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- Amitoj Singh, Arun Jacob (Editors-in-Chief)
All it took was a Reddit ‘chatroom’, Elon Musk and SPAC billionaire Chamath Palihapitiya to cause one of the most prominent stock booms this generation has ever noticed. It started on January 11 when a group of ‘YOLO’ (You Only Live Once) investors in a Reddit chatroom named ‘WallStreetBets’ decided to go all stars blazing on GameStop. The reason behind why these people started going all in on GameStop is still unknown, some believe that it was their personal whim to organise a coordinated social media movement while others believed that it was in order to prove some hedge funds wrong who had gone all short on the stock (they believed that the stock would fall further and planned on profiting from this fall). Whatever be the reason, this Reddit community was able to pull off one of the biggest coordinated social media movements in history and were also able to sustain this movement.
The GameStop stock (GME) rose from $20 in 11 January to $347 on 27th January, resulting in a whopping increase of 1635% only within 16 days. What added fuel to the fire was the spread of this movement to other social media handles like Instagram and Facebook where many famous celebrities supported this stock buying frenzy and encouraged people to buy more of GME shares. This frenzy of stock buying spread like wildfire where all everyone doing was talking about GameStop, stock markets, short selling, etc.
What caused this mania was an event called ‘short squeeze’. But before you can understand short squeeze, you need to be aware of short selling and how this work. So short selling refers to selling off a particular stock that you do not own in anticipation that the price of the stock would further fall and you could purchase the stock at a later stage and cash in the profits. For example, Mr. Arun anticipates that the stock of Reliance which is trading at (suppose) Rs. 30 to further fall down to Rs 10. One way Mr. Arun can profit from this situation is that he can sell the stock of Reliance which he doesn't own (with the help of his broker) at Rs 30 in the stock market. Now if Reliance share price falls to Rs10, Mr. Arun can buy back the stock at this price to return it to his broker and the total profit that Mr. Arun will make from this act of selling and buying will be Rs20 (Rs30-Rs10). This is known as short selling. Now the negative aspect of this transaction is that if the price of Reliance does not fall but increase (from Rs30 to Rs50), Mr. Arun would be in a loss of Rs20 as now he would have to purchase the stock at a higher price.
This is exactly what many Hedge Funds like Melvin Capital were doing with the stock of GameStop, they were short selling it in anticipation that the stock price would further fall and they could profit from this situation. But since the stock of Gamestop started rising instead of falling , these Hedge funds had to compulsorily buy back the shares at a high price which not only resulted in huge losses for these Hedge funds but also further increased the stock price of GameStop. This is known as short squeeze and this is what resulted in the soaring prices of GME.
Robinhood brokerage services even halted the trading in GME due to volatile price movements for a brief period but soon resumed the trading. Some people believe that Robinhood was a pawn acting on the behest of large hedge funds who were to make further losses if purchase of GME shares by retail investors continued. Nevertheless, this market frenzy brought into focus the possibility of market manipulation which attracted the attention of US lawmakers and regulatory bodies like Securities Exchange Comission to investigate the issue. This episode has raised questions about market integrity and prosecutors have subpoenaed information from brokers like Robinhood Markets Inc. The Securities Exchange Comission is also thinking of enforcing new regulations to keep such kind of trading frenzy in check in the near future.
Getting inspired by this frenzy, many Indian reddit forums like IndianStreetBets have aimed at organising a similar movement in the Indian stock markets. But is a similar situation possible in the Indian markets? The answer is No. Firstly because of the use of ‘circuit breakers’ by the stock exchanges which halts trading of a particular stock when there is high price volatility in that stock, for a brief period to allow trading activity to cool down among market participants. Secondly, shorting a stock is a very tedious task because of the various regulatory requirements placed by SEBI. Also, traders who short a stock are required to close their positions before the end of the trading session meaning that traders cannot short a stock for more than one day. Though the traders could indulge in shorting via the derivatives market, the concept of derivatives is too intricate and complex for retail investors to get involved in short selling. All these regulations in place and intricacies make it impossible to replicate a similar market frenzy in the Indian stock markets.
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