GameStop short squeeze

• 1. Introduction

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  The GameStop short squeeze of January 2021 began with an arithmetic oddity. By the 22nd of January, roughly 140 percent of the video game retailer's public float had been sold short. That means more shares had been bet against than ordinarily existed for the public to trade, because some borrowed shares were lent out and shorted a second time.

  Six days later, in pre-market trading on the 28th of January, the stock passed 500 dollars a share. Adjusted for a later stock split, that equals 125 dollars. The month had opened with the shares at 17 dollars and 25 cents, so the price had climbed nearly thirtyfold.

  Hedge funds that had wagered against the company were badly hurt. Much of the buying that hurt them was organized on a Reddit forum called r/wallstreetbets. What does it take for an online crowd to corner professional investors? Why did app-based brokerages suddenly stop letting their customers buy? And when the dust settled, who actually came out richer?

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• 2. Anatomy of a Squeeze

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  A short seller borrows shares, sells them at once, and hopes to buy them back later at a lower price. The shares go back to the lender along with interest, and the seller keeps the difference. Nothing caps how high a stock can climb, so the potential loss has no ceiling. Someone who simply owns a stock can lose only what was paid for it.

  That asymmetry creates the squeeze. When a heavily shorted stock jumps, perhaps on welcome news, sellers rush to buy shares back to stop their losses. Their buying lifts the price further and pushes still more sellers to cover. Analysts at Goldman Sachs later observed that short interest above 100 percent of a company's float had happened only 15 times in the previous 10 years.

  GameStop, a chain of brick-and-mortar video game stores, had been losing ground to digital distribution services. The COVID-19 pandemic then kept shoppers away from physical shops. Its falling share price convinced many institutional investors that the slide would continue, so they shorted it.

  Not everyone agreed. In mid-2019, Michael Burry's firm Scion Asset Management took a 3.3-percent stake and wrote to the board, arguing that the company held overlooked value and should repurchase shares. In August 2020, Ryan Cohen, the former chief executive of the online pet food retailer Chewy, disclosed a 9-percent investment. Some read that as a sign the stock was undervalued.

  In January 2021 Cohen joined the board, and the stock rose. On the 11th of January it jumped on the news, the first of the sharp moves that a Reddit community would soon amplify.

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• 3. The Forum

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  Keith Gill, a 34-year-old marketing professional and Chartered Financial Analyst from Massachusetts, bought about 53,000 dollars of GameStop call options in 2019. On Reddit he posted as DeepFuckingValue, shortened to DFV in polite company. On YouTube and Twitter he went by Roaring Kitty. He shared regular updates on the position, including the stretches when it sank. By the 27th of January 2021 it was worth 48 million dollars.

  After the squeeze, on the 29th of January, Gill said he had thought the trade would be successful but never expected what had happened over the last week. He added that he planned to keep making his YouTube videos and might buy a house.

  An earlier spark came on the 27th of October 2020. A user named Stonksflyingup posted a humorous video that used a scene from the series Chernobyl. It explained how a short position held by Melvin Capital could end in a squeeze, with the hedge fund blowing up like the reactor.

  The forum itself was known for talk of meme stocks and high-risk trades. Its members believed GameStop was badly undervalued. They also saw that with so much of it sold short, enough buying could force the short sellers to give up and cover at heavy losses.

  Traffic exploded. Mashable reported that on the 27th of January the subreddit drew 73 million page views in 24 hours, an all-time record. By the 29th it had gained 1.5 million users overnight, reaching 6 million, which made it the fastest-growing subreddit of the time. Moderators temporarily closed it to the public.

  The forum's Discord server was banned on the 27th of January for violating rules on hateful and discriminatory content. Users quickly set up similar servers, and Discord reversed its decision the next day and tried to help the community moderate instead.

  A cyber security company later suggested that thousands of automated bots might have hyped GameStop, Dogecoin and other stocks on social media. How much they influenced actual trading remains unclear. The forum had been founded back in 2012 by Jaime Rogozinski, who would later sell the story of his experience to RatPac Entertainment.

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• 4. Peak Week

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  A comment from Citron Research predicting that GameStop would fall arrived just before the forum's buyers pushed the other way. Over about two weeks, the stock rose 1,500 percent by the 27th of January. Its volatility triggered trading halts several times.

  On the 25th of January, according to Dow Jones market data, more than 175 million GameStop shares changed hands. That was the second-largest single-day total on record for the stock, against a 30-day average of 29.8 million. Some of the buyers were young teenagers.

  The stock closed up 92.7 percent on the 26th of January. Elon Musk then tweeted "Gamestonk!!", a nod to the "stonks" meme, with a link to the forum. A brief surge above 200 dollars followed. The all-time highest intraday price was 483 dollars, almost 190 times the 2 dollar and 57 cent low of April 2020.

  On the 27th of January, the forum's attention reached AMC Theatres, a company in a position similar to GameStop's. AMC Networks, a different company, also rose sharply, which was believed to stem from its similar name. Bloomberg reported that US trading volume by share count that day exceeded the peak of October 2008 during the financial crisis.

  The Financial Times described a second force at work, a gamma squeeze. Traders bought call options, and the sellers of those options hedged by buying the underlying shares. That buying drove prices higher still.

  On the 28th of January, more than 1 million GameStop shares worth 359 million dollars were deemed failed to deliver. The company's market capitalization hit 33.7 billion dollars, briefly making it the highest-valued company on the Russell 2000 index.

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• 5. The Buy Button

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  Charles Schwab and TD Ameritrade had already reported disruptions when, on the 28th of January, Robinhood barred customers from opening new positions in GameStop, AMC, BlackBerry, Nokia and other volatile stocks. Customers could still sell. Other brokerages soon followed. UK-based Trading212 and Israel-based eToro blocked purchases but allowed sales. Webull halted buy orders and then quickly resumed them.

  Many traders were furious, and popular Reddit posts called for class-action lawsuits. After markets closed, Robinhood said it would permit "limited buys" the next day, though it was unclear what that meant. Some users alleged that Robinhood sold shares without consent, which the company denied.

  The explanation came on the 29th of January. Trades then took two days to settle, so brokerages had to post collateral at clearing houses to guarantee their clients' orders. The Depository Trust and Clearing Corporation covers equities, and the Options Clearing Corporation covers options. When volatility rose, the clearing houses demanded more collateral, and the brokerages said they could not supply it in time.

  The Depository Trust and Clearing Corporation raised the industry-wide requirement from 26 billion to 33.5 billion dollars. It warned of risk at firms whose clients were mostly on one side of the market. Anthony Denier, chief executive of Webull, said his own firm was restricted from opening new positions for the same reason. Robinhood reportedly raised an additional 1 billion dollars.

  Restrictions kept shifting. On the 30th of January Robinhood added purchase limits on 50 securities, including Rolls-Royce Holdings and Starbucks. A day later it cut the list to eight.

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• 6. Fortunes Made and Lost

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  Melvin Capital, a fund that had shorted GameStop heavily, had lost 30 percent of its value by the 28th of January and 53 percent by month's end. Citadel and its partners put in 2 billion dollars, and Point72 Asset Management added 750 million. The total came to 2.75 billion dollars. The fund told CNBC it had closed its position on the 26th of January. Melvin gained 22 percent in February, far too little to recover, and shut down on the 18th of May 2022.

  Andrew Left, head of Citron Research, said he had closed his short as a total loss, with most of it covered around 90 dollars a share. He announced that Citron would stop publishing short-selling analysis. D1 Capital Partners lost 4 billion dollars, or 20 percent of its capital. By the 26th of January, short sellers had reportedly lost 6 billion dollars in total. White Square Capital, a London hedge fund, announced on the 22nd of June 2021 that it would shut down.

  The story that retail traders beat Wall Street turned out to be incomplete. Reuters found that some of the biggest asset managers profited both from share stakes and from lending stock to short sellers. Senvest Management had bought a 5-percent stake at 10 dollars a share and made 700 million dollars, exiting after the Musk tweet. BlackRock's stake of roughly 13 percent was worth 2.6 billion dollars at the peak.

  The Church of Jesus Christ of Latter-day Saints, through Ensign Peak Advisors, had bought 46,000 shares in 2020 and saw the investment rise 900 percent. Chief executive George Sherman held over 2.3 million shares. They were worth 44 million dollars on the last day of 2020 and 1.1 billion at 469 dollars a share, briefly making him a billionaire.

  The decline was steep. On the 1st and the 2nd of February the stock lost more than 80 percent from its intraday peak, and on the 2nd it fell 60 percent to close below 100 dollars. About 27 billion dollars in value vanished. Forum members urged each other to hold on, and entrepreneur Mark Cuban encouraged buyers to do so during an ask-me-anything session. Many who bought near the top lost heavily, and some lost most of their savings.

  The story was not over. On the 24th of February the shares doubled during the last 90 minutes of trading and closed at 91 dollars and 70 cents. On the 9th of March they closed at 246 dollars and 90 cents. On the 24th of March they fell 34 percent to 120 dollars and 34 cents, after the company announced a secondary offering of up to 1 billion dollars. The next day they rose 53 percent.

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• 7. Ripples and Backlash

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  In Australia, shares of GME Resources, a mining company, rose more than 50 percent intraday on the 28th of January. Its ticker symbol, GME, matched GameStop's. In Malaysia, a forum offshoot called r/bursabets, named for the Malaysian stock exchange, organized a rally in latex glove makers such as Top Glove, Hartalega and Supermax.

  Elsewhere, Dogecoin rose over 800 percent and Bitcoin climbed 20 percent to more than 37,000 dollars after Musk added a word of support to his Twitter bio. Silver rose 10 percent over the 28th and the 29th of January and hit an eight-year high on the 1st of February. Forum users denied causing that rise and blamed institutions such as Citadel.

  Political reactions crossed party lines. Alexandria Ocasio-Cortez and Ted Cruz both backed those driving prices up and criticized the brokerages that restricted purchases. Senator Elizabeth Warren faulted both camps, saying large investors had treated the market like their own personal casino.

  Massachusetts official William F. Galvin called for a 30-day suspension of GME trading, warning that inexperienced day traders would be hurt. Kevin O'Leary argued the opposite on CNBC. He said real-world education was valuable and that fear of social media vigilantes would discourage aggressive shorting.

  Reddit co-founder Alexis Ohanian compared the rally to Occupy Wall Street. Michael Burry called it "unnatural, insane, and dangerous". Leon Cooperman predicted it would "end in tears" for retail investors. Jon Stewart joined Twitter to back the Reddit traders. By March, Forbes reported that Michael Jordan's net worth had dropped 500 million dollars from its 2019 peak of 2.1 billion.

  Anger at Robinhood turned physical. Google deleted at least 100,000 review-bombing ratings from the app's Play Store page, calling them coordinated. Police in Menlo Park, California, logged ten protest incidents at its headquarters between the 28th of January and the 9th of February.

  The pressure also ran the other way. Andrew Left's accounts were hacked and his children were sent threatening messages. Gabe Plotkin of Melvin Capital hired security after facing slurs and threats. Steve Cohen deleted his Twitter account after threats to his family.

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• 8. Reckoning and Afterlife

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  On the 27th of January 2021, Treasury Secretary Janet Yellen convened financial regulators, including heads of the Securities and Exchange Commission and the Federal Reserve. Because Citadel had once paid her speaking fees, she first obtained clearance from Treasury ethics lawyers. Nancy Pelosi said Congress would review events, and the Securities and Exchange Commission announced its own review on the 29th of January. Texas Attorney General Ken Paxton said the brokerage limits "stinks of corruption", and his inquiry reached 13 entities.

  On the 18th of February, the House Financial Services Committee held a remote hearing titled Game Stopped? Witnesses included Keith Gill, Citadel's Ken Griffin, Reddit's Steve Huffman, Melvin's Gabe Plotkin and Robinhood's Vlad Tenev. Representatives pressed Tenev on why trading was limited, and several questioned payment for order flow. Gill, notably, referred to memes in his testimony. A second hearing on the 17th of March examined that practice and the gamification of investing.

  The Citadel suspicion centered on money. Bloomberg reported that 40 percent of Robinhood's revenue came from selling customer orders to market makers, and the Washington Post said more than half went to Citadel. Both firms denied that Citadel pressured the brokerage. At the hearing Griffin answered "absolutely not". Yet internal messages emerging from a lawsuit showed Robinhood's president, Jim Swartwout, writing "you wouldn't believe the convo we had with Citadel, total mess."

  A Robinhood customer filed the first class action on the 28th of January 2021. By the 2nd of February the company faced 34 such suits. They were consolidated in the Southern District of Florida before Judge Cecilia Altonaga. In January 2022 she ruled that investors could not pursue negligence and breach of fiduciary duty claims, citing Robinhood's customer agreement. As of September 2024, the remainder of the case was ongoing. A suit accusing Keith Gill of posing as an amateur was dropped by the plaintiff two months later.

  Regulatory changes were modest. On the 8th of February the Securities and Exchange Commission issued a sample letter urging companies raising capital in extreme volatility to disclose the risks. In June 2022 a 140-page House committee report called for new liquidity rules for clearing brokers. In January 2024, researchers at Italian and Danish universities concluded that Reddit and Twitter activity did causally move the stock price.

  On Sunday the 12th of May 2024, Gill posted an image to X of a person leaning forward in a chair. The next day the stock rose 74 percent. Over the following days it climbed from under 14 dollars to over 48, and GameStop issued new shares at more than 20 dollars to raise over 900 million dollars.

  The saga also reached the screen. The film Dumb Money was released on the 22nd of September 2023, after MGM acquired rights to Ben Mezrich's book proposal The Antisocial Network. The documentary GameStop: Rise of the Players arrived on the 28th of January 2022, and HBO's Gaming Wall Street followed on the 3rd of March 2022.

  Some holders began to speculate about a second, bigger squeeze, which they dubbed "the mother of all short squeezes", or MOASS. A community grew around the idea. By the 1st of June 2023, investors had registered 76.6 million shares directly with GameStop's transfer agent.

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