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Stocktake: Nothing noble about GameStop short squeeze

Despite the David v Goliath portrayal, Redditors’ moral outrage is misplaced

Spotting that short sellers had bet against GameStop, the Redditors piled into the stock. Photograph: Tannen Maury/EPA/File

Proinsias O'Mahony's face
Proinsias O'Mahony
Tue Feb 2 2021 - 05:40

"The French revolution of finance" is how Anthony Scaramucci described last week's crazed goings-on at GameStop, the video game retailer that the financial world is obsessed with right now.

Valued at less than $1 billion last month, GameStop’s market capitalisation topped $30 billion last week following an epic short squeeze driven by users of Reddit’s WallStreetBets forum.

The forum is populated by small traders largely motivated by a mixture of anger and amusement ("Like 4chan found a Bloomberg Terminal" is the forum's tagline). Spotting that short sellers had bet against GameStop, the Redditors piled into the stock; as the share price soared, shorts were forced to close their losing bets, driving GameStop to ludicrously high levels in the process.

The same strategy is being used against other widely-shorted stocks, causing massive losses for some hedge funds and tidy gains for the Redditors.

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Many have focused on the David v Goliath theme and the Redditors' desire to stick it to the man, to give Wall Street professionals a taste of their own medicine. High-profile Democrat Alexandria Ocasio-Cortez laughed off the matter, as did former labour secretary Robert Reich and left-wing journalist Glenn Greenwald.

However, Redditors' moral outrage is misplaced. The shorts are a small and unpopular minority on Wall Street. They were the first to spot the mortgage bubble prior to the global financial crisis, the first to protest against the late 1990s dotcom bubble, the first to spot fraud at companies like Wirecard and Enron.

Always a risky practice, shorting is now an increasingly dangerous activity.

Shorting aside, Redditors have made a few quid for themselves, but they’ve also enriched corporate shareholders and fast-money types on Wall Street who saw what was happening and joined the short squeeze.

A noble crusade? Hardly.

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