What the Fuck Happened? Ticker: GME (GameStop)
'The Man' always wins. Here's how it went down.
The Start
In early 2019, to everyone except a few Wall Street Bets (WSB) users, GameStop (GME) was a sure bet to fail. A specialty retailer in an industry going online. An ancient relic bleeding out in dying malls.
The 2019 bear thesis was clear. Next gen console games would be purchased mostly via download, GME stores were a burden bleeding money, and their e-commerce presence was a meaningless blip. Combine those current factors with the headwinds from a burgeoning streaming gaming industry and you've got Blockbuster 2.0.
The bull thesis proposed in March 2019 was relatively short term: GME wasn't overburdened by debt or short term liabilities, and they had a big enough cash pile to make it to the next console cycle. That's all that needed to happen to raise the share to $18 (~200% gain at the time). These launches cyclically propelled their revenue, profit, and shares to highs, and original Reddit posters made it clear that was their endgame. The first value thesis did not even mention short interest.
The Players
Melvin Capital, a small hedge fund with a reported seven clients and about $10 billion assets under management (AUM) had been shorting GameStop since the quarter ending March 31, 2016. Between 2016 and 2020 their short position was very successful seeing shares slide from $31.34 April 1, 2016 to $2.80 on April 3rd, 2020. Beginning in September 2020 they began a downward spiral ending with a multi-billion-dollar-losing short position unwind at the end of January 2021.
The majority of people I've heard from ask, 'Why would they continue to short GME when it rose from $3 bucks to $15?' They were confident at $30, much more confident at $2.80, and EVEN MORE confident at $15. Arguably, Melvin and a growing number of shorts caused this all to happen by doubling down hard as shares began to rise. So much so that, at its peak, the cumulative short interest (SI) was over 200% of the shares available for trading on the open market (the 'float'). [more on the nuts and bolts of this below].
User Roaring Kitty (youtube) / Deep Fucking Value (reddit), was one of the earliest monied retail-trader proponents of GME's bull thesis, a thorough technical analyst, and a key GME evangelist. Based on the timing of his trades, it is clear he saw the value in GME itself and in GME's substantial short interest.
He purchased OTM GME $8C 1/15/21 LEAP options beginning June 2019, amassing 1,000 of them by September 3rd noting that his buys were becoming more costly due to Dr. Michael Burry's (of The Big Short fame) post about the 60% SI. Burry called for other hedge funds to buy in, eat up the float, and trigger a short squeeze.
In his initial post, RK/DFV showed $46,433.96 profit on a $53,566.04 investment and a strong resolve to hold. He was roundly chided. The share price was under $5.
'Nobody could save blockbuster, nobody can save Gamestop.' - Reddit Commenter
As of January 17th, 2021 RK/DFV had GME stock, options, and cash proceeds totalling $47,973,298.84 gaining over $20 million dollars that day.
Ryan Cohen is an e-commerce wunderkind. In 2011, at 25, he started Chewy- a company that grew to become the world's largest online pet supply retailer in 2016, acquired by PetSmart the following year for $3.35bn. He is credited with Chewy's full success.
In addition to putting much of his earnings into Apple (becoming the largest individual shareholder), filings showed a growing stake in GME amounting to nearly 10% of the company in September 2020.
GME's savior had arrived. A tech-savy millennial e-commerce entrepreneur. Fortunately for the people holding GME, management didn't fight his influence and welcomed him with open arms. By January 11, 2021 GME replaced three board members with Ryan and two of his Chewy compatriots making up 1/3 of the GME board.
🎶 We Did Start The Fire, But It Was Always Burning 🎶
The subreddit Wall Street Bets had been a hotbed of GME chatter on and off for a while due to RK/DFV's gain posts eventually passing $1MM in September 2020. Amidst WSB's posts of TSLA gains buying people Tesla cars and a suspicious three-account pump 'n' dump of Purple Mattress, GME's presence became more and more prevalent.
This type of sentiment analysis does not go unnoticed, and big Wall Street players had been taking note. BlackRock filings detail holdings of over 11 million shares in February 2020. By 2021, the biggest holders of GME are a who's who of big sharks. In addition to BlackRock, there's Fidelity, Vanguard, Susquehanna, State Street Corp, etc all combined to institutionally own 110% of GME's outstanding shares.
One thing is clear: no one is "sticking it to the Man" with the GME short squeeze.
While Reddit lit the GME match in the public eye with their enthusiasm, volume, and retail trader enrichment, the institutions were the burning coals of the short squeeze and likely created it themselves.
Back in 2019, Dr. Michael Burry was encouraging funds to buy up all the float to force a short squeeze, by January 2021 that coincided with the vocal ebullition of millions of retail traders getting rich, quick.
Sharks in the Water, The Rich Get Richer
It's pretty clear by now that this isn't a "Reddit breaking the market" thing, but an engineered shuffling of money from these billionaires over here to those bigger ones over there. Theoretically this could have happened without any retail pressure whatsoever, so why stoke the retail trading ferver drawing attention to this mess?
Because big players directly connected to Melvin's short enriched themselves on the back of retail traders.
Robinhood is free in part because users' orderflow is bundled and sold to High Frequency Trading (HFT) Market Makers (MMs) who are able to front-run their trades and collect a tiny bit of money within the spread on every trade. The more retail trades that happen, the more money these firms skim out of RH users' pockets.
Citadel is one of these firms.
On January 25th, 2021 Citadel along with Point72 (who already owned a $1bn stake of Melvin) bought into Melvin Capital with a $2.75bn investment deal. The intention was to bail them out, get cheap equity, and allow them to continue or unwind the short.
Big sharks eating smaller sharks with retail traders helping fund the purchase and take the blame.
It looks like The Man (all of them) have already won, so what happens to retail?
The (TBD) Bag Holdening
It's still to be determined just how the mechanics of the end game will play out. While a lot of retail traders will be far more wealthy than they were a few months ago, the inklings of an engineered, forced bag holding are in the works. There have been whispers of the markets halting trading beyond the usual pre-prescribed halt rules to allow for institutions to 'recalibrate' themselves.
Personally, I expect that the funds that own shares and the funds that are short will come to a greymarket agreement to unwind the problematic SI and return pricing to a 'Fair Market Value.' I don't expect retail traders to have a seat at the table, and I don't expect GME stock to maintain it's current levels.
While I wouldn't be surprised by further bullish price action in the coming days, we will surely see loss porn soon enough.
So what? If you’re holding, be careful of bag holding while maximizing gains up to your personal risk threshold.
If you’re not holding, be weary of the narrative being spun about the retail traders’ effect in the market. It is just a drop in the bucket.
Addendum:
Trading Mechanics
How does short interest become greater than 100% of the shares outstanding?
Company A lends shares to B to short
B short sells to C
C lends to D
D short sells to E.
Technically 3 people own the same share (200% SI), and there’s no fundamental way to identify if each individual share was borrowed or sold by an owner.
Also, identifying shares as borrowed or non borrowed shares to prevent additional shorting would create a second class of share that couldn’t be lent out (and thus would be worth less).
Sources:
https://www.reddit.com/r/wallstreetbets/comments/b4zlkt/gamestop_investment_thesis/
https://www.marketfolly.com/2019/08/dr-michael-burry-long-gamestop-sends.html
https://www.nasdaq.com/market-activity/stocks/gme/institutional-holdings
https://fintel.io/so/us/gme/blackrock
https://bsic.it/how-payment-for-order-flow-is-impacting-markets-the-robinhood-and-citadel-case/