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The story reads like a thriller novel.
Traders who hang around a Reddit board called WallStreetBets have been getting together to make bets on a bunch of stocks over the last few years. One of those stocks was
GameStop Corp. (NYSE: GME).
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One of these would-be traders noticed that shares of GameStop were heavily shorted.
Very heavily shorted.
The Reddit traders started buying the stock and short-dated call options to drive out the shorts.
You see, when traders sell a stock short, they borrow the shares, sell them, and then plan to rebuy them later at a lower price, netting a profit. But when share prices start climbing, they re forced to cut their losses and buy back the stock at the higher price or else risk financial ruin. This is called a short squeeze, and the buying from it, called short covering, also helps push the share price higher.
Wall Street falls amid GameStop frenzy
Since the Fed injected trillions of dollars into the financial markets following a crisis last March, Wall Street has risen to new record highs in what has been increasingly seen as a speculative bubble on the way to bursting.
In recent days, the market frenzy has taken a new turn with a so-called “short squeeze” that has seen the shares of companies whose business models are in severe trouble, possibly putting them on the road to bankruptcy, escalate by hundreds of percentage points.
A GameStop storefront (Wikimedia Commons)
The exemplar of this phenomenon has been GameStop, a US firm selling video games, consumer electronics and gaming merchandise with more than 5,000 stores internationally. At the start of the year its shares were trading at around $19. Yesterday they had risen to more than $330, an increase of 1,500 percent, taking the market value of the company to more than $20 billion.