What has happened in GameStop is something really amazing and has never happened before. Reddit’s WallStreetBets forum which is a group of 3 million day traders gathered and conspired to take long positions in GameSpot which made hedge funds to square off their short positions.
To put things in perspective, short-sellers in GameStop lost $ 5 billion in mark-to-market losses in the month of January, and on Tuesday alone they made a loss of $867 million as the stock rallied 95 percent in one single session.
Still, data from the exchanges suggest that older shorts are covering their position due to large mark-to-market losses, new short sellers are looking to initiate new short positions.
Also, the borrowing fees for GameStop has increased to 31 percent, with new shorts paying a fee of more than 80 percent.
This kind of speculative trading can trigger wider sell-off in the market as hedge funds who suffered losses in these trades will be forced to sell winners in order to generate cash to cover losses.
GameStop Corp has become a national sensation reaching the doorsteps of both new President Joe Biden's administration and Federal Reserve Chairman Jerome Powell.
Administrators and regulators have found themselves on the receiving end of awkward questions about their takes on a business that sells five used video games for $10.
In India, retail investor behaviour and their holding in companies are not very significant to pull a stunt of such magnitude.Also, Sebi allows only certified analysts to give recommendations. Nevertheless, regulators in India should take a leaf out of it and make the required changes to prevent such things from happening in India.
How relevant is this for Indian investors and what are the takeaways?
India investors need to be cautious and not invest in companies that are trading at frenzied valuations.
Regulators in India should take note of the GameStop saga and keep a strict vigil on social media to avoid something like this happening in Indian markets.
(The author is Sr Analyst, SSJ Finance & Securities)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.