The Lazy Economist: Introducing the GME short squeeze

The beginnings of this crazy financial event, explained

The Lazy Economist talks Gamestop stock.
Photo: 
This is a two-part series on the GameStop stock short squeeze and how it unfolded in the eyes of Queen’s students.
 
The Gamestop (GME) short squeeze took the internet by storm this past January as retail traders drove up the price of GME stock by more than 1,900 per cent, costing hedge funds billions of dollars. 
 
Exactly how did retail traders pull this off? The Lazy Economist, with the help of Queen’s investors, is here to break it down.
 

The Short

 
When you buy shares, you believe you’ll be able to sell them in the future for more money. When you think a share’s price will decline, you can ‘short’ it. To short a stock, you borrow shares to sell at the current price—if the price declines later, you can buy it back at the lower price, pocketing the difference. Beware, though—if the price goes up, you pay that difference and lose money.
 
Hedge funds like Melvin Capital looked at GameStop, a brick-and-mortar, second-hand video game store that was already in decline before the pandemic and were certain it was going to go bust. There was such high confidence that GME was going to fall that by January, 140 per cent of GME shares were shorted. 
 

The Squeeze

 
Not everyone was convinced GameStop was doomed. Enter WallStreetBets, a Reddit channel, otherwise known as a ‘subreddit,’ comprised of retail—non-professional—traders. 
 
As Nolan Breault, ArtSci '21, explained, “The whole point of this group is to post about obscenely risky and often stupid investment decisions, but alongside that, there are a lot of knowledgeable people that can do professional level analysis of these equities.” It was this subreddit that kickstarted the GME short squeeze. 
 
The thought process was simple: if GME failed to fall, short-sellers would have to buy back their shares. Since the stock was so heavily shorted, this could cause a massive price surge. The odds of this short squeeze occurring were low, but the rewards could be huge. 
 
Some of the early investors in December and January included three Queen’s students: Clay Li, CompEng '21; Logan Groves, Eng '21; and Brynnon Picard, CompSci '21.  Li took advantage of a dip in December to buy a few shares at $13. 
 
After noticing the number of shorts weren’t falling while prices climbed, Groves took out a large position early January. 
 
“Obviously, the risk management departments at these hedge funds were not doing their job properly, to allow them to take positions like this and not close out at soon as it went to $20,” he said.
 
For Picard, changes in GameStop’s management and marketing led him to feel “[GME] was a bit undervalued by the market, and the short squeeze potential looked pretty good.”
 
After GME hit $30 a share in mid-January, hedge funds and their associates publicly accused retail traders of having gambling addictions and being dangerous and defective. The negative publicity backfired and rising prices only served to garner thousands of new investors, including Hansen Liu, Comm ’22, and Breault.
 
By the end of January, GME doubled three days straight, from $77 on Jan 26 to $350 on Jan 27, leaving Wall Street scrambling to cover their positions. Meanwhile, the percentage of shorts was still high, and the short squeeze looked like it was just taking off. 
 

The Steal

 
In an unprecedented move on January 28, Robinhood—the American version of WealthSimple—among other trading platforms, announced their customers were no longer allowed to buy GME, effectively killing upward momentum.
 
For three of Queen’s investors, Liu, Picard, and Li, it was time to sell. 
 
“I remember watching GME that morning shooting up […] while I ate breakfast, and then when I went to take a shower and came back 20 minutes later, it was dropping like a rock,” said Picard, who lost $15,000 in profit during that time. “It was the most expensive 20 minutes of my life.” 
 
In the end, though, both Liu and Picard made over $30,000 off the squeeze. 
 
Just like the negative publicity, the outrage at the trade restrictions spurred another wave of investors, including Aiden Yang, Sci '21, and Sam Alton, Sci '22. Yang described the sentiment of those new investors: “There was a bigger picture involved, not just gambling.”
 
The renewed support led GME to peak near $500 on Jan 28. Despite this, the momentum was crushed as retail traders sold their shares throughout the next couple days and GME plunged back down to $40 early February. 
 
However, GME still remained heavily shorted, leading some to believe the short squeeze had not played itself out. Among these were Alton and Groves, who continued to hold their positions. Would their bet payoff? 

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