GameStop short-seller Melvin Capital suffered a 49% loss in the 1st-quarter after being hit by the Reddit-fanned trading frenzy

Gabe Plotkin
Melvin Capital founder, Gabe Plotkin.

  • Gabe Plotkin’s Melvin Capital extended its first-quarter losses to 49%, Bloomberg reported, citing sources.
  • Melvin declined 53% in January, reversed some of that loss with a 22% gain in February, but slid 7% again in March.
  • Reddit traders hammered the hedge fund’s short positions against GameStop earlier this year.
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Melvin Capital, the hedge fund that dug itself into a hole during the GameStop saga, extended its first-quarter losses to 49%, according to a Bloomberg report.

The firm, founded by portfolio manager Gabe Plotkin, saw a 53% decline in January, reversed some of that loss by gaining 22% in February, but slid another 7% in March, Bloomberg said, citing sources.

Melvin was among a handful of short-sellers that got torched by the Wall Street Bets army that bid up GameStop’s shares, leading to massive losses for those that wagered bearish bets against the video-game retailer.

“51% to go,” a Wall Street Bets user posted on Reddit in response to Melvin’s first-quarter decline.

The fund closed its short position against GameStop on January 27. It started out this year with $12.5 billion in assets under management, but ended January with about $8 billion. Steve Cohen’s Point 72 and Ken Griffin’s Citadel injected a $2.75 billion investment in Melvin to support its battle against the Reddit army.

Plotkin racked up about $860 million through 2020 after his firm returned 53%, but January’s deep decline left him with an estimated personal loss of $460 million, Bloomberg reported.

Plotkin was grilled before a congressional panel in February, where he defended his short position and said it was never part of an effort to “artificially depress, or manipulate downward, the price of a stock.”

A spokesperson for Melvin didn’t immediately respond to Insider’s request for comment.

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GameStop knows its stock is ‘extremely volatile’ – but leadership says it’s completely out of their control

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  • On Thursday, GameStop finally acknowledged the ongoing short squeeze driving its stock price up.
  • GameStop leadership said the stock is “extremely volatile” and out of their control in an SEC filing.
  • The squeeze that began in mid-January has extended into late March, with no signs of stopping.
  • Visit the Business section of Insider for more stories.

GameStop said Tuesday that its stock is -and continues to be – “extremely volatile.”

Moreover, that volatility is “due to numerous circumstances beyond our control.”

The statement in a regulatory filing is the first such statement from GameStop leadership on its ongoing stock price fiasco that’s seen its shares rise as much as 1600% in a matter of weeks.

Under the “risk factors” section of the annual report, the company’s stock volatility is listed as the primary risk factor related to the company’s stock. It specifically cites “short squeezes” as a primary reason for that volatility.

“The market price of our Class A Common Stock has been extremely volatile and may continue to be volatile due to numerous circumstances beyond our control,” GameStop said in the filing.

Gamestop
A 12-month chart of GameStop’s stock value demonstrates the meteoric rises and catastrophic falls of the last few months.

GameStop’s stock value has been explosively unpredictable since mid-January.

Between January 15 and January 27, the price leapt from around $35 to just shy of $350. It’s seen similarly huge dropoffs, but months later it’s still in the $180 range.

The reason, of course, is the much discussed “short squeeze” from a large group of individual investors driving up the company’s stock price in an effort to defeat short sellers betting against the stock. It’s been a major topic of discussion for the past several months for loads of people in media and on Wall Street – except for GameStop leadership.

The company has more or less stayed mum for weeks, and even declined to discuss it on its quarterly earnings call this past week. Instead company leadership focused on the company’s ongoing “transformation” led by Chewy cofounder and former CEO Ryan Cohen.

Since Cohen joined the company’s board in January, taking charge of a “strategic” committee soon after, the company made a string of high-profile hires from the likes of Amazon and Chewy.

It is unclear what Cohen’s specific plans are the future of the company, but he broadly outlined plans in an open letter to the company’s board in late 2020.

GameStop, “needs to evolve into a technology company that delights gamers and delivers exceptional digital experiences,” Cohen wrote in the letter, “not remain a video game retailer that overprioritizes its brick-and-mortar footprint and stumbles around the online ecosystem.”

Got a tip? Contact Insider senior correspondent Ben Gilbert via email (bgilbert@insider.com), or Twitter DM (@realbengilbert). We can keep sources anonymous. Use a non-work device to reach out. PR pitches by email only, please.

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Short-sellers have tripled bets against SPACs since the start of 2021 amid fears the blank-check frenzy has gone too far

Stock Market Bubble
  • More and more short-sellers are beginning to turn their attention to SPACs, which have experienced a boom in 2021.
  • They’ve more than tripled their bets against SPACs to $2.7 billion since the beginning of the year, according to data from S3 Partners.
  • Recent SPACs that have been targets of high profile short-sellers include XL Fleet and Lordstown Motors, among others.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

SPAC IPOs have been all the rage since the COVID-19 pandemic began, and the trend has only accelerated in 2021. Now short-sellers are beginning to take notice.

The group of investors has tripled bearish bets against SPACs to $2.7 billion, from $724 million at the start of the year, according to data from S3 Partners first reported by The Wall Street Journal.

Short-sellers have a lot of SPACs to sift through, given that the $166 billion raised by SPACs in the first quarter of 2021 exceeds all of the SPAC deals formed in 2020. But high-profile short-sellers seem to be having no problem finding their targets.

Muddy Water’s Carson Block released a report earlier this month on XL Fleet, a recent SPAC IPO that, according to Block, misled investors on an inflated revenue backlog for its retrofitted hybrid vehicles. The share price of XL Fleet has yet to recover from Block’s short report.

Short-seller firm Hindenburg Research, which rose to fame last year after it released a damaging short-report on Nikola, has also had success targeting SPAC firms. Hindenburg released a report on Lordstown Motors last week, alleging that the SPAC-merged company has “no revenue and no sellable product.” Shares of Lordstown dipped more than 20% and have yet to recover from the decline.

Even the SPACs led by billionaire investor Chamath Palihapitiya have been unable to avoid the scrutiny of short-sellers. Palihapitiya’s recent Social Capital SPAC merger with fintech firm SoFi has more than 20% of its share float sold short, according to data from Finviz.

Besides the underlying business concerns raised by short-sellers for SPACs, underlying trends in interest rates could be helping their bets against SPAC mergers. A majority of the companies going public via SPAC merger are not profitable, and don’t forecast profitability until years down the road.

The dearth of profits hasn’t jived well with investors as interest rates have risen over the past few months, sparking a rotation out of high-tech growth companies and into cyclical stocks in the energy and financial sectors.

Read more: ‘It’s been a motherf—ing rocket ride’ : A top NFT artist who’s sold over $60 million worth of crypto art breaks down how he’s capitalizing on the sudden boom – and shares how he positions his own portfolio

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US regulators consider rule changes for options trading and short-selling after GameStop frenzy

Elizabeth Warren
Massachusetts Senator Elizabeth Warren

  • The GameStop short-squeeze earlier this year is prompting US regulators to consider potential rule changes for options trading and short-selling.
  • Senator Elizabeth Warren shared responses to her letters from the SEC and FINRA on Tuesday.
  • Both regulators said they are evaluating potential changes to a number of areas impacting investors.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The epic short-squeeze in shares of GameStop earlier this year is prompting US regulators to evaluate potential rule changes that could impact Wall Street.

GameStop posted year-to-date gains of 2,463% at its peak in late January, as Reddit’s WallStreetBets forum piled into the name in the hopes of squeezing out short-sellers.

Now, Congress and US regulators are reviewing what happened to see if there are any vulnerabilities in the stock market that need to be addressed. Regulators are considering rule changes on everything from options trading, to short-selling and gamification practices by investing apps like Robinhood.

On Tuesday, Senator Elizabeth Warren shared the responses to her previous letters that asked the SEC and FINRA how they planned to respond to the volatility in GameStop. The responses revealed a list of issues the regulators are now examining.

The SEC said it is evaluating if there are any gaps in its market manipulation rules. The agency also said it will “seriously consider” increasing the requirements for brokers that offer options trading, and increasing disclosure requirements for brokers that deal with payment for order flow and for hedge funds and investors that engage in short-selling.

FINRA, meanwhile, said its looking into the gamification of the stock market by investing apps like Robinhood, and whether its current rules adequately address the risks presented by these practices. Both FINRA and the SEC said they are still investigating if there was any wrongdoing related to the meteoric rise of GameStop earlier this year.

“The GameStop controversy revealed how the Wall Street game is rigged in favor of big hedge funds and giant corporations – and how this hurts individual investors and the economy. I’m going to keep fighting for answers, a level set of rules, and a transparent and open market for everyone,” Warren said.

Read the original article on Business Insider

Gabe Plotkin’s Melvin Capital gained 22% in February – but the GameStop saga leaves it in a deep hole

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Melvin Capital boss Gabe Plotkin testified to Congress on the GameStop saga in February

Gabe Plotkin’s hedge fund Melvin Capital gained a chunky 22% in February, according to reports, but the investment firm remained in a deep hole after being battered during the GameStop saga.

The 22% gain, reported by numerous outlets, well outstripped the 2.6% rise in the S&P 500 across the month.

Yet Melvin Capital lost 53% in January after hemorrhaging money on its bet against video-game store GameStop, which skyrocketed when amateur traders organizing themselves on social media website Reddit got behind the stock.

The $8 billion fund needs to produce gains of 75% before earlier clients break even, Bloomberg reported. That is a tall task, even for a fund that posted average yearly returns of around 30% from 2014 to 2020.

However, hundreds of millions of dollars have flowed into the fund from investors who are confident in Plotkin’s abilities, Bloomberg said. Insider has contacted a media spokesperson for Melvin Capital for comment.

Melvin’s February gains are in part due to tweaks to Plotkin’s trading strategy. In testimony to Congress on the GameStop saga in February, Plotkin said he had “learned” from the episode. “I am taking steps to protect our investors from anything like this happening in the future,” he said.

For example, Plotkin has stopped using exchange-traded puts – contracts that allow investors to make money if a stock falls – which show up on regulatory filings and allowed his bets to be singled out by day-traders, Bloomberg reported.

The fund took an injection of $2.75 billion in cash from hedge funds Citadel and Point72, the latter run by Plotkin’s mentor Steve Cohen, as the day-trading frenzy rocked the firm.

He also said in his Congressional testimony he would avoid situations where lots of investors are betting heavily against a stock.

Crowded shorts are vulnerable to the types of so-called short squeezes that battered Melvin in January. Squeezes happen when short-sellers are forced to buy back the stock to cover their positions, driving the stock price upwards.

Read the original article on Business Insider

A short squeeze happens when a stock suddenly spikes – a bind for traders who bet borrowed money it would drop

short squeeze
A short squeeze afflicts short-sellers, investors who have sold stocks they don’t actually own, in hopes of buying them back later for less money. If the stock rises instead, the strategy goes awry.

  • A short squeeze refers to a stock rise in price, adversely affecting investors who’d expected a decline.
  • Signs of an imminent short squeeze include heavy buying or a high amount of a stock’s shares being sold short.
  • Buy-limit orders and hedging strategies offer short-sellers some protection against a short squeeze.
  • Visit Business Insider’s Investing Reference library for more stories.

In late January 2021, shares of a company called GameStop stock, which had been trading around $2.57 per share, suddenly shot up, eventually as high as $500 – when users of the Reddit website subgroup Wall Street Bets began buying up shares. 

This was bad news for a lot of other investors, known as short-sellers, who had bet the stock would keep falling. Unlike most investors, who want their stocks to appreciate, short-sellers make money when stock prices go down and lose money when they go up. 

So when GameStop started gaining, these short-sellers were caught in what’s called a short squeeze. They had borrowed to support their pessimistic investment, and they now had to pay it back – by buying GameStop shares at the higher prices. Or else, hang on – and risk losing even more money.

 A short squeeze is a stock market phenomenon, something that happens to investors and traders who have acted on the assumption that an asset (a stock, usually) is going to fall – and it rises instead. Here’s how it happens.

What is a short squeeze?

To understand a short squeeze, it helps to understand short selling, aka shorting, a sophisticated investment strategy in which traders or investors sell stocks they don’t actually own, in hopes of buying them back later for less money. 

It works like this: A short-seller borrows shares (usually from their broker) they think are due for a fall or to keep on falling, and sells them on the open market at the current price. When the stock’s price drops, as the short-seller was betting it would, they then buy the shares back for the new, lower amount. They return the borrowed shares to their stockbroker, keeping the difference in price as profit. In the interim, they’re charged margin interest on the shorted shares until they pay them back.

The entire strategy hinges on the bearish view that the stock is going to drop in value. But what if it goes up instead? That’s when a short squeeze happens. 

When a stock rises sharply and suddenly, short-sellers scramble en masse to buy shares to cover their position (their loan from their broker). Each of these buy transactions drives the stock even higher, “squeezing” the short-seller even more. They have to keep covering their positions or get out totally – at a loss.

 How does a short squeeze happen?

 Here is how a short squeeze scenario unfolds:

  1. You identify a stock you believe is overvalued, and take a short position: borrowing and selling shares at today’s high price in anticipation the price will go down and you will be able to buy replacement shares at a much lower price.
  2. Instead, something happens causing the price of the stock to start going up. That “something” can be the company issuing a favorable earnings report, some sort of favorable news for its industry – or simply many other investors buying the stock (as happened with GameStop).
  3. You realize you are unable to buy the stock back at a low price. Instead of sinking, it’s climbing – and it exceeds the price you bought it for. At this point, you must either buy replacement shares at a higher price and pay back your broker at a loss, or buy even more shares than you need – in hopes that selling them for profit will help cover your losses.
  4. All this increased buying causes the stock to keep going up, forcing even more short-sellers like yourself into a tighter vise. You have the same choices as above, only the stakes keep mounting, and so do your potential losses.

Protecting yourself against a short squeeze 

There are specific actions you can take to try to protect yourself against a short squeeze or to at least alleviate its grip. 

  • Place stop-loss or buy-limit orders on your short positions to curb the damage. For example, if you short a stock at $50 per share, put in a buy-limit order at a certain percentage (5%, 10% or whatever your comfort level is) above that amount. If the shares rise to that price, it’ll automatically trigger a purchase, closing out your position. 

  • Hedge your short position with a long position – that is, buy the stock (or an option to buy the stock) to take advantage of rising prices. Yes, you’re betting against yourself, in a way, but at least you lessen the damages of the losses and benefit from the price appreciation. 

Predicting a short squeeze

Short squeezes are notorious for descending quickly and unpredictably. Still, there are signs a short squeeze may be coming:

  • Substantial amount of buying pressure. If you see a sudden uptick in the overall number of shares bought, this could be a warning sign of a pending short squeeze.
  • High short interest of 20% or above. “Short interest” is the percentage of the total number of outstanding shares held by short-sellers. A high short interest percentage means a large number of all a stock’s outstanding shares are being sold short. The higher the percentage, the more likely a short squeeze may be building. 
  • High Short Interest ratio (SIR) or days to cover above 10. SIR is a comparison of short interest to average daily trading volume. It represents the theoretical number of days, given average trading volume, short-sellers would need to exit their positions. The higher this number, the more likely a short squeeze is coming. Both short interest and SIR are on stock quote and screener websites such as FinViz.
  • Relative Strength Index (RSI) below 30. RSI indicates overbought or oversold conditions in the market on a scale of 0 to 100. A stock with a low RSI means it’s oversold – that is, trading at a very low price – and possibly due to increase; a high RSI indicates the stock is extremely overbought – trading at a high price – and possibly due to drop. Any RSI below 30 signals an imminent price rise, which could lead to a short squeeze. A company’s online stock listing usually includes its RSI, often under its Indicators section. 

The financial takeaway

A short squeeze can result when a stock – especially one that had been declining in price – suddenly goes up for whatever reason. 

This puts short-sellers, who bet the stock would drop or to keep on dropping, in a bind. They sold shares they didn’t actually own, and now, to cover their positions – repay the stock they borrowed -they have to buy increasingly expensive shares. Each of these buy transactions drives the stock even higher, forcing more short-sellers to spend more or get out at a loss. They call it a squeeze but it becomes more like a vicious cycle. 

There are indicators to predict a short squeeze, and ways to protect yourself against one. But overall, a short squeeze is one of the facts of life for a short-seller – and a reminder of the risks that sophisticated trading strategies like short selling carry. 

Related Coverage in Investing:

‘Buy the dip’ means purchasing a promising stock when its price drops, assuming a fast rebound and future profits

Goldman says the stock market is undergoing its biggest short squeeze in 25 years – and that has hedge funds dumping stock exposure at the fastest rate since 2009

Options let you lock in a good price on a stock without actually buying it – here’s how option trading works

A margin call means your broker is asking you to repay the money it lent you to buy stocks – and if you don’t, it could mean big losses for your portfolio

Trading and investing are two approaches to playing the stock market that bring their own benefits and risks

Read the original article on Business Insider

Goldman Sachs: Biggest ‘short squeeze’ in 25 years caused hedge funds to ‘de-gross’ at fastest rate since 2009

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Goldman Sachs said the GameStop saga had hit the wider market, with hedge funds rapidly cutting their positions

The US stock market is witnessing the biggest “short squeeze” in 25 years, forcing hedge funds to withdraw from their positions on stocks at the fastest rate since 2009, according to Goldman Sachs.

Last month saw GameStop shares rise more than 1,700%, “squeezing” hedge funds and others who had “shorted” the stock, costing them billions of dollars. A short position is a bet that a share price will fall.

The surge in GameStop and other heavily shorted stocks was driven by users of the Reddit forum Wall Street Bets, who forced up the price in an effort to make themselves money but also to hammer hedge funds such as Melvin Capital.

Read More: A chief investment strategist breaks down how the GameStop saga could upend long-standing practices on Wall Street – and shares her 4-part advice for navigating the frenzied trading environment

Goldman Sachs analysts this weekend shed some light on the situation in a note. “The past 25 years have witnessed a number of sharp short squeezes in the US equity market, but none as extreme as has occurred recently,” they said.

The equity analysts said a basket of the most-shorted US stocks has rallied 98% in the last three months. Estimates by data provider Ortex on Friday showed that short-sellers were sitting on losses of around $19 billion just on GameStop in 2021 so far.

Hedge funds and short-sellers who had made losing bets were forced to withdraw from the market rapidly at the fastest pace since 2009, in what is known as “de-grossing”.

They had to buy shares in companies such as GameStop and movie theater chain AMC to close their short positions, and sell other stocks to cover their losses.

“This week represented the largest active hedge fund de-grossing since February 2009,” Goldman analysts including David Kostin and Ben Snider said. “Funds in their coverage sold long positions and covered shorts in every sector.”

Kostin and his colleagues said regulations, limits put in place by trading platforms, or sharp losses could bring the amateur trading frenzy to a halt.

“Otherwise, an abundance of US household cash should continue to fuel the trading boom,” they said.

Read More: As Redditors flood the stock market, UBS breaks down 6 options strategies investors can use right now to protect their portfolios 

Goldman said retail investing was thriving because of the large amount of savings built up during the coronavirus period, as well as government stimulus.

“During 2020 credit card debt declined by more than 10%, checking deposits grew by $4 trillion, and savings grew by $5 trillion,” the investment bank’s analysts said.

“On top of these savings, our economists expect more than $1 trillion in additional fiscal support in coming months, including another round of direct checks.”

Read the original article on Business Insider

How to navigate GameStop madness – The strategy that outsmarted Wall Street – How Reddit traders are driving a populist movement

Hello and welcome to Insider Investing. I’m Joe Ciolli, and I’m here to guide you through what’s been happening in markets, as well as what to expect in the coming weeks. This week is packed with all the GameStop and Reddit content you could ever ask for.

Here’s what’s on the docket:

If you aren’t yet a subscriber to Insider Investing, you can sign up here.

Have thoughts on the newsletter? Just want to talk markets? Feel free to drop me a line at jciolli@insider.com or on Twitter @JoeCiolli.


Your weekly recap and outlook

If you’re reading this, that means you managed to make it through the stock market’s most absurb week in recent memory. You’ll always remember where you were when Reddit day traders banded together and pumped 90’s nostalgia stocks like GameStop to the moon – an unprecedented uprising that sent ripples through every layer of the financial system.

The story starts, of course, with the traders themselves, who conduct their business on r/WallStreetBets subreddit. They threw the exact perfect mix of market savvy, anti-establishment sentiment, and sheer will into a blender and came out with a destabilizing cocktail that left established Wall Streeters scrambling clean up the mess.

The central concept was relatively simple: focus on buying heavily shorted stocks, which will hopefully squeeze those positions until they’re forced to close, pushing the stock up even further. Ideally that inspires people that feel left out to pile in. Rinse, repeat. That these companies – which included Nokia, BlackBerry, and BB Liquidating (formerly known as Blockbuster) – were nostalgic, past-their-prime businesses was an added bonus to the Reddit crowd, who are never ones to pass up a chance at irony.

But the phenomenon goes far deeper than that. Underlying the memes and the hubris rests an anti-establishment streak. For a portion of the WallStreetBets crowd, this undertaking isn’t just about making money. It’s about making Old Wall Street pay, and the group isn’t exactly being coy about that fact. “It seems Occupy Wall Street had the wrong approach,” the official WallStreetBets Twitter account posted on January 26.

So what’s the damage look like on Wall Street so far? Arguably the biggest casualty has been Melvin Capital, which held a short position on GameStop that’s left them down 53% year-to-date – performance so bad that investing titans Steve Cohen and Ken Griffin have had to bail them out

But it hasn’t been all negative. Silver Lake Partners saw a convertible-debt investment strike gold when AMC Entertainment’s stock surged this past week. The firm was able to flip that debt into stock, which it then sold at the peak for a smooth $113 million profit. Some have called it the “trade of a lifetime.”

Then there’s also the matter of the preferred trading platform for the Reddit army: Robinhood. The online brokerage had a week for the ages after restricting further buying of GameStop, then backtracking after backlash from everyone from AOC to Chamath Palihapitiya. There have also been reports that Robinhood was forced to draw on bank credit lines amid the madness. How this impacts the company’s quest to go public this year will be a story to watch in the coming weeks.

So where do we go from here? One thing to watch is how hedge funds react. They were already shedding equity exposure in the early days of the GameStop craze, and it’s possible the market dislocations exploited by Redditors will cause them to retreat further.

Many other questions remain. Who else was caught short and ultimately doomed by WallStreetBets? Who else raked in big returns like Silver Lake? When will the so-called meme stocks come plunging back down to earth? And will the stock market ever be the same? Keep watching this space to find out the answer to those, plus many more.


JOIN OUR LIVE EVENT: A conversation with Insider’s markets gurus on the GameStop and Reddit-trader phenomenon

Join us Tuesday, February 2, 2021 at 1:00 p.m ET as deputy editor Joe Ciolli, markets and economy reporter Ben Winck, and senior investing reporter Vicky Huang discuss the GameStop phenomenon, the influence of WallStreetBets, and how the Reddit-fueled trade might end.

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How to navigate a GameStop crazed environment

GameStop Clerk

Ally Chief Investment Strategist Lindsey Bell says the meme-stock rally could be a good thing for average investors. Still, she says traders who want to play the newest hot stocks should understand they are speculating. Bell also advises investors to have a plan and stick to it when things get strange, and understand how unusual this time is.

Read the full story here:

A chief investment strategist breaks down how the GameStop saga could upend long-standing practices on Wall Street – and shares her 4-part advice for navigating the frenzied trading environment


The intricate strategy GameStop traders used to outsmart Wall Street

gamestop store line crowd

Steve Sosnick – the chief strategist of Interactive Brokers and head trader of its trading unit Timber Hill – breaks down the short squeeze and gamma squeeze Reddit traders put in place for GameStop. He also shares how the massive moves in these so-called meme stocks could permanently alter markets.

Read the full story here:

A veteran options trader breaks down the intricate strategy that Reddit traders used to outsmart Wall Street’s bet against GameStop – and shares 2 ways the parabolic rally could permanently alter the stock market


How Reddit-trader mania represents a full-fledged populist movement

occupy wall street reddit 2x1

The Reddit-fueled trading phenomenon lifting GameStop, AMC, and other stocks is backed by populist sentiments. Cries to dethrone the establishment and redistribute wealth resemble those seen at Occupy Wall Street protests in 2011. The trend has all but certainly formed a bubble, but its political messaging can still live on.

Read the full story here:

The GameStop mania driven by Reddit traders isn’t simple market trolling. It’s a populist movement threatening to disrupt the financial system to a degree Occupy Wall Street only dreamed of.


JOIN OUR LIVE EVENT: Execs reveal what’s on tap for the red-hot IPO market in 2021

Join Insider on Wednesday, February 3 at 2:30 p.m. ET as Insider’s chief finance correspondent Dakin Campbell moderates a panel featuring Kim Posnett, Goldman Sachs partner and Internet investment banking chief, Greg Rodgers, a Latham & Watkins LLP attorney and direct-listings expert, and Mitchell Green, a venture capitalist at Lead Edge Capital who backed Uber, Spotify, Asana, and Alibaba.

These IPO experts will discuss what you can expect for the year ahead and how the recent changes have dramatically altered the calculus for startup entrepreneurs. They will also take reader questions. 

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Stock pick central

Seeking experts who are willing to name names? Look no further:

Read the original article on Business Insider

Reddit day traders are taking on hedge fund giants and winning, and it’s a sign of a new era for markets

WallStreetBets
  • The 4 million-strong WallStreetBets forum on Reddit has officially disrupted Wall Street.
  • They did it by piling into heavily shorted stocks, sparking short-squeezes at the expense of Wall Street hedge funds and large institutional investors.
  • “They are proving to be quite capable of mounting some successful ‘value capture’ against Wall Street institutional investors,” Fundstrat’s Tom Lee said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Wall Street hedge funds are scrambling, and it’s all because of a online investing forum that has more than 4 million members who self-describe themselves as “degenerates.”

Reddit’s WallStreetBets forum has surged in popularity after retail investors within the group successfully staged a gravity-defying short-squeeze in GameStop at the expense of hedge funds that were betting the physical video-game retailer was on its last legs. 

A short-squeeze occurs when investors who are betting against the stock are forced to close out their position by buying the stock, further adding fuel to the fire.

As of Thursday morning, GameStop had a year-to-date gain of more than 2,400%. The rally in GameStop crushed Melvin Capital, a roughly $12 billion hedge fund that has suffered a more than 30% decline due to its short position in GameStop.

The hedge fund received an emergency $2.8 billion investment from Steve Cohen’s Point72 and Ken Griffin’s Citadel amid the record surge in GameStop.

Read more: As Redditors flood the stock market, UBS breaks down 6 options strategies investors can use right now to protect their portfolios

Citron’s Andrew Left, a famed short-seller, also felt the heat from Reddit investors after he called for the stock to fall 50% last week. Left ultimately closed out his short in GameStop for a loss, as did Melvin Capital.

Maplelane Capital is another New York-based hedge fund that saw declines of about 30% due to its short position in GameStop, according to a report from The Wall Street Journal.

The developments are remarkable when you consider that retail investors on Reddit likely lack the sophisticated data feeds that multi-billion-dollar hedge funds rely on.

But after spending a few hours on the forum, billionaire investor Chamath Palihapitiya concluded that the Reddit traders can do the same fundamental analysis as hedge funds, if not better. Palihapitiya ultimately followed the retail investors into GameStop, and won big.

Now, Reddit traders are trying to replicate the success of GameStop and are targeting other stocks that are highly shorted by professional investors. And they’re succeeding.

Stocks like AMC Entertainment, Bed Bath & Beyond, and Virgin Galactic have soared this week as Reddit investors piled into the names via both stocks and deep out of the money call options, creating unprecedented demand for the shares.

Read more: A chief investment strategist breaks down how the GameStop saga could upend decades-long practices on Wall Street – and shares her 4-part advice for navigating the frenzied trading environment

“They [retail investors] are proving to be quite capable of mounting some successful ‘value capture’ against Wall Street institutional investors,” Fundstrat’s Tom Lee said in a note on Monday, adding that “large size does not always win.”

But the influence of WallStreetBets on stock moves could wane in the future as systematic funds “adjust” their models to incorporate this new source of volatility, Lee said.

And it’s not only quant funds that could put a dent in the influence of 4 million Reddit traders, it’s also trading platforms.

On Thursday, Robinhood restricted buy trades in a handful of stocks that have seen epic short squeezes and have been targeted by the Reddit group, including GameStop, AMC Entertainment, and Nokia, among others.

Now the question is, according to Lee: “Will their strategies endure?” 

Read more: Morgan Stanley handpicks 18 US stocks to buy for the best business models that deliver market-beating returns for years to come

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Here’s how short-selling works, and how Reddit’s day-trader army spoiled the strategy for GameStop bears

2021 01 27T150631Z_560376978_RC2FGL9DIIHP_RTRMADP_3_GAMESTOP HOT (1).JPG
GameStop. REUTERS/Mike Blake

Short-sellers have taken a hit now that GameStop shares have topped $330, in what analysts have dubbed an irrational rally stoked by the Reddit group “Wall Street Bets.” 

When the market operates rationally, investors have the option to short a company’s stock. In the case of GameStop, Melvin Capital and Citron Research were among the list of short sellers, and they’ve lost their bet, by a lot. The more than 2 million members of the subReddit group have been bidding up GameStop shares in the past weeks, causing the stock to skyrocket more than 1,200% since mid-January. 

And short sellers have lost billions

To short a stock means the investor is betting the price of that company’s shares will decline. (In a normal bet, which is called going long, investors purchase a stock with the hopes of it increasing).

In shorting a stock, an investor borrows shares from a lender, let’s say at $10 per share. The investor then takes the borrowed shares and sells them for that same price. Once the stock goes down, to let’s say $1 per share, the investor buys the shares back and returns them to the lender, pocketing $9 per share. 

“Let’s say you short XYZ company at $100, and the next day it goes to $10. You take $10 out of your pocket and buy back the stock and give it to the guy you borrowed it from. And you have $90 in your pocket,” Michael Pachter, an analyst at Wedbush, told Insider. Pachter added that there’s the added cost of paying the interest on borrowing the stock, though if an investor only holds a short position for a month, the interest would be negligible. 

But sometimes, like in the case of GameStop, the shorts get “squeezed” when the shares go up, said Telsey analyst Joe Feldman, who maintains the Street-high target price of $33 for GameStop. That means short sellers have to buy back the stock at a higher price. So if the shares were borrowed when the stock was $10, and now the stock is $20, the investor loses $10 per share. 

Read more: How hedge funds are tracking Reddit posts to protect their portfolios after the Wall Street Bets crowd helped tank Melvin Capital’s short positions

GameStop short-sellers Melvin Capital and Citron Research lost a lot when the stock started spiking, said Pachter. They’ve both since closed out of their short positions. CNBC reported that hedge fund Melvin Capital ate a huge loss on Tuesday when it closed its short position. Citron managing partner Andrew Left said that the firm’s position was covered when GameStop traded at about $90 at “a loss of 100%.”

“There’s a point where the shorts say, ‘This is crazy I’m getting out,'” Pachter said. 

The problem with shorting the stock at the higher price now, betting it will go back to normal levels, is that analysts are unsure where the irrational share increase will stop. “What if it goes to infinity?” Pachter said.

Joost van Dreunen, who teaches at the New York University Stern School of Business and has an expertise in gaming, said the current valuation of GameStop is “totally disconnected from reality.” GameStop’s record highs prior to this rally were in 2007 and 2013 when the Nintendo Wii and Switch launched, respectively, and pushed the stock to about $60. 

“That was their absolute high watermark, and they haven’t been able to recover it since,” van Dreunen said. “The current situation is just post-modern financial drama totally void of reality.”

“Fundamentally, nothing has changed for the company,” Feldman said. “If anything the fourth quarter was probably a little disappointing.”

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