What happened with GameStop this week?

Monday 1 February 2021

If you’ve been following the financial news this week, you’ve heard about GameStop. The struggling game retailer, owner of Australia’s EB Games, has been on the decline for years as more and more gamers have moved to buying games digitally rather than in bricks and mortar stores. 

This decline had hedge funds overly short the stock (betting that the share price would keep falling). 138% of the shares available to trade were short (meaning some shareholders had lent their shares out multiple times for funds too short). This set up a risky situation for those short sellers, with so many people short the stock it would be difficult to buy the stock back if they needed to get out of their short positions. 

What came next was an epic short squeeze, a tactic normally reserved for large funds, to drive the price up and force those short the stock to cover their bets. 

The person who started it all, by posting on Reddit, YouTube and TikTok, was a 34 year old former insurance worker who has turned a $53,000 investment into $48 million. These two articles from the New York Times tell the story of the past couple of weeks. The first article retells the story of what happened and the second looks at the broader context and underlying causes. 

The second article is particularly interesting, and it tries to ground the GameStop saga in the string of ‘online revolts’ we’ve seen recently – be it disrupting presidential rallies, getting the graphics changed on a movie or in this case moving the share price of a stock. We shouldn’t expect this is the last time we see this phenomenon, where individuals from around the world congregate on online forums and social media and find ways to take the fight to big institutions. 

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