What Happened With GameStop in January 2021?

In January 2021, shares of GameStop (ticker GME), a struggling US video game retailer, rose from under $20 to an intraday high of $483 in about three weeks, driven by a wave of individual investors organised largely on social media, and by heavy short interest. On January 28, Robinhood and several other brokers stopped customers from buying GME and other “meme stocks,” which caused outrage and a Congressional hearing. The price then collapsed by more than 80% within days.

In short: GameStop was a combination of three things. A heavily shorted stock, a surge of coordinated retail buying, and a clearing system that demanded billions of dollars in extra collateral from brokers when prices became extreme. The SEC staff’s October 2021 report concluded that the brokers’ trading restrictions were a response to clearinghouse margin requirements, not a favour to hedge funds, and that while short covering played a part, it was positive sentiment from buyers, not short covering, that sustained the rally.

A note on prices: GameStop carried out a 4-for-1 stock split in July 2022. All prices in this article are the original January 2021 prices, before that split.

The background: a heavily shorted stock

By 2020, many professional investors believed GameStop’s business, selling physical video games in malls, was in long-term decline. Many of them expressed that view by short selling the stock: borrowing shares, selling them, and hoping to buy them back later at a lower price. The mechanics, including why losses on a short are theoretically unlimited, are explained in how short selling works.

The SEC staff report found that GME’s short interest hovered around 100% of its public float through most of 2020, and reached about 123% of float in January 2021. In other words, more shares had been sold short than were freely available to trade.

How short interest can exceed 100%

It sounds impossible, but it isn’t. The SEC staff report explains that the same share can be lent more than once:

A lends a share to Short Seller 1, who sells it to B.
B now owns that share and lends it to Short Seller 2, who sells it to C.

The single original share now shows up twice in short interest. Both short sellers owe a share back, so total short interest can exceed the number of shares in the float.

Meanwhile, a separate story was building. GameStop had been discussed on the Reddit forum r/WallStreetBets since 2019, including discussions about a possible short squeeze. In August 2020, Ryan Cohen, co-founder of the online pet retailer Chewy, disclosed a large stake in GameStop, and on January 11, 2021, GameStop announced he would join its board.

The run-up: January 2021

The SEC staff report, which used trade-level data from the Consolidated Audit Trail, documents the sequence:

Date (2021)	What happened
January 11	Cohen board announcement; GME intraday high of $20.65
January 13	Close rises to $31.40 from $19.95; volume jumps to about 144 million shares from about 7 million
January 22	Price rises from $43 to $72 in about three hours; 197.2 million shares trade, the month’s highest volume
January 27	GME closes at $347.51, more than 1,600% above its January 11 close
January 28	Intraday high of $483.00; several brokers restrict buying
February 19	Price as low as $40.59

Overall, GME’s price rose about 2,700% from its intraday low on January 8 to its intraday high on January 28, then fell more than 86% from that high to the close at the end of the first week of February.

The number of individual accounts trading GME exploded. According to the report, unique accounts trading GME on a given day went from fewer than 10,000 at the start of the month to nearly 900,000 by January 27.

Was it a short squeeze?

A short squeeze happens when a rising price forces short sellers to buy shares to close their positions, and that buying pushes the price up further, forcing more short sellers to buy. A summary of the concept is in the short squeeze glossary entry.

There was some squeeze. Several hedge funds closed their GME short positions in late January at large losses. The SEC staff found that buying by traders with large short positions coincided with the steepest part of the rise, beginning around January 22.

But the report’s key finding is more nuanced. Staff found that this buy-to-cover activity was a small fraction of overall buying, and that GME’s price stayed high after the direct effect of short covering would have faded. In the report’s words, it was “the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation.”

Was it a gamma squeeze?

A popular theory at the time was a gamma squeeze. When investors buy call options, the market makers who sell them often hedge by buying the underlying stock, which can push the price higher and require yet more hedging. Options are introduced in how stock options work.

The SEC staff report said it did not find evidence of a gamma squeeze in GME in January 2021. Options trading by individual customers did surge, from $58.5 million on January 21 to a peak of $2.4 billion on January 27, but that increase was driven mostly by buying put options, not calls, and market makers were buying call options rather than writing them. Those patterns are not consistent with a gamma squeeze.

Was there massive naked short selling?

Some commentators claimed GME’s short interest proved widespread naked short selling (selling shares without arranging to borrow them first). The report noted spikes in “fails to deliver,” which can be a sign of naked shorting, but said fails can occur on both long and short sales, and that GME did not experience persistent fails to deliver at the levels some had claimed.

January 28: why brokers stopped people buying

On the morning of January 28, Robinhood, Interactive Brokers, and several other brokers serving mainly individual investors restricted trading in GME and other meme stocks. Robinhood put eight securities, including GME, AMC, BlackBerry, and Nokia, into “position closing only” status: customers could sell but not buy. The next day it replaced that with limits on how many shares customers could hold, at one point across more than 50 names, and stopped allowing fractional share purchases in the restricted stocks.

To many investors it looked like the system was being rigged to protect hedge funds that were losing money on their shorts. To understand what the SEC staff actually found, you need to understand clearing.

How clearing creates the pressure

When you buy a stock, the trade is executed in seconds, but the money and shares change hands later, at settlement. In January 2021, US stock trades settled two business days after the trade (T+2). See how a stock trade settles.

In the gap between trade and settlement, the National Securities Clearing Corporation (NSCC), part of the Depository Trust & Clearing Corporation (DTCC), stands in the middle. It guarantees that the trade will complete even if one side’s broker fails. To protect itself, it requires every member broker to post collateral to a Clearing Fund, sized according to how risky that broker’s unsettled trades are.

When a stock’s price swings by hundreds of dollars a day, the risk that a broker could fail before settlement goes up sharply, and so does the collateral the clearinghouse demands.

The margin calls in numbers

From the SEC staff report:

On January 27, NSCC made intraday margin calls on 36 clearing members totalling $6.9 billion, bringing total required margin across all members to $25.5 billion.
Of the $6.9 billion, $2.1 billion was routine mark-to-market calls and $4.8 billion was a special charge for unusual volatility in certain securities, including GME, assessed on 18 members.
NSCC also calculated excess capital premium charges for members whose risk was large relative to their capital. It waived those charges for all members on January 28. Without the waiver, the report says, one retail broker-dealer would have faced an additional charge of more than double its $1.4 billion margin requirement that day.

Robinhood later stated in its July 2021 IPO registration statement that it had temporarily prevented customers from buying certain securities from January 28 to February 5, 2021, because of increased deposit requirements that NSCC imposed on its clearing broker.

What the restrictions were not

At the February 18, 2021 hearing of the House Financial Services Committee, Robinhood’s CEO testified that the restrictions were not imposed at the request of hedge funds, and the heads of Citadel and of Melvin Capital (a hedge fund that had been heavily short GME) each testified that their firms played no role in the decision.

The SEC staff report did not find otherwise. It describes the restrictions as decisions made by broker-dealers in reaction to margin calls and capital charges, and notes that NSCC’s rules do not give it the power to tell members to stop trading individual stocks. It also observed that brokers’ customer agreements typically reserve the right to decline orders for risk management reasons, which many customers had never noticed.

A worked example: why volatility multiplies collateral

The real NSCC formula is complex, but the intuition is straightforward. (Hypothetical numbers.)

Suppose a broker’s customers have, in total, bought 1 million shares of a stock on Monday that will not settle until Wednesday. The clearinghouse wants enough collateral to cover a very bad two-day move in case the broker fails before settlement.

	Calm stock	Meme stock
Price	$20	$300
Unsettled purchases	1 million shares	1 million shares
Value of unsettled trades	$20 million	$300 million
Plausible bad two-day move	10%	60%
Collateral needed (value × move)	$2 million	$180 million

The same share count requires 90 times as much collateral, because both the price and the volatility rose. A broker whose customers were overwhelmingly buying meme stocks could see its requirement jump far beyond the capital it had on hand, overnight. Its options were to raise money fast, which Robinhood did in the following days, or to limit the trades creating the exposure.

What else the SEC staff found

GME was not unique in its moves. On January 27, single-day price changes in KOSS (480%), AMC (301%), and others were larger than any single-day GME change.
Hedge funds broadly were not badly hurt. Some funds that were short lost heavily, and some long funds made large gains, but staff found hedge funds broadly were not significantly affected and observed no liquidity problems at fund advisers.
Most retail orders were executed off-exchange by wholesalers that pay brokers for order flow, a topic covered in how stock brokers make money.

What changed afterwards

The report’s closing section listed areas for further study:

Forces that can cause a broker to restrict trading, and one way to reduce the risk: shortening the settlement cycle.
Digital engagement practices and payment for order flow, including whether game-like app features encourage people to trade more than they otherwise would.
Trading through wholesalers and dark pools, where retail orders are less visible to the wider market.
Short selling, and better reporting of short sales.

Some of this became policy. The US moved to T+1 settlement on May 28, 2024, and Canada made the same move a day earlier, on May 27, 2024. With one day instead of two between trade and settlement, there is less time for a broker to fail, which reduces the collateral needed for the same trading. In October 2023 the SEC also adopted a new short-position reporting rule, Rule 13f-2, for large institutional short positions, though its compliance date has since been pushed back.

What can go wrong: lessons for ordinary investors

Brokers can restrict trading. Your account agreement almost certainly allows it. In extreme conditions, you may be able to sell but not buy, or vice versa.
Late buyers bear the losses. Anyone who bought near $300-$480 and sold in February lost most of their money, even though GME stayed well above its early January price.
The story is not the mechanism. “Hedge funds are trapped and must buy at any price” was only partly true. Short covering was a small share of total buying.
Volatility cuts both ways. A stock that can rise 1,600% in two weeks can fall 86% in one.
Short sellers face real risk too. Short positions can produce losses far larger than the original bet.

The short version

GameStop’s January 2021 surge began with a heavily shorted stock, with short interest above 100% of the float, and a flood of buying by individual investors coordinated on social media. Short covering added fuel, but the SEC staff found it was a small fraction of buying and that positive sentiment sustained the rally; it found no evidence of a gamma squeeze. Brokers’ buying restrictions on January 28 followed billions of dollars in clearinghouse margin calls, not instructions from hedge funds. The episode helped push the US and Canada to T+1 settlement in May 2024, and it is a lasting reminder of how much plumbing sits behind a “buy” button.