The meme stock phenomenon of 2021

Early 2021 saw the birth of meme stocks, an unprecedented phenomenon in the stock markets where a series of stocks of seemingly failing companies with particularly high short interest, the most relevant of which GameStop, experienced price surges unpredicted by any kind of fundamental analysis due to coordinated retail trading activity. As such, this report aims to give a holistic view at the phenomenon. To achieve this, we start by looking into short sales and the relevant regulation overseeing them, in particular the locate and close-out requirements established the U.S. Securities and Exchange Commission. Secondly, we explore both how these requirements can be theoretically exploited in stocks with high short interest to turn a profit by potentially triggering gamma and short squeeze events and how one might define possible targets for these strategies. To aid us in this we examine the 2008 Volkswagen short squeeze, the most relevant past example of a short squeeze, as well as the more recent case of GameStop in order to understand their feasibility and the actual reasons behind these episodes. Lastly, we conclude by going through some of the factors that have allowed for these anomalies to take place in the first place. Specifically the rise of discount brokers and their business model, investment forums and the behavioral phenomena taking place in them, and the COVID pandemic and its implications on retail trading.