Even by typical January standards, last month was tough and being bored is the new going out. You have binged every series by now and outdoor exercise is as tempting as another family zoom quiz. Even Trump is (fairly) quiet at the moment, so it is little surprise that we all grabbed some popcorn, brushed off the complicated financial jargon and tuned into the GameStop saga. If you feel like it was entertaining but you have more questions than when you started, we have two options for you. The first, read our breakdown of exactly what happened in the simplest way we can explain it. The second, head to IMDB because you watched Inception.
Who are GameStop?
GameStop is the world’s largest video game retailer, founded in America. They deal in video games, electronics and associated goods, similar to GAME in the UK. Unfortunately, just like GAME, they have been struggling for some time now.
Profits had been declining for years as online services for videogames grew, now you can simply download games to your console without needing to visit a store. The bricks & mortar model was simply no match for online leaving GameStop with an outdated business model, no turn turnaround plan and a pandemic only intensifying the pain.
Word on the Wall Street.
Wall Street invests with the aim of making a profit, which is literally just the definition of investing. The thing is, you can make profitable investments if you think the price of a share will rise or fall. Given the aforementioned headwinds GameStop was encountering, the general view on Wall St. was that shares would only be falling further. The logic of this assumption is hard to argue against. Hence why there was quite a few institutions taking the same view. When an investor thinks a share price will fall in the future, they ‘short’ a stock. Have you ever bought an item of clothing before Christmas, only for it to inevitably go into sale on Boxing Day like you knew it would? Well, if you have ever returned something to buy it straight back and pocket the difference, it is a little like that.
Reddit is a social news aggregation site in which posts are up or down voted by users. Enter Ryan Cohen. A successful and influential e-commerce investor. He took an opposing view to the majority on GameStop, taking a long position in the company back in August 2020. He was more recently appointed to the board of GameStop with the hope of turning the business around (didn’t waste much time). Retail investors exchange ideas and views just like they do on Wall St. Replace boardrooms and bullpens for online forums, Youtube, Twitter, Reddit and so on. Ryan Cohen posted his view to a popular forum on Reddit and the rest is history, the idea effectively went viral. The share price move at first was to many like a weird fashion trend…. Suddenly everyone was involved but you don’t know why and don’t particularly want to follow . Yet, come next week there you are on the bandwagon. During the final week of January Wall St. was reminded of just how powerful social media can be nowadays.
To quickly recap, GameStop’s share price move was anomalistic in nature and size due to the fact that there were so many factors. The short squeeze compounded by options and margin calls, Reddit and retail investors hungry for hedge fund blood. Momentum investors wading in. The power of social media and transparency of information all culminated against Wall St. It may not be easy to get to the pub in 2021 but buying shares from your front room is pretty easy.
David v Goliath
Wall Street, given their financial clout, would look at retail investors the way Shooter McGavin looked at Happy Gilmore when he arrived in a hockey top with wooden clubs for his first day on tour. With a reputation for greed not helped by the global financial crisis still fresh in people’s minds, investors saw a Robin Hood opportunity (the irony of this we’ll explain shortly). What was clear is the idea to stick it to Wall St. was unanimously endorsed and gained momentum like no other. As you can see, GameStop had nothing to do with their share price rollercoaster. They were merely the catapult chosen by David to fell Goliath.
Reading about GameStop, you likely came across Robin Hood being mentioned. As entertaining as it may have been, a highly skilled archer was not after hedge fund managers. In this context Robin Hood is in fact a platform typically used by retail investors for buying and selling shares. Robin Hood is meant to take from the rich and give to the poor right? Well, when the platform suspended trading activity on GameStop, it felt like friendly fire. This was yet more fuel to the fire of retail investors as yet again they felt asymmetric punches Wall St. can’t relate to. You have to remember without Robin Hood and apps alike they could not buy or sell, their ammo was confiscated whilst Wall St was reloading. In truth, the abnormality of the situation led to Robin Hood simply needing time to assess capital and liquidity requirements, which was brought on by an extremely rare level of trading activity on one stock. You can either view this as Robin Hood simply needing a few deep breathes or take a conspirator view.
Gamestop almost reached a valuation of £20bn, as shares climbed 400% in one week, up 14-fold for the month. Retail investors managed to support the inflated valuation long enough to cause some serious damage to some Wall St. investors, with some hedge funds forced to close positions costing billions of dollars. Retail investors left serious scars on Wall St this time, warning shots are over.
Despite this, some will now look and see GameStop has returned to the levels it was at before hysteria took hold. Retail positions have unravelled, but in all honesty, Reddit knew they only had to apply pressure for a certain amount of time to cause the intended damage. The way financial contracts work with premiums and expirations can mean shares only have to be at uncomfortable levels in Wall St’s view for a short space of time.
Ryan Cohen was the butterfly and the tornado he created certainly hasn’t stopped. Wall St. now has a new risk…. because there weren’t enough already *sarcastic sigh*. It is quite clear though that both sides need some fine tuning from the regulator. The irony is there was in fact more manipulation from the ‘Reddit’ side. But how is stock manipulation compared from Wall St to internet forums? That’s one of many tornadoes the regulator has the job of keeping under control now. Little pesky butterfly.
The trigger in GameStop’s share rise was when it became about causing pain to hedge funds, not resuscitating GameStop. Now hedge fund disclosure about their large positions have become walking bullseyes. The retail community has already had a go at other firms in a similar predicament like Nokia, Blackberry and AMC.
As we round up, here’s some information that will never help you in a pub quiz. Michael Burry, the guy that predicted the global financial crisis (Christian Bale in the film ‘Big Short’), also held GameStop shares in his hedge Fund. Burry really does love being right and making hundreds of millions because of it. At this point we wouldn’t be surprised if he’d backed Leicester in 2016.
Sometimes we don’t know areas of weakness until they’re brought under pressure, hamstrings are prime examples. The GameStop case has put so many different facets of markets under the spotlight. Wall St will no longer underestimate the everyday investor after showing they have the power to come together like a Power Ranger Megazord. Institutions have also been reminded that they’re not out the dog-house yet. This is the first of its kind, but unlikely to be the last.
*all tweets are 100% fake