Gamestop 's Bubble Deflates

Gamestop is not what meets the eye for those of you unaware GameStop the mall retailer of video games has not been doing well over the past several years their revenues have been falling. Next year they're expected to lose over 100 million dollars and this has made them quite the target of short-sellers, short-sellers are people who bet against stocks and typically the biggest short-sellers are hedge funds and institutional investors because retail investors don't typically have as much capacity to short sell stocks they can and you know I'm sure there are a few retail investors who have been burned on this.

But usually, the vast majority of the demand comes from the institutional side, and to sell something short simply means that you borrow the stock today to sell it and then you buy it back at a later date to replace the share you borrowed and you hope that the price falls so that you can buy back for a lower price.

Right, you sell the stock today for 100 you buy it back at 50 and you keep that 50 profit fewer fees and whatever but the thing is people kind of notice that with Gamestop specifically there was a lot of short demand on this position in fact over 138 of the stock was being shorted.

So what that means is that there was more short demand than there were actual stocks for this company and people started sharing this on wall street bets and it got people buying the position and wall street bets is an interesting place to say the least a lot of people there are just sharing memes you know calling each other idiots and other stuff and usually the content on wall street bets are people making jokes about tossing their life savings on stupid plays.

And recently they've been talking about Gamestop part of the reason for this is that when there's a lot of short demand for stock it means that something called a short squeeze might happen a short squeeze is essentially when those people who have shorted those stocks have to eventually buy back the position right they borrowed someone else's stock and they need to replace it at some point and if prices start to rise for that stock people will be forced to close their positions prematurely and that's what a short squeeze is and some people on wall street bets started sharing memes around Gamestop and the idea that you know if they push the price high enough themselves by buying the stock themselves they will force these short sellers to you know realize a loss to lose money on this position and then buying back their position will even worsen the situation for other short sellers because short-sellers are primarily hedge funds and institutional investors.

You know the idea kind of got pushed along that this was kind of a fightback against the injustices of the finance industry needless to say finance industry doesn't have the best track record for transparency for market manipulation and things like that.

And a lot of people saw this as an opportunity to you know make some people bleed and a lot of people are joining this movement to share collective anger right at wall street at financial institutions that have done their own market manipulation in the past you know this has been labeled market manipulation by some and people are kind of retorting that well that's not uncommon for the industry so why does it matter when we do it but institutions do it on the daily but there is one point I want to highlight about all this one thing that's important I think for people to know is you know yes this is hurting short-sellers it's hurting them a lot but at the same time I think what a lot of people don't realize is there's institutional money on both sides of this bet.

On the one hand, I would not be surprised if most of this market volatility is coming from algorithm trades and high-frequency traders tools that by their very nature are institutional there are very few retail investors who have the tools at their disposal to use algorithm trades and to use high-frequency trading these are systems where computers are essentially trading on behalf of people to make money and they're very quick to pick up trends they're also very quick to amplify trends so for example if retail investors are buying a stock and it rises to say 10 algorithms will notice that and they'll buy in trying to catch on that trend but then buying in can inherently you know expand that trend and lead to more algorithms joining in and that can lead to things like what we've seen where a stock rallies by such a high percentage point.

Now it's difficult to know today how much of GameStop's stock price is the result of high-frequency traders you know it's something that the figure itself is only estimated and you know I don't believe there's a real-time data point that shows how many traders buying and selling the stock are you know computers but the other thing to consider that I think really demonstrates that institutions are actually benefiting from this.

Certainly, there are hedge funds that are making quite a bit of money a killing off of this rally is the percentage of GameStop that's actually owned by institutional investors according to Nasdaq 111 of GameStop's float their you know tradable shares are owned by institutional investors these institutions range from companies like Blackrock where the end-user might be that retail investor two hedge funds right and these people are able to own more than 100 of the company by buying.

The shorted shares that are occurring behind the scenes you can think of it this way if I own GameStop my broker can let someone else short my GameStop position so behind the scenes my GameStop shares borrowed and sold by Timmy and then Timmy can then sell the share to jimmy you can see it gets pretty complicated but the idea being that the same stock can in the short term be owned by more than one person i don't know why it's allowed or what the ramifications are.

That's just what happens but my point in highlighting this is that those institutional owners are clearly going to benefit from GameStop rallying by this amount and some of those are hedge fund managers I'm not sure what the percentage is but I think it's important for people to know that and I also think it highlights that you know with institutional investors owning so much of this company.
You know it leads me to question how much retail investors are actually influencing this stock it's not to say that people outside of that group who hold GameStop can't influence a stock in fact you know you have options and futures and derivatives that can impact a company stock without actually holding the company stock so there are ways for company stock to be influenced by people who aren't actually buying and selling the underlying stock there's a whole system a whole market out there that you know bets on the sidelines and influences the stock's price.

And surely that is possible with GameStop I think I actually read recently that the company's seen a record level of call options being written on the company but typically market volatility comes primarily from institutional money right a single company is going to have more money than hundreds of thousands of individual retail investors and that means that anyone trade from that one company is likely to outweigh those retail investors.

Just as an example you know if you take all the people on wall street bets the Reddit that supposedly caused all this and they each invested one thousand dollars it would be roughly three billion dollars of call it influences but the stock has risen from one billion dollars to 25 billion dollars in this year alone since the beginning of 2021 so retail demand might be behind this but I think what's more likely is that retail demand started this trend and sure it might have started on wall street bets it's an interesting place but sure they might have influenced people to buy GameStop.

If people might still be buying GameStop because of that what I believe has happened since then is it's been taken over by institutional traders by people you know who are happy to push the narrative that this is wall street bets it's their fault that they did this while making money from the rally and causing it to extend further so what does it all mean well aside from the kind of punching some holes in the efficient market hypothesis I don't know the weird thing about stocks is to an extent they can be a self-fulfilling prophecy GameStop does not have very good fundamentals but if enough people want it to be a good company and buy its stock price to higher and higher levels that greatly expands the toolkit available to GameStop to turn things around.

All this is such a strange scenario that I think it's important to know that it's a gamble right now one way or the other with GameStop fundamental analysis means nothing right now with the company and while people have made a lot of money in the short term on this it's impossible to know what will happen over the next even two days with this stock it could go up another thousand percent it could crash back to the way it was before.

I don't know it's a weird situation but I want to make this video to explain what happened what might be occurring that people don't aren't really talking about and to highlight just how unprecedented this situation really is anyway thanks for watching I hope that helped clear up the situation and hopefully you know helps people understand that it's not as simple as a bunch of subreddits went online and decided to make a stock go higher that could be playing a big role you know a bigger role than maybe I'm even giving merit to but I think what's more likely is you know Redditor started this trend and the institution took it to overtake that however you want you know I'm not telling you to do one thing or the other that's just how I believe the situation is actually playing out so be careful with the stock it's a gamble right now so treat it as such and yeah possibly more than with any other position I've talked about in the past be safe out there.