So, what has happened with GameStop (plus others)

Late January produced a frantic exuberance in some US stocks, which is frequently a signal of an over inflated stock market “bubble”. In turn, the soap opera that has played out has reflected the fears of a popping of such a possible “bubble” can bring.

One of the lead players in this soap opera has been the company GameStop, a US retail outlet for electronic and video gaming. GameStop shares (GNE) saw an exponential gain at the end of January, having already produced an aggressive rally since the start of 2021. This surging advance has been assisted by the next key player in our soap opera, individual traders, driven by a herd mentality. The next character in our story, is WallStreetBets a subreddit on Reddit, the social news and discussion site. WallStreetBets have been urging individuals to buy certain stocks, including GameStop, whose shares surged 400% in the last week of January and 1600% for the month. It was not just GameStop that was targeted, with other stocks such as Blackberry and AMC also highlighted by WallStreetBets, with their stocks also moving pushing aggressively higher. And now, Silver too!

And why has this impacted hedge funds?

The recommendation to buy these stocks by WallStreetBets was to attempt push these stocks higher, because WallStreetBets had identified that the hedge fund community had large, leveraged shorts exposure in these stocks. The hedge funds, the next player in our soap opera were looking for these shares to fall in value. Why? Because they had been identified as having already weak prospects before the pandemic, with the pandemic significantly impacting their businesses in a very negative way. So, the hedge funds had large, leveraged shorts, and were susceptible to a “shirt squeeze”. You can find out more about short selling here. The aggressive moves higher in these stock prices put these hedge fund shorts under trading pressure because to the hard-hitting buying from the mass of individuals, working as a herd. Melvin Capital were a notable casualty in this battle.

But why did the brokers suspend trading in some of these stocks?

Some brokers, most obviously Robinhood, decided to suspend trading in some of these shares. They did not do this to stop the individual traders, but rather to protect themselves. The extremely large positions taken out by the individual traders left the brokers exposed if the price of these stocks fell aggressively. Many of the brokers had to draw on credit lines as they faced margin issues.

And why did the broader markets sell off?

During this frenzied activity at the end of January, the wider stock market reacted in a very negative way. The major US stock indices plunged lower, also pulling global share averages to significantly lower levels, erasing gains from early 2021. And the reason for this? Simply fear, a massive driver for stocks. Broad fears that this frantic activity highlights a “frothy” and over exuberant market for stocks encouraged the decline across the wider markets. In addition, the hedge funds that were enduring the losses from the “short squeeze” in the targeted stocks, were forced into liquidating positions in the broader market to repay stock loans. Selling the good to pay for the bad.

And what next?

Well, the Silver ETF (Exchange Traded Fund) is now on the WallStreetBets target list and this has seen the ETF surge with massed individual buyers, alongside the price of Silver itself and even Silver miners. Who will be targeted next? That remains to be seen. Moreover, will the US Securities Exchange Commission (SEC) need to do more than just “monitor” the situation and step in to investigate the frantic activity. Could global authorities also become involved due to the global contagion, for example the UK Financial Conduct Authority (FCA) or other authorities in Europe and beyond?

Whatever happens next, we are sure it will be gripping, and having the right broker is going to be key. So, visit FXExplained to make sure you pick the right broker.