Video games retailer GameStop has seen its share price rise dramatically as amateur investors organised to 'short squeeze' professional investors. Dr Stephen Connelly of the School of Law comments on what is so unusual - and risky - about this situation.
Dr Connelly said: “For potential retail investors tempted by the advertised returns on Gamestop and similar shares, 400 years of warnings about speculative manias apply: be prepared to lose your money. The danger signals are amplified by opacity as to any major players behind the squeeze, significant trading volatility induced by the temporary suspension of chatboards such as that hosted by Reddit, and a background of a declared equity bubble across global markets. Yet from a retail perspective what is particularly concerning about the recent squeezing of hedge funds’ short positions – and perhaps unique – is that the usual blind optimism of ‘a bust won’t happen this time’ seems to have been superseded by a wide-eyed embrace of financial destruction for all concerned. Ostensibly, the driver of this bubble is not gain, but punishment.
"Squeezing a short seller relies on a limited supply of shares and a short seller needing to acquire those shares at a future date. But it is often open for the short seller to cut its losses and run (as Melvin Capital has done), or for a corporation like Gamestop to issue new shares, or even for a regulator or market administrator to intervene and suspend trading or related transactions. Retail investors could very quickly be left holding shares plummeting in speculative value.“
28 January 2021
Media Relations Manager (Warwick Medical School and Department of Physics)
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