SBAI Thought Piece on GameStop and Short-Selling
In response to the negative coverage for hedge funds following the GameStop short squeeze, we highlight the importance of short selling and note that public disclosures could potentially have a negative impact on market integrity.
Retail trading increased during 2020 and 2021, aided by the popularity of commission free trading tools and social media platforms, such as Reddit’s r/WallStreetBets chatroom. In late 2020 and early 2021 this forum was used to drive up the price of certain stocks. The increase in the share price contributed to a short squeeze of GameStop shares resulting in significant losses to some hedge funds who held large short positions in the stock (as well as losses to some retail investors who entered the trade at the top).
Resulting coverage has been negative on hedge funds in general and specifically on short selling. We argue that short selling is an important tool in portfolio risk management and contributes to efficient price discovery, increased liquidity, and the mitigation of market bubbles - to the benefit of all investors. We also note that the public disclosure requirements of short positions in some jurisdictions can have a potentially negative impact on market integrity.