Mar 19, 2021, 04:37pm EDT | 30,036 views
GameStop: Were The Short Sellers
Routed? Does It Matter? (Beware The
‘Gamma’)
By George Calhoun, Quantitative Finance Program Director, at Stevens Inst. of Technology
The “twin peaks” pattern in GME’s share price
(January and February/March) has shocked the markets.
There is no obvious fundamental driver for a 1700% gain in the GME share
price in less than a month. GME’s sales have contracted by 30% in the past
two years, with losses of over $1 billion. Bloomberg columnist Matt
Levine summed up the company as “a money-losing mall retailer in a dying
business during a pandemic.” Maybe the future will be brighter, or maybe
not. But it is clear that right now Price and Value are out of joint.
Beyond that, however, the pattern make no sense technically, at least
according to the standard view of how the market works and how prices
move. Normally, when a stock moves up, we expect a certain steadiness.
There are mechanisms – psychological, procedural – that guide-rail the
process. A triggering event catches the market’s attention and prompts a
reassessment. Some investors move quickly; others lag, then join in.
Momentum develops, trend-followers pile on, the media talk up the story,
the chat rooms get going, and investor sentiment ripens to a golden glow of
positivity. The equilibrium-seeking tendencies of the market modulate
price movements and smooth out the fluctuations.
Single spikes like GME’s January surge are not unknown. They are rare, but
explicable, usually as technical adjustment by investors compounded by
some sort of crowded trade. But a double spike, without fundamentals, with
outlandish volume statistics (see below)… is a new chimera. And yet there it
is.
Is it a freak, an anomaly like the Flash Crash of 2010? Or is this a sign of
something truly new, an important change in market behavior? Something
that may become a regular part of the game going forward?
The Official Short Interest Figures
Following the January surge, the short interest had been reduced by
almost 80%. The straightforward interpretation is that short sellers were
squeezed and most were forced to cover.
The short interest going into the February surge was thus much lower, and
did not change much during the event.
If these figures are accurate, the proposition is clearly established. Shortcovering played a large part in the January surge, and a much smaller part
in the February surge.
The Volume Shock
What is most striking about this episode is not the surge in prices, but the
unprecedented explosion of trading volume.
GME trading had averaged a few million shares a day, for many years. Then
on the morning of January 13 2021, orders for 20 million shares hit the
market in the first hour of trading. 93 million shares traded before
lunchtime – more than twice the public float. By the closing, almost 150
million shares had changed hands.
It was just the beginning. Waves of buy orders began to sweep through the
market over the following weeks.
To put this in perspective, the typical “hot stock” — like Tesla, or Apple –
may trade a few percent of the float daily. On Apple’s heaviest trading day
this year, shares equal to 1.7% of the float changed hands. Tesla’s trading
has averaged 5% of its float daily over the last three months. Its heaviest
volume occurred on Dec 18 (the day before the company joined the S&P
500). Tesla set a record for the dollar value of shares traded in the stock of a
single company on a single day: 222 million shares at an average price of
about $750 a share, 28% of Tesla’s public float.
Since January 13, GME has traded a daily average of 118% of its float.
On several days, the turnover has exceeded 300% of the float.
During the February surge (Feb 24-26) and the January surge (Jan 22-27),
the turnover ratios were 7:1 and 14:1 respectively.
Where is this volume coming from? With the prices rising, the transaction
momentum was clearly driven from the buy-side. Who was in control of the
game? Who was buying?
Was it the short-sellers buying to cover their short positions? Certainly
some of the demand, in the January episode at least, derives from this
source. But the entire short interest, as overdrawn as it was, could have
been taken out in a few hours once the surge began. From January 13 to the
end of the month, over 1.2 billion GME shares traded – about 20
times the short interest.
By the time of the second surge in February, the short interest was small
enough that it could have been cleared out in the first 60 seconds of
trading at the open on February 25. We may be justified in
concluding from this that the short interest was of negligible significance
for the 2nd peak.
This big-picture perspective on the enormous trading volumes establishes
that the short interest can have played a most a minor supporting role in
January, de minimis in February.
The fine structure of these two events may reveal a bit more, and confirm
the big-picture conclusions.