Wednesday 27 January 2021 6:29 pm

Reddit day traders out for blood as they tell GameStop short-sellers: 'We want to see the loss porn'

The ongoing battle between Reddit day traders and corporate short-sellers over GameStop stock has heated up, with the Redditors vowing: “We want to see loss porn”.

Shares of US videogame retailer GameStop jumped 146 per cent today, driving the price of the stock to a whopping $365 by midday.

Today’s surge leaves GameStop stock up a staggering 700 per cent in just two weeks, lifting the struggling video game retailer’s market value from $1.24bn to more than $10bn.

An ongoing battle between Reddit day traders and corporate short-sellers has been waging for days, and it has led to an enormous short-squeeze.

A tug of war emerged late last week after short-seller Citron Research said it had placed a bet against the stock and that the company was “pretty much in terminal decline”. In response, the Reddit day traders pushed the price of the stock through the roof.

The war is still to be won, but the battle victory certainly appears to have gone to the Redditors.

The gains caused by the Redditors have been so great that they have forced hedge funds to take heavy losses as they unloaded short positions.

The short squeeze was so sharp that funds were selling long positions in stocks to pay for the losses, which sparked a 1 per cent slide in Wall Street’s main indexes.

An open letter to American broadcast network CNBC, posted on Reddit by a user earlier this week, made it clear the Redditors were not ready to give up.

“We don’t have billionaires to bail us out when we mess up our portfolio risk and a position goes against us,” the user wrote. “We can’t go on TV and make attempts to manipulate millions to take our side of the trade. If we mess up as bad as they [Citron Research] did, we’re wiped out, we have to start from scratch and are back to giving handjobs behind the dumpster at Wendy’s.

“Seriously. Mother**** these people. I sincerely hope they suffer. We want to see the loss porn,” the user added.

Short-seller Andrew Left, who runs Citron Research and a hedge fund, said he will still short the stock, and is more convinced than ever of his position.

“If I had never been involved in GameStop and came to this right now, would I still short this stock? 100 per cent,” he told Reuters on today. “This is an old school, failing mall-based video retailer and investors can’t change the perception of that.”

Short sellers typically borrow and sell shares in companies they expect will fall in price, hoping to buy them back at a lower price and pocket the difference.

The trading strategy is high risk in that losses are theoretically unlimited when the stock rises instead of falling – and so far, GameStop stock has risen 250 per cent this year.

Last week Citron tweeted GameStop stock would be “back to $20 fast”, and described the GameStop buyers as “suckers in this poker game”. Yesterday GameStop’s price was $160 per share.

According to the Financial Times, GameStop has been a favourite stock of day traders on Reddit forum r/wallstreetbeats.

Someone’s going to get hurt

“These are not normal times and while the [Reddit] … thing is fascinating to watch, I can’t help but think that this is unlikely to end well for someone,” Deutsche Bank strategist Jim Reid said.

BlackRock could have made gains of about $2.4bn on its investment in GameStop. It owned about 9.2 million shares, or a roughly 13 per cent stake, in GameStop as of 31 December, a regulatory filing showed on Tuesday.

But extreme volatility means investors stand to lose money, said Matthew Keator, managing partner in wealth management firm the Keator Group in Lenox, Massachusetts.

“It’s a dangerous game to play from both sides of the spectrum, whether you’re long or short. You get close enough to the fire you’re going to get burned,” he said. “At some point in time, valuation is going to matter and it won’t matter what social media is cheering the stock on.”

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