On January 28, as GameStop’s share price reached $469, retail investment app Robinhood imposed restrictions on its users’ ability to purchase certain stocks, including GameStop, which had the immediate effect of driving the price down. Click here for the update.
One of the more unexpected developments of the week, month, and year is the sudden comeback of GameStop. And I do mean sudden: After a gentle rise through the second half of 2020 driven by a new Microsoft partnership and promising financial results over the holiday season, the company’s share price exploded from well under $20 at the start of January to, as of 1:30 pm on January 27, $325.
That jump has been fueled largely by communities of speculators like the WallStreetBets subreddit , which took issue with a cautionary tweet on January 19 from Citron Research warning that the share price would go back to $20 “fast,” and that people buying in at higher prices “are the suckers at this poker game.” Citron, a GameStop short seller, had good reason to want to see the price go down: The higher it rises, the more the firm stands to lose.
Reddit’s furor was also directed at Melvin Capital Management, one of the biggest institutional shorters of the GameStop stock, as seen in this “Battle of GameStop” video meme posted in December:
THE BATTLE OF GAMESTOP – WSB VS MELVIN CAPITAL (sound on) from r/wallstreetbets
Simplistically, short selling works like this:
$GME Short squeeze explained nicely:Snake – Melvin Capital & CitronApes – Retail Investors Credit @ the group pic.twitter.com/0vyyg9lsnJJanuary 26, 2021
Reddit wasn’t the sole driving factor behind GameStop’s climb, but it “definitely helped push it higher,” industry analyst and consultant Michael Futter told us earlier this week.
“Think of it like amplifying any other kind of trolling. They are creating signal above the noise,” he said. “The Reddit stuff is material, because it led to GameStop being the most traded stock on the market on Friday. Without r/WallStreetBets, that doesn’t happen.”
At that time, on January 25, GameStop’s share price had hit a peak of $144, and then slid back down to a little under $80—a big drop, but still a remarkable price given the stock’s history over the last year. But the ride wasn’t over: The following day, the stock continued to climb, reaching a new high of $148, and then blew past $230 in after-hours trading, helped by none other than Elon Musk.
Gamestonk!! https://t.co/RZtkDzAewJJanuary 26, 2021
On January 27, it opened at a ridiculous $350, and despite some bouncing around remained within shouting distance of that figure by mid-afternoon. All of which leads to one very obvious question: What happens next?
It’s hard to overstate the impact that GameStop’s sudden ascendancy has had, and continues to have, on the stock market. Hedge fund Melvin Capital Management required an investment of nearly $3 billion from two other funds to stabilize the company in the wake of GameStop’s initial rise, although CEO Gabe Plotkin told CNBC that reports the company was on the verge of bankruptcy are false. Melvin says it closed out its position Tuesday afternoon after suffering a “huge loss” on it, according to CNBC.
BREAKING: Melvin Capital closes out of its GameStop position, a stock which it had a short position on. $GME @andrewrsorkin reports. https://t.co/N69FXufOJD pic.twitter.com/TZg0c8q1O1January 27, 2021
Today international brokerage TD Ameritrade took steps to protect itself and customers from the chaos, imposing “several restrictions on some transactions” involving GameStop and other securities currently targeted by Reddit, such as movie theater chain AMC. “We made this decision out of an abundance of caution amid unprecedented conditions and other factors,” the company said in a statement.
One possible—even likely—outcome of all this furious activity is some sort of regulation to keep it from happening again. But how do you regulate against the actions of hordes of mostly faceless commenters, posters, and social media accounts? NASDAQ CEO Adena Friedman told CNBC that regulators need to consider advances in technology that are used to disseminate information about companies on the market as it tries to determine whether this type of online interaction qualifies as a “pump-and-dump scheme,” in which investors artificially inflate the value of a company by spreading misinformation before selling their shares, or if it’s a separate technological evolution that calls for some new form of regulation.
“As we look at these new technologies that are available … it’s important for regulators to understand that manipulation is manipulation whether it’s happening through a new technology medium or it’s happening through traditional mail,” says @Nasdaq CEO @adenatfriedman. pic.twitter.com/iSP31KoXvmJanuary 27, 2021
“I do think that as we look at these new technologies that are available to everyone, including investors, I think it’s also important for regulators to understand that manipulation is manipulation, whether it’s happening through a new technology medium, or it’s happening through traditional mail,” she said. “I think it’s just a matter of making sure that we understand what the behavior is, what’s underpinning the behavior, and working appropriately with the regulators to manage the situation, regardless of the technology that they’re using.”
White House press secretary Jen Psaki also confirmed that the US government is “monitoring the situation.”
Press Sec. Psaki on GameStop: Treasury Secretary Janet Yellen is “monitoring the situation.” pic.twitter.com/4uWOT0ubn8January 27, 2021
Social Capital CEO Chamath Palihapitiya, who bought into GameStop yesterday, described the WallStreetBets activity in a CNBC interview as “a pushback against the establishment,” and credited many of the redditors who use it for doing “as good, and frankly a better job” at diligence and analysis than some hedge fund analysts. He also acknowledged the frustration and anger driving much of what the group does.
“Coming out of 2008, Wall Street took an enormous amount of risk, and they left retail [investors, ie average people] as the bag holder,” he said. “A lot of these kids were in grade school and high school when that happened. They lost their homes, their parents lost their jobs, and they’ve always wondered, ‘Why did those folks get bailed out for taking enormous amounts of risk, and nobody showed up to help my family?'”
GameStop’s share price was bound to come back to reality sooner or later, but the brazenness of Robinhood’s actions has, predictably, led to a heavily-upvoted WallStreetBets thread calling for legal action against the company.
However, attorney Ryan Morrison of the digital entertainment-focused legal firm Morrison Rothman believes that such a class action suit would would only benefit the lawyers. “System is rigged from start to finish,” he said.
And shame on the six or seven attorneys who successfully convince enough of you to file a class action lawsuit. You’ll get at BEST a check for twelve or so dollars in the mail. Those attorneys will make enough to let their grandkids retire. System is rigged start to finish.January 28, 2021
I’ve reached out to Robinhood for comment on its decision to halt its users’ ability to sell GameStop and other shares, and will update if I receive a reply.