The newswires have been dominated by the spectacular rise in GameStop most recently. A trading forum on Reddit spread the idea to squeeze short-sellers by channeling liquidity flows into stocks with large short interest outstanding. The strategy worked and GameStop increased almost 3000% in January 2021. Short-sellers had to cover their positions. Consequently, a few hedge funds reported spectacular losses for the month.
Shorting an asset in size is risky. It certainly won’t help if everyone in the market knows that exposure precisely and can play with it. That’s what happened with GameStop and there were not only retail traders buying. Institutional accounts were also involved on the long side. Attention focused on other names most recently, and the forums are reminiscent of front running penny stocks. The intention is to get rich quick by tricking others and not by investing in an orderly functioning stock market.
The topic has been framed as a class war between retail investors and the establishment – “hoods vs. suits”. However, there is absolutely nothing new about the events besides how the story gets wrapped up and told. The street is paved with institutional blowups and failures. Leveraging positions in illiquid markets is among the most reliable ways to end up with big losses. Moreover, according to statistical evidence, more than 80% of retail trading accounts lose money. Most likely, this time is unlikely different and both facts will prevail again.