Squeezing short-sellers used to be a game for the professionals, but it seems the amateurs are now learning a few of the tricks themselves.
On Friday, a hoard of retail traders who seem to often congregate on Reddit forum r/wallstreetbets managed to cause the stock of video gaming retailer GameStop to rocket 50 per cent in a day up to $65.01, giving it a market value of $4.5bn. On January 4, the stock had been worth just $17.25.
Much has been made of these retail-driven squeezes, which usually involve buying large volumes of out-of-the-money call options in a single name with a high short interest. The option gives the buyer the right to purchase a share at a higher price (say $100 versus a share trading at $50), which the broker then hedges by passing on the risk to a counter-party, or by buying the underlying shares themselves.
In shares with thin liquidity, the latter causes the share price to rise as brokers scramble to purchase shares on the open market to hedge their exposure. In turn, this causes the share price to rise again, forcing brokers to buy even more shares as the value of their exposure grows larger as the share price gets closer to the call options strike price (this non-linear relationship is the “gamma” in the so-called “gamma squeeze”).
In a company with a high short interest (GameStop’s sits at 102 per cent of shares outstanding, according to Eikon Refinitiv data) this buying pressure is further exacerbated by short-sellers closing their positions to avoid losses, which also involves buying back the shares on the open market. Feedback loop upon feedback loop.
And so it was this morning also, with GameStop’s shares up by as much as 60 per cent in pre-market trading. At pixel time, the stock is at 94.10, or a gain of 45 per cent.
One quick thought here. Many have bemoaned the “gamification” of the stock market via commission-free trading apps, but hasn’t the stock market always been a game of sorts? The only difference this time is that it’s the institutional investors who are getting mugged off, rather the retail investors. (For the moment, anyway.)
As to whether these bull attacks constitute insider trading or not, we had a look at this question almost exactly a year ago so we’re not going to go over it again. But it’s fair to say that the Exchange Act of 1934’s stipulation for regulators to keep “fair and orderly securities trading” looks fairly strained right now.
Related Links:
GameStop shares leap as day-trading ‘mob’ tussles with short seller -- FT
Reddit: bull attack -- FT Alphaville
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January 25, 2021 at 06:59PM
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