# Explain the GameStop short squeeze? **URL:** \ **Category:** Factual Questions\ **Created:** [January 28, 2021, 11:04am UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681 "2021-01-28T11:04:54Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Machine\_Elf](https://avatars.discourse-cdn.com/v4/letter/m/82dd89/32.png) [@Machine\_Elf](https://boards.straightdope.com/u/Machine_Elf)\ **Post date:** [January 28, 2021, 11:04am UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/1 "2021-01-28T11:04:55Z")
If you haven’t seen this is in the news lately, it’s kind of bizarre. > **[GameStop short squeeze](https://en.wikipedia.org/wiki/GameStop_short_squeeze)** > > In January 2021, a short squeeze of the stock of the American video game retailer GameStop and other securities took place, causing major financial consequences for certain hedge funds and large losses for short sellers. Approximately 140 percent of GameStop's public float had been sold short, and the rush to buy shares to cover those positions as the price rose caused it to rise even further. The short squeeze was initially and primarily triggered by users of the subreddit r/wallstreetbets, ... TL,DR: Gamestop is a brick-and-mortar video game seller that many believed would be going out of business soon. The belief was so strong that hedge funds were betting strongly against it by shorting its very low-priced stock, and stood to make a lot of money if/when it finally did close its doors. Then [something] happened on a Reddit subforum, and the share price _exploded_, with a return of 788% in just one week. According to the Wikipedia article, the that happened was this: > On January 22, 2021, users of r/WallStreetBets initiated a [short squeeze](https://en.wikipedia.org/wiki/Short_squeeze) on [GameStop](https://en.wikipedia.org/wiki/GameStop), pushing their stock prices up significantly. OK, I think I understand a short squeeze: it’s when short sellers (like the above-mentioned hedge funds) start to fear that the stock _won’t_ tank like they expected, and start buying shares at current market value, hoping to limit their losses. This starts something like a “run on the bank,” where short sellers buy the stock, causing the price to rise, causing other short sellers to panic and buy, resulting in a chain reaction that balloons the stock price, burning all of those short sellers. **My question:** What was the [something] that happened in r/WallStreetBets that “initiated” a short squeeze? How did they do that? Was it just a coordinated effort to buy substantial amounts of the stock, causing an uptick in price that ignited the short-seller panic? ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [January 28, 2021, 11:35am UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/2 "2021-01-28T11:35:57Z")
Here is an excellent explanation [![](https://img.youtube.com/vi/9ToOGrUQ7ME/hqdefault.jpg "Saagar Enjeti: Wall Street Elites DESTROYED, Beaten By Redditors At Their Own RIGGED Game") ](https://www.youtube.com/watch?v=9ToOGrUQ7ME) ---
**Author:** ![Ike\_Witt](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ike_witt/32/283_2.png) [@Ike\_Witt](https://boards.straightdope.com/u/Ike_Witt)\ **Post date:** [January 28, 2021, 1:15pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/3 "2021-01-28T13:15:11Z")
So of course butthurt stock borkers want some sort of investigation. > “The frenzy raises all sorts of questions with respect to possible market manipulation,” said Michael Hewson, chief market analyst at retail broker CMC Markets UK. Translation: “Waa. We lost money we were not expecting to lose.” If any sort of regulations come about to curb this type of trading while leaving the big traders alone will not look good. ---
**Author:** ![Maserschmidt](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/maserschmidt/32/18829_2.png) [@Maserschmidt](https://boards.straightdope.com/u/Maserschmidt)\ **Post date:** [January 28, 2021, 1:20pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/4 "2021-01-28T13:20:38Z")
It’s worth noting that a lot of this was concentrated against Andrew Left, who is a complete scumbag. Of course, being who he is, he’ll sue somebody and everybody over this. > **[The Bounty Hunter of Wall Street (Published 2017)](https://www.nytimes.com/2017/06/08/magazine/the-bounty-hunter-of-wall-street.html)** > > Andrew Left sniffs out corporate fraud — and gets rich doing it. ---
**Author:** ![Si\_Amigo](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/si_amigo/32/2877_2.png) [@Si\_Amigo](https://boards.straightdope.com/u/Si_Amigo)\ **Post date:** [January 28, 2021, 1:57pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/5 "2021-01-28T13:57:22Z")
So if I were a GameStop executive why would I not cash out all of my stock now and make a huge profit and let the company stock settle back down? Unless they were involved in the Reddit manipulation scheme they wouldn’t be doing anything illegal, correct? They would be stupid not to take advantage of this IMHO. ---
**Author:** ![MandaJo](https://avatars.discourse-cdn.com/v4/letter/m/ac91a4/32.png) [@MandaJo](https://boards.straightdope.com/u/MandaJo)\ **Post date:** [January 28, 2021, 2:14pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/6 "2021-01-28T14:14:34Z")
It’s important to note that the firms that were shorting the stock weren’t just hoping or predicting it would go down on It’s merits. They were publicly trashing it, in hopes of depressing the price. ---
**Author:** ![Machine\_Elf](https://avatars.discourse-cdn.com/v4/letter/m/82dd89/32.png) [@Machine\_Elf](https://boards.straightdope.com/u/Machine_Elf)\ **Post date:** [January 28, 2021, 2:16pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/7 "2021-01-28T14:16:03Z")
AIUI, the success of the Reddit scheme depended on the stock having already been heavily shorted. In fact, they (the Reddit crew) seemed to know that the stock was 140% shorted. How did they know this? How does one find out the degree to which a given stock has been shorted? ---
**Author:** ![Munch](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/munch/32/5281_2.png) [@Munch](https://boards.straightdope.com/u/Munch)\ **Post date:** [January 28, 2021, 2:22pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/8 "2021-01-28T14:22:56Z")
> [@Si\_Amigo](#): > > So if I were a GameStop executive why would I not cash out all of my stock now and make a huge profit and let the company stock settle back down? Most executives with stock holdings are limited in the window they are able to sell company stock. This is referred to as [Rule 10b5-1](https://www.investopedia.com/terms/r/rule-10b5-1.asp). ---
**Author:** ![ShadowFacts](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/shadowfacts/32/2934_2.png) [@ShadowFacts](https://boards.straightdope.com/u/ShadowFacts)\ **Post date:** [January 28, 2021, 2:46pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/9 "2021-01-28T14:46:02Z")
I have a related question. I’ve read a few articles about this and it seems like there are two current results of the short squeeze: 1. A bunch of short sellers lost a LOT of money 2. A bunch of reddit investors now own a bunch of GameStop stock that is _wildly_ overinflated AIUI, there’s no question that GameStop stock is a huge bubble right now and it’s going to burst, probably sooner rather than later. So my question is: aren’t a lot of the #2 people going to lose a lot of money when that happens? Or did they somehow already sell and they are sitting pretty on fat piles of cash? ---
**Author:** ![MandaJo](https://avatars.discourse-cdn.com/v4/letter/m/ac91a4/32.png) [@MandaJo](https://boards.straightdope.com/u/MandaJo)\ **Post date:** [January 28, 2021, 2:48pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/10 "2021-01-28T14:48:35Z")
They are betting that the aggressive pressure applied by the hedge funds to lower the price meant that it was artificially overvalued. So if they bought it at $2 and it blows up to $100 and then drops to $3, it’s “real” value, they will still make money. And it’s unlikely it will drop lower than it was when this whole thing started. [all numbers made up]. ---
**Author:** ![Arcite](https://avatars.discourse-cdn.com/v4/letter/a/67e7ee/32.png) [@Arcite](https://boards.straightdope.com/u/Arcite)\ **Post date:** [January 28, 2021, 2:49pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/11 "2021-01-28T14:49:16Z")
> [@Machine\_Elf](#): > > AIUI, the success of the Reddit scheme depended on the stock having already been heavily shorted. In fact, they (the Reddit crew) seemed to know that the stock was 140% shorted. > > How did they know this? How does one find out the degree to which a given stock has been shorted? Here’s a website where you can enter a ticker and see that number (“short float”): > **[GME - Gamestop Corporation Stock Price and Quote](https://finviz.com/quote.ashx?t=gme)** > > GME - Gamestop Corporation - Stock screener for investors and traders, financial visualizations. ---
**Author:** ![Tired\_and\_Cranky](https://avatars.discourse-cdn.com/v4/letter/t/a87d85/32.png) [@Tired\_and\_Cranky](https://boards.straightdope.com/u/Tired_and_Cranky)\ **Post date:** [January 28, 2021, 2:49pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/12 "2021-01-28T14:49:19Z")
> [@Machine\_Elf](#): > > What was the [something] that happened in r/WallStreetBets that “initiated” a short squeeze? How did they do that? Was it just a coordinated effort to buy substantial amounts of the stock, causing an uptick in price that ignited the short-seller panic? Basically, yeah. From what i understand, someone on the boards said the stock was a good value based on their analysis and noting that the big short interest meant that if the price rose enough, the short sellers would get squeezed and lose a bunch of money, which would accrue to the buyers. Short sellers borrow stock and sell it today with the obligation to return the stock back at some point in the future. The short sellers borrow the shares from their broker, who charges them interest on the stock and who monitors the entire portfolio to make sure that the value of the portfolio is always high enough to pay back the short seller’s loans. Short sellers hope that the stock price will drop so while they sold high today, they can buy low in the future to pay back the stock they borrowed. The difference in the prices is the profit But short sellers lose money when the price rises. If they lose enough money, the value of their whole portfolio will drop. If it drops enough, the broker will look at the balance in the portfolio and say, “gee, if this short position loses more money, there won’t be enough money in the account to pay back the loans.” The broker’s solution is to force the short seller’s account to buy the stock in the market. This buying closes out the short seller’s position and reduces the broker’s risk but it locks in the short seller’s losses. Worse yet, the broker buying the stock is pushing the price up further, exacerbating the short seller’s losses. This is the “short squeeze,” – short sellers being forced to buy stock when the stock price is rising even though they want to do the exact opposite. > [@Si\_Amigo](#): > > So if I were a GameStop executive why would I not cash out all of my stock now and make a huge profit and let the company stock settle back down? Some probably are but perhaps not in sufficient volume to offset the buying by the teeming masses of message board readers who are buying. I’m not looking at the GameStop executives specifically but often, executives’ interest in the company are in the form of stock options which have not yet vested. There are many executives who might like to cash out now but don’t have any saleable options. Some may not want to be accused of insider trading, even if they aren’t actually trading on the basis of insider information. Insiders selling stock is also viewed as a no-confidence vote, so many will avoid it if they want to keep their jobs. Other executives may be selling their stock according to predefined plans (called 10b5-1 plans, after Exchange Act Rule 10b5-1) under which they agree to sell a set amount of stock according to a set schedule for a period of time. These plans are a safe harbor from accusations of insider trading but they can’t vary their sales under those plans in response to current market conditions. > [@MandaJo](#): > > It’s important to note that the firms that were shorting the stock weren’t just hoping or predicting it would go down on It’s merits. They were publicly trashing it, in hopes of depressing the price. For the big guys, that’s how short selling works. Generally, the tilt in market information is people who want you to buy stock saying nice things about it, corporate insiders saying nice things about their employer, and (to be very cynical) analysts at investment banks who want to do business with the companies saying nice things about them.\* One good source of contrary information are short sellers who don’t believe all the bullpoppy everyone else is slinging. - This could be a whole discussion all by itself. Changes in rules and market practice have reduced this problem somewhat but it still happens in some ways, like analysts choosing to drop coverage of stocks they think will tank rather than saying bad things about them. > [@Machine\_Elf](#): > > How did they know this? How does one find out the degree to which a given stock has been shorted? Short interest is publicly reported. Not continuously but often enough that traders on the lookout can know when short interest is high enough that a short squeeze is possible. > **[Short Interest Reporting](https://www.finra.org/filing-reporting/regulatory-filing-systems/short-interest)** > > FINRA requires firms to report short interest positions in all customer and proprietary accounts in all equity securities twice a month. All short interest positions must be reported by 6 p.m. Eastern Time on the second business day after... The reporting doesn’t tell you who is selling short but short sellers are often public about their positions and trashing the stock, as @MandaJo notes. It’s rarely a secret when a whale is short seller. ---
**Author:** ![MandaJo](https://avatars.discourse-cdn.com/v4/letter/m/ac91a4/32.png) [@MandaJo](https://boards.straightdope.com/u/MandaJo)\ **Post date:** [January 28, 2021, 2:53pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/13 "2021-01-28T14:53:37Z")
> [@Tired\_and\_Cranky](#): > > For the big guys, that’s how short selling works. Generally, the tilt in market information is people who want you to buy stock saying nice things about it, corporate insiders saying nice things about their employer, and (to be very cynical) analysts at investment banks who want to do business with the companies saying nice things about them.\* One good source of contrary information are short sellers who don’t believe all the bullpoppy everyone else is slinging. Right. But this is an important counterargument to the claim that the reddit was doing something unfair or illicit by coordinating their actions and trying to manipulate the stock price by getting the rest of the sub to buy it. Everyone does this and it’s not illegal. ---
**Author:** ![Munch](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/munch/32/5281_2.png) [@Munch](https://boards.straightdope.com/u/Munch)\ **Post date:** [January 28, 2021, 2:53pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/14 "2021-01-28T14:53:51Z")
> [@ShadowFacts](#): > > A bunch of short sellers lost a LOT of money This isn’t quite correct. They haven’t lost a lot of money _yet_. Options have an expiration. In the case of this situation, that date is tomorrow. So r/wsb needs to hold strong until tomorrow to cash out, and the hedge funds need r/wsb to crack before then. We’ll see what happens at market open to see which forces win out. ---
**Author:** ![Pleonast](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pleonast/32/1183_2.png) [@Pleonast](https://boards.straightdope.com/u/Pleonast)\ **Post date:** [January 28, 2021, 2:59pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/15 "2021-01-28T14:59:12Z")
As a general note, when buying stocks long, you have limited potential losses and unlimited potential gains. Selling stocks short is the opposite, unlimited potential losses and limited potential gains. Professionals know their risks. ---
**Author:** ![ShadowFacts](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/shadowfacts/32/2934_2.png) [@ShadowFacts](https://boards.straightdope.com/u/ShadowFacts)\ **Post date:** [January 28, 2021, 3:09pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/16 "2021-01-28T15:09:20Z")
> [@Munch](#): > > This isn’t quite correct. They haven’t lost a lot of money _yet_ . Some of them have. [This article in the Boston Globe](https://www.bostonglobe.com/2021/01/28/business/heres-what-you-should-know-about-gamestop-insanity/) says that at least 2 big players have closed their positions and lost money. > A spokesperson for Melvin Capital — which needed a $2.75 billion cash injection Monday because of the squeeze — said the firm had closed out of its short position. Andrew Left of Citron Research, another short, said he had covered the majority of his short position “at a loss, 100%.” ---
**Author:** ![Andy\_L](https://avatars.discourse-cdn.com/v4/letter/a/c67d28/32.png) [@Andy\_L](https://boards.straightdope.com/u/Andy_L)\ **Post date:** [January 28, 2021, 3:17pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/17 "2021-01-28T15:17:16Z")
Previous thread about short sales > [@Confused about the profit generated from a short sale of shares](https://boards.straightdope.com/t/confused-about-the-profit-generated-from-a-short-sale-of-shares/677915): > > Hi, I usually think of making a profit when I own something that I have bought cheaply and sell at a higher price than I originally bought it for. I can’t see the connection with the following transaction. I don’t understand where the profit comes from. The broker borrows the stock for me to trade with using my margin account as collateral (correct?). So the price of a share goes down from $ 65 ( $6,500 for the shares. This is where I’m confused. I don’t own the stock. I’m just borrowing it to… ---
**Author:** ![Pleonast](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pleonast/32/1183_2.png) [@Pleonast](https://boards.straightdope.com/u/Pleonast)\ **Post date:** [January 28, 2021, 3:38pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/18 "2021-01-28T15:38:53Z")
> [@ShadowFacts](#): > > > A spokesperson for Melvin Capital — which needed a $2.75 billion cash injection Monday because of the squeeze — said the firm had closed out of its short position. Andrew Left of Citron Research, another short, said he had covered the majority of his short position “at a loss, 100%.” I read that and thought that couldn’t be right. But the market capitalization of GameStop is now $25B, so that’s a quite plausible loss. Ouch, playing with fire can give some harsh lessons. ---
**Author:** ![Acsenray](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/acsenray/32/4519_2.png) [@Acsenray](https://boards.straightdope.com/u/Acsenray)\ **Post date:** [January 28, 2021, 3:40pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/19 "2021-01-28T15:40:24Z")
> [@Munch](#): > > > [@Si\_Amigo](#): > > > > So if I were a GameStop executive why would I not cash out all of my stock now and make a huge profit and let the company stock settle back down? Unless they were involved in the Reddit manipulation scheme they wouldn’t be doing anything illegal, correct? They would be stupid not to take advantage of this IMHO. > > Most executives with stock holdings are limited in the window they are able to sell company stock. This is referred to as [Rule 10b5-1](https://www.investopedia.com/terms/r/rule-10b5-1.asp). Company executives also have a fiduciary duty to the company and aren’t allowed to do certain things that hurt the company to benefit themselves individually. ---
**Author:** ![Si\_Amigo](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/si_amigo/32/2877_2.png) [@Si\_Amigo](https://boards.straightdope.com/u/Si_Amigo)\ **Post date:** [January 28, 2021, 3:45pm UTC](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681/20 "2021-01-28T15:45:19Z")
OK, I understand that, but . . . couldn’t executives own stock that wasn’t part of their compensation package? Could they have seen the stock going artificially up and decide to buy in on the open market and ride the bubble themselves? Surely company executives knew something was happening, would buying in while the stock was still low be illegal for them as long as they were not using company funds to do so? [Next page](https://boards.straightdope.com/t/explain-the-gamestop-short-squeeze/931681.md?page=2)