Game Stop

First, you need to know what a “short sale” is: An investor finds a stock that s/he thinks is going to go down in price. The investor borrows the stock from a trader/broker, sells the borrowed stock (say for $5), and then buys the stock back at a later date after the price has gone down (say to $2) and returns the stock to the trader s/he borrowed it from.

So, now the details of the “Game Stop” story: There was a company named “Game Stop” that sold computer games, a product that was going out of fashion, (since lots of gamers play with others on line now instead of buying games for their own personal private use). Because of this trend, “Game Stop” stock value was going down. Knowing that this was the case, hedge funds were borrowing “Game Stop” stocks and selling them short.

However, a group of gamers had more detailed information about “Game Stop.” They knew the company was well managed and had considerable financial reserves and that there were not very many shares of stock outstanding. They saw what the hedge fund managers were doing, borrowing “Game Stop” stock and selling it short.

They thought they would play a trick on the hedge fund managers, and make some money to boot. They contacted other gamers (through a news/content aggregator called reddit.com) and told them to buy lots of “Game Stop” stock because it appeared to be undervalued. So a lot of these people started buying “Game Stop” stock. This reduced the number of shares available for sale (supply) which in turn increased the demand, which pushed up the sales of the stock. In fact, they all did this at about the same time and the “Game Stop” stock skyrocketed. The more stock sold, the smaller became the supply and the higher the price went because of the greater demand.

About this time, the hedge fund managers noticed something was afoot. They had counted on the “Game Stop” stock going down in price, and the time was approaching for them to sell the stock and give it back to the trader they had borrowed it from. However, the price had not gone down, but had risen, due to the sales generated by the gamers. In fact the price was higher than what it was when the hedge fund people borrowed it. Bad news. But the time had expired and they had to buy it back in order to return the borrowed stock to the trader they borrowed it from.

The only thing they could do was buy it back at the current, higher price, which made them lose money, rather than making money on the deal. The more they bought back, the more demand they created, and the resulting decrease in supply drove the price up even higher; i.e., the more they tried to buy back the stock to return it to the traders they borrowed it from, the more they drove the supply down, the demand up, and price up, and the more money they lost. Catch-22.

These hedge fund managers were panicking and losing billions of dollars, when an app that processes stock sales and purchases on line (ironically called RobinHood) put a stop to buying (some would say illegally, but at least unethically). When this happened, “Game Stop” stock had gone from around $5/share to $350/share, and there were very few or possibly no “Game Stop” shares available for purchase. Now the gamers are suing RobinHood for putting a stop to trading. Hedge fund managers are ticked; someone beat them at their own game.

Suzanne Kupelian, P.E.