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On Jan. 26, GameStop’s shares were traded more than the S&P 500. Pexels.

GameStop Corp. (GME) made head­lines last week after a wild week in the stock market.

Shares rose 1,625% in the month of January to $325 per share. That par­a­bolic rise inten­sified last week and hurt hedge funds like Melvin Capital, who had a large short position on GME. 

Melvin lost 53% in January on their shorts, accounting for about $6.6 billion in losses. When an investor shorts a stock, they borrow it from someone else, imme­di­ately sell it, and wait to buy it back to return the bor­rowed shares later. The shorting investor earns a profit when the stock price falls, and loses when the price rises.

On Jan. 26, GameStop’s shares were traded more than the S&P 500. By the 28th, bro­kerage firms like Robinhood, ETrade, and others stopped users from buying GameStop.

Indi­vidual investors who used the Reddit channel “r/WallStreetBets” cried foul play from the financial insti­tu­tions, leading to a class action lawsuit against Robinhood. Addi­tionally, politi­cians like Alexandria Ocasio-Cortez, D‑N.Y., and Ted Cruz, R‑TX., joined the call against bro­kerages restricting selling.

Asso­ciate Pro­fessor of Finance Robert Atra said he doesn’t see last week’s volatility in quite the same way. In class on Friday, Atra pointed to tra­di­tional financial metrics like the short ratio to explain that GameStop was expe­ri­encing more shorting than can be pos­sibly sold.

The short ratio is the ratio between the number of shares in a company sold short over the average daily volume of the stock. On Jan. 15, that ratio was 2.81, which was 226% of shares available for trading.

“The way it’s written is like pitting one group against the other,” Atra said. “I don’t think that’s the case. I think it was just fol­lowing a tra­di­tional signal that some­thing was oversold, and because it was short sold the short­sellers had to buy it back and the people taking long posi­tions ended up ben­e­fiting from short­sellers buying it back.”

Con­sid­ering this short pressure, which requires firms to buy the stock to close their position, hedge funds were required to buy back into Game­Stock as the price ticked higher, and that further sent the stock upward.

“When some­thing is that heavily shorted, it doesn’t take a lot of movement to cause massive buy-ins,” Atra said.

This is what’s known as a short squeeze, and it’s exactly what hap­pened last week with GameStop.

Prac­ti­tioners have developed metrics for market con­di­tions like this. Short sale indi­cators like the short ratio appear in text­books like Donald E. Vaughn’s “Survey of Invest­ments” from 1967.

GameStop is hardly the pop­ulist rev­o­lution in finance the Wall­StreetBets com­munity may want it to be. Rather, the GameStop saga is a unique aber­ration in equity markets caused by a perfect storm of size, trading volume, and short selling pressure, according to Michael Burry, who first shorted the housing market in 2007 that later became fea­tured in the book and movie “the Big Short.”

“There really can’t be another GME,” Burry said. “Nothing else is/was even close to as shorted and so hated/ignored/dismissed prior to the #the­bigshort­squeeze.”

Nor is it a flash­point of insti­tu­tional backlash against the group of indi­vidual investors at odds with Wall Street traders. Robinhood CEO Vlad Tenev said the firm halted trading on certain equities to maintain its capital requirements.

“I always won­dered about the Robinhood business model, myself,” Atra said. “It sounds like there was so much trading they couldn’t afford to do the trading.”

By Monday, Robinhood raised $3.4 billion to help facil­itate the volume of trading users were demanding. If that’s the case, the curb on trading had to do with bro­kerage firms’ ability to clear trades more than with exe­cuting them.

With the restric­tions eased, online investors have redoubled their efforts this week on GameStop and have since shifted buying pressure into silver. But in the end, experts in the field like Atra don’t see this flash­point resulting in much beyond an episode of simple speculation.

“If you’re cheering on the pop­ulist investors, what do they do with GameStop now? Are they bailing out and taking their cash, or are they hanging in?” Atra said. “Surely those investors don’t think GameStop is a great long-term investment.

“Fun­da­men­tally, this has very little to do with long-term investing,” Atra said. “Nobody’s 401k should be really con­cerned with this kind of activity.”