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GME Stock Lost 16% in Pre-Market, GameStop Rally Forces Hedge Funds to Take Exit

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by Bhushan Akolkar · 3 min read
GME Stock Lost 16% in Pre-Market, GameStop Rally Forces Hedge Funds to Take Exit
Photo: Wikimedia Commons

GameStop (GME) has baffled Wall Street with its recent move as the investors from the Reddit community behind the price pump have forced big hedge funds to square off their short positions.

The Reddit community r/WallStreetBets behind the ongoing short squeeze of the GameStop stock (NYSE: GME) is just refusing to give up. GameStop (GME) stock was down 16% in Thursday’s pre-market session and reached the level of $292.02. The stock is slightly up as the market opened trading at $347.51.

The stock movement has created a huge uproar leaving Wall Street and big financial giants absolutely stunned. As it turns out, a community of individual traders decided to bet against the short calls of hedge funds on GameStock. Thus it resulted in a massive short squeeze taking the stock spiraling vertically upwards. Interestingly, the GME stock has multiple 8.8x as on Wednesday closing, just in the last five trading sessions.

On Wednesday, the GME stock closed 135% at a price of $348. This has also shot the company’s market cap to a massive $24 billion. As it turns out, hedge fund giants like Melvin Capital and Citron who have shorted big-time on GME have to square off their positions. Of course, this happened at a massive financial loss worth billions of dollars.

The wild price swing, however, has enticed retail players as the call options have piled up significantly. The GME Stock squeeze has also forced shorts and options dealers to buy the shares just to cover their positions. As a result, this spiraled in a feedback loop driving the price of the stock higher and higher.

Interestingly, Michael Burry, the real-life character from the movie ‘The Big Short’, who made a fortune during the 2008 financial crisis by shorting the market is holding 1.7 million shares of GameStop. In his now-deleted tweet, Burry has called this price surge “unnatural, insane, and dangerous”. However, he told Bloomberg he doesn’t hold any long/short positions in the stock.

Brokers Hint at Strong Action, Regulators Closely Watching GameStop (GME)

Well, brokerage bodies have struggled to remain online during the ongoing hysteria. Big trading platforms like Robinhood and ETrade reportedly crashed due to a massive rush. On the other hand, TM Ameritrade has restricted this sudden spike in demand “out of an abundance of caution amid unprecedented market conditions.”

Nasdaq CEO Adena Friedman has also warned that it will halt the trading of the stock if they find any unusual activity related to it. Speaking to CNBC, she said that Nasdaq’s role as a “self-regulatory organization” is to ensure the legitimacy of the market activity. However, she didn’t specify what tools Nasdaq has to determine the unusual activity.

No doubt, the Reddit forum has been promoting the GameStop (GME) stock very aggressively. One of the Reddit users noted:

“This is quite the experience for my first month in the stock market. Holding till infinity. “We’re literally more powerful than the big firms right now.”

Well, Bank of America has raised its target price of GameStock to $10 per share. In a note to its clients on Wednesday, the bank noted:

“While it is difficult to know how much very high short interest and retail ownership … could continue to put upward pressure on shares, we think fundamentals will again factor into valuation”.

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Bhushan Akolkar

Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.

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