GameStop short squeeze

Based on Wikipedia: GameStop short squeeze

In late January 2021, a 34-year-old financial analyst from Massachusetts watched his $53,000 investment balloon to $48 million. His Reddit username was "DeepFuckingValue." And he had just helped orchestrate one of the most spectacular David-versus-Goliath moments in Wall Street history.

The target was GameStop, the struggling video game retailer you probably walked past in your local mall. The weapon was a coordinated buying spree by millions of amateur investors. The casualties were some of the most powerful hedge funds in the world, who had bet billions that GameStop's stock would fall.

They were wrong.

The Art of Betting Against a Company

To understand what happened, you first need to understand short selling—one of the most counterintuitive practices in finance.

When most people buy stock, they're hoping the price goes up. Buy at $10, sell at $20, pocket the difference. Simple. This is called taking a "long position."

Short selling flips this logic entirely. A short seller borrows shares from someone who owns them, immediately sells those borrowed shares at the current price, and hopes to buy them back later at a lower price. The difference between what they sold for and what they bought back for is their profit.

Here's a concrete example. Imagine GameStop stock is trading at $20. You believe it's going to fall to $5. So you borrow 100 shares from a broker and immediately sell them, pocketing $2,000. A few weeks later, the price drops to $5 just as you predicted. You buy 100 shares for $500, return them to the broker you borrowed from, and keep the $1,500 difference as profit.

Sounds clever, right? There's just one terrifying catch.

When you buy stock normally, the worst that can happen is it goes to zero. You lose your initial investment. That's it. But when you short sell, your potential losses are theoretically infinite. If that $20 stock doesn't fall to $5 but instead rises to $100, or $500, or $1,000—you still owe those shares back. You have to buy them at whatever price they've reached.

This asymmetry is crucial to everything that followed.

A Dying Retailer in a Digital World

GameStop, by any reasonable analysis, was a company in trouble. Its business model—selling physical video game discs and consoles from brick-and-mortar stores—was being steadily eroded by digital downloads. Why drive to the mall when you can buy a game directly from your PlayStation or Xbox?

The COVID-19 pandemic accelerated this decline dramatically. With people avoiding physical stores, GameStop's already struggling business took another hit. By early 2020, the stock had fallen to as low as $2.57 per share.

Wall Street smelled blood. Institutional investors piled into short positions, betting the company would continue its slide toward irrelevance or bankruptcy. By January 2021, approximately 140 percent of GameStop's publicly available shares had been sold short.

Wait—140 percent? How can you short more shares than actually exist?

This happens when shares are borrowed and sold short, then the person who bought them lends them out again to another short seller. The same physical share gets shorted multiple times. Analysts at Goldman Sachs later noted that short interest exceeding 100 percent of a company's available shares had only occurred 15 times in the previous decade. It was extraordinarily rare.

And it created an extraordinarily dangerous situation for the short sellers.

The Forum Where Fortunes Are Made and Lost

Deep in the labyrinth of Reddit—a social news website where users congregate in topic-specific communities called "subreddits"—there exists a particularly wild corner called r/wallstreetbets.

The culture there is unlike anything you'd find in a traditional investment forum. Users call themselves "degenerates" and "apes." They celebrate astronomical gains and catastrophic losses with equal enthusiasm. Screenshots of six-figure profits sit alongside screenshots of portfolios reduced to nothing. The aesthetic is deliberately crude, the humor absurdist, the risk tolerance stratospheric.

But beneath the meme-laden chaos, some users were doing genuine analysis. And a few of them had noticed something interesting about GameStop.

First, the company wasn't quite as doomed as the short sellers believed. In mid-2019, Michael Burry—the investor made famous by the film "The Big Short" for correctly predicting the 2008 housing crisis—had taken a significant stake in GameStop through his fund Scion Asset Management. He saw overlooked value in the company and urged its board to buy back shares.

Then in August 2020, Ryan Cohen entered the picture. Cohen had co-founded Chewy, the online pet food retailer that became a massive e-commerce success. When he revealed a 9 percent investment in GameStop, it suggested he might be planning to transform the company into an e-commerce player. When he joined GameStop's board in January 2021, the stock began to rally.

But the real catalyst was that 140 percent short interest figure. Some users on r/wallstreetbets recognized it for what it was: a powder keg waiting for a match.

What Happens When Everyone Needs to Buy

A "short squeeze" is what happens when short sellers' worst nightmares come true simultaneously.

Remember, short sellers eventually need to buy back the shares they borrowed. If the stock price rises instead of falls, they start losing money. At some point, either their losses become unbearable or their brokers demand they close their positions. Either way, they have to buy.

Here's where the math gets vicious.

When short sellers buy to close their positions, they create demand for the stock. More demand means higher prices. Higher prices mean other short sellers start losing money too, forcing them to buy. This creates more demand, pushing prices even higher, triggering even more short sellers to capitulate.

It's a feedback loop. A cascade. And with 140 percent of GameStop's shares sold short, the potential cascade was enormous.

The users of r/wallstreetbets began buying. And buying. And telling others to buy.

The Man Behind the Username

Keith Gill, the 34-year-old marketing professional who went by "DeepFuckingValue" on Reddit and "Roaring Kitty" on YouTube, had been invested in GameStop since the summer of 2019—long before the squeeze was a glimmer in anyone's eye. He held the Chartered Financial Analyst designation, a rigorous professional credential, and had done genuine research concluding the stock was undervalued.

He purchased around $53,000 in call options—a type of contract that gives you the right to buy shares at a specific price in the future. If the stock went up substantially, these options would become extremely valuable.

What made Gill remarkable wasn't just his investment thesis. It was his transparency. He posted regular updates to r/wallstreetbets showing his positions, including during periods when his investment had plunged. He made YouTube videos explaining his analysis. He wasn't just making a bet; he was building a following of fellow believers.

By January 27, 2021, his initial $53,000 had grown to $48 million.

Other users were making their own fortunes. And hedge funds were watching their positions burn.

The Rocket Ship

On January 11, when news broke that Ryan Cohen was joining GameStop's board, the stock began its ascent. On January 22, Citron Research—a firm known for publishing bearish analysis—predicted the stock would fall. This seemed to galvanize the r/wallstreetbets community even further.

The stock price increased 1,500 percent over the course of two weeks.

On January 25, more than 175 million shares of GameStop traded hands—the second-largest single-day trading volume on record. The stock was halting repeatedly throughout the day as exchanges triggered automatic circuit breakers designed to slow down extreme price movements.

On January 26, the stock closed up 92.7 percent in a single day. That evening, Elon Musk tweeted a single word: "Gamestonk!!" along with a link to the r/wallstreetbets subreddit. The tweet—referencing the "stonks" meme popular in internet culture—sent the stock price shooting up even further in after-hours trading.

By January 28, GameStop stock reached $483 during regular trading hours. In pre-market trading that same day, it briefly touched $500.

To put this in perspective: nine months earlier, in April 2020, the stock had traded as low as $2.57. The rise from that low to the January peak represented an increase of nearly 19,000 percent.

GameStop—a mall retailer selling physical video game discs—temporarily became the most valuable company on the Russell 2000 index, with a market capitalization of $33.7 billion.

The Casualties

For the hedge funds that had bet against GameStop, the squeeze was catastrophic.

Melvin Capital, one of the most prominent short sellers of GameStop stock, was among the hardest hit. In a darkly humorous video posted to r/wallstreetbets in October 2020—months before the squeeze—a user named Stonksflyingup had used footage from the HBO miniseries "Chernobyl" to illustrate how Melvin Capital's short position could blow up "like a nuclear reactor." The video proved prophetic.

The exact losses are difficult to calculate precisely, but estimates suggested that short sellers collectively lost billions of dollars. Some hedge funds required emergency capital infusions from investors just to survive.

The squeeze also triggered what traders call a "gamma squeeze" layered on top of the short squeeze. When investors buy call options betting that a stock will rise, the firms that sell those options typically hedge their risk by buying the underlying stock. This additional buying pressure pushed GameStop even higher, creating yet another feedback loop.

Then the Music Stopped

On January 28, at the peak of the frenzy, something unprecedented happened. Robinhood—the commission-free trading app that had become enormously popular with younger, smaller investors—halted purchases of GameStop stock. You could sell your shares, but you couldn't buy new ones.

Other brokerages followed suit. TD Ameritrade, Charles Schwab, Interactive Brokers, Webull, Trading212, eToro—one after another, they restricted trading in GameStop and other volatile stocks.

The reaction was volcanic. Users on r/wallstreetbets were furious. They saw this as Wall Street protecting its own, rigging the game against regular people just as those people were finally winning. Politicians from across the political spectrum—from Alexandria Ocasio-Cortez on the left to Ted Cruz on the right—condemned the trading halts. Hashtags calling for Robinhood's executives to face criminal charges trended on Twitter.

Dozens of class-action lawsuits were filed within days. The U.S. House Committee on Financial Services announced it would hold a congressional hearing.

The Plumbing Explanation

So why did the brokerages halt trading?

The explanation involves the somewhat obscure machinery that makes stock trading actually work. When you click "buy" on your phone, your money doesn't instantly transform into stock. There's a two-day lag—known in the industry as "T+2" settlement—between when you execute a trade and when the cash and shares actually change hands.

During that gap, clearing houses act as intermediaries guaranteeing that trades will settle properly. These clearing houses—organizations like the Depository Trust & Clearing Corporation, or DTCC, for stocks, and the Options Clearing Corporation, or OCC, for options—require brokerage firms to post collateral. Think of it as a security deposit ensuring that even if something goes wrong with a brokerage, the trades can still be settled.

Here's the catch: the amount of collateral required depends on the riskiness of the trades. When a stock becomes extremely volatile—when its price is swinging wildly and unpredictably—the collateral requirements shoot up.

GameStop in late January 2021 was experiencing the kind of volatility that stress-tests normally don't account for. The DTCC increased industrywide collateral requirements from $26 billion to $33.5 billion. Robinhood, which processed a huge volume of GameStop trades from its retail customers, suddenly needed to come up with billions more in collateral than it had anticipated.

The company claimed it simply couldn't post the required collateral fast enough to continue allowing unlimited GameStop purchases. It had to halt buying while it scrambled to raise emergency funding. By January 29, Robinhood had raised an additional $1 billion from investors to shore up its position.

This explanation satisfied almost no one. Critics pointed out that halting only the buying—while still allowing selling—created an asymmetric situation that could only push the stock price down. If everyone can sell but no one can buy, prices fall. The restriction seemed designed to benefit the short sellers who were being squeezed, even if that wasn't the intent.

The Aftermath

The trading restrictions worked, in the sense that they broke the momentum. GameStop's stock price plunged from its highs. Many retail investors who had bought near the peak suffered significant losses.

But the story wasn't over.

On February 24, GameStop's stock price doubled within a 90-minute period—another dramatic spike that caught observers off guard. For the next month, the stock averaged around $200 per share, far above the single digits where it had languished before the squeeze.

On March 24, after GameStop released its earnings and announced plans to issue additional shares, the price fell 34 percent to $120. The next day, it recovered by 53 percent. The volatility was extraordinary even months after the initial squeeze.

What It All Meant

The GameStop saga was interpreted through many different lenses.

To some, it was a populist uprising—regular people using the same tools Wall Street had used for decades, finally beating the institutions at their own game. The hedge funds had gotten greedy, shorting more than 100 percent of a company's shares, and they'd been punished for it.

To others, it was a cautionary tale about mob behavior and market manipulation. Many of the retail investors who bought at the peak lost money when the price eventually fell. The winners were those who got in early and got out at the right time; the losers were those swept up in the excitement too late.

To market structure experts, it exposed problems in the plumbing of American financial markets. The two-day settlement window, the collateral requirements, the concentration of retail trading through apps like Robinhood—all of these came under scrutiny.

The congressional hearings that followed featured testimony from Keith Gill (wearing a red headband, as he often did in his YouTube videos), Robinhood's CEO Vlad Tenev, and hedge fund executives. Legislators from both parties grilled the participants, though no major regulatory changes resulted immediately.

The Bot Question

Later analysis by cybersecurity researchers suggested that thousands of automated bot accounts may have amplified the GameStop hype on social media. Similar bot activity appeared to pump Dogecoin, the cryptocurrency that had started as a joke, and other volatile assets during the same period.

How much these bots influenced actual trading behavior remains unclear. Were they the cause of the buying frenzy, or merely noise around an organic movement? The answer probably lies somewhere in between. The initial enthusiasm on r/wallstreetbets was genuine, driven by real users doing real analysis. But as the story went viral, opportunists and manipulators of various kinds surely piled on.

The r/wallstreetbets subreddit itself became a phenomenon. On January 27, it received 73 million page views in 24 hours, shattering traffic records. By January 29, the community had grown by 1.5 million users overnight, reaching 6 million total—making it the fastest-growing subreddit in Reddit's history.

Discord, the chat application, briefly banned the r/wallstreetbets server for violating its restrictions on hate speech—reflecting the sometimes toxic culture that had developed alongside the financial enthusiasm. The ban was reversed the next day after public outcry, with Discord instead trying to help the community moderate itself.

The Collateral Damage

One of the stranger side effects of the squeeze was the rise of AMC Theatres stock. AMC, like GameStop, was a struggling brick-and-mortar business with heavy short interest—movie theaters had been devastated by the pandemic. The r/wallstreetbets community began buying AMC stock as well, triggering a secondary squeeze.

Even more bizarre: AMC Networks—an entirely different company that produces television shows like "The Walking Dead" and "Better Call Saul"—saw its stock rise significantly. The apparent reason? Its ticker symbol, AMCX, was similar to the movie theater chain's ticker, AMC. Some traders appeared to be buying the wrong stock.

BlackBerry Limited and Nokia Corporation also got swept up in the frenzy, with both stocks spiking and then being subjected to trading restrictions.

More Than Shares Failed to Deliver

On January 28, at the peak of the chaos, more than 1 million GameStop shares—worth approximately $359 million—were classified as "failed to deliver." This means that sellers who had promised to deliver shares to buyers were unable to do so.

Failed-to-deliver situations can occur when short sellers have borrowed and sold shares, but when it comes time to actually hand them over, the shares don't exist. With short interest at 140 percent, the fundamental problem was that people had sold more shares than actually existed in the float. The entire situation was, in a sense, a reckoning for that overextension.

The Persistence of Volatility

What made the GameStop situation particularly unusual was how long the elevated prices and volatility persisted. A typical short squeeze is a brief event—prices spike, shorts cover, and things return to normal within days.

GameStop defied this pattern. Months after the initial squeeze, the stock remained dramatically higher than its pre-squeeze levels. A community of committed holders—who called themselves "apes" and adopted the rallying cry "diamond hands" (meaning they would hold their shares through any volatility)—kept substantial buying pressure on the stock.

The company took advantage of this by issuing new shares at the elevated prices, raising capital that could fund its attempted transformation into an e-commerce business under Ryan Cohen's leadership. Whether that transformation would succeed remained an open question, but the squeeze had undeniably given GameStop a second chance.

A Story With Many Morals

Perhaps the most lasting impact of the GameStop squeeze was psychological. It demonstrated that retail investors, coordinating through social media, could move markets in ways previously reserved for institutional players. It showed that the financial system's plumbing could seize up under unexpected stress. It revealed that the relationship between small investors and the brokerages that serve them was more complicated—and more fraught—than the apps' friendly interfaces suggested.

Keith Gill, for his part, emerged from the chaos as a kind of folk hero. In his final post to r/wallstreetbets before going silent, he said he "thought this trade would be successful" but "never expected what happened over the last week." He mentioned he might buy a house.

With $48 million, he could probably afford a nice one.