The recent short squeeze battle between retail investors on the Reddit community r/WallStreetBets (wsb) and Wall Street hedge funds over GameStop’s stock has drawn widespread attention. Retail investors banded together to drive up GameStop’s share price, causing multi-billion dollar losses for short sellers Melvin Capital and Citron Research. This event highlights the growing power of retail investors coordinating over social platforms like Reddit. However, sustainability of such short squeezes and share price spikes based predominantly on speculation rather than fundamentals remains doubtful.
Retail investors drove massive surge in GameStop share price
In January 2021, a group of retail investors on the Reddit forum r/WallStreetBets noticed that hedge funds had heavily shorted GameStop stock, with over 100% of available shares shorted. They strategized to collectively buy GameStop shares and call options, aiming to trigger a short squeeze by pushing up the share price. Their strategy proved successful – GameStop’s share price surged from around $20 in early January to a peak of $483 later that month. Hedge funds like Melvin Capital that had short positions reportedly suffered billions in losses and had to close out their shorts.
Short squeezes led by retail investors are difficult to sustain
While the GameStop short squeeze delivered big wins for retail investors in the short term, the share price increase was predominantly driven by speculation rather than fundamentals. After the initial surge, GameStop share price eroded quickly, falling back below $100 within days. This shows the difficulty of sustaining a short squeeze rally only based on speculative buying without fundamental improvement in the company’s performance and valuation.
Regulators reviewing market manipulation concerns over Reddit trading frenzy
The huge spike and subsequent steep decline in GameStop’s share price led to an investigation by regulators over manipulation concerns. The SEC said it would review actions taken by Reddit traders and hedge funds to determine if there were abusive practices that artificially inflated the stock price before profiting from its decline. Increased regulatory scrutiny could have a dampening effect on future attempts by retail investors to instigate short squeezes.
The GameStop short squeeze led by Reddit group r/WallStreetBets highlights the disruptive power of social-media driven retail investing. However, sustainability of such speculative, momentum-based price spikes remains doubtful without fundamental improvements. Regulators are also reviewing concerns over manipulation by both hedge funds and retail investors.