The story of Gamestop and Wallstreetbets is the classic David vs Goliath story. And it’s also really fascinating to see how Gamestop and wallstreet bets(David), beat hedge funds(Goliath) at their very own game. First off, this is a story that I don’t really have a lot of familiarity with the field and the industry, so if I get anything wrong, I apologize in advance.
First off, there are a lot of characters in this story. One of the main characters is a retail store called GameStop. A lot of people have probably heard of GameStop, it is a brick and mortar video game store that was very popular among millennials. The keywords though are “brick and mortar”, and in the age of Amazon and online shopping, most of these stores are in a very precarious situation. Furthermore, with the pandemic closing down shops, and preventing people from entering stores, things are going down for Gamestop. Even as stores reopen, people haven’t been flooding into the Gamestop stores. The 22% decline in company revenue over the last year has been long in the making, and not all of the blame falls on the pandemic.
There are more fundamental issues to Gamestop. First, they are late to the digital party in terms of getting sales away from physical stores to digital markets. This is despite digital sales being the go-to plan for new CEO and majority shareholder Ryan Cohen, former Chewy.com(an online retailer of pet supplies) who is very experienced in selling things online. In addition, Gamestop’s quality of games has declined over the years and has further alienated its original gamer base. Also, Gamestop has a sort of Dunder Mifflin/Blockbuster style standing in the gaming industry, where they rely on buying games at a retail price and selling it for a profit. It is a much less convenient and poorer quality option than what companies like Xbox and Playstation are offering by selling digital packages of games for cheaper. Analysts have long believed that the company will eventually fail and that their low stock value of $33 per share just a couple months ago is very justified.
Enter in our “bad guys’ in the public’s eye’, short-sellers and hedge funds. Hedge funds are a form of investment organization in which investors pool their money into a fund for a high return. Hedge funds and their money supply is managed by a hedge fund manager that invests in the stocks and looks out for the interests of the investors. Some characteristics of hedge funds that are relevant to Gamestop are many things. First off, hedge funds are must less regulated by the SEC as they only consist of veteran and accredited investors that have spent years or entire lives on Wall Street. As well, hedge funds are organizations that are very expensive and most likely only available to high net worth individuals. Hedge funds are also very controversial outlets that have been involved in many different situations.
Now, to understand short selling, one needs to understand the stock market. After seeing the backlash against hedge funds, many people have said that it is the stock market that is the problem. They state that the stock market is basically just gambling and speculation where people make billions of dollars from manipulating the market and not adding anything of value to the stock market. This is not true, because the stock market is an integral part of the economy which serves as an indicator for the economy as well as helping increase investment and innovation. To start, indicators are important in the economy, if there weren’t indicators of wealth in the economy, then our economy ceases to function as money itself is basically just an arbitrary value. The stock market serves as a barometer for the economy, helping to demonstrate trends and patterns for economic advisers to analyze and create new economic policy. Also, a certain company’s share price is an important indicator of its performance and financial situation. Moreover, the stock market increases investment in the economy by allowing high-performing companies to attract investors and funding for the things that they are planning to do. Now, it is correct that the stock market is flawed, as many people rightly pointed out that the stock market is going up right now, in the middle of an unprecedented pandemic. However, one must realize that the stock market accounts for the value of companies, not a country’s economy as a whole. For example, small businesses have taken the brunt of the damage caused by the pandemic, thus it has been a huge hit to the economy but not the stock market. This is because most of these small businesses are private companies and not traded on the stock market. Companies such as Amazon have actually seen their stocks go up as their profit has gone up. Certain sectors such as INformation technologies, internet security and communications have gone up during the pandemic as they were largely unaffected. It also happens that these companies hold a lot of weight in the stock market and in indexes such as the Dow Jones. Companies such as Google ,Microsoft, and Intel dominate the Dow Jones, whereas companies in sectors such as construction have been struggling due to the pandemic. These companies are usually also small businesses and thus not represented on the stock market.
It is also true in many occasions when people state that the stock market is not an accurate representation of companies, which is it’s fundamental purpose. That is where the hedge funds commit their first crime in this story, but far from their last. Hedge funds, as revealed by Jim Cramer, a financial analyst and former hedge fund manager, do manipulate the stock market by utilizing their savvy and influence within the market. Cramer described how hedge funds could easily spread false rumors on a stock to drive a stock down. Cramer would go further to tell how they would utilize certain reporters that were either bribed or tricked into giving out false information. While this is illegal by the standards of the SEC, this kind of stuff is hard to regulate thus the SEC doesn’t even have an idea that this was going on.An example of this is Herbalife, a surging medical supplies company on the upwards trajectory. This manipulation occured in 2012, in the start of the year, the stock would be worth around $32 per stock, however, the stock would take a plummet in the span of the single month of December down to around $14 per stock. Hedge funds masterfully organized a publicity campaign decrying this company, as well as purchasing 500,000 short shares of this stock, both succeeding in decreasing the confidence in the stock. Their public campaign would include Jim Cramer(himself) and Herb Greenberg, both seemingly working to hurt the public image of the company. Greenberg wrote a highly popular and influential article titled “Why did Herbalife pay Felon Barry Minkow $300,000?”. Also, in an interview between him,Cramer and the CEO of Herbalife Micheal Johnson, in which the two normally friendly anchors would constantly attack the CEO in a blatant attempt to humiliate the CEO in front of a national audience.
In the stock market, stocks can go up or down. One can buy a stock, commonly called a long position, where you are hoping that it goes up and you make money. Selling, or taking a short position is the opposite, which in the end, the person is hoping that the stock will go down. Short selling works in a very complicated way compared to buying, in which you invest and if it goes up, then you make money. A person that wants to short a stock borrows that stock from a 3rd party, usually a brokerage firm, then sells the stock at its current price to a buyer(who taking the long position and hoping the stock goes up). If the stock goes down and is at a lower price when the short seller buys his stock back, then he buys the stock back at a discount to give it back to the 3rd party . This thing was happening with Gamestop, where hedge funds and other short sellers of the stock were shorting almost 140% of the stock around January 22nd, showing that hedge funds heavily shorted Gamestop. Shorting 140% is basically just shorting on top of shorting. This works as I sell the stock that I borrowed hoping to buy it back for cheaper, then the person that bought the stock then also shorts the stock by lending it to another person.
Now comes the most entertaining part of the story, where our heroes over at r/wallstreetbets start scheming. For a long time, r/wallstreetbets was an online community on Reddit where regular people were known to make and discuss high risk investments. For example, there was this guy that spent $93 million on a single stock. Anyways, there was discussion on this subreddit, with a lot of people feeling that Gamestop was undervalued at that moment. People such as Keith Gil, known by his Reddit username as Roaring Kitty would believe in Gamestop, providing information daily and convincing many to go all in with the stock as well. A lot of motives caused people to buy into this movement. Some common people were towards the “hedge fund Wharton graduate billionaire” in times of economic troubles, Other were angry at the corrupt nature of hedge funds, the no risk factor of hedge funds, where they could be bailed out by the government whenever they messed up. A prime example of this being in the financial crisis of 2007: cause of the crisis was that bailouts were so prolific in saving these hedge funds,. A truckload of r/wallstreet bets investors would buy into Gamestop, causing the foundation for Gamestop to increase, support from people such as tech mogul Elon Musk would further push the Game stop stock’s meteoric rise.
The final factor in the rise would be the short squeeze by the short sellers of the Gamestop stock, this is a phenomenon when short sellers are trying desperately to buy back their stock after it is continuing to rise and their losses are continuing to mount as they will have to pay more and more to get their loan back. The short sellers attempting to buy back their stock will increase demand,driving up the price of the stock even more, causing even more short sellers to bail out of their failed venture, eventually turning into a snowball effect on the stock price. All of these factors would result in the gamestop stock at a starting price of $19.94 on Jan 11th 2021 to January 29th’s 2021 closing price of $325. The same r/wallstreetbets would trigger another exponential growth to different companies such as AMC,Blackberry, and Nokia, companies with bleak future prospects that were being heavily shorted by hedge funds and other short sellers. On the other side of the coin, there are the hedge funds, such as Melvin Capital Management, which heavily shorted the stock and lost nearly $6 billion dollars of the $12.5 billion that they have in assets The company has not revealed it’s financial situation, but it has stated that it will not go bankrupt. While this may be true, reports have claimed that Melvin borrowed $3 billion in order to keep from going under. Melvin is just one example, as studies have shown that short positions taken by firms have lost more than $70 billion among 5000 US based firms.
The first saga of the story was complete. Now, the actions of the r/wallstreetbets users at this moment is hilarious and highly influential, but also debatable. There’s anger and jealousy at hedge funds profiting while the rest of the American economy is in the doldrums. There’s also the fact that they were heavily shorting Gamestop, in which they are hoping that the stock drops. In that way, they are hoping for the failure of (which, objectively is not very nice). A Lot of people might argue that shorting in itself is an act that hinders investment and innovation, as it is the opposite of investing in a company in the stock market. Finally, there are many such as Senator Elizabeth Warren who have criticized large investors and hedge funds for gambling and recklessly speculating without any consequences. However, no matter what the hedge funds are at this point, they have broken no laws. But then comes the Robinhood saga, in which things are a lot more dubious. RobinHood is a popular online trading platform. Robin Hood, at the height of the GameStop growth on January 28th, would announce that companies such as Gamestop, AMC,BlackBerry, and Nokia all couldn’t be traded on their platform. Many other brokerages such as TD Ameritrade ,Webull, and Charles Schwab would follow suit. Backlash was almost immediate, with Reddit users demanding a class action lawsuit. Robinhood would relent on the very next day, allowing for what they called “limited buys.” Many companies such as Webull during this time period allowed for transactions to still occur on these stocks, but prevented people from buying the stock, allowing only for the selling of the stock. Many of these companies explained their action as a result of the huge market volatility. They stated that their reason for this was that they needed to give collaterals/deposits to certain clearinghouses and exchanges such as the Depository Trust and Clearing Corporation and Options Clearing Corporation. Brokerages have to give collateral to these authorities as a way to insure that if a certain company fails and leaves a debt, the debt won’t cause a domino effect causing other brokerage firms to go bankrupt. The clearinghouses need that collateral/deposit in order to pay off that debt (kind of like insurance). However, during times of great volatility, clearing houses will raise the price of collateral as the possibility of failure is higher. Robinhood and others have argued that in order to give their collateral on time, they would have to shut down certain stocks there were very volatile. Politicians, public figures, and other people were all highly critical of this decision. Democratic Congresswomen Alexandria Cortez and Rashida Tlaib along with Senator Ted Cruz all came to criticize the move. In the words of representative Rashida Tlaib:” This is beyond [email protected] need to have a hearing on Robinhood’s market manipulation. They’re blocking the ability to trade to protect Wall St. hedge funds, stealing millions of dollars from their users to protect people who’ve used the stock market as a casino for decades”. Anyways, CNN reports have shown that the subsequent plummeting of the stocks of companies such as Gamestop on February 2nd would be highly tied to the fact that people couldn’t access and buy Gamestop stocks to drive up the price. The Gamestop stock alone went down 80% from the peak that it reached in late January.
Finally there is possible collusion between Robinhood and the hedge funds that were hurting from the shooting up of the shock. Robinhood is an online brokerage firm that uses a very unique method in order to make money, not by charging commissions on users, but gives the order for a stock to a market maker, which is basically brokering for the broker. The Market maker is the one that carries out the order for the Robinhood customer. As well, one might think that since the Market maker is the broker for Robinhood, they get paid by Robinhood. This is incorrect, it is Robinhood that gets paid by the market maker. The reason why this is the case is because if the market maker gets information on the orders.This way, they can do something called front run, getting in between the order of the customer and the actual price of the stock that the customer wants to buy. The market maker then bumps up the price of the stock a fraction so that they can make a small amount of money from that person.Typically, market managers are big banks, investing firms, and, you guessed it, hedge funds. In the particular case of Gamestop and Robinhood, the majority market manager, who makes up about 55% of orders and revenue for Robinhood, is a company by the name of Citadel Execution Services. Then we get into the crazy stuff. If one goes up in this article, the biggest loser in the rocketing prices of Gamestop is a hedge fund by the name of Melvin Capital. Citadel is the largest investor in the Melvin Capital company. This has led to people speculating that Citadel pressured Robinhood into restricting trade of the Gamestop stock as a way to save one of their biggest companies from bankruptcy. Citadel and Robinhood have both denied these statements. But, even if the public is to believe companies such as the Citadel and Robinhood, the huge influence that Citadel wields in Robinhood is clear that hedge fund interests are very important and influential within Robinhood. Even if this is not the case, studies show that Robinhood investors and the app in general relies heavily on margin trading. This type of trading in which their users borrow money(usually from Robinhood) to buy stocks. In a volatile time where almost all experts are stating that Gamestop stocks are going to drop like a rock after the financial bubble that the stock is in pops. This means that there will be many Robinhood users who have been a little too slow in pulling out of the Robinhood stock and won’t be able to pay back the debts that they borrowed from Robinhood, potentially leading to Robinhood becoming bankrupt. This is just another case where the accusations of manipulation and corruptions of big companies, hedge funds, and generally rich people in the economy, especially the stock market, are able to use their influence to look out for their own interests, while taking away the rights and opportunities for normal people.
Finally, there are some reasons to be optimistic about this entire situation. Action has been taken against Robinhood for this potential, and probably very likely collusion with certain hedge funds and big businesses. Many lawsuits have been filed, many as 34. A majority of these lawsuits accused Robinhood of “manipulating the open market”. Also, there were calls for the government by many critics of short-sellers and hedge funds, such as senator Elizabeth Warren, who called on the US Securities and Exchange Commission to stand against unfair market practices of hedge funds and large investors that manipulate the value of companies on the stock market. These calls would be answered on January 27th, when the White House revealed that the Biden administration was working with Congress and that the Treasury Secretary Janet Yellen, would look at the situation. There were many state and Congressional calls for an investigation of Citadel and Robinhood. However, there was an interesting revelation which showed that Janet Yellen, one of the biggest players in the investigation, potentially had a conflict of interest as she received $810,000 from Citadel as Chair of the Federal Reserve. She has also been a huge beneficiary of many big financial firms, including many hedge funds, getting paid $7 million total for “speeches” made for these companies. On January 29th, the US Securities and Exchange Commission would finally step in, forcing Robinhood Ceo Vladimir Tenev to speak in front of their organization, as well as announcing that they would review the situation to protect common retail investors and look for “abusive or manipulative trading activity.”
In the end, the Gamestop situation really is about the rising of the common man in the financial sector. The internet is a recent invention and something that has revolutionized the world that people live in. One of the largest revolutions is that common people are able to make their voices heard. For example, something like youtube is a place where common people can become huge cultural and social icons without really having to be that special or well funded. The same thing is happening with r/wallstreetbets and the financial market. For a long time, ever since the beginning of the stock market, mainstream new sources such as the Wall Street Journal and college educated, powerful, and well-connected brokers have been the dominant force on Wall Street. Now, the world can see the power of regular people in r/wallstreetbets and others that bought into Gamestop. The creation of the internet forum Reddit allows like-minded people to be able to band together to fight for a common cause. People who aren’t particularly rich, nor well connected, are able to overturn the entire stock market and affect the pockets of the previously untouchable Wall Street giants, showing the evolving nature of the stock market as another institution facing change with the advent of the internet and a new decade. It’s also a really interesting story of how common people beat giant and powerful hedge funds at their own game, which is market manipulation. There has been an extensive history of hedge funds using their influence in order to change the tides of the market to their benefit, which is allegedly what they did with Robinhood. These gamestop buyers did the exact same thing, artificially pumping out the price of stagnanting stocks such as Gamestop to insane heights, making a killing and hurting the hedge funds at the same time.