and Robinhood CEO Vlad Tenev. Representatives focused their attention on Robinhood's role in the event, asking Tenev why the brokerage had limited the trading of some securities and if it had clearly communicated its business model to its customers. They also questioned whether Robinhood was encouraging its customers to take excessive risks in order to generate a profit and whether it had the appropriate infrastructure and funding to handle influxes of new clients. Several committee members expressed skepticism at the practice of payment for order flow and pressed Griffin and Tenev on the issue. Representative Brad Sherman accused Griffin of trying to evade his questions. At various points during his initial testimony and questioning, Gill made references to memes. Committee members also discussed increasing short-selling regulation.

On March 17, 2021, the Financial Services Committee held a second hearing, which focused on the regulation of payment for order flow and gamification of investing.

Lawsuits

A Robinhood customer filed a class-action lawsuit against the company on January 28, 2021, for halting trading on GameStop. The lawsuit, which was filed in the United States District Court for the Southern District of New York, claimed that Robinhood "purposefully, willfully, and knowingly removing the stock 'GME' from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market"; the lawsuit also accused Robinhood of "manipulating the open-market". Several other investors began using the app DoNotPay to automatically join the lawsuit.

A second class-action was filed in the Northern District of Illinois claiming that Robinhood's decision to halt trades of BlackBerry, Nokia and AMC was made "to protect institutional investment at the detriment of retail customers". Similarly, a man in Colorado filed a federal lawsuit against Robinhood as well as Citadel, Charles Schwab, Interactive Brokers, Open to the Public Investing, TD Ameritrade, and Webull, alleging he "was forced into a situation by which he was essentially forced to sale his equities at a drastically reduced position given the new market condition set by these supposedly neutral brokerage houses, taking significant losses and being incapable of trading in these publicly held equities that he had performed significant due diligence and research on, and relied upon over the course of his job as a day trader." As of February 2, 2021, Robinhood was facing 34 separate class-action lawsuits. In January 2022, a federal court ruled that investors could not pursue negligence and breach of fiduciary duty claims, citing Robinhood's customer agreement which allowed for restrictions on trading. The same judge had previously dismissed a lawsuit alleging that there was collusion between brokerages and Citadel Securities.

A lawsuit was filed in a court in Massachusetts by securities class action firm Hagens Berman Sobol Shapiro on behalf of an investor against Keith Gill. The suit alleges Gill misrepresented himself as an amateur investor to inflate the stock price.

Regulation

On February 8, 2021, the U.S. Securities and Exchange Commission released a sample letter providing guidance to companies seeking to raise capital during periods of "extreme price volatility". It requires that companies outline the related risks in their financial disclosures and encourages companies to contact the SEC prior to launching such offerings.

In reaction to the short squeeze, some Democratic politicians have expressed support for a financial transactions tax, arguing that it would raise revenue and curb speculative betting.

In June 2022, a 140-page report released by the United States House Committee on Financial Services called for the Securities and Exchange Commission and the Financial Industry Regulatory Authority to craft new rules to address market risks highlighted by the events of January 2021, including a liquidity rule and framework governing liquidity planning for clearing brokers.

Scientific Research

In January 2024, researchers concluded that there was a causal link between the Reddit/Twitter activity and the movements in the stock price

Political figures

A variety of politicians and commentators across the political spectrum made statements in support of those driving up the price of GameStop and other stocks, as well as against Robinhood and other companies' decision to limit these trades, including Representative Alexandria Ocasio-Cortez, Senator Ted Cruz, Representatives Ro Khanna, Ted Lieu, and Rashida Tlaib, Fox Business host Charles Payne, and conservative political commentators Rush Limbaugh, Ben Shapiro, and Donald Trump Jr.

 

Senator Elizabeth Warren criticized both the short sellers and the buyers, and argued that more regulation was needed. She stated that the large investors and hedge funds who were criticizing the rally "have treated the stock market like their own personal casino while everyone else pays the price". She also called for stronger regulatory action from the U.S. Securities and Exchange Commission "to ensure that markets reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders."

In an interview with CNBC, Massachusetts Secretary of the Commonwealth William F. Galvin criticized the investors' behavior as based on reckless speculation and called for a 30-day suspension of trading GME stock, stating "I think we've all recognized the current pandemic has created a unique situation where many have gotten into day-trading and really have no idea exactly what they're doing ... I think small-time investors like that, unsophisticated investors, are going to be hurt by this." In another CNBC interview joined by Canadian businessman and Shark Tank investor Kevin O'Leary, O'Leary disputed Galvin's assertions, saying that real-world education was positive; that the risk of being targeted by "social media vigilantes" would dissuade hedge funds from aggressively selling short stocks; and zero-commission brokerage apps such as Robinhood had sparked a growing interest in retail investing.

On January 28, New York State Comptroller Thomas DiNapoli told reporters that the state pension fund, which had 647,500 shares in March 2020, had sold off hundreds of thousands of shares since then, benefiting from the squeeze.

Public figures

In a CNBC interview, Reddit co-founder Alexis Ohanian compared the rally to Occupy Wall Street, saying that "it's a chance for Joe and Jane America—the retail buyers of stock—to flex back and push back on these hedge funds." Numerous journalists have also drawn comparison to the Occupy movement. Similar sentiments sympathetic for the retail investors were expressed by billionaire investors Mark Cuban and Chamath Palihapitiya. Palihapitiya, who passed on early investment opportunities in Robinhood, opined that the founding co-CEOs, Baiju Bhatt and Vladimir Tenev, lacked integrity and urged his followers to delete the app. OpenAI CEO Sam Altman suggested the company change its name. SpaceX and Tesla CEO Elon Musk also criticized the general practice of stock shorting, calling it a "scam legal only for vestigial reasons" A number of major hedge funds had previously shorted Tesla, incurring losses of more than $40 billion as the stock rose considerably.

Several celebrities and influencers also criticized Robinhood. Actor and rapper Ja Rule, who had used Robinhood since 2014, said what the company did was "a fucking CRIME" and called the situation "an uprising". Comedian and television host Jon Stewart, after joining Twitter, expressed support for the Reddit traders in his first tweet, stating "they're joining a party Wall Street insiders have been enjoying for years". Late night host Jimmy Kimmel criticized Stewart for his tweet, sarcastically asking him "RealDonaldTrump? Is that you?"; the tweet was later deleted, Kimmel later called the Redditors "Russian disruptors" on his show. YouTuber Philip DeFranco announced he would be dropping his partnership with Robinhood, saying "Robinhood is never getting a fucking spot on my show again regardless of the offer." Barstool Sports founder David Portnoy also criticized Robinhood for its lack of "free trading". More generally, it was recognized that Wall Street was now subject to the same populist vigor (afforded by Internet connectivity) as the entertainment industry, politics, and so on.^{[additional citation(s) needed]}

However, investor Michael Burry, who had acquired a 3.3-percent stake in GameStop in 2019, criticized the short squeeze, stating that "there should be legal and regulatory repercussions", and adding "this is unnatural, insane, and dangerous". In a CNBC interview, billionaire investor and hedge fund manager Leon Cooperman angrily criticized the Reddit users' market behavior, calling it a result of the federal response to the pandemic and stating that it would "end in tears" for the retail investors.

In March 2021, it was reported that the former basketball player Michael Jordan, who was among the most wealthy sports figures, had lost a major portion of his net worth on GameStop shares. His net worth, as reported by Forbes, had declined by $500 million from its peak of $2.1 billion in 2019. Other co-owners of the Charlotte Hornets with Jordan also experienced heavy losses due to short positions on GameStop, being forced into tens of billions of dollars of debt as a result.

Retaliation and protests

Disgruntled users review-bombed the Robinhood app on the Google Play Store after it halted the trading of GameStop securities, pushing its ratings down to one star. Google deleted at least 100,000 such reviews, calling them "coordinated or inorganic". However, after another round of negative reviews on the app dropping it to a 1.1-star rating, Google confirmed that the new reviews do not violate Google policies and will not be removed. Protesters also showed up outside Robinhood headquarters in Menlo Park, California, at the Securities and Exchange Commission headquarters in Washington, D.C., and the New York Stock Exchange. Menlo Park police reported ten separate incidents related to protests at Robinhood headquarters from January 28 to February 9, including a man throwing animal feces at the building's front door.

The Wall Street Journal reported that short seller and Citron Research editor Andrew Left was being targeted online, including an incident where Left's social media accounts were hacked to text his children "threatening, profane and personal language". Several financial executives hired additional security due to online threats. Gabe Plotkin of Melvin Capital hired security after facing anti-semitic slurs and threats. Steve Cohen deleted his Twitter account after threats to his family.

Alleged conflict of interest between Robinhood and Citadel

 

Following the decision by brokerage firm Robinhood to halt the buying of stocks affected by the short squeeze, users on Reddit and other social media called in question its relationship with Citadel Securities. Bloomberg News had previously reported that 40 percent of Robinhood's revenue was derived from selling customer orders to market-making firms including Citadel Securities and Two Sigma Securities, in a practice known as payment for order flow. The Washington Post reported that Robinhood routed more than half of its customer orders to Citadel, which was its largest market making partner by volume. Citadel Securities is the sister company to Citadel LLC, which along with Point72 Asset Management invested $2.75 billion into Melvin Capital. As Robinhood restricted trading of GameStop shares, users alleged that Citadel Securities directed Robinhood to do so. Citadel Securities stated that they did not instruct any brokerage to suspend or otherwise limit trading, and Robinhood denied that it had been pressured by Citadel. In November, a U.S. District Court dismissed a class action lawsuit ruling that investors failed to show collusion.

During the February 18 hearing held by the House Financial Services Committee, Citadel CEO Kenneth Griffin and Robinhood CEO Vlad Tenev faced questioning regarding their relationship and denied that the limits imposed on the trading of GameStop shares had been requested by Citadel.

Internal communications revealed

On September 27, 2021, Citadel released a statement through Twitter rejecting "Internet conspiracies and Twitter mobs" that alleged the firm pushed Robinhood to limit trading in GameStop. The statement was made as the hashtag #KenGriffinLied was trending on said platform, in which users accused Citadel's CEO Ken Griffin of having lied under oath to Congress. Internal Robinhood messages stemming from a class-action lawsuit, showed Robinhood executives "scrambled to talk to Citadel CEO Ken Griffin", on January 27, 2021, the day trading of GameStop and related stocks was temporally halted, according to VICE.

The lawsuit alleges that on January 27, "employees of Citadel Securities and Robinhood had numerous communications with each other that indicate that Citadel applied pressure on Robinhood." Robinhood President and COO Jim Swartwoth said in an internal chat, "you wouldn't believe the convo we had with Citadel, total mess." The lawsuit alleges that a call was set up between Robinhood CEO Vlad Tenev, and a redacted person at Citadel Securities. It notes that Swartwout then stated, "I have to say I am beyond disappointed in how this went down. It's difficult to have a partnership when these kind of things go down this way."

During the Congressional hearing, lawmakers asked Ken Griffin if anyone in Citadel pressured Robinhood to restrict trading, to which he answered, "absolutely not."

In February 2021, Deadline Hollywood reported on Netflix's plans to develop a movie based on the events, with Mark Boal in negotiations to write and Noah Centineo set to star in the film. Separately, Metro-Goldwyn-Mayer (MGM) acquired the rights to make its own movie based on Ben Mezrich's book proposal The Antisocial Network, aimed at chronicling the recent events on Wall Street. This would become the movie Dumb Money, which was released on September 22, 2023. A limited-run series based on the events titled To the Moon was also announced. Jaime Rogozinski, who founded r/wallstreetbets in 2012, sold off his life experience to RatPac Entertainment, and a documentary based on the event, created by the studios XTR and The Optimist and partially funded by a Kickstarter campaign, is also in the works. HBO developed a mini-series, Gaming Wall Street, which was released on March 3, 2022. The documentary GameStop: Rise of the Players interviewed several of the r/wallstreetbets users and was released on January 28, 2022.

In September 2022, Eat the Rich: The GameStop Saga, an investigative-docuseries, premiered on Netflix. It is a 3 episode Limited-run series/Miniseries.

As the stock price recovered after the short squeeze, several retail investors on Reddit (many of which still held GameStop stock) began speculating if a second, even bigger, short squeeze could occur through similar methodology. This hypothetical event was eventually dubbed "the mother of all short squeezes" ("MOASS"), and a community sprung up around the theory on various subreddits.

Throughout the months that followed, the MOASS theory continued to evolve and came to allege far-reaching naked short selling and other criminal conduct by major financial institutions, and a belief that short squeezing this will generate stock prices so absurdly high that they could cripple the global economy. The theories primarily focuses on GameStop, but also other meme stocks such as AMC Theatres and Bed Bath & Beyond. Members of this community refer to themselves as "Apes".

The community has been described as a doomsday cult, and their financial beliefs are regarded as conspiracy theories.

• Mezrich, B. (2022). Dumb Money: The GameStop Short Squeeze and the Ragtag Group of Amateur Traders That Brought Wall Street to Its Knees. New York: Grand Central Publishing.
• Chohan, U.W. and Kerckhoven, S.V. (2023). Activist Retail Investors and the Future of Financial Markets: Understanding YOLO Capitalism. London: Routledge.
• Jakab, S. (2022). The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors. London: Penguin Random House.

• Cryptocurrency bubble – Speculative bubble involving cryptocurrency prices
• Everything bubble – 2020–2021 correlated bubble in assets
• Philip Falcone – businessman who performed a short squeeze in 2012
• Greater fool theory – Theory that the price of an object is determined by consumer demand
• Irrational exuberance – Unfounded market optimism that lacks fundamental valuation
• Pump and dump – Form of securities fraud
• South Sea Company – 18th-century economic speculation bubble
• Tulip mania – 17th-century economic bubble in the Netherlands