GameStop (NYSE: $GME): Online Boiler Room Or Illegal Institutional Naked Short Selling?

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GameStop found itself caught in the middle of a wild stock market frenzy – one that we haven’t since the feverish 80s – and one that some view as a clash between the public and the elite.

Robinhood restricted this Thursday, among other brokerage firms, trading in thirteen equities (Jan 29 pre-market): AAL +11%, AMC +51%, BB +17%, BBBY +15%, CTRM +12%, EXPR +45%, GME +96%, KOSS +97%, NAKD +36%, NOK +7%, SNDL +1%, TR +8%, TRVG +16%.

This was done based on the suspicion of market manipulation or collusion by users out of /wallstreetbets, a subreddit on Reddit (the back page of the internet), in something resembling a boiler room and pump ‘n dump set-up – but now online.

The conviction on the subreddit itself is different. They feel it’s the public’s surprise against the big financial institutions. A member of the community, Lous Rosmann, expresses his opinion:

“People seem aggravated at a financial sector that always seems to win while normal people seem to lose.”

The whole charade was ignited when retail investors discovered that large financial institutions (incl. Melvin Capital, $12.5B AUM) had shorted 120% of the available GameStop  (NYSE: $GME) shares.

A very risky move. Did anyone mention that naked short-selling is illegal?

Retail investors then stepped in by buying up the very few remaining outstanding shares, quickly taking the price from $40s to a high beyond $500, in a matter of days. A move that provoked financial institutions and clearinghouses and pressured the brokerage firms.

Perhaps that’s when all the money went into GME Ressources Ldt. (ASX: $GME) in Australia which also saw a +100% spike throughout the week.

Barry James from James Investment Research believes it was a wrong move from the brokerage firms to restrict client trading, as it then doesn’t constitute a free market.

The regulatory response ought to be huge, this is a job for the SEC and FINRA.

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“It’s truly a modified pump and dump because, at the end of the day, it will most certainly go back down because it’s not trading on any rational, fundamental value.” Jordan Belfort.

Buyer beware – the ones getting in at the end of the party could be the largest victims of this Ponzi.

 

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Luka Marjanovic

Partner

Luka holds a Bachelor’s in International Business and a Master’s in International Management. During his undergraduate studies he worked as a research assistant in the field of Big Data; founded his own consulting firm providing services to local SME's in various sectors and invested in the capital markets; as well as working pro-bono providing education and career counselling. Prior to his business education, he studied Biology-and-Biotechnology, and served in the Danish Royal Army as Second Sergeant, leading and managing a group under extreme conditions and pressure. Luka has spent significant time abroad, living and working in seven different countries. When he's not in the office, he's chasing the next gusts windsurfing, carving the mountain snowboarding or out in the forest for a jog.