Redditors Take Gamestop, Whole Stock Market, On Wild Ride

Redditors engaged in a campaign to buy Gamestop stocks. This resulted in wild swings in the stock market and angered hedge fund billionaires.

Gamestop has been a struggling retailer for some time now. While not as in bad shape as others (i.e. Sears), it still has seen better days. In part, it is thanks to gamers going increasingly digital only. Stores like Steam continue to pull in sales online. Microsoft and Sony are continuing to push for online only sales in their newest consoles. The result is that physical retailers are struggling to continue to sell games on their physical store shelves even though this is a multi-billion dollar industry.

Then, just the other day, the stock value rose by an incredible amount. Some estimates put the value of the stock value as going up by more than 1,000%. It basically eclipsed the kind of growth you’d see from the likes of Apple and Google. What drove the sudden increase in the value? Did Gamestop come up with some sort of brilliant business strategy that sees insane growth in the near future? Not really.

As it turns out, Redditors have been encouraging each other to buy the stocks of a handful of companies including Gamestop. Nothing really new is happening with the company itself and the actual value has technically remained unchanged in recent days.

Apparently, multi-billionaire hedge fund CEO’s were shorting the Gamestop stock market value. In essence, the investor borrows some shares in a stock, sells the share at a certain value, then when the price drops, buys the stock back. They are banking on the value dropping in order to get cash out of the deal. The problem arises when the stock value goes up.

That’s when a bunch of Redditors jumped in. They were apparently buying the stock and pumping the prices up to ridiculous levels. Reportedly, the aim was to get those short sellers to lose their money. From the CBC:

Shares in a U.S. retail chain that hasn’t made any money in years have risen by 1,000 per cent in less than two weeks, wiping out billions of dollars from two Wall Street investment funds in the process.

The sentence above makes little sense at first blush, but it is nonetheless an apt description of the saga currently underway surrounding shares in GameStop.

Wall Street has been betting against GameStop shares for well over a year now as investors known as short sellers have profited from the company’s misery, driving the price down from around $25 in early 2017 to around $5 for most of last year.

The result is that two short sellers have now bailed out of their scheme. From The CBC:

In the David and Goliath saga surrounding the struggling retail chain GameStop, Goliath has fallen.

Two Goliaths, actually.

A pair of professional investment firms that placed big bets that money-losing video game retailer GameStop’s stock will crash have largely abandoned their positions. The victors: an army of smaller investors who have been rallying on Reddit and elsewhere online to support GameStop’s stock and beat back the professionals.

One of the two major investors that surrendered, Citron Research, acknowledged Wednesday in a YouTube video that it unwound the majority of its bet that GameStop stock would fall. Andrew Left, who runs Citron, said it took “a loss, 100 per cent” to do so, but that does not change his view that GameStop is a loser.

“We move on. Nothing has changed with GameStop except the stock price,” Left said. He did acknowledge that Citron is taking a fresh look at how it bets against companies, in light of the GameStop campaign.

So far today, though, the stock value has dropped again. This might be, in part, because online brokerages have now barred investors from buying Gamestop stocks. From Yahoo! News:

GameStop Corp. plummeted on Thursday, wiping out a chunk of a rally posted over a dizzying six-day period, after moves by brokerages to curb trading of the stock on their apps whipped up volatility and enraged the company’s retail fanbase.

The stock plunged as much as 68% Thursday after Robinhood Markets, Interactive Brokers Group Inc. and others took steps to curtail activity in several high-flying stocks, including GameStop and AMC Entertainment Holdings Inc. E*Trade Financial is preventing customers from purchasing shares of both firms, according to a person familiar with the matter.

Shares of the video-game retailer were down 29% to $248 as of 3 p.m. in New York after at least 18 volatility halts. Volume also fell, with about 49 million shares traded by Thursday afternoon, a far cry from Friday’s record of 197 million.

The trading curbs resulted in howls of outrage on Reddit’s WallStreetBets forum, which has been the launching point for many of this week’s blistering rallies, and Robinhood was hit by lawsuits from customers.

It also prompted lawmakers to criticize restrictions imposed on retail investors. Democratic Senator Sherrod Brown, the incoming Senate Banking Chairman, said he plans to hold a hearing on the “current state of the stock market.”

There are now reports that some brokerages are taking things a step further. For Robin Hood, there are reports that the company is forcing the sale of Game Stop stocks and refusing to allow investors to cancel those transactions.

Robinhood is currently selling people’s shares of $GME $AMC $NOK and other tickers that has affiliations with WallStreetBets “for their own good” ~ Stocks of Wall Street

Some are obviously questioning the legality of this, but apparently, the companies Terms of Service allow them to sell stocks without your authorization to “protect” their “interests”.

The wider implications in all of this is that stocks tumbled all over the world yesterday. The DOW Jones dropped 630 points. The Canadian TSX dropped 126.61 points. Other markets took a massive hit yesterday as well.

Today, however, the market values have rebounded for the most part. The DOW Jones is up 300 points while the TSX is up almost 250 points. So, markets are recovering in the wake of all of this at the very least. Really, the drop was temporary as you would expect.

At the end of the day, this is all market manipulation. The only difference is that established market investors who have long manipulated the market didn’t see someone else manipulating the market on them coming.

The other point to be made here is that, sooner or later, this ride is going to come to an end. The value of some of these stocks are now hugely inflated and someone is going to get hurt in all of this. Still, it has many people questioning what freedoms people have should they become an investor themselves. Further, it also highlights just how manipulated and broken the stock markets are. That has been an ongoing problem for decades and it is being highlighted here again this week.

Drew Wilson on Twitter: @icecube85 and Facebook.

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