What exactly is GameStop and why is there a huge buzz around it?
What exactly is GameStop
GameStop is an American video game, consumer electronics, and gaming merchandise retailer. During the past decade, the demand for physical game media has been on a decline since there were a rise in online services such as Xbox Live, PlayStation Network, Nintendo eShop, and Steam. All of them offer downloadable digital versions of games. Furthermore, there were much more attention drawn to the way they treated the employees by forcing them to hit unreasonably high KPIs to meet the sales in order for the business to stay afloat. All of these resulted in a few changes in the management level of GameStop.
Who are the parties involved in the saga
Retail investors (from wallstreetbets Reddit)
- Retail investors are investors who are individuals or non-professional investor which buys and sells securities/stocks/shares through brokerage firms.
Hedge funds (from Wall Street)
- Hedge funds are financial institutions that use pooled funds and employ different strategies to earn active returns for their investors. These funds are then able to make extensive use of more complex trading, portfolio-construction and risk management techniques to improve performance, such as short selling, leverage and etc.
The entire saga
It all started out when a user, Keith Gill, known on the site as u/DeepFxxkingValue, or also otherwise known as “Roaring Kitty” on other social media accounts, started to invest in GameStop, after believing the stock was undervalued. He shared his investment on r/wallstreetbets and provided regular updates on its performance, including the times when the investment has plunged.
So, what happened was the involvement of power play, magnified by social media, between small retail investors who want some share prices to rise and larger hedge funds who have made big bets that those share prices will fall.
Basically, the redditors found out that large hedge funds such as Melvin Capital was shorting the GameStop shares, because they are very positive that the share price will be driven down for them to buy them back at a significantly lower price for them generate higher returns.
Shorting, in simplified terms, translates to the act of selling a security at a given price without possessing it and purchasing it later at a lower price. It is largely done with the motive of earning profits, which is the difference between the price when they sold the securities initially and the price when they bought back the securities a much lower price.
Basically, big hedge funds like Melvin Capital and Citron Research were betting that the price of GameStop shares will plunge them so they took short positions.
What happened next was basically a rally between the Redditors on Reddit to fight against the big giants aka the hedge funds. A fight between David and the Goliath, I would say.
So, the redditors were determined to cause immeasurable losses to these hedge funds. One sure way to do that was to cause the shares price to rise up indefinitely, causing these hedge funds to lose much more than 100% of their initial investment at their short positions. The theory is pretty much based on the fact that shorting means that traders, or institutions can lose more than what they originally invested because there is no ceiling for a stock’s price and ultimately, a short squeeze would happen.
So, most of these retail investors from the r/wallstreetbets started to buy more and more GameStop shares and holding them, to force these hedge funds into a short squeeze by driving the price of the shares to skyrocket within less than a week. Short squeeze is a phenomenon that occurs when a stock jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses. However, their scramble to buy only adds up to the upward pressure on the stock’s price, amounting to higher losses.
Controversy
Straight after the major hedge funds who were shorting the GameStop stocks were reporting massive losses, up to a few billions, major trading platforms like Robinhood, has banned those who are already holding GameStop shares from buying additional shares while customers who do not already own GameStop are limited to purchasing a single share. Many other trading platforms have also rallied and promoted the same across their platforms.
However, Robinhood, owing to its popularity, its namesake and its branding as a democratizing force in the world of high finance, drew the ire of customers and public officials for shutting its customers out in the middle of the trading frenzy.
That said, in a blog post, Robinhood said its decision to limit buying was necessary to conform with financial regulations, “including SEC net capital obligations and clearinghouse deposits,” which can heighten in times of substantial volatility.
Afterthoughts
To be honest, it has been since forever that these hedge funds have been ruling the stock market compared to the retail investors, which most of them are our average Joes.
The move taken by Robinhood to restrict the additional buying of shares for GameStop will indefinitely tarnish its own branding and reputation in the near future. That said, it could be due to the large influence helmed by corporations holding massive fundings, causing immense pressure downwards to these trading platforms so as to minimise their losses to the minimum.
With the democratization of information in this leading age of social media, it can be seen that scenarios that have not happened for the past decades have surfaced, of which normal people(retail investors) are able to rally against giants(hedge funds) and still be able to secure a victory, although it was not that long-lived…
