GameStop Stock Skyrocketed Because of Reddit Day Traders
In completely off-the-wall news, Friday saw the stock price of struggling retailer GameStop leap a total of 69% before trading was halted. That GameStop's stock would rise significantly is in itself a surprise, but truly it's the story of how it happened that's most baffling. It involves a YouTube video, an awkward prediction, a Reddit community trying to make a point, and a stock exchange phenomenon called a "short squeeze." As silly as it sounds, it may conclude with reported criminal activity.
The fiasco starts with a natural rise in GameStop's stock value just recently. This rise was caused by the popular Chewy CEO Ryan Cohen joining GameStop's board. Cohen's support of GameStop and his addition to the board has been seen as a positive move that could help the retailer improve its online presence. Having Cohen placed on GameStop's board caused GameStop's stock to rise nearly 250%, and that's where things start getting complicated.
Given GameStop's precarious position for some time, with the video game industry shifting away from retail and toward digital, the company's stock rise was a surprise – especially so for investors who "shorted" GameStop's stock, which is to say they gambled on GameStop's stock value dropping. That's where Citron Research enters the situation. Citron released a video on Thursday saying that it expected GameStop's stock price to drop back to $20 in time, while also saying something called a "short squeeze" was not occurring.
A short squeeze occurs when a stock that's commonly shorted begins to rise, leading to a cascade effect where shorters, in turn, rebuy the stock as it climbs to capitalize on the rise. The subreddit named r/WallStreetBets took Citron's comment both as a joke and an opportunity. The subreddit's denizens would both prove Citron's prediction wrong while also making a profit in the process, which is exactly what it has done.
Interactive Brokers Chief Strategist Steve Sosnick describes the situation as "a rare convergence of a short squeeze combined with some fundamental news and an army of fast money traders." 175 million shares were bought and sold on Friday as a result, said to be more than 21 times the daily average in 2020. Citron called GameStop stock buyers "suckers at this poker game" but it seems like Reddit's the one laughing for now.
As for what this means for GameStop, or any of the involved parties, it's difficult to tell. Citron says that it's been doxxed, its Twitter account hacked, and that it'll be reporting criminal activity to the FBI and SEC. Reddit believes the stock will only climb through Monday. GameStop's probably content to continue asking if gamers would like to pre-order next month's big game release.
Post a Comment