Alan Healy: How the GameStop saga is causing a revolution in the financial world

The world of finance has been rocked in what has been referred to as either a 'David vs Goliath' victory or a 'French Revolution'
Alan Healy: How the GameStop saga is causing a revolution in the financial world

GameStop, Cork City. Shares of the computer game company GameStop rose almost 700% over the past week.

The world of finance has been rocked in what has been referred to as either a 'David vs Goliath' victory or a 'French Revolution' of the financial world depending on who you talk to.

On the face of it, the story plays out as a major victory for the little guy. 

Established hedge funds handling billions in trades have suffered major losses due to the actions of individual amateur investors who have come together on message boards such as Reddit and Discord to boost the share price of companies the investors had hoped would fall.

The practice by hedge funds, known as short selling, has often been criticised, as they are betting against the companies, expecting their share price to fall while defenders will say they are simply taking advantage of an overvalued company. 

Either way, what has happened in recent months, accelerating dramatically in the past 10 days, may very well end up redrawing the finance world.

Individual retail investors have long discussed stocks on Reddit and other social media forums, but in recent months Wall Street has had to pay attention to what they are saying. 

Long dismissed as “dumb money”, the retail traders in recent months have put enough money into the market to make stocks move in ways that defy fundamental analysis.

The most stunning recent example is a nearly 700% rise over the past week in shares of the computer game company GameStop, without any fundamental change in business for the retailer that Wall Street had long given up for dead in the age of Amazon and online downloads. 

The company operates a number of stores in Ireland and its outlets have been commonplace in shopping centres and high streets for many years, selling a range of computer games and consoles.

Sharp upswing

However, the sharp upswing in GameStop shares has mowed down sophisticated traders who had taken short positions on the stock, betting against it. 

The surge in the company’s share price was fueled, in large part, by a series of posts talking up the stock on popular forums such as wallstreetbets on Reddit. 

A series of posts, opinions, and analysis over the past two years began to accelerate last summer when the $4 share price began to climb. 

In the past 10 days, things began to snowball and by the middle of this week, the share hit a peak of $347.

Online trading platforms, Robinhood and Interactive Brokers, began restricting the trading in shares of GameStop, BlackBerry, and other companies that have seen hefty gains due to a social media-driven trading frenzy. 

These actions have drawn their own controversy, attracting criticism from across the financial and political sphere.

However, the overall saga has shone a spotlight on low-cost retail trading platforms which have allowed millions of ordinary Americans to trade stocks. 

Americans stuck at home during the Covid lockdown, some flush with cash from stimulus cheques and forced savings, have been chasing higher on the stock market at a time of zero interest rates. 

Their trades are becoming a force to reckon with.

Consumer advocates say retail investors are taking risks they may not understand and incurring hidden costs that are rarely fully disclosed.

However, the combination of accessible retail trading and social media has changed the market forever. 

Until now, the fractured nature of retail traders who have been buying and selling stock individually has not drawn too much attention. 

Last year, it was believed that the surge in amateur traders was helping the surge in share prices of technology stocks. 

With GameStop and other companies, they have made a significant statement showing the true nature of social media and other communications platforms of just how powerful such traders can be when they rally around certain stocks.

The discussions by day traders have moved into every sphere of social media with tips now being shared on Instagram, WhatsApp, Slack, and Facebook. 

The idea of using social media for investing is far from new. Popular platforms from the 2000s include Bogleheads, Yahoo Finance, and StockTwits.

Generational shift

The recent phenomenon takes the medium further because of a generational shift where people feel more comfortable touting investments online, as well as trading apps such as Robinhood geared towards first-time investors. 

In addition, the new influencers see themselves as rebels and educators leading disenfranchised communities to economic freedom, rather than greedy tipsters looking for a quick buck.

Talk of regulation or restrictions for retail traders has been met with derision and criticism. 

Most responses have been that the established financial structures have been caught out and are playing sour grapes. 

The GameStop saga has drawn parallels with the 2015 film The Big Short, starring Steve Carrell, Brad Pitt, and Christian Bale that focused on different groups of financial experts who predicted the 2007 housing bubble that led to a major financial crash. 

The film is celebrated by many day traders who wish to emulate the small guys who spot something in the market that the establishment is blind to and exploit it.

Bale was nominated for an Oscar for his portrayal in the film of investor Michael Burry, now a legendary figure in the financial world. 

It was reported in 2019 that Burry's investment firm had a 2.4% stake in GameStop that helped lay the foundation for the recent retail frenzy. 

While he helped to increase the share price, even Burry raised concerns about what has been happening in recent weeks. 

"If I put $GME on your radar, and you did well, I'm genuinely happy for you," he tweeted on Tuesday, referring to GameStop's stock market symbol. 

"However, what is going on now — there should be legal and regulatory repercussions. This is unnatural, insane, and dangerous," he added, tagging the Securities and Exchange Commission's enforcement arm. 

The tweet was deleted minutes later.

The actions by traders in recent weeks has now taken on a global dimension. 

The Malaysian government cautioned investors against participating in social media chatrooms that promote trading of certain stocks after online forums fuelled a surge in Malaysian glove makers, similar to GameStop. Shares of Top Glove, the world's largest medical glove maker, rose 8.5% after a call by local retail investors to drive up its share prices and squeeze out short-sellers.

Supporters such as entrepreneur Mark Cuban have touted the success of wallstreetsbets on Reddit as a counterweight to high-speed trading firms that have technological advantages against individuals.

"I LOVE LOVE what is going on," he wrote on Twitter on Wednesday night.

Tesla CEO Elon Musk had also weighed in, tweeting "Gamestonk!!", along with a link to Reddit's Wallstreetbets group. "Stonks" is a tongue-in-cheek term for stocks widely used on social media.

The impact of the day traders has been significant. Hedge fund Melvin Capital Management, which had suffered heavy losses by betting against the video game retailer, has closed out the position and repositioned the portfolio, a spokesman for the firm said. 

The spokesman also said that the firm, once among Wall Street’s best performers, is not collapsing.

The Fearless Girl statue, a four-foot statue of a young girl, defiantly looks at the iconic Wall Street Charging Bull sculpture in New York City. File picture: Volkan Furuncu/Anadolu Agency/Getty Images
The Fearless Girl statue, a four-foot statue of a young girl, defiantly looks at the iconic Wall Street Charging Bull sculpture in New York City. File picture: Volkan Furuncu/Anadolu Agency/Getty Images

Global equity markets have also suffered as funds were forced to sell some of their best-performing stocks, including Apple, to cover billions of dollars of losses.

The trading platforms themselves have come in for criticism. One of the most popular platforms, Robinhood, drew criticism from users, politics, and celebrities on Thursday when it began restricting users from trading up to 13 stocks including GameStop, AMC Entertainment, and American Airlines. Chief Executive Vlad Tenev said the action was taken to protect the company and its customers from volatility.

It was founded in 2013 with the mission of "democratizing finance for all" by offering commission-free trading, but Thursday's move was seen by many as hypocritical. Many users shared a tweet from 2016 in which the company said: "Let the people trade."

"This is unacceptable," tweeted representative Alexandria Ocasio-Cortez, a Democrat.

"We now need to know more about @RobinhoodApp's decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit."

Her tweet was shared by Republican senator Ted Cruz who commented: "fully agree." 

Musk, whose shares have also been a retail favourite, also commented on Ocasio-Cortez's tweet saying "Absolutely". 

Bowed to pressure

Robinhood bowed to pressure yesterday lifting some of the restrictions it had imposed which resulted in a renewed surge in GameStop shares.

Other platforms have taken similar actions. 

Facebook took down a popular Wall Street discussion group, Robinhood Stock Traders, in a move its founder said was an unjustified response to conversations that have buoyed shares in GameStop and other companies. 

The social media giant later reinstated the group.

Even ground zero for the current stock market volatility, the wallstreetbets discussion group on Reddit was forced to close to new members for a period this week given the huge influx of new members. 

"We have grown to the kind of size we only dreamed of in the time it takes to get a bad night's sleep. We've got so many comments and submissions that we can't possibly even read them all, let alone act on them as moderators."

What happens next is open to much speculation. 

However, the GameStop saga, referred by some as the Big Short Squeeze, has created a revolution in the financial world that is here to stay and marks the beginning of a new era where significant power exists with individual traders who share insights and opinions and are gaining more power and influence over the market.

  • Additional reporting Reuters

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