The GameStop frenzy even touched sports

In case you're foggy about the hottest story on the internet at the moment, CBC Sports' Jesse Campigotto provides an explanation.

Some team owners cheered — others got burned

Dallas Mavericks owner Mark Cuban rooted on the renegade investors in the GameStop frenzy. (Hector Vivas/Getty Images)

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In case you're foggy about the hottest story on the internet at the moment, here's a quick explainer:

GameStop is a retail chain that sells video games and related equipment. Like a lot of brick-and-mortar outfits, the company has been losing money for years. Betting that its downward spiral would continue in a pandemic, some traders shorted GameStop stock. That's when you borrow stock from a broker, sell it right away and hope for its price to fall. That way, you can buy it back for a lower price, return the shares you borrowed and pocket the difference. Pretty standard stuff on Wall Street.

Until, that is, a bunch of amateur traders who congregate on the popular Reddit forum r/WallStreetBets noticed that some big-time hedge funds had shorted billions worth of GameStop stock and decided to stick it to them. They did this by buying (and encouraging each other to accumulate even more) GameStop stock and/or options, causing the share price to go up (and up and up). They also weaponized social media by shaming (even harassing) establishment types who suggested publicly that the stock was dangerously overinflated and people should sell.

This army of small-time traders gobbling up GME stock (and refusing to sell it) created a nightmare for anyone with a big short position. Faced with theoretically unlimited losses if they didn't act, the short-sellers had little choice but to buy the dwindling supply of available shares at inflated prices so they could pay back the shares they'd borrowed and stop the bleeding. These purchases, of course, caused the stock's value to rise even higher and faster.

How high and fast? Well, back in the summer, a share of GME was trading for about four bucks US. A few weeks ago it was up to around $20. Two days ago, it became the most-traded stock in the United States. This morning, it peaked at almost $470 before finally (and inevitably) tumbling. Bottom line: those savvy amateurs made out like bandits at the expense of the deep-pocketed shorters who do this for a (very nice) living. The Joes beat the pros.

Wall Street short sellers have been caught in a short squeeze on GameStop shares in recent weeks as they have been forced to buy in at higher and higher prices to cover their bets. (Alex Kraus/Bloomberg News)

Some of the hedge-fund types that lost a boatload are now complaining that it's wrong for a band of renegades on the internet to be able to manipulate stock prices like this. They're warning of a dangerous rise in "meme stocks" after buying stakes in dying companies became a craze over the last few days. Shares in the pandemic-ruined AMC movie theatre chain quadrupled yesterday before coming back to earth. People were rushing to buy Blackberry!

But others (including the renegades themselves) are hailing the r/WallStreetBets traders as anti-establishment heroes — little guys beating the big guys at their own game. Dallas Mavericks owner Mark Cuban, who still fancies himself a disruptor, and Golden State Warriors minority stakeholder Chamath Palihapitiya cheered them on via Twitter.

At least two other sports owners are directly involved in the GameStop mayhem — and, unfortunately for them, not on the right side.

Gabe Plotkin is one of the two New York-based investors who bought a sizable piece of the Charlotte Hornets from majority owner Michael Jordan in 2019. He's also the founder and Chief Investment Officer of Melvin Capital — the hedge fund that took perhaps the biggest hit on GameStop. To stay on its feet, Melvin took a $2.75-billion bailout from two other hedge funds. A reported $750 million of that came from the fund owned by Plotkin's old boss, Steven Cohen, who's the new owner of the New York Mets. Cohen's Point72 is reportedly down 15 per cent this year, partly due to its positions in GameStop.

Mets fans are understandably scarred by their experiences with the team's previous owners, the Wilpon family, who initially profited from and then got burned by Bernie Madoff's Ponzi scheme. Now some are worried that Cohen's involvement in the GameStop bloodbath might cause him to renege on his promise to reverse the Mets' penny-pinching ways. But they can relax. With an estimated worth of more than $14 billion, Cohen is three times richer than the next-wealthiest Major League Baseball owner.

If you want a more in-depth explainer on the GameStop saga and what comes next, by someone who actually covers business, check out this piece by CBC News' Pete Evans.

How short selling works

CBC News

2 years ago
An animated explanation of how people make money from stocks losing value 0:46

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