It’s been several days that the events around the quotations of a US company GameStop, owning a chain of video-game, gaming equipment, and accessory shops, are disturbing the whole of the stock market. What’s the gist and the peculiarities of the situation? Why is there so much fuss? What consequences are we to expect? Read on and find out.
Some background info, please
GameStop, being a chain of offline gaming shops, has been in trouble since online commerce sprouted alongside other representatives of traditional retailing. Since five years ago, the market share of GameStop decreased by 90%.
According to CNBC, at the end of 2020, GameStop was the leader of the US market in terms of short positions in its stocks – 138% of all the stocks in circulation.
When did retail traders declare war on professionals?
Everything started from a post in a super popular social network Reddit (1.7 billion unique users in December). In November 2020, on a subreddit Wllstreetbets, a user under the nickname Ronoron criticized the actions of a hedge fund Melvin Capital Management that started playing short on the stocks of GameStop actively and massively.
Many members of the subreddit supported Ronoron’s resentment and decided to buy GameStop’s stocks, making Wall Street representatives nervous. In December, the quotations rose by 20%, which was just the beginning of sky-rocketing.
What was next?
On January 27th, Reddit users brought the stocks of GameStop to space – 347.51 USD each, while market capitalization leaped over 41 billion USD. This means that since the beginning of the month, the quotations had grown by 1914.5%.
How did hedge funds react?
Melvin Capital Management, which was the initial goal of the crusade from Reddit, lost 30% of its managed capital by the end of last week, trying to close its short positions in the stocks of GameStop. This makes 3.75 billion USD.
On January 25th, Bloomberg, quoting S3 Partners, reported a loss of 6 billion USD by the shortists.
Why are hedge funds losing money?
Retail investors bought the stocks of GameStop to make the quotations grow. The stocks, indeed, grew, which made hedge funds buy the positions they were against urgently. Buying the stocks, they don’t only pay excessively but also provoke more demand and further growth of the quotations.
Did they bite back?
On January 28th, several platforms, including the well-known Robinhood, decided to limit trading the stocks of GameStop. The official position was to decrease the risk that those quotations will disturb the whole stock market. This decision dragged the stock price down by 44.29% to 193.6 USD.
How did Reddit users react?
According to CNN, on January 29th, they filed a collective action lawsuit against Robinhood. Claimants state that the company, manipulating the market and protecting the interests of Wall Street, caused financial damage to retail investors, depriving them of the opportunity to trade the stocks of GameStop.
What was the social feedback?
The whole story immediately attracted the attention of US politicians. Sherrod Brown, a US Senator from the Democratic Party, claimed the necessity to hold a congressional hearing to study the actual state of affairs in the stock market.
Another Democratic Congresswoman Alexandria Ocasio-Cortez, well-known for her left-wing views, supported her colleague. She criticized the limitations, calling them inadmissible. Several Republicans also voiced their support.
Robinhood was also criticized as a fraud and hypocrite by one of the most famous representatives of the traders’ community and the founder of the blog Barstool Sports – David Portnoy. On his Twitter account, he wrote: “Democratizing finance for all” except when we manipulate the market cause too many ordinary people are getting rich”.
Elon Musk didn’t stay aside either: “Here come the shorty apologists. Give them no respect. Get Shorty”.
Michael Burry, a famous financier who was the first one to forecast the collapse of the real estate market and mortgaging in 2008, thinks we’ve lost control over the rally of GameStop’s stocks. He warns that there’s something unnatural, crazy, and dangerous going on.
According to Neil Wilson, an exchange analyst, the whole story is peculiar because of being revolutionary and so personal – Reddit users against experienced market players. He calls this a battle of two generations, reshuffling of wealth – the idea of taking fortune away from the rich and giving it to “poor” Millenials.
What will this war of emotions end like? Let us know your opinion in the comments.