SEC doesn't actually do anything. Failures to Deliver for GameStop stock has been on the securities threshold list for more than a month and off and on for the past year. I believe OverStock was on it in the past for over a year at one point and the SEC did nothing.
Yeah, running Hedge Funds like Melvin capital is where the real money is. They get a 30% cut of profits they make from their clients money and they have around $10 billion under management. They were up 50% last year so the management team took home ~$1.5 billion. They're deep in the red, down 30%, first month of 2021, due to the systemic risk they took on from all their bloated retail store short positions, but that's okay because the money they're losing is their clients and not theirs.
When they blow up, they talk to their media contacts and lay the blame on retail day traders ganging up on them and start a new fund.
It's disturbing and dishonest how the media is painting an image where the day traders on WallStreetBets are the villains and the hedge funds shorting this stock to over 100% of float for over the past year and also purchasing large numbers of puts so market makers naked short to hedge are the victims.
The float has been over 100% shorted for over a year. The shorts could have easily covered or trimmed their position when the stock was trading in the $3-$4 range this spring and summer for a profit but they chose not to. Book value was estimated to be $10 at that time. News came out that improved GameStop's situation and its future appeared less bleak. There should have been short covering on each of those pieces of news: GameStop paying off debt early, Ryan Cohen first buying 5% of the company, then 13%, then joining the board with 2 other CHEWY executives, the new PlayStation and XBox consoles releasing and always being immediately sold out, the microsoft profit sharing deal, huge ecommerce growth yoy, etc. But the shorts chose not to cover at all! Short float remained the same at over 100% as more new people bought into the company on the good news.
Many people may not know this but a new CEO was hired 2 years ago: George Sherman, and he's been doing a good job of turning around the company by doing unsexy things like shutting down unprofitable stores like where there's 2 GameStops in a single mall and improving their supply chain logistics and ecommerce business. 95% of all GameStop stores are 4 wall ebitda profitiable was what they said on a conference call 2 years ago.
I would also like to point out GameStop is a highly cyclical business. It depends a lot on the 7 year playstation and xbox console cycle. Look back on the historic stock chart. People think it's failing because revenue declines year over year then the stock goes parabolic in the new console release year. It's like the console cycle isn't priced in until it hits people in the face.
The hedge funds shorting this like Melvin entered into a very crowded trade where the risk / reward towards the end, when GameStop was trading in the $3-$4 was very questionable. Over 100% of shares were sold short. This was at a time when GameStop had a book value of around $10. There's a reason why certain individuals / value funds have been buying heavily into this stock with 5% ownerships being disclosed at one time or another: Michael Burry, Donald Foss, Must Asset Management, Senvest Capital, Ryan Cohen.
Hedge funds like Melvin have billions of dollars under management and they need to allocate a certain percentage of that pool to each idea they have to make sense financially and they poured too much money into this one short idea than would be appropriate from a risk management perspective. They didn't do their research properly and probably thought the company would go bankrupt. That wasn't the case. GameStop doesn't have much debt and they survived the pandemic. The shorts should have realized their mistake and started covering. What was going on for months this summer and fall seemed like the posterchild of an inefficient market. Instead the shorts doubled down and they've tried to break the momentum of people buying into the stock ever since September when it started rallying by heavily naked shorting and buying large blocks of short term puts. You can observe this by reading level 2 and seeing the entire tape being red and bid prices being rapidly sold off. Numerous articles were written weekly on various financial sites saying the stock rise doesn't make sense and some were even irresponsibly telling retail investors they should short, often lying through omission on important details like Ryan Cohen becoming an activist investor and the extremely high short float and the new console cycle and the new microsoft deal and huge ecommerce growth. I question how many of these authors had connections to the short funds and wrote articles for them.
The new console cycle definitely contributed. I think it more had to do with Ryan Cohen, founder of CHEWY, buying 13% of gamestop shares and joining the board with two other CHEWY executives. The assumption is he will play a large role in GameStop's future and buying GameStop stock is a bet on his ability to pivot GameStop into new revenue generating gaming verticals.