Squeezing their Shorts

It is Eid and you are flush with cash, you got money from relatives and elders. You are about to make one of the biggest mistakes of your life but you do not know it yet.

Your mother makes an offer, she tells you to give her the money for safekeeping and convinces you that otherwise, you are going to lose it. You expect to save a bunch of money with her and then to get paid in spades later. You make the first investment decision of your life (it is a bad one). 

Then your mother does not give you back anything at all and now you have all of these things you planned to spend money on but cannot anymore. Now you know how the hedge fund managers felt when their stock shorting schemes did not quite work out.

A crash course on shorting

Were you the scrawny kid in school? Was the canteen run over by a zombie stampede of your schoolmates at lunch? Did you just settle for choosing the mediocre options because it has low demand and you have fewer chances of getting killed in the process of buying it?

Well, then you understand how investment companies have a vested interest in buying stocks they think are going to fall in value. 

We have been victims, or at least witnesses to many fads in our lives, there were Pokemon cards, Beyblades, Yoyos, Ben Ten toys, Tazos, and the list goes on. You remember tugging at your parents' sleeves to buy you one of these just to feel relevant among your friends. You would throw a fit and cry until they bought it for you (yes, you were that kid, shame on you).

So, let's take, for example, Beyblades. For some reason, you stayed off the TV and abstained from computer games, did not open a Facebook account until you were 10 (in fact, you are not on social media and use a landline phone exclusively) and you never went out alone.

So, you were blessed with foresight for listening to your parents. If life is a Rockstar game, this is the biggest hidden upgrade. The result is, you know Beyblades will fall in value, so you borrow a bunch of them from friends and immediately sell them (at market value which is high at the time). You wait for the price to fall, buy the Beyblades back at a lower price than you sold them, and return them to the people you owe, bam, you have made a profit. Now imagine doing this same thing, but with stocks.

When life gives you lemons, squeeze

The hedge funds were shorting the stock of GameStop (you either know what this is too well or not at all), a brick-and-mortar chain of stores that sell games and other gaming products. The assumption was that the GME (GameStop) stock prices are going to fall due to the digital sale of games rising in popularity.

But one Reddit user in a Sub-Reddit called WallStreetBets presented the case that GME stocks might rise in value. When other Redditers got on the bandwagon and tried to buy the stocks, they noticed something interesting. The hedge funds were trying to short this stock by 137%, meaning they owed their lenders (the people they borrowed the stocks from) 137% of the value of the stock they borrowed, and they were counting on the price to fall even further.

This was a golden opportunity. How golden you ask? Your friend leaving their phone unlocked with Facebook logged into and leaving the room, that golden. So, Reddit users bought all these stocks in coordination and the hedge funds eventually needed to buy them back, but the owners (the Reddit dwelling good-for-nothings) just would not sell. Which drove up the prices exponentially.

Reddit users colluded in increasing the value of GameStop with a buying frenzy when they found out that hedge funds were betting against the company. PHOTO: REUTERS

Because the borrowers (greedy hedge funds) had to pay interest daily and the more time that passed, the more desperate they and everyone else shorting the stock became. The higher the demand climbed, the higher the price went. Imagine having to hold it in on a long journey and starting to lose the battle as you finally enter Dhaka and get stuck at Gabtoli, taken to a whole other level. 

Meanwhile, Elon Musk got involved too (because of course). It appeared that the boring company's flamethrowers were not the only thing that could spit fire as Musk tweeting "GAMESTONK!", leading to its all-time high price at almost $350.

At this point, the whole debacle was more of a cultural thing than it was news. And it spread like wildfire, which led to more people buying stocks and refusing to sell in a very short period, too quick for the hedge funds to react.

 How many squeezers would Robinhood stop if Robinhood could stop Squeezers?

The answer is a lot. The irony in this part of the story is enough to cure deficiencies in malnourished children. Robinhood is a financial app that lets the average citizen invest in the stock market by letting them trade stocks straight from the app.

The intention was to let the general public in on the action so that big corporations could not use the stock market like their very own money machine (they are not quite powerful enough to be controlling central banks yet, that is for the big boys). This was like saying the Bangladeshi educational system is not an elaborate rat race, it is built around giving children an education (*snorts trying to hold back laughter*).

Robinhood made most of its money selling its users' trading data to big hedge fund managing corporations. So, when their overlords were losing, Robinhood decided this was not fair, and only allowed users to sell, not buy.

Some accounts even suggested that Robinhood sold their shares without their knowledge, let alone consent. So, to reiterate, a trading app named Robinhood was manipulating the market so that the rich did not have to lose so much money. I hope the first sentence of this section makes sense now.

What came of all that squeezing?

As Joker in Dark Knight said, it is all about sending a message. Much like the road safety protests down here, this elaborate protest against the rich manipulating the system ended with the powerful having their way, with some of the common people trying to take a stand against them ending up losing a lot (and some making many millions!).

But like any good protest, a message was sent, the fiasco left a $70 billion hole in the monopoly of larger-than-life investment institutions. 

But at the end of the day, no matter what your parents tell you, they do have a favourite child. And so does the government. While they could not afford stimulus cheques for honest, hard-working individuals, they seem to have enough to bail out these organisations.

The stimulus cheques have been announced and are being cashed out, but a large portion of the total stimulus budget was allotted to bailing out corporations (25% of the entire stimulus budget). You could speculate that there is going to be some form of bailout for these institutions sometime this year.

The story of the GME stocks is one of drama, intrigue and hope. Being one of the most entertaining events of 2021 so far, it is also an important lesson in how much our modern financial system can be manipulated for personal gains. 

Kazi Faisal Arefin is an undergraduate student at University of Dhaka

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.