How Wall Street short sellers are trying to control the Gamestop narrative

BY JACK TAZMAN

SEPTEMBER 5, 2021

Getting people to feel bad for greedy billionaires isn't an easy sell.

The entities that shorted GameStop have definitively not closed their positions. The math simply doesn’t check out.

But this article isn’t going to make the case for GameStop’s market positioning. It is an examination of the strategies used by media outlets to push narratives and sway public sentiment to be better aligned with Wall Street’s agenda.

Watching this story unfold has been one of the most enlightening experiences in understanding not only how deeply broken and corrupt our markets and financial system are, but how the media is one of the most important tools in their box.

The implications of the tactics used to frame retail investors for the greed and corruption that created the GameStop fiasco extend beyond this particular story. GameStop is hardly the first narrative powerful interests have doctored and spent top dollar controlling. It is already not the last.

The media industry’s business model

Running a media operation – from websites to TV stations – isn’t cheap. You have writers, editors, expensive equipment, a team of highly paid engineers to make everything run smoothly, sometimes lawyers, just to name a few. Well known publications have some of the finest creative in this business, who do an impeccable job keeping the media medium looking premium.

But looks can be deceiving. Their attention to detail and high-quality presentation is often conflated as credibility for the content being presented.

For the most part, media businesses are operated at a net loss. It’s a cost – not a revenue source.

In other words, you have to pay to play.

But media coverage itself has value for those who have a vested interest in controlling public sentiment for the sake of other revenue-producing ventures. That’s why many large corporations have large stakes in or outright own media outlets.

Consider this mash up of various local news networks promoting Amazon using the exact same scripting.

Now that’s the kind of coverage only a handful of people could buy.

Jeff Bezos bought the Washington Post and Marc Benioff bought TIME magazine. Rupert Murdoch owns News Corp, an umbrella cooperation that consists of major outlets, from FOX news to the Wall Street Journal. They aren’t the only ones.

In the case of GameStop, the parties with vested interest in controlling the fallout – hedge funds that sold short and Citadel – presumably had strong connections with CNBC, Motley Fool, Yahoo! Finance, Benzinga, Barron’s and Seeking Alpha.

While they were able to get their message out in other outlets as well, these media sources were especially diligent in their coverage spin.

That makes GameStop an interesting case study in the media’s ability to sway public opinion on behalf of the wealthy and corporate interests.

Short selling 101

The jist of the Gamestop (GME) saga is this: Short sellers got too greedy and started playing dirty.

The way short selling is supposed to work is that a short seller borrows a stock from a broker, then sells it in the market. They keep the cash from the sale, but are on the hook for the share they sold. The idea is if the stock goes down, they can buy the shares back at the lower rate and pocket the difference.

Short selling adds nothing of value to the real economy. Wall Street has paid good money to defend short selling, because short selling makes good money for Wall Street. It is by its most fundamental nature, market manipulation.

Short selling gives big players the ability to manipulate supply and demand. When a stock is shorted, it effectively puts supply that was never issued by the company into circulation. Combined with algorithmic trading and the budgets to hire quants and computer engineers, players like Citadel and Melvin Capital not only manipulate the market – they can effectively decide exactly what price point a stock should be, provided another whale doesn’t challenge them on it. Short selling is market manipulation.

Even if we were to suspend disbelief and say that short selling has a place in the market, in theory, there should never be more than 100% of the total shares shorted. If a company issues one million shares, there could be a maximum of an additional one million shares in borrowed status, bringing the total shares in circulation to two million. That’s if every single share the company ever issued was shorted. Why we would want to put such a heavy burden on the real American economy when so few people profit off of it is a question we should be asking our politicians and representatives.

It should cap out there. But it often doesn’t.

The delisting jackpot

If short sellers can drive a stock price to a low enough level to get the company delisted, there are two bonus prizes.

For one, they don’t have to buy the stock back and return it to the lender. They pocket the money from the sale of the stock they never paid for. Secondly, because they never bought the stock – only borrowed it – they technically never owned the asset. That means there is no taxable event. They get to keep the money without giving a penny back to the real economy.

The result is: Short sellers are financially incentivized to drive stock prices down to the point of delisting or even bankruptcy.

Sometimes, shorting every single share the company ever issued doesn’t quite drop the price low enough to get the company delisted. They may need to overwhelm the market with supply to dilute the value of real shares.

Market Makers like Citadel and stock brokers lend short sellers shares. As a market maker, they don’t have the share on hand in order to lend it out. The justification they shout from rooftops is that they need to provide liquidity. Apparently, despite sophisticated computer algorithms that are able to check numerous exchanges for sales prices within fractions of a second in real time for tens, if not hundreds of millions of transactions, they still haven’t quite found a way to count how many shares they have or lent out. They lend them out anyways.

That’s how GameStop ended up with well over 100% of its float shorted. With the help of colluding marker makers and brokers, short sellers can continue to short the stock, even after every single share is already borrowed and shorted. Market makers can provide short sellers an endless supply of shares to create relentless sell pressure on a stock and and drive share price down.

In Gamestop’s case, every share ever issued was ‘borrowed’ and shorted multiple times over.

As recently as February 2020, short sellers could have closed out their positions at just $3.60 per share. But they chose not to – and instead recommitted to the delisting jackpot.

Ryan Cohen

Little problem though: Ryan Cohen.

Ryan Cohen is the billionaire founder of Chewy.com. Cohen spun the pet supply e-commerce platform up from scratch to multi-billion dollar company in less than six years before selling it to PetSmart for over $3 billion. That cements his status as an e-com whiz kid.

Ryan entered the Gamestop fold in August 2020 with a nine million share purchase. He upped his stake to about 13% of the company in December 2020. That earned him some seats on the board, from which he pushed through major changes. Among them: Paying off the company’s long-term debt, aggressively dialing up their e-commerce and product offerings, leasing out industrial scale distribution centers, raising almost a billion dollars with a shelf offering of the stock for the company to fund these transformations, and lining the C-Suite with all stars from Chewy and Amazon. And he did all that in less than a year.

Long story short: Gamestop isn’t going bankrupt. It’s no longer at risk of getting delisted. That’s really the crux of the matter.

As such, all those shorted shares will have to be bought back from the open market after all. The shorters had started their saenguination of Gamestop when stock price was hovering around $50. They bled it down to $3.60 – pocketing $46 profit per share – by selling hundreds of millions of shares.

But they wanted the grand prize. They wanted Gamestop delisted so that they wouldn’t have to return the borrowed stock, and pocket the profits tax free.

Their predatory greed backfired.

Call in the spin doctors

When this realization came to light, Gamestop short sellers and the market makers that enabled them knew they were in hot water.

They needed two things to happen:

retail traders needed to be persuaded that the squeeze was over so that they would sell out of their positions; and any further demand on the stock price needed to be curtailed. They needed to make the price spike look like a fluke. For that they turned to one of the many tools in their well-funded arsenal: the media.

It was a story that even the most brilliant minds in marketing and politics would struggle to make lemonade from. How could the media sway public opinion against retail traders and in favor of a multi-billion dollar hedge fund who had fixed to bankrupt a struggling American retailer for profit and wipe another 12,000 American jobs off the table? How could they cover their tracks?

To varying degrees of success, here are five strategies they attempted.

1. Create/discredit a scapegoat

From the very first time the GameStop “short squeeze” hit the headlines, it was not in a flattering light.

The goal was to distract away from the acute dynamics of the shorts needing to buy back the available float several times over. They needed the January run up to look like an internet fad – as arbitrary and inexplicable as the Tide Pod challenge.

Articles published in Barron‘s, Motley Fool, Wall Street Journal, CNBC – all bought and paid for by Wall Street hedge funds – aimed to make this activity look frenzied, unfounded, antagonistic, and transient.

GameStop retail shareholders were depicted as as “unsophisticated,” “amateur” day traders who were all feverishly chasing an arbitrary whim. They published article after article calling the force behind the chaotic price movements “speculative.” Guests on CNBC repeatedly stated that their hedge fund colleagues were “right” to short Gamestop. Apparently, they were very sophisticated and entitled to feast on a company that was struggling, but wasn’t dead. That anyone should disagree with them and not concede their ‘recommendations’ was indeed a shock to their playbook.

‘Analysts’ and ‘financial news sources’ repeatedly stated they would cease coverage of the stock because the ‘unpredictable retail investors’ made it ‘impossible to properly analyze.’ And yet, they continued to publish articles on it day after day, perhaps more than any other stock.

It’s a pretty transparent attempt to curtail other investors from getting in on the action, which would tighten supply and make every rebought share more expensive. They had to discredit the retail investors’ thesis and the retail investors themselves. In reality, their bitterness that retail actually knew the game they were playing seeped through.

With supply now locked up in the hands of retail traders and short sellers on the hook for every single share in circulation, they were now looking down the barrel of losing everything.

2. Distractions and diversions: ‘Forget GameStop’

The next strategy they implemented was to create distractions. They began pushing the “next big short squeeze.” The goal was to redirect traders from Gamestop into other trades that would benefit short sellers.

The first major ‘hey-look-at-this-instead!’ was silver.

Headlines came out trying to leverage the ‘gotcha’ moment Gamestop had created by promoting similar market dynamics in silver.

Not-so coincidently, those on losing side of the GameStop rally also happen to be heavily long on silver. An influx of capital from retail investors chasing the news would have produced profit for them. The stars align.

Who happened to be long on silver? Citadel – the marker market who failed at orchestrating the bankruptcy of Gamestop.

It would not be their only attempt to distract.

The GameStop situation is unique because usually, Wall Street hedge funds and players aren’t on the defense.

Rather, they proactively use these tools to manufacture sentiment. That involves getting “financial news” content creators like Jim Cramer and writers at various publications synced on a narrative.

It’s worth noting that CNBC’s Jim Cramer also advised investors to keep their money in Bear Sterns just days before the bank’s meltdown in 2008.

The dynamics were different then. But the relationships leveraged were the same.

3. Playing with semantics

Gabe Plotkin, Melvin Capital’s founder and CIO as well as several of his Wall Street cronies such as Citadel’s Ken Griffen, and began making rounds on CNBC. They were eager to tell the world that they had covered their short positions.

Technically this was true. They had covered their short positions. But they were using hair-splitting semantics to create deception. Covering a short position means they had moved things around on the books so that they had enough money to maintain their short positions or hid them in Wall Street’s market manipulation tool box that is the derivatives market. What they need to do is close their position – return the borrowed stock to lender.

To illustrate this, let’s use some simple math.

Say I have a net worth of $100. I borrow 10 shares and sell them into the market at $10 each. I now have $200 dollars, but I’m on the hook for 10 shares.

If the price goes down to $5, I buy back the ten shares, close the position, and pocket the difference – in this case, $50.

But let’s say it doesn’t go as planned. The price shoots up to $15 dollars. I now have $200 and owe 10 shares that have a combined market worth of $150. That means I lost $50 – but I’m still good for it.

If that share shoots up to $25 dollars, I have $200, but I owe 10 stocks at $25 each, which would cost me $250 to buy at market rate. That puts me in margin call territory.

My friend lends me $100 (or in Gamestop shorter’s case, $2 billion). Now I have $300 in cash, but owe ten shares that are currently worth $250 total. I have covered my position. I am solvent…for now. Thanks to the cash infusion, I am able to buy ten shares from the market to return them to the lender. But I still owe them to the lender.

Alternatively, I could reconfigure my position into options, swaps, futures, and other financial instruments that changes the reported figures on critical metrics that were under the microscope at the time, such as short interest percents and volume.

In both cases, I have covered. I have not closed.

The short positions that caused the January run ups are still on the books – and still need to be bought and returned to the lender. The need to buy huge amounts of shares on the open market is still there.

Now that we understand that, take a look at this very misleading headline from CNBC:

'GameStop jumps more than 130% even as hedge funds cover short bets, scrutiny over rally intensifies'

The implication is that the move doesn’t make sense in light of the fact that shorts covered their positions. Thus, the 130% jump must be due to baseless ‘retail frenzy.’

But covering the positions means shorts are still on the hook.

4. Dilute the conversation – with bots

When it comes to controlling the narrative, Wall Street has found great success in using its traditional channels such as publications, news outlets, and TV programming. After all, media is a tough business to be profitable in independently.

Little problem with the Gamestop situation: The story was mostly unfolding in online forums.

In the days that followed the January runup, the Reddit forum r/wallstreetbets, which served as the early epicenter of the Gamestop movement, experienced a tremendous influx of new subscribers. Going into 2021, r/wallstreetbets had around 2 million subscribers. By mid February, it was approaching 10 million.

Sure, the January run up had brought some interest to the subreddit. But a tremendous amount of these new subscribers were new or accounts that had been dormant for extended periods of time, back from the dead for the sake of Gamestop.

These new accounts – many just days old with no history other than sowing fear, uncertainty and doubt specifically about Gamestop – invaded subReddits en masse.

They used a host of tactics. Some tried coming from a caring standpoint, inexplicably interested and concerned about other retail investors. They encouraged users to sell now while they still can. The strategy wasn’t terribly unlike headlines.

Others ridiculed people who weren’t selling as ‘bagholders.’ Still others complained over and over that the GME narrative had overtaken the culture of the subreddit – the squeeze was over and investors needed to come to terms with it.

It’s worth noting that two weeks later, Keith Gill, also known as DeepFuckingValue, posted an update in which he not only didn’t sell – he doubled down.

Creating thousands, if not millions of accounts and being active in massive communities day after day is a tremendous amount of work. Luckily, wealthy Wall Street players have the resources to hire programmers and spamming companies to create armies of online bots. They use these bots to make it appear there are many people who’s individual experiences align with the overall story being crafted.

That would push GME holders in the right direction…as far as the short sellers were concerned.

Superstonk fights back

Luckily, some preventative measures were put in place to curtail the presumably Wall Street-bankrolled bot misinformation army on GME-specific subreddits like r/GME and r/Superstonk.

Subreddit r/Superstonk in particular has imposed some of the most rigorous posting requirements on Reddit. In order to vet out Wall Street’s misinformation bot armies, the subreddit’s moderators require contributing accounts have at least 120 days history to comment, 240 days to post. The accounts are also required to have a minimum of 1500 karma points (comment) or 6000 karma points to post. Everyone is able to view posted content.

They are among the strictest of the subreddits, the result of coordinated, hostile attempts to overwhelm the conversation with paid misinformation bot accounts. These bot accounts are generally new and had little, if any account activity (as they were only created for this purpose). These requirements vetted out a solid majority of them.

Notably, the imposition of these standards almost exclusively eliminated negative sentiment and proactive instigation of infighting. All the new misinformation bot accounts seemed to soley exist to push a narrative and give the appearance that there was much more division than there really was among actual, established Reddit users.

The difference in tone and overall culture of the subreddits has improved drastically since. There is little in fighting, incredible journalism, sophisticated analysis, supportive threads, critical thinking about macroeconomic trends as well as some memes that will surely be in museums of fine art one day for their cultural significance. Overall, it is among the most positive communities on the internet.

The divide-and-conquer strategy to distract from the real source of problems – one of the mainstream media’s favorite plays – failed here.

5. Cherry pick what gets out there – and what doesn’t

There was an attempt to takeover the subreddit control overall. Respected moderators sounded the alarm that the subreddit was experiencing a hostile takeover.

In February 2021, r/wallstreetbets moderator u/zjz created a post announcing the thread had been infiltrated and they needed Reddit’s support.

“You deserve to know that this place is being sold out on multiple levels by the people at the top, and that everyone below them wants them gone and is heartbroken."

"They’ll probably take this down and remove me and hire some asshole to replace me. fuck it. hi cnn. fucking hilarious some assholes trying to call us ows when we’re literally being occupied.” – u/zjz

Users began posting screenshots of direct messages they had received offering payment for generating fear, uncertainty, and doubt. Some even had a payment structure – the more engagement the comment or post received, the higher the payout.

It begs the question: Who is paying to recruit users for this purpose? And if the shorts have already closed their positions and therefore have no vested interest in the situation – why?

The logical explanation is that they have not closed their positions. They still have vested interest in getting retail investors to sell.

This is an old Russian propaganda tactic known as the Firehose. The strategy is to overwhelm the conversation with doubt and mixed messaging so it becomes very difficult to discern the truth.

Ultimately, when it came to r/wallstreetbets role int he Gamestop saga specifically, Wall Street won. Eventually, GME investors were forced to create new subreddits to share information and research.

r/GME and r/Superstonk became the new gathering places of GME investors. r/Superstonk tried to fight the spread of FUD and bots by imposing account age and karma requirements. Both eventually became targets for harassments and moderator takeovers, too.

That’s because those on the losing end of the Gamestop fiasco – Wall Street hedge funds and the banks that back them, such as Credit Suisse and Citadel – understand the importance of controlling the narrative.

6. All news is bad news

Over the last year, Gamestop has had a good run. They paid off their debt, ramped up their ecommerce activity, leased out massive warehouses to support that, raised a billion in capital with small shelf offerings, recruited executives from multi-billion dollar companies such as Chewy and Amazon, among other positive developments.

But the headlines try – almost embarrassingly – to spin these positive developments negatively.

Check out these headlines that followed major company announcements:

Gamestop paid off its outstanding long term debt – the very debt the short sellers thought meant certain bankruptcy for the company.

Gamestop ousts executives who oversaw the period analysts say justified aggressive short positions and replaces them with former Amazon and Chewy executives.

Gamestop reports 25% increased sales in 2021 Q2 earnings call:

"Is GameStop Worth More Than $10 A Share? Analyst Slams 'Shameful' Earnings Call - Benzinga"

"GameStop: The Stock Deserves To Fall"

Way to keep it objective there, Seeking Alpha.

Why an unbias media source would feel a well-known retailer ‘deserves to fail’ is anyone’s guess.

The bottom line

The bottom line is media coverage is a costly business. Gamestop short sellers have spent good money trying to get their messaging out there.

When we think of news, we often think of journalists doing deep research, talking to insiders and digging up the truth, no matter how obscured it might be.

It’s a perception we need to unlearn. Most media outlets are now marketing machines posing as news coverage. It’s a great strategy – it makes it seem as though unbiased third parties vouch for the like of Amazon, the defense contracting industry, and others.

Meanwhile, real journalism and stories that do seek the truth and can easily be dismissed as a conspiracy theory and buried. And that’s where they’ll stay.

Reach and influence is expensive. Unfortunately, Americans have been conditioned to expect content to be free. This bodes exceptionally well for those who can afford to produce it as a cost of doing business, and poorly for those who want to get the real story out there. The result is, the rich and powerful fully control the information that gets out there on a wide scale.

So next time you’re watching the news, consider who might have a vested interest in getting the information presented out there.

If we aren’t paying for good information, we will only get information that someone else has paid for us to get.

At the time of this writing, GameStop is trading over $200 a share, a YTD gain of almost 1000%.

If you’re starting to consider that CNBC, analysts, and the Motley Fool could be wrong about the whole thing, just remember this.

They already are.

Edit: Wow! Thank you Reddit – specifically – r/Superstonk for your support and thoughtful feedback! We are humbled by your response and kind words, have read every comment, and fully plan to keep covering various angles of the GameStop story.

Jack Tazman

Jack Tazman is a Baltimore, Maryland native. He attended Washington University where he studied political science. Since then, he worked as a writer for various national news organizations specializing in politics and policy. He now resides in New York City as a freelance writer and political consultant.