This case explores the general observations and financial implications behind the short squeeze that had happened on the GameStop Corp. (NYSE: GME), an American chain of brick-and-mortar video game stores. The company had struggled in recent years due to competition from digital distribution companies and the adverse impacts of the COVID-19 pandemic. As the share price of GME went up due to the hope of possible digital transformation since August 2020, there had been increasingly extensive short selling activities of GME stock by many institutional investors believing the firm was overpriced. Some of those short sellers were sizable hedge funds.
In late January 2021, the short interest of GME stocks had been the highest among all U.S. stocks. It once climbed up to 138.3% of the floated shares of the stock. Seeing the overly shorted positions of GME and knowing that short sellers had to buy back GME stock eventually in order to close their short positions, retail investors from the “r/WallStreetBets” community of the online social forum Reddit, and from some other social media platforms, rallied to significantly increase their holdings of GME shares and call options and refrained themselves from selling them to the short sellers.
Following the above, GME’s stock price skyrocketed to an extraordinarily high level and increased over fifteen times over just three weeks as of 29 Jan 2021. Those retail investors collectively made substantial gains. At the same time, this caused billions of losses to the short sellers of GME stocks. The event systemically caused ripple effect to the overall stock market that experienced a sharp, succinct drop as some short sellers had to sell their holdings of other stocks to raise funding to meet margin calls on their short positions of GME.
On January 28, Robinhood and a few other brokers halted the purchasing of GameStop and other securities. That raged some retail investors and class-action lawsuits were filed against Robinhood. The drama of short squeeze of GME also caught the attention of regulators prominent politicians in US, including the U.S. SEC and the Biden Administration.
The case seeks to highlight the definition, underlying factors, and mechanism of short selling, naked short selling and short squeeze. The reasons for market participants to do the above, the forthcoming risks, as well as the corresponding impact to the market are discussed. The case will discuss the interaction between social media and financial system nowadays. The perspectives (including interests and concerns) of the following parties will be analyzed, namely the retail investors, hedge funds and/or market makers, brokers (especially the FinTech-enabled zero-commission brokers), and regulators.
Understanding the observations and implications of the case, students will be able perform a more comprehensive analysis on how social media and new technology shape the new investment world. Students will also be able to assess their own risks in conducting trades amid a short squeeze, or in anticipation of a short squeeze.
On completion of the case, students will be able to:
1. Understand the definition, mechanism, intent, risks, costs, and impacts of short selling
2. Explain the reasons for a short squeeze
3. Analyze the relationship between naked short selling, failure-to-deliver phenomenon, and short interest
4. Assess the timing to take advantage of a short squeeze opportunity
5. Discuss the regulatory concerns in response to a short squeeze incident