That an army of traders decided to coordinate on a social network to forge a demonstration against large Wall Street investors and succeed, it only seems a good argument for the next Netflix movie. However, in the dystopian world of the pandemic, the WallStreetBets (WSB) movement took place.
WallStreetBets, a Reddit forum with just under 2 million subscribers, caused GameStop (GME) became one of the most traded stocks on Wall Street , generating billions of dollars in losses to mutual funds that bet short on GME. But how did all this revolution that has captured so much attention come about?
A group of Reddit users that manages to bring Wall Street to its knees is not something that is achieved overnight. the morning. In fact, the movement would have begun to take shape in August 2019, after the investment fund manager Michael Burry (the man who predicted the mortgage crisis in 2008 and got rich betting on the downside against the banks), reported on the purchase of 3 million shares, or 3.3% of GameStop, a chain of stores selling video games, consoles and accessories.
At the time, Burry warned about the company’s 63% short interest that would possibly result in a short squeeze (squeeze in short). In the weeks that followed, various media outlets reported on Burry’s investment. Which put members of the Reddit WallStreetBets forum on alert.
Before continuing, let’s define the term short squeeze to understand WallStreetBets strategy. “ Short squeeze ”, (in Spanish short squeeze), is a play that occurs in the stock market , basically when the participants who have a certain stock for sale, need to reverse their positions quickly because the demand to buy is exceeding them. Short sellers (from English short or “ shortened ” in trading lingo) are investors who bet a stock is going to fall.
The truth is that Burry, like many others, saw GameStop as a potential victim to bet short. The company had already bottomed out with a value of USD 3 per share in 2020 , as many people thought that the chain of stores would soon go bankrupt. GME had captured the attention of the shorteners who assumed that the shares could not rise if it was a company with difficulties to adapt to the new times, with an outdated business model and excessively dependent on sales in physical stores.
WallStreetBets and the short of the century
A post by the user Jeffamason entitled: « The real great short circuit of the century» , is a kind of declaration of war to the formulas that Wall Street usually uses. With its more than 12,000 characters it describes the strategy that a visionary raised in the WallStreetBet forum. In its lines it defines the behavior of the market with such precision that it could be interpreted as a prediction of what would happen 4 months later, that is, in January 2021.
In his description, Jeffamason exposes the reasons that led him to think that hedge funds and other market makers manipulate the system in their favor. At that time, came up with a scheme to join forces with the idea of overcoming these market manipulators (MM) who use their huge sums of capital, as well as the means communication and other tools, to balance operations in your favor, as indicated.
Jeffamason’s approach is that no matter how astute a retail investor may be, large funds or those managing large capital can quickly ruin a given stock. Simply by throwing in more capital than the average investor can dream of. Therefore, encourages the other members of the WSB forum to fight back , taking advantage of the fact that, at that time, the subreddit had an influx of new users.
“Sup gamblers. Do you feel bad about missing the profit train at TSLA? Have no fear, something much bigger and stupid is here. Do you know Citadel? The MMs that took all our money today? Well now we will finally not be at the mercy of the MMs. Instead, we will temporarily join forces with the Galactic Empire and hijack the Death Star. Our weapon… GME ”.
Post by Jeffamazon in September 2020.
The publication of Jeffamazon is the script of a movie, one full of emotions, as if it were a new installment of the Star Wars saga, in which the Jedi (WallStreetBets users) select a new weapon (GME) to defeat the empire (Wall Street). In addition, defines the intention of the actions to be taken, outlines the objectives , sets out the reasons for believing, presents a schedule and contemplates a risk contingency in case something could go wrong.
The weapon: GameStop
To define the weapon to use in his attack, Jeffamazon draws attention to the fact that there was an unusually high short interest in the video game retailer. With approximately 120% of the outstanding shares controlled by short sellers. That is, there was more interest in short options than stocks themselves , which indicated that a brutal shorting technique was in development.
With so many people betting on GameStop’s bankruptcy, there was also the possibility that the whole picture would change if the company produced good news , or if others investors simply pushed the price of shares up. If it happens this way, those who are short lose money if stocks go up. Ironically, the only way to stop losses is to buy back the shares.
In your analysis of why GameStop? The post presents several fundamental elements, one of them is the relationship of the investor Ryan Cohen (RC) with GameStop. After building a successful e-commerce policy around Chewy, a pet products company, Cohen had joined GameStop’s board of directors with the idea of making it the Amazon of video games.
That was potential good news that could raise the share price of the chain of stores that ran an antiquated business model. “RC can turn this into an ecommerce / tech company, which would make Wall Street drool. It has already caught the attention of some people, hence the recent 75% increase since RC’s announcement, ”the post reads.
“ GME is TSLA (Tesla) ago a year. GME is AAPL in 2017. Add to that the best short reaction you’ll ever see, and you’re in for an incredible show, ”adds Jeffamazon, repeatedly mentioning the Tesla event that for years was the investment of choice for short bettors. , until their shares suddenly began to rise in price , generating million-dollar losses.
Interest is also identified in the post Burry and other large investors for acquiring GameStop shares. He also mentions “retail robinhooders” (small investors in the Robinhood trading app) and hedge funds like Citadel. “This time we will work with them,” he says.
Then Jeffamazon mentions a play that is often used by market makers or intermediaries between buyers and sellers. It is called “ gamma squeeze ” and consists in that, if the market maker has sold a relatively large number of call options, he must start cover their positions. This can only be done by buying the shares. The faster the share price rises, the more shares the market maker must buy . But these purchases also affect the price, causing the value of the shares to continue rising, which forces to hedge again by buying more shares.
In this way, if short investors rush to close their positions when a stock is already trending up, they are creating additional demand for the stocks. Additional demand generally means higher prices. For that reason the strategy of the Reddit group was to bet its GME shares higher with the idea of breaking short bets and forcing demand for shares by boosting its price.
Jeffamazon wrote, “if GME shoots up after earnings, the short squeeze will have started and we can stack 10-20% weekly options to force KG (Citadel) to hedge itself by buying shares, ad infinitum: see TSLA. ”
Taking into account that the strategy was risky, in the publication also presents an alternative in case things did not turn out so well: “If GME goes under, buy cheap options in anticipation of the burning of shorts.”
What happened then it is already part of history. But the Jeffamazon post was the seed that was sown on Reddit four months before the events occurred. During the following months, WallStreetBets subscribers continued to coordinate their operations until the seed germinated and on January 14, the price of GameStop touched 40 dollars, leading the total losses of more than $ 2 billion. The following week with the stock at USD 77, the losses exceeded USD 4.2 billion.
As CriptoNoticias reported a couple of days ago, many have praised the traders of the Reddit forum r / WallStreetBets for teaching traditional Wall Street mutual funds a lesson. Among them, Mark Cuban, renowned investor and owner of the Dallas Maverick, who referred to WSB as “The Generation of the Safeguard of Value” ( Store of Value Generation ).