What on Earth is Going on With GameStop? – The Big Short Squeeze

The GameStop rally has virtually nothing to do with the company’s recent performance. The cause of the rally stems from retail investors and day traders buying the stock in massive quantities as a means of exercising their power over institutional investors. Hedge funds have typically targeted failing companies such as GameStop for short-selling opportunities, meaning they would borrow shares of the stock to sell, essentially guaranteeing the institution makes a profit as the financial health of the underlying show telltale signs that the price would fall, allowing the institution to repurchase shares of the shorted stock at a lower price to return those borrowed shares. Retail investors who were unhappy with this practice banded together via discussion website Reddit to initiate a short squeeze on the stock after noticing the massive short interest in GameStop. These retail investors are buying shares solely to raise the share price and subsequently forcing short sellers to cover positions and further push the price up. However, the massive short squeeze has not gone without its consequences.

The Securities and Exchange Commission (SEC) has stated that it has noticed the volatility and would be taking a closer look at the situation (Choe, 2021). In a statement made on January 27th, the SEC said, “Consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants” (Epstein & Fabian, 2021). To put things simply, the SEC may be looking to build a case of market manipulation against individuals who were involved with initiating the short squeeze on GameStop. Industry professionals say that the SEC would likely look at whether the messaging by investors holding the stock long-term and activists betting against it was manipulative (Prentice & Schroder, 2021). It is worth mentioning the SEC may also be looking into actions taken by Melvin Capital to drive down the price of GME.

The GameStop rally is without a doubt one of the biggest recent events on the stock market , and the facts of the situation deem it unprecedented. The outcome of the SEC’s investigation into the rally has the potential to alter the current investing landscape in some capacity. If the SEC were to find these investors guilty of market manipulation, the results of the case could see more restrictions placed on retail investors, limiting their trading capabilities. Restrictions could arise in the form of limits to quantities of shares which can be traded. Some stock exchanges have already begun limiting some transactions for GameStop. NASDAQ’s chief said the exchange would halt trading in a stock if it seemed linked to unusual social media chatter (Sorkin et al., 2021). More concerning may be the impact it will have on Reddit channels like r/WallStreetBets, which pioneered the current events. Will they be aggressively censored moving forward? As the events continue to unfold, some form of change seems to be on the horizon for investors. Only time will tell whether the change will be for better or worse, and how exactly serious it will be.