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Reddit Users Battle Wall Street Over GameStop

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For the past few weeks, retail investors that are also Reddit users battle Wall Street firms over GameStop stock. The battleground covers some of the market’s ailing stocks, chief among them GameStop (GME). And for now, Redditors are winning. One Wall Street short seller, Citron, is leaving the arena. 

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GameStop

GameStop is an ailing video game retailer whose fortunes further went down south as the pandemic forced them to close shops. Left mostly for dead, the stock hovered at $2.80 last April, which made it a ripe target for short sellers including Citron.  

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Retail investors from the r/wallstreetbets channel, however, continue to see promise in GameStop. They accused short sellers of ignoring the console cycle where new models such as the PS5 and Xbox Series X will generate renewed interest. Microsoft similarly saw potential in GameStop and signed them to a multi-year strategic partnership last October. Retail investors also noted that short sellers ignored the fact that GameStop’s online sales increased 300% during the holiday season. 

Enter Ryan Cohen 

GameStopfound another savior in Ryan Cohen, the former CEO of Chewy, who invested and joined the board in November. The activist investor believed that GameStop can still turn around by moving away from the brick and mortar stores and instead focus on e-commerce. GameStop is famous enough and has enough customers to make that transition. 

With Cohen on board, retail investors began touting GME stock on Reddit’s r/WallStreetBet channel. This led to a demand for GME stock, which both raised its capitalization while squeezing out the short-sellers. In fact, Monday saw GameStop's trading halt several times due to volatility. While shares more than doubled at one point, they settled down lower and finished 18% higher. 

Citron Research

Meanwhile, Citron Research, an investment firm that often targets failing companies ripe for short selling, found itself on the wrong end of the GameStop battle. Citron and a large group of hedge firms bet against GameStop. They did so by borrowing shares and selling them. In order to profit, they will repurchase the stock they borrowed at the lower price they expected, then pocket the difference. 

Citron found Andrew Left was so confident of GameStop’s decline that he issued a report that called the company a “failing mall-based retailer” and predicted that the stock would plunge from $40 at the time to $20. Instead, investors led by WallStreetBets pushed the stock to $65 last week, squeezing out the short sellers into buying the stock at a loss to cover their bets. After hitting a $119.90 intraday high yesterday, GME stock closed at $76.79. Left also said he is refraining from further commenting on GameStop, citing increased harassment from the company’s loyal investors. 

Staying on the Sidelines

GameStop itself remained content staying on the sidelines while Reddit users battle Wall Street. Instead, the company confirmed its intent to transform into a digitally-focused retailer. Apart from Cohen, two other former Chewy executives will join the board. “The three new directors collectively bring deep expertise in e-commerce, online marketing, finance, and strategic planning to GameStop,” the company said in a press release.

An Awakening

Financial adviser Tim Collins described the GameStop saga as an awakening of sorts. “A large group of retail traders has realized if they work together, using market tools such as out-of-the-money call options or low-float stocks, they can overpower any institution or short-seller in the world, outside of the Fed, of course,’ he observed.

Collins also warned of “another level of danger” to what he saw as a gamma squeeze. “This involves the relentless, high-volume buying in low-priced far out-of-the-money call options to drive a stock price higher by forcing the market maker to purchase the stock as protection against their selling the calls, assuming they can't find another party to take the risk,” he said. He warned that this can take some market makers out of the game. “For market makers unable to pass the risk, they could soon find themselves out of business. We could also see market makers begin to abandon stocks,” Collins noted.

Watch the CNBC news video reporting that GameStop's huge run continues as Reddit fuels short-seller squeeze:

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Do you approve of short-selling? Do you think GameStop warranted short-selling? Or, do you think it’s a better long play investment? Who do you root for as Reddit users battle Wall Street? Let us know what you think by leaving your comments below.

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