Retailers Revenge Hedge Funds in GameStop Shares Saga

The shares of GameStop skyrocketed from $US19 on the last day of 2020 to $325 on January 29 as retailers huddled up to take revenge from notorious hedge funds this time by holding shares of gaming merchandise company.

The battle between the retail traders and hedge funds have existed since the beginning of the equity markets.

However, the hedge funds had always been at the top due to their mammoth capital accumulation. Hedge funds are considered to be the market movers meaning that they can take the price of a share up and down at their wills.

This can happen due to their big pockets which enables them to buy thousands of shares at a time.

However, the retail traders, those who relatively buy a small number of shares for profits, got united against the hedge funds this time and decided to take revenge for all the losses they had suffered due to the hedge funds.

The union of the retailers led per share price of GameStop to above $300.

Behind story

The renowned hedge funds like Melvin Capital and Citron Research decided to short-sell GameStop shares as they predicted that the share price of the company would go down. It means that they decided to buy the share at a higher price and then short it.

Due to the injection of millions of dollars at a time by hedge funds, the share price would have to eventually move down as hedge funds were short.

The retail traders who had purchased GameStop shares and hoping for them to go up under normal circumstances would face losses.

However, the strategy of the hedge funds got ‘leaked’.

The retailers in Wallstreetbets forum on Reddit decided to ‘revenge’ the market monopolists.

The borrowing of the huge number of funds by hedge funds from stock brokers for going short created negative floating in the market.

Float in stocks is the number of shares actually available for trading. Negative float is that shares borrowed from the brokers were not actually available in the market for trading.

The retail traders on Reddit had decided not to sell it to hedge funds when they (hedge funds) are required to buy shares to close their short positions.

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This triggered an immense gap in supply and demand and hedge funds did not have retailers to purchase GameStop shares from them. Eventually, the funds lost billions of dollars which was the ‘revenge’.

They had to close their short-positions at losses and return the shares to the lenders as there were no buyers (retailers) who were ready to purchase them from the hedge funds at that plummeted price.

Therefore, the price of the GameStop share skyrocketed and incurred a loss of billions of dollars to the hedge funds.

Due to this, the price of GameStop escalated to a 1,900 percent increase in the price of its share.

The prices of the GameStop shares further surged when Elon Musk tweeted a link to the Reddit forum where the ambush against hedge funds was planned.

Gamestonk!! https://t.co/RZtkDzAewJ

— Elon Musk (@elonmusk) January 26, 2021