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The bizarre skyrocketing of GameStop’s (GME) share price, apparently led by an army of retail investors mobilised on a Reddit forum, has captured the world’s attention with many media headlines citing short sellers' losses running into the billions of dollars, but does this tell the whole story?
Most readers will be familiar with events so far, but just in case: earlier this month, Citron Research’s Andrew Left announced his fund was short GME, primarily based on the fact it was a bricks-and-mortar store selling physical copies of video games at a time when digital downloads are dominant; to say nothing of the obvious impact of the pandemic on the high street.
Shortly after the statement was published it was picked up by the constituents of Reddit forum WallStreetBets — a hodgepodge of gamers and market speculators — which took umbrage with the perceived attempt by short sellers to crush the GameStop franchise which recent forum posts indicate users have fond memories of.
The forum has almost 4.5 million subscribers and its tag line is ‘like 4Chan found a Bloomberg terminal illness’ — 4Chan being the infamous online hangout for internet trolls, conspiracy theorists and worse.
True to form, the self-titled ‘degenerates’ decided to hand-out some vigilante justice Wall Street-style and mobilised amateur investors armed with low-fee trading apps to put pressure on short sellers by buying GameStop em masse.
GameStop spent most of 2020 trading at a few bucks a share, down from 2014 highs of around $55 per share. It opened 2021 at around $18 a pop, but, once the mob descended, its shares exploded by an improbable 1,744 per cent year-to-date. The company’s market value is now north of $20 billion as of close-of-play 27 January.
It is worth noting that although ample circumstantial evidence exists to suggest the share price surge is retail-driven, it’s unclear whether the grassroots demand is being propped up by institutional players seeking to cash in on the circus.
Cue a frenzy of market commentators and journalists revelling in speculation that hedge funds caught short were out-of-pocket to the tune of around $5 billion. Citron Research is understood to have been forced to cover its position, eating significant losses in the process.
The drama has even spilt outside of the financial sphere and into the mainstream with the likes of The Daily Show, Barstool Sports and even LadBible among those attempting to put the mechanics of securities lending and short selling into laymen's terms for their massive respective audiences.
The Big Shorts' soap-sudded exposition deliverer Margot Robbie has also enjoyed the meme treatment as onlookers grapple to understand what's going on.
Despite the coverage, some instigators believe the market and the mainstream media are rushing to protect their own and have thrown around accusations of market manipulation, harking back to the financial crisis when banks were seen to be allowed to speculate and profit from clients' money, safe in the knowledge they would be bailed out if they bottomed out.
One WallStreetBets member wrote an expletive-riddled open letter to CNBC, the US media organisation, in the forum accusing it of hosting its “shill hedge fund buddies” that “demonised” the forum. The letter informed readers that “I sincerely hope they [short sellers] suffer. We want to see the loss porn”.
And they are suffering, but maybe not as much as some headlines would have you believe.
Crunching numbers
First-and-foremost, short interest in GameStop did not start this month.
Utilisation of share available to lend first hit 100 per cent on 7 September 2020, after a rapid increase that began on 10 August, according to data analytics firm Ortex, which offers short trading insight powered by FIS’ Astec Analytics. Utilisation has remained maxed-out ever since.
As of 28 January, just over 40 million shares were on loan, down from a year-to-date peak of 54 million on 12 January.
Meanwhile, average cost-to-borrow sits at around 33 per cent (as of 28 January), which will be an uncomfortable short squeeze for those looking to ride out the storm. For context, the threshold for when stocks become 'hot' to lend is 500bps or 5 per cent.
Average cost-to-borrow has increased steadily from just over 10 per cent on 30 November 2020 to present levels. However, the data shows some loans were booked with borrow fees as high as 324 per cent in recent days.
Notably, current borrow fees are well below the 12-month peak seen in early May 2020 when average cost-to-borrow briefly hit an eye-watering 169.8 per cent. The main factor holding back an even steeper price spike is believed to be a lack of demand from new borrowers. This hypothesis is reinforced by the fact that the average loan length visible to Ortex is 60 days.
Meanwhile, despite some high profile funds including Melvin Capital Management finding the heat too much to handle, many seem content to pay the fees and hold, presumably hoping enough retail investors won’t be able to resist banking chunky profits, thereby causing a mass exodus by those not willing to show off their knife catching skills.
Depending on when a short seller opened their position, it's possible a large enough crash in the stock price would offset most or all of the borrow fees, and maybe even still allow for a profit to reward their bravery.
Rise of the retail?
After their initial success in giving short sellers a bloody nose, the cabal of retail investors, drunk on nostalgia, continue to flex their muscles. They even caused Blockbuster, the video rental chain that went bankrupt over a decade ago, to spike 7,000 per cent in the past seven days. Other firms close to the hearts of Redditors are also seeing flash-in-pan price spikes.
Once the furore is over, online brokers and institutional market players may wish to indulge in a moment of introspection to assess the monster they helped create. A consequence of the COVID-19 pandemic was a surge of amateur day traders drawn low-fee trading apps to supplement revenue shortfalls. Robinhood, one of the largest trading apps in the US, gained more than 3 million new users in 2020, many seeking to top-up their earnings once the pandemic shut down large swathes of the economy.
For the securities lending market, this could spell trouble. The combination of an influx of retail investors, many holding anti-short seller sentiments, will open up a second front in the industry’s heart-and-minds campaign to prove its environmental, social and governance credentials to existing beneficial owners.
Well before GameStop, the culture war claimed its first victim. Last year, the South African retail broker EasyEquities faced a PR firestorm after it attempted to roll out a securities lending programme as a way to offer additional income to its users. Sceptical day traders took to social media to complain that there should be a way to opt-out as they did not wish to facilitate short selling and, in their eyes, risk downward pressure on their assets.
The roll-out was scrapped shortly after the backlash began, pending an ongoing internal review.
Given the long battle short sellers and banks have fought to educate regulators, politicians and asset owners on the benefits of securities lending as a way to promote price-discovery and overall market transparency and stability, not to mention increase revenue, the challenge of convincing firebrand retail investors could present a mountain to climb that even GameStop would be envious of.
