$GME (GameStop) Theory: Don’t Lose Your Shorts

$GME Theory: Don’t Lose Your Shorts
by Caleb Arndt

Over the past couple of weeks, the GameStop short selling saga has become a cultural moment, thrusting the relatively unheralded stock market into the collective conscious. So what happened, and what does it mean for institutional trading moving forward?

I have been following the subreddit, r/wallstreetbets, for a number of years. This discussion forum on the infamous website Reddit.com, deconstructs the complexities of investing and boils them down to uncouth memes and internet slang. However, despite their inelegant approach, this community is genuinely well-organized. So much so, that when multiple users posted about GameStop’s unique situation, it gained significant traction. The initial posts suggested that a look into the company’s financials would indicate the share price was undervalued. So, the interest in the stock grew, and the stock price rose (from around $20 to over $300 in a very short period of time). Shortly after this initial interest, another narrative festered in the wallstreetbets streets. Users pointed out that the rise in the stock price led to hedge funds getting involved, with the intention of shorting the shares. Essentially, these hedge funds were betting on the price falling back to where it had been before the recent surge. This is where the chaos of the story begins. 

Like many social movements over the past decade, the internet flexed its influence; this time, via wallstreetbets on Reddit. Before I tell more of the story, it’s important to give a brief explanation of short selling. Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money. In order to sabotage the hedge fund’s plans to short-sell GME, wallstreetbets instructed its millions of followers to buy up all the shares of GameStop they could, thus driving the price up. And not just driving it up 20 or 30 percent—since the beginning of the year, GME is up 1,625%. Of course, there is a level of critical mass pushing this massive buying spree, all built around the premise of bankrupting hedge funds, an institution, which to many, represents the ultra-wealthy and elite. You see, due to the nature of the shorting, many of these hedge funds will be obligated to buy the shares they shorted, regardless of price. So the shares that a hedge fund may have borrowed for $50 a share could very well end up being $300 a share.  

Personally, I stayed almost entirely on the sidelines during this unprecedented sequence of events. However, I have many friends who bought into GME to push the price up; to many of them, it was not about trying to make a quick buck, but rather a form of class warfare. I have no dog in the fight, but I will admit to being fascinated by the whole debacle. I do think there will be tremendous ramifications as a result of this, from regulation to lawsuits, to companies and individuals losing everything they have. My hope is that both retail and institutional investors will reevaluate their risk tolerances and what due diligence truly means. This needs to be a learning opportunity, not a bellwether of what is to come.  

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