28/01/2021 GameStop: flash mob vs Wall Street | Financial Times

Opinion Lex
GameStop: flash mob vs Wall Street
This is a cautionary tale of how social media can be co-opted to attack the financial establishment

GameStop has long been a target for short sellers © AFP via Getty Images

AN HOUR AGO

For most Americans, GameStop is a struggling bricks-and-mortar video game

retailer. For investors, the company has become the epicentre of a war between
hedge fund pros and so-called “Reddit bros”.

Their concerted buying has pushed the stock up 1,700 per cent since the start of
the year, forcing short seller Melvin Capital to seek a cash injection from allies.

It would be tempting to dismiss the Reddit bros — some of them alt-right

supporters — as “dumb money” and their frenzied buying as a Ponzi scheme.
Instead, this is a cautionary tale of how social media can be co-opted to attack the
financial establishment. Reddit may be changing Wall Street in the way Twitter
and Facebook changed politics.

GameStop has long been a target for short sellers. Short interest in the shares
exceeded the entire float. Amateur stock jocks armed with free-trading apps piled
in, egging each other on via Reddit’s WallStreetBets message board. This was retail
investment for flash mobs

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28/01/2021 GameStop: flash mob vs Wall Street | Financial Times

The resultant short squeeze was magnified by short sellers scrambling to cover
their exposure via call options, setting up punishing feedback loops. Short sellers
have lost $5bn on GameStop this year, according to S3 Partners. Melvin and Citron
Research, both closed out their positions this week.

Emboldened, retail investors are taking aim at other heavily shorted stocks,
including cinema operator AMC and BlackBerry. The trend rippled across the
Atlantic to lifted heavily shorted UK stocks such as Pearson. Algorithmic traders
must now be reprogramming to scrape Reddit message boards for pointers to the
next big ramp.

The Securities and Exchange Commission has to decide where the dividing line lies
between legitimate online discussion of a stock’s prospects and market abuse. Chat
app Discord has banned the r/WallStreetBets server, though this was for hate
speech rather than financial fraud.

Smart Reddit bros will have already sold out to the Greater Fool, as latecomers are
termed. Fresh short sellers are targeting GameStop. What goes up must come
down. The phenomenon will repeat as long as regulators allow it and markets are
flying.

The Lex team is interested in hearing more from readers. Please tell us what you
think of Gamestop in the comments section below.

Copyright The Financial Times Limited 2021. All rights reserved.

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