The fervor of the crowd versus Wall Street commenced during one of Benzinga's live shows.
On Jan. 21, Citron Research's Andrew Left went live with Benzinga’s Luke Jacobi and Jason Raznick on the daily "Power Hour" show to discuss his opinion on GameStop Corporation GME.
The show ended up among the most important events in history since Bill Ackman squared off against Carl Icahn on live TV. While Left was sharing his short thesis, members of WallStreetBets took over the discussion on Benzinga’s YouTube channel, posting thousands of messages defending GameStop’s growth prospects and board member, Chewy Inc CHWY co-founder Ryan Cohen.
The stock hit a high of $76.76 the next day, prior to continuing a meteoric rise that left Citron no other option but to exit its bearish bets, on the stock, at a loss.
Benzinga’s Power Hour is where one of the most well-known short-sellers showed up, accompanied by the WallStreetBets community, and it now will live in the annals of history as the “room where it happened.”
After that interview, Benzinga also hosted a WallStreetBets member alongside GMEDD.com co-proprietor Rod Alzman to discuss the volatility and trade ideas.
In the following text, Benzinga unpacks the hype surrounding GameStop, as well as the dynamics governing price action and trading in the days after.
See also: How to Short a Stock
What Happened: Left discussed his bearish thesis on GameStop, a stock primed for upside by members of the Reddit forum.
In September 2019, a WallStreetBets member posted about his bullish call option position in GameStop set to expire in January 2021. Using the call option, which gives contract owners the right to buy GameStop at a predetermined price, the member amassed nearly $3.1 million in profits going into the new year.
Other users caught wind of the member’s performance and followed suit.
Left, who was betting against the stock, drew criticism from WallStreetBets members after his company tweeted: “Tomorrow am at 11:30 EST Citron will livestream the 5 reasons GameStop $GME buyers at these levels are the suckers at this poker game. Stock back to $20 fast. We understand short interest better than you and will explain. Thank you to viewers for pos feedback on last live tweet.”
In the call with Benzinga, Left said investors want to purchase the stock without proper due diligence. According to him, the mall-based retailer is facing failure.
“You might have loved the setup on GME when it was $14, because of the high short interest,” he said. “There’s a high short interest for a reason, because pretty much their business is on a decline.”
Watch the interview in the video below:
His commentary on Benzinga’s show stirred up anger among listeners, with one user stating: “Left's video today, worse quality and with lower level detail than 90% of GME dd's on wsb man. Puts on this man's career.”
Another user said: “Just went in and placed orders of GME. All in guys!!!”
That same day, shares of GameStop hit a high of $44.75.
GameStop Action Accelerates: Citron, alongside large funds like Melvin Capital, held bearish put positions, allowing for the opportunity to sell GameStop at a predetermined price in the future.
Melvin, alongside other funds, was also static short stock, borrowing and selling shares of the company.
Shares of the heavily shorted retailer soon rose exponentially after a mass of retail traders began buying shorted dated call options and stock.
The influx of out-of-the-money call buying drew counterparty liquidity providers to hedge their short call exposure by buying underlying shares of stock, in turn exacerbating the volatility of the upmove and worsening losses for squeezed shorts.
At a certain point, the feedback loop of call option and stock buying became so strong that short-sellers had no option but to capitulate, buying-to-close stock.
Citadel and Point72 Asset Management invested nearly $3 billion in Melvin Capital after the firm’s short bets went awry.
Full-Blown Mania: Robinhood, alongside other retail brokers popularized for their part in gamifying financial markets, on Thursday announced it would stop allowing new opening positions in GameStop, AMC Entertainment Holdings Inc AMC, and Koss Corporation KOSS.
The decision, which was falsely thought to have been the result of brokers colluding with market makers like Citadel, mentioned earlier for its Melvin investment, came after volatility made it costly to clear shares of the popularized names.
“[O]ur clearing firm simply cannot afford the cost to settle those trades,” said Webull CEO Anthony Denier.
“We cannot use customer funds to front that cost due to regulation. So the brokerages or the clearing firms have to go into their own pockets to do it. And they simply can't afford the cost of that trade clearance.”
As anger and calls for class-action suits mounted, Robinhood, among other brokers, allowed "limited buys" on the volatile stocks.
"In order to protect the firm and protect our customers, we had to limit buying in these stocks," Robinhood CEO Vlad Tenev said. Congress members like U.S. Representative Rashida Tlaib called for a hearing on the actions by Robinhood and other brokers.
“This is beyond absurd. @FSCDems need to have a hearing on Robinhood's market manipulation. They're blocking the ability to trade to protect Wall St. hedge funds, stealing millions of dollars from their users to protect people who've used the stock market as a casino for decades.”
The Fallout: During regular trading hours, shares of GameStop hit a high of $483 on Jan. 28 before hitting a low of $112.25 on the same day after brokers decided to limit trading on volatile stocks.
Since then, the stock stabilized ahead of the large Jan. 29 option expiry, after which much of the underlying long stock used to hedge against expiring positions will be liquidated.
Regardless of future price action, it’s clear that the events that transpired over the past few weeks will go down in history for permanently changing the perspectives of all market participants and regulators. No longer will large institutions discount the power of retail investors who have weaponized assets en masse.
“That’s obviously a challenge ... if the stock is going to go higher, it’s going to go higher," Left told Benzinga about when to fight the momentum.
"The problem — forget about the insider selling — eventually the company works against you because they’re sitting with over $1 billion in debt. So if you want to take the stock higher and the company says tomorrow, 'hey, we’re going to issue 30 40, 50 million shares, you can’t blame them. They’re operating a business, and someone’s hijacked their story.”
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