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Wicked game

25 January 2021 By John Foley

Disliking short sellers is human. Falling share prices are generally a reflection of unhappy times for companies, executives and employees. Sometimes those seeking to profit from a stock’s decline pile on with too much unsupported innuendo. But the fast and furious rise of shares in U.S. video-game retailer GameStop shows the phenomenon of market-moving murmuration is just as unhealthy when it works in the other direction.

GameStop, with around 5,000 stores and a market capitalization of $4.5 billion as of Friday, was recently a plaything of market bears. By December, the number of shares out on loan was greater than the total number of shares that exist, according to Refinitiv data, a measure of heavy short interest. Citron Research, a short-selling outfit whose past targets include Chinese real estate developer Evergrande, critiqued the company in a tweet on Jan. 19, adding to the company’s herd of detractors.

Then the bulls took charge. GameStop has become what users of online message board Reddit refer to as a “meme stock.” Demand for call options, which have less of an up-front cost than buying shares outright, soared. The stock, which market-makers have to buy to hedge the options they sell, quadrupled in a week.

The principal substantive objection to short sellers tends to be that their actions undermine confidence, and in the words of Bank of England chief Andrew Bailey last year, “might not be frankly in the interest of the economy.” But the same can be said for GameStop’s market updraft. Like short sellers, the bulls need not care about what happens to the company over time – they just need the shares to go up for long enough to cash in.

It’s all particularly unhelpful for those who run GameStop, starting with Chief Executive George Sherman. Turning a bricks-and-mortar retailer into an online one requires capital, and the markets are theoretically a place to raise that. But issuing stock for cash becomes difficult when a company’s shares whipsaw daily. By late Monday they were trading at 350 times this year’s estimated earnings, according to Refinitiv. That turns the short-bashing debate on its head.


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