By Ian McDowell


GamesStop (ticker: GME) is a video game retailer that, prior to the events described in this blog, had mostly been written off by professional investors due to a largely outdated business model.  This negative outlook led a substantial number of professional investors to “short” the stock, benefitting as the price of GameStop declined (while conversely, losing money if the price goes up, highly risky given that the maximum price of a stock is hypothetically infinite). [1]  The mechanics of a short-sell are simple- the investor hoping to profit on a stock’s decline borrows that stock (for example, from their broker), sells it on the open market, and then buys it back at a lower price (thus making a gain) before returning it to the lender at the lower price. [2]  If the price goes up, that investor faces losses and may get “margin called” by their broker, which requires them to deposit funds to cover potential losses on the short. [3] A “short squeeze” refers to a situation where investors act to raise the price of a stock through purchases, which may force those short in the stock to purchase it themselves to cover the losses from their short position, which raises the price even more. [4]


Over January 2020 alone, GameStop appreciated by over 1500% due to investors (or uninformed speculators, depending on one’s view) driving up demand to “short-squeeze” the hedge funds that were shorting the stock. [5]  As of this writing, the price of GameStop has declined significantly from its peak valuation, signaling that the short-squeeze is over. [6] The GameStop short-squeeze of 2020-2021 is notable because it signaled the emergence of retail investors as a powerful market force, and highlights the increasing importance of discussions on social media platforms in accounting for why a security might move in a certain way.


It must be emphasized that the retail traders that decided to buy the stock (or call options- a right to purchase a stock at a higher price in the future) to influence the price were not doing so because of typical revelations that could influence a stock to appreciate in value, such as positive changes in the company’s financial data, a new management strategy, the acquisition of the company, lower interest rates, and so on.


Given that many individuals participated in this coordinated strategy, there is not one single motivation for picking GameStop (out of thousands of tradable securities) as the primary stock to target.  For some, driving GME up was a way to exact revenge on hedge funds for the 2008-2009 economic crisis, despite the fact that the funds that were notably short on GME simply did not engage in the activity that caused the collapse of the housing market and the subsequent broader recession in 2008. [7]  Even if certain Reddit posters were incorrect in their assessment of recent financial history, these posts nevertheless indicate that a long-standing resentment of Wall Street in an era of great uncertainty and wealth inequality was a significant motivating factor for many to take the risk of buying GME stock and potentially cause financial pain to hedge funds.  In response to the short squeeze, SkyBridge Capital managing partner (and former White House Communications Director) Anthony Scaramucci commented that observers were witnessing the “French Revolution of Finance.” [8]


Other traders of course may have simply wanted to collect on the gains, and might have never had any particular ideological motivation behind buying the stock.  In addition, prominent figures such as Elon Musk and Chamath Palihapitiya tweeted favorably about the GME surge, which certainly influenced the price to trend upwards. [9]


While the media has portrayed retail traders as being responsible for the GME short squeeze, it has emerged that many institutional investors have recently purchased the stock, and retail traders did not solely influence the price movements. [10] It is clear that many of the individuals that were speculating on GameStop’s price were not sophisticated investors, as evidenced by large purchases of another stock under the ticker GME at the same time that the short squeeze was taking place. [11]


If legal, there is a certain appeal to disregarding more traditional investing strategies in favor of collectively banding together with others over social media to influence the price of a stock (despite any concerns over the company’s health).  Specifically, the price will (in the ideal scenario) appreciate with near-immediate effect solely because the investors have banded together to cause a rise (whereas, with other stocks without any coordination it might take years to see a stock appreciate), regardless of any other factor.  The risk to the social-media coordination strategy is precisely that it ignores the fundamentals of the stock, and that after large numbers of the traders that caused the price of to go up sell to realize their gains, the stock price will inevitably go down as demand decreases, leading to the price reflecting a more reasonable interpretation of the publicly available data of the company.


Given the serious price fluctuations with GameStop and the public spectacle of a perceived contest between retail traders and professional investors, it was only natural that there would be a subsequent federal investigation.  The Justice Department’s fraud section, the San Francisco U.S. Attorney’s Office, the Commodity Futures Trading Commission, and the Securities and Exchange Commission are all currently investigating potential illegal activity in relation to trading around GameStop. [12] Daniel Hawke, a former chief of the SEC’s market abuse unit and a partner at Arnold & Porter Kaye Scholer LLP noted that users of a social-media platform “egging each other on, [. . .] effectively constituted a crowdsourced pump-and-dump scheme” and that the traders on social media were “making no effort to conceal their apparent intent to manipulate the price of the stock.”  [13]


The GameStop Short Squeeze raises broad questions of the appropriate role of forums and social media platforms with regard to trading of other securities.  Public figures such as Elizabeth Warren have harshly criticized the SEC for having a woefully inadequate response to potential GameStop and potential market manipulation, which could lead to increased enforcement of existing policy in the future, if not new regulations. [14]


In addition to a potential federal response, the President of the NASDAQ stock exchange has indicated that the organization has technology that monitors and evaluates market-oriented discussions on social media, and that NASDAQ would potentially halt trading of any stock if there was unusual trading activity that matched social media conversations.[15]  Further, it is plausible that social media companies may seek to limit discussions regarding financial markets to protect against any civil or criminal legal liability.  To conclude, while the extent to which forums such as Reddit will be able to influence securities pricing in the future is uncertain, it is plausible that a regulatory response can be expected to curb the risk of market manipulation vis-a-vis forums or social media platforms.


[1] Alex Fitzpatrick, So, Uh, What’s Up With GameStop’s Stock?, TIME (Jan. 26, 2021),

[2] Chad Langager, What are the Minimum Margin Requirements for a Short Sale Account, Investopedia (updated Jan. 7, 2021),

[3] Justin Kuepper, Margin Call, Investopedia (Updated Jan. 28, 2021),

[4] Cory Mitchell, Short Squeeze, Investopedia (Updated Jan. 28, 2021),

[5] Yun Li, GameStop, Reddit, and Robinhood: A Full Recap of the Historic Retail Trading Mania on Wall Street, CNBC (Jan. 30, 2021),

[6] Caitlin Ostroff, Peter Santilli, The Rise and Fall of the GameStop Frenzy, Wall Street Journal (Feb. 11, 2021),

[7] See Rick Newman, What the GameStop vigilantes get Wrong About the 2008 Financial Crash, Yahoo! (Feb. 1, 2021),

[8] Nicole Casperson, How Social Media Fueled the GameStop Stock Surge, Investment News (Jan. 27, 2021),

[9] Id.

[10] See Maggie Fitzgerald, GameStop mania may not have been the retail trader rebellion it was perceived to be, data shows, CNBC (Feb. 5, 2021),

[11] See Justin Harper, GameStop: Share Buying Mistakes ‘on the rise’, BBC News (Feb. 11, 2021), (discussing a spike in an Australian mining company that also trades under the ticker GME, as well as other recent instances of clear trader error, such as the recent 1500% spike in Signal Advance stock (SIGL) after Elon Musk tweeted favorably about an (unrelated) messaging app called Signal).

[12] Dave Michaels, GameStop Mania is Focus of Federal Probes Into Possible Manipulation, The Wall Street Journal (Feb. 11, 2021),

[13] Dave Michaels, Alexander Osipovich, GameStop Stock Surge Tests Scope of SEC’s Manipulation Rules, The Wall Street Journal (Jan. 28, 2021),

[14] Thomas Franck, ‘You’ve got to Have a cop on the Beat’: Elizabeth Warren Slams SEC Over GameStop Chaos, CNBC (Jan. 28, 2021),

[15] Jason Rechel, How Social Media Moves Markets: Analyzing GameStop (GME) Using Social Listening Data, Sprout Social (Jan. 28, 2021),

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