Retail is always the exit liquidity. But in 2021, it was the hedge funds.

GameStop sold video games in shopping malls in 2020, which was a bad business to be in. The stock traded around $4 and a lot of professional investors had bet against it. That bet is called shorting: you borrow the shares, sell them now, and buy them back later, hopefully lower.

Here is the thing about that trade. You have to buy the shares back. Not if you feel like it, not when the price suits you. You borrowed them, so eventually you return them, and to return them you buy at whatever the price happens to be. A normal investor who is wrong can sit still for 10 years. A short seller who is wrong is on a clock, and pays rent while it runs.

By the end of 2020 roughly 140% of the float had been sold short, which is more stock than actually existed to trade. Some people noticed. If the price went up enough, the funds would have to buy. Their buying would push the price up further, which would force more of them to buy. Retail traders were not the ones hoping to sell into strength. The funds were the buyers, whether they liked it or not.

Then it went. $19 at the end of December. $65 by 22 January. $76 on the Monday, $148 on the Tuesday, $347 on the Wednesday. On Thursday morning it touched $483 before the day was done with it. That is not a rally. That is a market with no sellers left in it.

Somewhere in the middle of that, the funds ran out of road. A short position that moves against you does not just lose money, it grows. The more it rises the bigger the position gets, the more collateral the broker demands, and eventually somebody calls and tells you the decision is no longer yours. Melvin Capital closed out its GameStop short on 26 January, near the worst possible price, because staying in was no longer an option it had. Citron gave up the same week.

Here is the part worth being precise about. Closing a short means buying. Every share Melvin bought to get out had to be bought from somebody who owned one, at whatever that person was willing to accept. The fund was not choosing to buy at $148. It was made to. And the people selling to it were the ones who had been buying at $20.

That is the whole thing, and it almost never happens this cleanly. Usually you are somebody's exit liquidity and you never find out whose. For a few days in January 2021 it ran the other way, in public, with the losing side legally obliged to keep buying while everyone watched. Melvin lost 53% that month, took a $2.75 billion cash injection from two other firms to stay standing, and shut down entirely in 2022.