Predatory Trading and the GameStop Short Squeeze
Summary
The document applies the concept of predatory trading to GameStop's 2021 episode. Predatory trading can occur when traders exploit or intensify another investor's need to reduce a position, worsening price moves and liquidation outcomes. In the response, buying GameStop with awareness that heavily short investors might be forced to cover is presented as a clear example: the buying pressure can contribute to the squeeze and benefit buyers as shorts face margin calls or close positions.
The response distinguishes this motive from buying based on company fundamentals or support for the retailer, while also arguing that uninformed momentum buying may have similar market effects. It views the episode as a mixture of motives and offers an opinion that it involved predatory behavior. The exchange provides no systematic evidence to identify traders' intentions or establish a formal regulatory finding, and its claims about likely enforcement outcomes are speculative.
Key ideas
- Predatory trading exploits or worsens another trader's need to liquidate a position.
- Buying with knowledge that short sellers may be forced to cover can amplify buying pressure and benefit the buyers.
- The response distinguishes deliberate exploitation from fundamental or supportive buying motives.
- It argues that uninformed buying can still contribute to predatory market effects.
- The discussion is opinion-based and does not establish trader intent or a regulatory conclusion.
Tags
Full text
# Why GameStop is a case of "predatory trading"? # Why GameStop is a case of "predatory trading"? Predatory trading is defined as below by Brunnermeier, 2005 > This paper studies predatory trading, trading that induces and/or exploits the need of other investors to reduce their positions. We show that if one trader needs to sell, others also sell and subsequently buy back the asset. This leads to price overshooting and a reduced liquidation value for the distressed trader. Hence, the market is illiquid when liquidity is most needed. Further, a trader profits from triggering another trader's crisis, and the crisis can spill over across traders and across markets. Hasso, 2021 documented that GameStop is an example of predatory trading > GameStop was the first case of predatory trading credited to retail investors. I still have not fully link the GameStop case and "predatory trading" as above, could you please help me to sort it out? ## Answer by will (score 2, accepted) https://quant.stackexchange.com/a/68641 If all the people buying the stock while saying "i like this stonk", simultaneously stiffling a smirk, were only buying gamestop because they liked the fundamentals, wanted to support a high street store through a difficult time, or some other similar reason, then i think you can say happily that it was not predatory trading. If however people were buying the shares because they were aware that a market particpant held significant short positions and would need to liquidate (i.e. buy back) large quantities of stock to satisfy margin calls, or cut shorts due to poor mtm (leading to the same buying pressure), then they are directly profiting from their own market impact, triggering a crisis with another trader and directly benefiting from it. This absolutely is predatory trading. The third scenario is that people are buying the stocks because they see the news, they think they can make a quick buck, go on wall street bets, read that they should buy stock X because it will go up, and so they just buy in because FOMO. IMO this is also predatory - just because someone is oblivious of the implications of their trading activity, it does not change what it was. It was almost certainly a combination of the three above, IMO it was absolutely predatory behaviour - we saw the same people buying sending out a large quantity of negative memes and other stuff about melvin - exactly the person they were negatively impacting with their trading - Apes make money, Melvin loses = hilarious, justice, right. Stock price goes down, triggering stop losses on massively leveraged margin trades = evil manipulation. I think it is unliekly this conclusion will ever be reached though, there is no value in the SEC determining this - all that will happen is retail investors will either angrilly claim the market is rigged, or they won't understand what has happened and end up with the same conclusion that it's unfair and against them. I think that what is more likely is that robin hood and other brokerages will be found to have been allowing trading activity which did not maintain stable markets and fined for it. my 2c. tldr: IMO it was predatory, but in this instance nothing will come of it - retail investors will be left alone.
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.