The GameStop Saga

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Last week major national newspapers headlines covered a ‘stock-market revolution is unfolding’. Or is it all just a big troll?, asks Caroline Mimbs Nyce in The Atlantic.

About GameStop

According to the Wikipedia, GameStop Corp. is an ‘American video game, consumer electronics, and gaming merchandise retailer headquartered in Grapevine, Texas and is the world’s largest video game retailer, operating 5,509 retail stores throughout the United States, Canada, Australia, New Zealand, and Europe as of February 1, 2020’.

Recently, Wall Street hedge fund managers had shorted GameStop stock (meaning that they bet this stock would decline in value) then a bunch of Reddit day traders came up with a clever revenge plot to drive up the value of the stock, according to the Atlantic.

What’s new about the GameStop mania isn’t mania, and it’s clearly not GameStop. It’s Reddit, and it’s Robinhood.

Derek Thomson in The Atlantic

Describing the current phenomenon, Karl Russell writes in the New York Times that “a growing band of amateur investors using free trading apps like Robinhood started wagering on this pool of otherwise unremarkable stocks. A lot of the interest was driven by online hype from day traders on the social media services Reddit and Discord.”

The GameStop company’s share price was up more than 1,700 percent for the month, at one point.

Screenshot source: New York Times

About Robinhood

The Robinhood financial service company was founded in 2013 two Standford classmates Vladimir Tenev and Baiju Bhatt whose mission is to “democratize finance for all” by offering commission-free trading on individual companies, options and ETFs.

The commission-free Robbinhood App is available for download through iOS or Android. The App users are able to create an account by entering their Social Security number and address and a bank account to connect with the app. According to company website, it makes revenue through rebates from market makers, such as Citadel Securities, and trading venues, its Gold membership program, stock loan income, income from un-invested cash and cash management.

Robinhood is reported to use “aggressive tactics to attract new, often inexperienced, investors” and its “use of strategies such as gamification to encourage and entice continuous and repetitive use of its trading application.”

WallStreetBets Community

The r/wallstreetbets, also known as WallStreetBets or WSB, is a subreddit where community of participants (with 5 million followers) discuss stock and option trading. WSB’s Wikipedia page describes the group as profane with aggressive trading strategies and its recent role in the ‘GameStop short squeeze that caused losses on short positions in U.S. firms topping US$70 billion in a few days in early 2021′.

They have seen the rich get extremely rich by taking advantage of cheap money, and they want to get their piece as well.

Richard Fisher, the former president of the Dallas Federal Reserve (source: CNN Business)

According to CNN’s Christine Romans, it quickly became “”a populist uprising armed with no-fee brokerage accounts instead of pitchforks. The only ones crying foul were the ‘sophisticated‘ Wall Street players.”

The irony is delicious. An online flash mob beats Wall Street insiders at their own game.

CNN’s Christine Romans

In the CNN Business, Allison Morrow breaks down the GameStop saga into the following five key things:

  • Professional vs Amateur traders: A struggle between the more professional Wall Street Pro vs amateur day traders.
  • The WallStreetBets community: The group established in 2015 has reportedly some 5 million followers have fuel a war on a perceived corrupted mainstream. The group realizing that the GameStop stocks were heavily shorted by hedge funds pro, the Reddit day traders began buying up the company shares which they believed were undervalued.
  • The GameStop stock surge: The GameStop’s stock rose after the news of three new directors joining the company. Two days after the announcement, its stock rose 57%, then 27%…and so on. The Reddit crowd also drove huge jumps in AMC, BlackBerry, Macy’s and other stocks that were heavily shorted.
  • The Robinhood backlash: Citing extreme volatility, millions of amateur investors suspended trading of the red-hot Reddit darlings. That left the WSB crowd with just two options: hold or sell. Others, without Robinhood free-trading app were able to carry on their trading. The backlash was swift.
  • Eventual Bubble .. burst: The GameStop stop may have been undervalued, but hardly anyone believes that GameStop, BlackBerry, Macy’s, AMC or any of the other companies that the Reddit crowd is promoting have the fundamentals to support such sky-high prices.

“Someone is going to get hurt. As happens with crowd behavior, you end up having people come in at the end at a very high price and getting burned.”

Richard Fisher, the former Dallas Fed president (source: CNN Business)

According to the CNET, several other similar apps also offer commission-free stock trading including TD Ameritrade, WeBull, Cash App, Fidelity, E*Trade and others

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