Unless you have been living under a rock, you will have heard that there are big things happening with a company called GameStop and Wall Street. However, what exactly is happening might be a little unclear.
One of the main ways that money is made on Wall Street is from a high-risk technique known as “short selling.” This is when stock is traded on the market with the expectation of the price falling. Essentially betting on business failure. After selling borrowed stock, the value drops and that stock is bought back at a lower price, usually bringing in a high return.
GameStop is one of those companies that billionaire hedge funds had been banking on failing. A video game retail chain was hit hard by the societal switch to online shopping which was not helped when COVID-19 struck. In April 2020, shares were being traded for as little as $3.25. As of Thursday morning, GameStop stock was trading upwards of $483 a share.
What happened?
Back in September of last year, investor Ryan Cohen bought 9 million shares in GameStop, becoming the company’s largest shareowner. He began pushing for GameStop to expand its online presence in order to compete with Amazon and was later added to the company’s board.
Primarily using a trading app called Robinhood, independent and small investors began buying stock believing that Cohen’s new business model would reinvigorate the struggling retailer and turn it into a profitable investment.
Wall Street, on the other hand, decided to take that bet and short sell GameStop instead, as many big investors saw competing with Amazon as a sure-fire failure.
And this is where the saga truly begins.
A sub-Reddit group called WallStreetBets started noticing that hedge funds were borrowing and selling billions of dollars’ worth of GameStop shares. A clear indication of a short play. The group, which has over 4.5 million members, began discussing how these hedge funds were inevitably going to have to buy back these shares (remember, they are borrowed). If individual and small investors continued to buy shares, the value of those shares would continue to rise and hedge funds would be forced to buy back at significantly higher rates.
The speed in which WallStreetBets has driven up the stock value of GameStop is like nothing before. After decades of market manipulation and predatory practices, Wall Street has been quickly brought to its knees. It is reported that GameStop short-sellers have lost over $5 billion.
Naturally, such a monumental hit to the wealthy has left those of the 1% crying foul. On Thursday, the main trading avenue for this David-and-Goliath battle, the app Robinhood, blocked users from buying shares of GameStop through their platform. Such a move seriously limits the ability of many users from participating in GameStop stock-trading as the investment market is not easily accessible to those outside Wall Street. The restriction has already caused GameStop stock to fall.
In an interview with Chris Cuomo on CNN, Robinhood CEO Vlad Tenev stated that, although some of the app's investors were those who were now losing money, the block was done in the best interest of its users.
Speaking about how quickly GameStop’s stock value has risen, Tenev says, “We haven’t really seen anything like this before. And to prudently manage the risk and deposit requirements, we had to restrict buying these thirteen stocks [GameStop and others], but customers that held them could sell throughout…”
Cuomo interrupted Tenev and reminded him that it was not up to Robinhood to control the way that GameStop is traded as that authority belongs to the New York Stock Exchange. And that authority is used very minimally and mainly focused on concerns of fraud.
Tenev never fully addresses this fact and weaves a nonsensical justification by saying Robinhood is required to comply with regulations. To which Cuomo says that the Federal Communications Commission has not said that Robinhood needs to or needed to do anything. As Cuomo points out, much of what is suspicion about Robinhood’s actions is how users were restricted from buying, not selling. Such a move only benefits Wall Street.
After lawsuits were filed by users, Robinhood reopened trading of GameStop stocks Friday, but within a limited capacity. New users are only allowed to purchase five shares and users who already have five shares are not allowed to purchase any more. GameStop stock has now gone up again.
The ultimate outcome of this saga is still to be determined. But while the frenzy has died down, it certainly is not over.
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