On January 28th, 2021, a seminal moment occurred in financial market history; Robinhood, and other brokers, turned off the buy button on $GME. The price, which had been moving parabolic above $500, cratered within hours. This exposed deep underlying truths about the stock market that have reverberated for years to come.
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In September of 2019, a user named u/DeepFuckingValue begins posting on Reddit about a wild YOLO bet he makes using long-dated options and shares on the video game retailer company, Gamestop. Most thought he was half-crazed: the positions amounted to more than $50k!
In August of 2020, activist investor and founder of Chewy, Ryan Cohen, begins buying shares of Gamestop. He believes that $GME has massive untapped potential as a retailer, and even notes later in public filings that the stock has a large short interest in it.
That same month, u/DeepFuckingValue, who goes by RoaringKitty on Youtube, publishes his $GME long thesis, discussing the evolution of the gaming industry, the structure of the business, and what needs to change.
He notes that 95% of stores were EBITDA positive in 2019! By late December 2020, the stock had risen from $1 in the summer to the $3-5 range. DFV began doing more livestreams, and WallStreetBets begins to catch on to the hypetrain.
In early January, the stock ripped to $10. Then $20. Frantic options and share buying began to unfold, with many users posting screenshots of buys on Reddit. On the 11th, Ryan Cohen joins Gamestop's Board with a new vision of how the company should be run. Short-sellers begin to panic. Andrew Left, who runs Citron Research, is first to get run over, but continually insists that his thesis is correct and retail investors are "dumb money" who will be proven wrong.
Two weeks later, Citron would close its short position allegedly.
On Friday, January 22nd, the price would swing wildly, running into the $80 range before slamming down. News spread of the cornered shorts over the weekend.
On Monday the 25th, $GME begins to move parabolic, ripping up by $59, or 167%. The WSB subreddit gets even more active. Internet virality took over. Twitter joined in, and memes began to abound targeting the massive short sellers and users created analogies to describe the process of a short squeeze to new investors.
Shockingly, users discovered short interest was 140%!
The shorts had shorted more shares than even existed. If retail bought enough of the shares, and held onto them, this could prolong the squeeze and ensure price rising into the thousands of dollars. On the afternoon of the 26th, Elon Musk tweeted Gamestonk! to his 100M+ twitter followers and the sub took off, gaining millions of followers in 24 hours. The price continued to rip upwards. Melvin Capital, staggering from losses, receives a $2.8 billion bailout from Ken Griffin and Steve Cohen.
A day later, the WSB discord was overwhelmed with users as well as "inflammatory comments” and Discord decided to shut it down. The mods put out a call for help on the WallStBets subreddit, explaining that they were overwhelmed. On January 27th, $GME price soars to $347.51/share, and the pressure continues to build on the shorts. Robinhood and Citadel begin secret calls. Ken Griffin is hugely underwater.
Credit to u/ringingbells for the graphic;
Melvin Capital publicly claims that it has closed out its short position.
In the early morning of Jan 28th, 2021, the price goes truly exponential. $400, then $450, then $500 a share. Users celebrate ecstatically, it appears that the shorts are truly trapped.
In the final moments of the run-up, some users report selling fractional shares of $GME for $2600 a share. A potential generational wealth transfer is at hand.
The price goes truly parabolic and reaches $500 a share. The sub is in disbelief. Then, the unthinkable happens. A few minutes later, Robinhood releases a statement that it is turning off the buy button.
The app no longer allows purchases of new positions, and the security becomes position close ONLY. The internet immediately goes into uproar. Twitter and Reddit both explode. Here are some examples:
The CEO of Interactive Brokers goes live on CNBC and claims that the buy button had to be shut off because the market was at risk of collapsing.
Due to the buying craze of meme stocks, clearing houses were exposed to double-digit billions of losses and due to concerns of potential defaults and market integrity concerns, restricted buying was enacted across platforms.
Etrade, IBKR, eToro, Merril Lynch, WeBull and more all prohibit buying.
NSCC, the National Securities Clearing Corporation, waives capital premium charges for ALL MEMBERS.
Funny enough, the links to this statement on the NSCC website and the Fed's website are broken.
This margin exclusion includes negating a $2.2B margin call on Robinhood.
Robinhood wasn't the one who got the largest margin call. Instinet was- and it was waived $50 BILLION in Excess Capital Premium Charge!
User u/VerySlump hypothesizes that we were very close to "setting off a market nuclear bomb"
Rage continued on the internet. The kings of high finance had been caught with their pants down, and retail was poised to profit to the tune of billions. At the last second, they changed the rules to save themselves.
The next day, the internet is still abuzz. Robinhood and other firms slowly lift the ban on the buy button, but still restrict purchases of shares.
Michael Burry comes out of the woodwork. He also tweets that it took weeks for them to find his shares, and many firms were likely naked shorting the stock.
Class-Action Lawsuits are filed all across the country. S3 Partners Claims 113.31% $GME Short Interest on the 29th. This countered CNBC who claimed the shorts were all closed
The sub bands together. Many users had lived through 2008 and recall the tough times caused by bank mismanagement of financial assets.
Retail was not bailed out last time. The financial media appears to be completely in the pockets of the large firms Robinhood is forced to raise $1B in additional capital on Friday the 29th. Many politicians promise investigations. Attorney General Ken Paxton of Texas Launches Investigation Into Robinhood.
Much happens over this weekend, including massive spikes in the silver price, which the media claimed was due to the "reddit crowd". In reality, silver posts were virtually non-existent on WSB.
When trading opens again on February 1st, the price begins to plummet. Over the next few weeks, negative articles abound and the press begins to claim that "the squeeze is over".
However, in late February, the price rips upwards again. This time, no massive retail buzz was occurring beforehand, so WSB "mass buying" does not appear to be the culprit. Several learnings are clear from the Jan 2021 events with $GME.
First, shorting mechanisms are badly abused in our markets. Some securities, like $GME, were able to be sold over 100% of the float. The 140% short interest on the stock was later found to be the maximum that the system could report. In reality, the stock was shorted around 220%, and even that might be conservative. S3 Partners changed how they calculated SI to ensure this couldn't happen again:
Second, financial media takes the side of the institutions, every time. The appeal to "retail investors" is a facade- it's a wonder that these news channels can even retain any of their legitimacy after this, with a notable example being Jim Cramer. Third, the clearinghouses, NSCC, and DTCC worked together to protect the brokers, short-sellers, and other firms who had been caught in this trade.
"Free and fair markets" was now clearly shown for what it was- A LIE.
An SEC report released later announced a startling find-
Excellent post. Great reminder for our future descendants.