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Short-Sellers Lose Estimated $70 Billion Following Reddit’s GameStop Stock Surge

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Short-Sellers Lose Estimated $70 Billion Following Reddit’s GameStop Stock Surge

Anyone who thought 2021 was going to be less chaotic than 2020 must be scratching their heads. We've had an insurrection, a new US President, the whole Dutch government resigning over a welfare scandal and now Wall Street is terrified.

The last few days have been a fascinating fight between the internet and US stock brokers over the American video game retailer GameStop.

The retailer's dwindling stock market value was on something of a path to recovery in the second half of 2020, helped by a new partnership with Microsoft, the next-gen console launches, and the promise of financial gains during the holiday season.

Then, seemingly out of the blue, the company's share price exploded from under $20 to, at the time of writing, USD$249.

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Credit: PA
Credit: PA

What happened? In a word, Reddit. This massive jump has been largely pushed by online communities like the WallStreetBets subreddit.

In mid-January, Redditors saw hedge funds were trying to short GameStop, which meant they wanted to see the price go down.

Redditors took on the hedge funds, like Melvin Capital Management, one of the biggest institutional shorters of the GameStop stock, and decided to buy loads of stock in the retailer.

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This caused the stock price to surge, meaning the hedge funds firm would lose money - lot's of money. While Reddit wasn't the sole factor behind GameStop's surge, it played a pivotal role. Oh, and Elon Musk got involved at one point. It's been a week.

Financial data analytics firm Ortex estimates that short-sellers have lost USD$70.87 billion on their investments. The company made this calculation through data collected from agent lenders, prime brokers, and broker-dealers.

If you're lagging behind on what a short sell is, this Twitter post explain it in a good way.

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That's how it all started. But it is of course still going on and doesn't seem to be slowing down. This entire GameStop saga has had a massive impact on the stock market, to the extent that Melvin Capital Management ended up needing an investment of nearly USD$3 billion just to stay alive after GameStop first started to rocket upwards.

CEO Gabe Plotkin has told CNBC that reports the company was coming close to bankruptcy are false, although Melvin pulled away from GameStop and left Reddit to it on Tuesday afternoon after suffering a 'huge loss'.

The ramifications of what this means for the American stock market are yet to be seen.

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While some are praising Reddit for proving that the stock market is a strange and complicated mess, others are concerned about the precedent the GameStop situation has set.

Social Capital CEO Chamath Palihapitiya praised WallStreetBets run as 'a pushback against the establishment', and argued those involved are doing 'as good, and frankly a better job' than many hedge fund analysts.

Credit: PA
Credit: PA

He also pointed out that many of the Redditors who took the initial risks are driven by an anger at the way the stock market is run - and ruled - by a select few.

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"Coming out of 2008, Wall Street took an enormous amount of risk, and they left retail as the bag holder," he explained.

"A lot of these kids were in grade school and high school when that happened. They lost their homes, their parents lost their jobs, and they've always wondered, 'Why did those folks get bailed out for taking enormous amounts of risk, and nobody showed up to help my family?'"

At present it's important to remember that none of what Reddit has done is illegal in any way, but some are now calling for regulators to consider the way advances in technology can be used to share information on the market, and how that might impact things going forward.

Of course, the minute the people who were always winning start to lose is when the rules have to change.

White House press secretary Jen Psaki also recently confirmed that the US government is 'monitoring the situation', which suggests that this story is far from over.

Featured Image Credit: PA

Topics: News

Ewan Moore
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