Here’s how ordinary investors, spurred on by a Reddit message board, took on the big Wall Street funds and sent share prices soaring for the video game retailer
GameStop is in midst of a dizzying rally that has sent its shares up more than 400 percent this week alone.
GameStop’s improbable run has lifted its stock to meteoric heights — all propelled by ordinary investors, spurred by a Reddit message board, looking to show up the Wall Street funds that bet big money on the shares to fall.
The frenzied trading has catapulted the video game retailer’s valuation to nearly $20 billion, a fourteen-fold increase from a month ago. Prices have risen so fast, and the drama over its stock trading has consumed so much attention, that members of the Biden administration and the U.S. Securities and Exchange Commission were compelled to say they were monitoring the situation.
Regular investors have openly rebelled against the deep-pocketed hedge funds that viewed GameStop as a mall-based dinosaur, destined to go the way of the record store. GameStop shares spiked nearly 70 percent Friday, closing out at $325 per share — a tumultuous week on Wall Street with a more than 400 percent gain.
Reddit’s /r/wallstreetbets astronomical rise
They contend that moving away from physical stores and toward e-commerce, mobile gaming and streaming could reverse the company’s spiraling financials. GameStop has lost money in five of the past six quarters, and said revenue fell 30 percent in the most recent three-month reporting period.
Enthusiastic traders also figured that if the stock price rose, all the giant funds that had brazenly bet against the company would get crushed by the weight of being wrong. This, they intuited, would trigger a cycle that would further elevate the company and enrich the everyday trader at the expense of the Wall Street establishment. Regular investors have followed the same trading playbook with such brands as AMC Entertainment, BlackBerry, and Nokia, among others.
Why is GameStop stock rising?
The start of GameStop’s astonishing run can be traced to August 2020, when Ryan Cohen, the co-founder of the online pet supply company Chewy, disclosed that he held a major stake in the company. Armed with a record of success in e-commerce, Cohen is leading GameStop to de-emphasize its legacy bricks-and-mortar stores and to focus instead on digital sales, esports and mobile gaming.
Earlier this month, GameStop named Cohen and two other former Chewy executives to its board, tasked with helping to transform the business into a digital empire. Shares nearly doubled the week after the announcement.
GameStop shares are on a wild, Reddit-driven run.
What is GameStop’s ‘short squeeze’?
People claiming to have purchased GameStop shares have framed their efforts as a financial rebellion — collective payback for the Wall Street giants that placed what they view as reckless bets and have long exploited the financial system at the expense of the little person.
At the start of the year, GameStop was among the most highly targeted companies by short sellers — investors who bet against a company and are rewarded when its stock price falls. To short a company, a seller typically borrows a stock and then sells it, with the intention of buying the stock back later once the price drops. The seller then returns the shares to the entity from which it borrowed and pockets the difference in price.
But should the short sellers get it wrong and stock prices rise, they still have to cover their borrowed shares. They are then forced to buy the stock back at the higher price in what’s known as a “short squeeze.” In this situation, short sellers try to cut their losses and buy shares that they expected to lose value. This money-losing squeeze can fuel a cycle of even higher prices, as short sellers purchase more shares and drive stocks even higher.
How short selling of stock works
In this example, an investor named John is trying to short a stock. That means he’s making a bet that the price of the stock will go down. Here are the steps.
1. Borrow shares
and sell them
2. After price drops,
buy shares
John borrows one share from a brokerage and sells it for $30, the current stock price.
John still owes the brokerage one share, so he buys one at the new price of $5. Then he returns the share, “closing” his position.
$30
3. Profit
$20
John makes a $25 profit, minus the brokerage’s transaction fees.
$10
$0
But if the stock price goes up instead
1. Borrow shares
and sell them
2. After price drops,
buy shares
Again, John borrows one share from a brokerage and sells it for $30.
John still owes the brokerage one share. Nervous that the stock will contine to rise, he buys one at the new price of $50. Then he returns the share.
$30
3. Loss
$20
John loses $20, plus transaction fees.
$10
$0
This can create a cycle. Buying a stock raises its price, so if many short sellers close their positions, the stock’s price could keep going up. Some hedge funds shorted GameStop when its price was less than $20. At Jan. 29 close, its price was $325.
When other investors buy a stock to drive its price up and hurt short sellers, that’s called a “short squeeze.” This is what retail investors like those in r/WallStreetBets appear to have done to hedge funds shorting GameStop.
KEVIN SCHAUL/THE WASHINGTON POST
GameStop, AMC shares surge after Reddit users lead chaotic revolt against big Wall Street funds
How are trading companies responding to the frenzy?
On Thursday, GameStop and other stocks swept into the frenzy began to tumble, and leading brokerages moved to limit trading — a decision that infuriated many ordinary investors. GameStop fell more than 44.3 percent to close at $193.60
Interactive Brokers placed restrictions on GameStop trading, saying that long stock positions would require a 100 percent margin and short stock positions would require a 300 percent margin, indefinitely.
“We do not believe this situation will subside until the exchanges and regulators halt or put certain symbols into liquidation only,” the firm said in a statement. “We will continue to monitor market conditions and may add or remove symbols as may be warranted.”
Robinhood also took similar action to rein in GameStop, as well as other targeted companies like AMC, BlackBerry, Express, Koss, Nokia and Naked Brand Group.
Alexis Ohanian, Reddit’s co-founder, said in a series of tweets Thursday that the frustration among ordinary investors like those who claim to have fueled the frenzied trading of GameStop dates back to the Great Recession.
Meanwhile, at least seven retail brokerage firms — including TD Ameritrade, Robinhood, E-Trade, Charles Schwab, Fidelity Investments, Vanguard and Interactive Brokers — experienced service disruptions Thursday morning, which many attributed to higher volume, though they did not specially cite the GameStop activity.
The website Downdetector reported log-in and website issues for some of the firms, as well as Reddit, in premarket and after market close trading hours since Wednesday.
How are investors responding?
Many of the investors who trade on Robinhood, Interactive Brokers and other platforms found their accounts restricted after the GameStop sell-off began Thursday. Since then, Robinhood announced that it would allow “limited buys” of GameStop and other heavily shorted stocks on Friday, but investors reported restrictions throughout the trading day.
Massachusetts resident and Robinhood user Brendon Nelson filed a lawsuit saying he plans to seek class-action status against Robinhood, accusing the brokerage firm of blocking his access to his GameStop shares Thursday in the U.S. District Court for the Southern District of New York.
“Robinhood, in order to slow the growth of GME and deprived their customers of the ability to use their service, abruptly, purposefully, willfully, and knowingly pulled GME from their app,” the complaint reads. “ … Upon information and belief, Robinhood’s actions were done purposefully and knowingly to manipulate the market for the benefit of people and financial intuitions who were not Robinhood’s customers.”
The complaint also alleges that Robinhood intentionally restricted trading to deprive investors of gains and manipulate the market, under claims of breach of contract, breach of implied covenant of good faith and fair dealing, negligence and breach of fiduciary duty. A Robinhood spokeswoman declined to comment.
Nelson, who is represented by Alexander Cabeceiras of Derek Smith Law Group in New York, called for a trial by jury. Cabeceiras did not immediately return a request for comment.
Frank Merentino, 40, a carpenter in New Jersey, sold all of his other holdings and bought 16 shares of GameStop’s stock last week through Robinhood when he saw reports that the stock was trending. He then joined the Reddit message board r/WallStreetBets to keep up with the saga.
On Thursday morning, Merentino said he watched the company’s stock drop in premarket trading and tried to buy more shares — but Robinhood canceled the transaction and flashed the message, “Order to sell has been confirmed at $140 per share.” He tried to hit cancel, but the sale went through. He said he lost more than $2,000. He said the app took the money from his bank account but won’t transfer the sale, so he’s stuck and can’t move to any other brokerage firms.
“I just got on this GameStop thing out of luck really, and now I got screwed,” he said. “I’m not an expert of Wall Street stuff, but I know if I walked down the street and took something out of somebody’s pocket, I know where I’d be.”
When a close friend and member of r/WallStreetBets told Joseph Maxfield, a freshman at the University of Dayton in Ohio, about the GameStop rally, he jumped into the game. He bought shares in AMC, Naked and Nokia and watched them spike on the Robinhood app — until Thursday morning. Within a half-hour, the firm disallowed him from trading any short stocks or buying new ones, he said.
“I just don’t understand, if you can sell, who’s buying it? Because there’s nobody to buy it,” he said. “I would just like for somebody important or somebody powerful to look into it because it kind of seems like they cheated a lot of people out of money.”
Pam Quinlan, a Portland-based lawyer, stand-up comic and former stock analyst, said she bought into GameStop even though it “goes against my investment nature” after some of her friends made the leap.
“For me to buy GameStop, understanding how bubbles work and stuff, that’s not me — and yet I’ve been having so much fun.”
A Vanguard user, Quinlan said she put $750 toward what she called the “Reddit stocks”: GameStop, AMC, Bed Bath & Beyond and BlackBerry. She said she usually prefers utility stocks and pays 50 percent in cash, but she wanted to cash in on what she saw as a historic event in the world of finance. And so far, so good, she said.
How are lawmakers and government officials reacting to the situation?
White House press secretary Jen Psaki told reporters Wednesday that Treasury Secretary Janet Yellen and the rest of the Biden administration’s economic team are monitoring the news. The U.S. Securities and Exchange Commission said Friday that it was closely monitoring the “extreme price volatility of certain stocks’ trading prices” and pledged to protect retail investors.
Top Democrats on the House and Senate committees overseeing the financial services industry said they intend to hold hearings on the matter. Sen. Elizabeth Warren (D-Mass.) sent a letter Friday asking SEC acting chair Allison Herren Lee to review market activity affecting GameStop and other publicly traded companies, warning that the “manipulation of share prices may exacerbate inequality and the impacts of the ongoing pandemic-related economic collapse.”
Texas Attorney General Ken Paxton (R) announced in a tweet Friday that he was launching an investigation into Robinhood, Discord and hedge funds he accused of rigging the free market to benefit Wall Street.
– Washington Post