Inside The Collusive GameStop Massacre That Crushed Short Sellers
The insane rally in GameStop showed no signs of slowing down Monday as retail investors talking in chat rooms and hedge funds rushing to cover their short bets against the stock briefly pushed it above $100 a share, CNBC reported.
Trading was halted briefly on Friday as the stock soared more than 70 percent, due in part to online support of a group of Reddit day traders, The Verge reported.
The stock traded at $87.80 when it reopened Monday. Its shares have quadrupled in January alone and are up 500 percent in three months.
A mall retailer, GameStop sells video games, consumer electronics and gaming merchandise. Based in Grapevine, a suburb of Dallas, Texas, GameStop operates 5,509 retail stores throughout the U.S., Canada, Australia, New Zealand, and Europe.
Short-seller Citron Research predicted the GameStop price would drop. However, members of the Reddit board r/wallstreetbets, who had been generating interest in the stock, criticized Citron on the Reddit message board and continued praising the stock on social media, The Verge reported.
The Reddit messages helped create a “short squeeze” on GameStop stock. That’s what happens when some investors, known as shorts, bet that a company’s stock will fall. These investors borrow stock from other investors and sell it, planning to buy it back when the prices fall and then return it to the original owner. However, the problem with shorting is that one’s losses are theoretically infinite, The Verge reported. If a stock goes up, some short sellers will abandon their short and buy shares at the higher price. This makes the stock go up, hurting any other shorts who remain in the stock. Some of those may choose to cover their own shorts.
What’s happening with GameStop amounts to “an awakening,” wrote Timothy Collins, a financial advisor who operates Retro Wall Street, a site focused on trader mentoring and education.
“A large group of retail traders have realized if they work together, using market tools such as out-of-the-money call options or low-float stocks, they can overpower any institution or short-seller in the world, outside of the Fed, of course,” Collins wrote for The Street.
Andrew Left is known in the finance world as an “activist short seller“. An author and editor of the online investment newsletter Citron Research, Left publishes reports on firms that he claims are overvalued or are engaged in fraud.
“After he places a bet against the price of a stock, he then publishes research designed to torpedo the company’s value, often by airing accusations of fraud or abuse. This is entirely legal, as long as what he publishes is not itself fraudulent,” New York Times reported in June 2017. “Left takes short positions in companies across a whole range of industries — Tesla, Valeant, GoPro — and though he makes mistakes, he has an unusually high success rate.”
On Thursday, Left predicted in a YouTube video that shares of GameStop should trade down to $20 — about a 50-percent drop from Thursday’s close, Business Insider reported.
Citron Research claimed it had “multiple hacking attempts” on its Twitter account, according to Yahoo News.
Left said he and his family were harassed by what he described as an “angry mob” of GameStop investors. In a letter posted on Twitter that that has since been removed, Left said Citron Research will no longer publicize his bearish commentary on GameStop. “This is not just name-calling and hacking but includes serious crimes such as harassment of minor children,” Left said. “It is our duty to walk away from a stock.”
In the letter, Left said, “What Citron has experienced in the past 48 hours is nothing short of shameful and a sad commentary on the state of the investment community.
“We will no longer be commenting on GameStop, not because we don’t believe in our investment thesis, but rather the angry mob who owns this stock has spent the past 48 hours committing multiple crimes that I will be turning over to the FBI, SEC and other governmental agencies,” Left wrote.
GameStop posted on Twitter that a “bunch of Redditors with Asperger’s have collaborated to engineer the short squeeze of the decade by buying short-dated, out-of-the-money call options.”
GameStop shares have risen 1,513 percent over the past six months, Yahoo News reported. Out of the six analysts covering GME stock, three rate it as “hold”, two say “sell” and one says “buy.”
Trader mentor Collins said that he found the reports “of longs” personally attacking Citron Research editor Left “to be a bit unnerving … threatening personal harm and staging internet attacks to take down websites crosses a line for me. Folks doing that are no longer just traders with an opposing view. They aren’t even bullies. At that point, they become criminals utilizing intimidation tactics.”
Collins said he has clashed with Citron before, “but this development is troubling … I’m hearing from other sources that attacks on Left and Citron aren’t the end of it. At least one additional bearish author I know also suffered cyber-attacks.”
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Left said he has “never experienced anything like this viciousness … And over GameStop,” which he described as a “failing mall-based retailer” on YouTube.
Left expressed confidence in his GameStop investing strategy “now that I see who owns the stock,” he wrote in the letter. “We hope the enforcement of the government will eliminate this problem for all future market commentators whose families get bullied and terrorized by people who naively think they are anonymous.”
As investors piled into shares of GameStop on Friday, sending the video game retailer up 51 percent in an apparent effort to squeeze out short-seller Left, New York Post writer Lisa Fickenscher wrote, “This is one sick game.”