Amateurs beat Wall St pros at their own game

The GameStop incident has caught the attention of markets, regulators and governments worldwide. It has been a classic financial power tussle between a swarm of amateur traders and the influential hedge funds, in which the former emerged victorious. ET looks at what transpired:WHAT IS THE GAMESTOP EPISODE ALL ABOUT?It revolves around an NYSE listed video game retailer GameStop that has been in distress in the past few quarters. Several large hedge funds led by Melvin Capital have been mounting bearish bets or ‘shorts’ on the stock on expectations the stock will eventually tank. A short-seller benefits when the stock price falls. A bunch of amateur traders, who were part of an investors’ forum on online platform Reddit, decided to take exactly the opposite position compared to the hedge funds. They mopped up shares of GameStop, leading to a 500% surge in the stock since Monday from $70 to $300. The spurt caught shortsellers on the wrong foot. Many hedge funds incurred heavy losses as they looked to liquidate their positions.WHY WERE HEDGE FUNDS BEARISH ON GAMESTOP?In September 2020, activist investor and founder of online pet food portal Chewy, Ryan Cohen bought 13% in the company. Until then, GameStop was a gaming retailer with brickand-mortar stores. Cohen started lobbying to persuade GameStop to shift to an online model. This brought some euphoria amongst small-time investors who are looking to make a quick buck. Between September 2020 and January 13, the stock soared 500% to $30. However, the business of GameStop was still bleeding, which made the hedge funds think that the stock was bound to fall eventually. The stock attracted the attention of short-sellers like Citron Capital’s Andrew Left, one of Wall Street’s most outspoken in the business. GameStop was one of the most shorted among listed companiesWHAT DROVE THE GAMESTOP STOCK HIGHER?The driving force seems to be a Reddit-forum known as WallStreetBets or WSB with a large trader base—many of whom are amateurs. Many of the traders began aggressively purchasing the stock after billionaire investor Chamath Palihapitiya, chief executive of Social Capital, on Tuesday tweeted he had bought call options of GameStop. A one-word tweet Tesla’s CEO, Elon Musk on Wednesday fuelled the rally further. Musk tweeted “Gamestonk!!” and sent the link to WSB, triggering a buying frenzy in the stock. This resulted in the classic “short-squeeze”—a situation where short-sellers are forced to buy back the shares they shorted after the share prices rise. Covering of these short positions pushed the shares higher, bleeding hedge funds and making the retail traders richer.WHY IS THE EPISODE A HOT TOPIC OF DISCUSSION WORLDWIDE?It’s rare that a herd of retail traders push back the stronger hedge funds. It’s seen as a fight between Wall Street and Main Street. It is also the first time that an online trading community is calling the shots in the stock market

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