What Lessons Wall Street Can Learn From ‘The Big – Short Squeeze’

Market volatility driven by Reddit’s Wall Street Bets proves why alt data is a must for institutional investors that want to survive
Wall Street Bets financial squeeze short on gamestop and how alt-data could be used to financially forecast better
Nadav Roiter - Bright Data content manager and writer
Nadav Roiter | Data Collection Expert
03-Feb-2021
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In this article we will discuss:

What happened?

Institutional investors have been able to make educated investments throughout the history of stock markets based on a company’s financials:

  • Earnings
  • Debt
  • Projected sales

Game Stop (GME) was deemed as a ‘short play’ as it is mostly a bricks & mortar business with relatively weak ‘corporate financials’ especially in light of a decline in physical retail since the outbreak of coronavirus. Large financial institutions such as Melvin Capital Management took a short position on the company, anticipating stock prices would go down. So much so that GME had an unprecedented level of shorts placed against it equaling no less than 139% of stock volume. That means that funds were taking high risk positions which could not be covered in actuality by the real number of securities in existence.

In the interim, Game Stop got a new CEO, Ryan Cohen, who was seasoned in the business of eCommerce, having led his previous company, ‘Chewy’ to great success.

Here is where an investment ‘thread’ on the discussion forum, Reddit called ‘Wall Street Bets (WSB) ’ entered the picture. Group members identified Cohen’s chairmanship as a positive move which could take the bricks & mortar chain online thereby greatly increasing potential future revenues. Group members had also realized that GME was being shorted and decided to band together and ‘democratize Wall Street’ to both ‘take revenge for the unfair bailouts of 2008’ and the ‘unfair distribution of wealth’. Many people are now calling this group ‘opportunistic idealists’, which may or may not be true.

The only thing that is for certain is that WSB was able to drive GME’s stock price ‘to the moon’ (as group members like to say when driving stock prices up).

impact of Wall Street Bets on the GME stock after the short squeeze was on

Image source: Bright Data

A stock which hit as low as $2.57, now hit a high of $483 or 188 times its original value.

Why should institutional investors care?

Some of the funds who originally took out a short position on GME sold their positions. This was fueled for the most part by social sentiment data which was indicative of a highly flammable situation they wished to avoid. On the other end of the spectrum, some funds doubled up on their short GME positions, believing solely in financial fundamentals, not taking social sentiment as a serious indicator of securities movement.

The only thing is that with short positions, there is an upwards limit up to which a short can be pushed. So as the stock price rose some short investors were forced to sell at a loss. Others who did not believe the rally would persist held on to their shorts for dear life. This created huge amounts of debt causing some funds to even sell over ownership shares to cover amounting debt.

As Warren Buffet was quoted by CNBC as saying about ‘short investing’:

…you face potentially unlimited losses since there’s no absolute upper limit to a stock’s price.

And Buffet was right. To date the funds that shorted GME and other heavily shorted stocks which WSB made mass plays against lost a grand total of $19 Billion.

The true value of alt data for Wall Street

When this series of events is analyzed in retrospect, one can clearly see which hedge funds and private equity firms were implementing a strategy incorporating alternative data.

Alt data, is any type of user or business-driven recordable internet activity. This may include:

  • Search engine results data
  • Social media sentiment
  • Credit card transactions

Firms who were able to crawl Reddit, Twitter, Instagram, and TikTok, for example, were able to identify positive sentiment towards GME and take preemptive (i.e. selling their shorts) and proactive measures (i.e. ‘buying long’). Those who relied exclusively on classic company and financial data, ended up taking on the larger portion of the loss ratio.

What’s next?

It has been a topic for debate whether WBS’s GME ‘short squeeze’ was an isolated incident or not. The truth is that this may very well be the beginning of larger parts of the economy participating in securities markets. Apps like Robinhood and TD Ameritrade have brought unprecedented securities access to the masses. Some argue that this is a siege on finance, while others see it as a fight for economic equality. Whichever one it is, expect to see additional market volatility driven by short squeezes. Wall Street Bets chat rooms are already filled with banter about taking BlackBerry (Nasdaq:BB), American Multi-Cinema (Nasdaq: AMC), Nokia (Nasdaq: NOK) and Bed Bath & Beyond (Nasdaq: BBYD) ‘to the moon’.

Nadav Roiter - Bright Data content manager and writer
Nadav Roiter | Data Collection Expert

Nadav Roiter is a data collection expert at Bright Data. Formerly the Marketing Manager at Subivi eCommerce CRM and Head of Digital Content at Novarize audience intelligence, he now dedicates his time to bringing businesses closer to their goals through the collection of big data.

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