GameStop has become a household name over the past few weeks after a plucky group of Reddit users from the WallStreetBets forum collectively drove up the price of the US-based video game retailer, going head-to-head with Wall Street hedge funds that had heavily shorted the stock.
At one point the stock had soared to an all-time high of US$483 after dropping to US$5 last year, sending shock waves through the stock market, raising the Volatility Index Overview to 53 and knocking 620 points off the Dow Jones Industrial Average.
Since the opening of the market on Monday, the stock has been heavily sold, falling to US$92.41 on Wednesday.
The GameStop phenomenon was initiated by a dispersed group of small investors — known as retail investors within the financial industry — who were angered by Wall Street hedge funds’ aggressive short-selling of the stock.
The Reddit group effectively crowdsourced call options on the stock, pushing up the price and forcing hedge funds, who had bet heavily the other way, to cover their losses.
The community’s strategy worked, causing several hedge funds to exit the market with their tails between their legs, nursing enormous losses.
It was a marked difference from the usual state of affairs: Retail traders are normally picked off and kicked to the curb by institutional investors. For the first time, using the collective power of social media, retail investors banded together to stick it to the Wall Street big shots.
The Reddit investor army has been variously praised in the media as a David and Goliath battle, minnows fighting off a whale and an army of ants pulling down an elephant. Others have expressed deep concern over the “popularization” of the stock market and the almost fanatical behavior of some of the forum’s users.
GameStop operates more than 5,000 outlets, where its sells used and new video games, but its business model has been in decline with the popularization of online video game sales. The company has registered losses for successive years and its stock price has been in near-constant decline.
The company has been trying to turn its situation around and had announced plans to transform into an online only operation.
This pushed the stock price to US$20, which attracted the attention of hedge funds, who simultaneously “talked down” the company’s stock and took short positions, which entails borrowing shares from a broker, then selling the shares on the market in anticipation of buying them back at a lower price.
At one point, 140 percent of GameStop’s total share float was short. In other words, hedge funds had overextended themselves so that their collective short position was larger than the total number of GameStop shares on the market.
This drew the ire of members of WallStreetBets. Knowing that the hedge funds were dangerously exposed, a plan was hatched to strike back.
Following an intense game of offense and defense, in which both sides attempted to gain the upper hand, on Friday last week GameStop’s share price closed at US$325.
The event made headlines worldwide. Not only had several hedge funds been forced to exit their short positions at a massive loss, the power of social media seems to have invented a new model of stock market investment for the Internet age.
The primary factors that enabled the Reddit investors to take on Wall Street were the ability to exchange messages and information on the forum, which fired-up the movement, and a new range of commission-free online trading platforms and apps. These apps allowed them to use crowdsourcing power to exert influence over the market.
Some investors used their COVID-19 stimulus money from the US government to buy shares, putting additional liquidity into the financial system. Meanwhile, the lockdowns meant that many people who would not normally trade in stocks entered the market.
The potential for Internet forums and social media to aggregate willpower into a powerful force is immense. In April last year, a group of Taiwanese used crowdfunding to buy an advertisement in the New York Times to raise the nation’s international profile.
WallStreetBets is just the latest to demonstrate this awesome power.
Perhaps the most striking feature of the WallStreetBets move against the hedge funds was the zeal and enthusiasm of a new generation of Internet investors.
Of course, it might not have been just retail investors who were buying into GameStop — some large institutional investors might have got in on the action to make a quick profit. Nevertheless, most of the contributors to the chatter on WallStreetBets were clearly young people who have grown up with the Internet and have a disdain for baby boomers, “suits” and mainstream financial media, such as CNBC.
Many of the users said that they purchased the stock for nostalgic reasons, having grown up playing games rented from GameStop, a company that, in their view, predatory hedge funds were seeking to pummel into rubble.
In addition to GameStop, other stocks heavily shorted by hedge funds include US cinema chain AMC Theaters, Blackberry and American Airlines. The WallStreetBets community has been “defending” these stocks, too.
The movement has also received support from Tesla CEO Elon Musk, who on Tuesday last week added fuel to the fire by writing “Gamestonk!!” on Twitter with a link to Reddit. Musk has previously railed against short-sellers’ attacks on Tesla’s stock.
The conflict is really between the Internet generation and dyed-in-the-wool Wall Street traders. One consequence of the tussle is that hedge funds would have to be more prudent in taking short positions. When the GameStop stock rose 400 percent last week, hedge funds were forced to defend their positions by dumping other blue-chip stocks such as Apple to reduce their leverage. The sell-offs flowed through other markets, which is one of the reasons US indices had heavy losses last week.
The White House, US Congress, US Department of the Treasury and US Securities and Exchange Commission are closely watching the turbulence caused by the GameStop short squeeze. Some observers believe it represents a “just war” by small investors against the “Wall Street machine.”
They argue that while capital markets must be properly regulated, this does not mean playing the game according to Wall Street’s rules.
The WallStreetBets phenomenon certainly bears some resemblance to the “Occupy Wall Street” movement following the 2008 financial crisis. If the Reddit investors are able to inflict a mortal blow to one or more of the big-name Wall Street “fat cats,” who are widely perceived to have profited from the 2008 crash, then the forum would deserve its place in history.
As posters on WallStreetBets are fond of saying: “You only live once.”
The GameStop saga has also injected a new sense of justice into the market — as well as whimsical affection for stocks that investors intrinsically just “like” and therefore want to support. This is something quite contrary to the combination of greed and fear that normally stalks Wall Street.
While GameStop’s price has fallen from the giddy highs of last week, the online community is still bullish and it remains to be seen how this will end.
If the GameStop stock settles at a “fair” value and the company successfully adopts a new business model, some analysts believe that the price could rise to US$120 or higher.
However, holding the stock’s value in the face of aggressive hedge funds still shorting the stock would be a challenge for investors, and demands patience and tenacity, although the additional element of righteousness and brand affection that drives these investors might give them with the fortitude to weather losses.
Watching the GameStop affair from afar, in addition to being mindful of the correlation between Taiwanese and US stocks, Taiwanese should use this as an opportunity to reflect upon the rights and interests of the public and retail investors.
Take for example, the more than NT$4 trillion (US$140.93 billion) in labor pension funds. In the past eight years, there have been several cases of malpractice. In 2012, an externally appointed investment manager used funds to make illegal profits by speculating in the markets, while last year senior officials within the Bureau of Labor Funds were allegedly involved in an “inside job” to embezzle funds. These are serious cases that need to be fully investigated.
With the barriers to entry for retail investors lowering over the past few years, an Internet-savvy younger generation has started investing in the stock market.
In the US, the number of retail stock trading accounts has seen a dramatic increase. In Taiwan last year, 670,000 new accounts were opened. The total number of accounts opened today exceeds 11 million, or 47.3 percent of the total population. Within this cohort, people aged 20 to 30 make up 36 percent.
Reasons for the popularity include the TAIEX trading at an all-time high and the convenience of technology.
Should the younger generation behave differently than older investors in terms of stock selection and operation, then the entire stock market ecosystem would inevitably change accordingly.
Stock markets might not become populist, but fairness and democracy are enduring basic market principles that all should strive toward achieving.
Translated by Edward Jones
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