What is going on with GameStop and this whole thing about naked shorting?

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by GregBahm

Answer: Gamestop made a lot of money selling used games, especially around 2008 and 2014 when new consoles had come out. They could sell one copy of the same game over and over at spectacular profit margins. In this way, they carved out a market for themselves, and their stock traded as high as $20 a share.

But now more and more games are sold digitally, or are free to play, or are accessed through subscription services. This cuts Gamestop out of the relationship between game developer and game customer, so in 2020 Gamestop’s stock was down to $5. Many expected it to go the way of Blockbuster when Netflix came around.

Shorting a stock is betting that the price will go down. Some people consider it evil (you’re hoping a company will fail.) Some people consider it a form of market self-regulation (if you think a company is selling magic beans, you can bet your money on that and take away the profits from their scam.)

In 2020 when COVID hit, and people couldn’t go to Gamestops nor even get their hands on the new consoles, major investment institutions started shorting Gamestop HARD.

But a guy named Ryan Cohen announced he was joining Gamestop, hot after his mega-hit startup “Chewy.” Chewy was a pet food website that got bought by Petsmart. Many thought Petsmart would eventually be destroyed by Amazon, but Chewy provided Petsmart an edge over Amazon by setting up grooming appointments and stuff. Ryan Cohen had generated billions of dollars for investors off of this, so people were really excited by the idea that Ryan Cohen could save Gamestop.

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So the stock shot up to a huge new high of $40.

But then people noticed how distressing this was to the major investment institutions that were betting Gamestop’s stock would go down. This led people to pursue the idea of a “short squeeze.” A “short squeeze” is when you take someone’s bet that your stock will go down, then pump the stock price up so ridiculously high that they go broke. It’s like if you were selling magic beans, and you told everyone to just pretend the beans were magic so you can win a bet, because you’ll pay everyone out of your winnings.

Short squeezes are typically illegal. Former r/wallstreetbets moderator and famous disgraced “pharma bro” Martin Shkreli went to jail for leading a short squeeze in 2017. But the Gamestop short squeeze was unique in that it confederated anonymous internet people in the effort, as opposed to a more coordinated and organized thing.

Gamestop’s stock price rose to $400 and then dropped back down to $40 over the course of a day. Some people made a lot of money, and some people were left holding the bag, as is always the case with short squeezes.

However, a strange thing happened in the next couple of days. The stock price returned to $200 and proceeded to hover around from there. Some people believed this was because of earnest expectation that Ryan Cohen could somehow save Gamestop, and then make it 10 times bigger than it had ever been before. But many believed the short squeeze simply wasn’t over.

There emerged this idea of “the mother of all short squeezes.” The idea was that people would buy so much Gamestop stock, that major financial institutions would collapse and all their money would be transferred to redditors. This idea became the obsession of r/GME. However, as the months went by, people became more and more worried that this magnificent event was never going to come. People started turning on each other and believing that paid shills had infiltrated the message board, so the community collapsed and reformed as the new r/Superstonk. Still, no “MoaSS” occured.

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Now the community grasps for explanations for how this can be. One explanation is that gamestop stock holders didn’t hold, and big financial institutions got out of their short positions long ago, and there has never been a path to a “MoaSS” regardless of government intervention. But a more exciting idea, is that all the gamestop stock holders DID hold, and all the big financial intuitions still ARE short, and they’ve actually bought more GME stock short than should legally exist!

You see, buying short tends to make the stock price go down, as a component of stock price discovery. So the theory is that major financial institutions (“the hedgies”) keep buying more and more GME stock short to drive the price down, even as the r/Superstonk community buys more and more stock to drive the price up. This is an extremely exciting idea, because it means the system could eventually explode, and if the government doesn’t intervene (for some unknown reason) all the GME holders will get rich like they always wanted.

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