GameStop: Redditors give Wall Street a run for its money
2 February 2021: The financial markets were stormed by an online army last week, which targeted the stocks of a struggling gaming retailer, boosting its share price by 700% in just a week.
This story first caught headlines as the stock price of struggling US gaming retailer – GameStop (GME) – saw its shares surge from $20 to values of around $350 per stock between 25-27 January.
This explosive rise in value was the work of amateur investors banding together through online community website Reddit and buying the low GME stock to boost the price and sell at the top for a quick financial gain.
These investors combined their efforts through the use of online trading platforms such as Robinhood, Trading212 and Freetrade, which have grown in popularity during the various national lockdowns.
CEO of Space X and Tesla, Elon Musk, also got in on the trend by tweeting “Gamestonk!!”, with a link to the original Reddit page called “wallstreetbets” where the phenomenon began.
The Reddit page currently has 7.8m members, with the linked Twitter account “@wsbmod” amassing 735k followers.
Reddit v hedge funds
The motive behind this collaborative effort is the subject of much speculation. For some, it is an attempt to make their money go further as lockdowns continue and interest rates remain low, but for others the idea of “sticking it to the man”, more specifically, hedge funds, appeals.
The GME stock was greatly shorted so when the price shot up, traders lost their bets and incurred losses.
The saga has generated much comment from the financial markets and beyond, including former stockbroker and original Wolf of Wall Street Jordan Belfort, who told Sky News “I wish I would’ve thought of it myself”.
Belfort added that the trend shows the power of social media. “It’s a testament to the convergence of technology allowing even the smallest investor to get real-time access to information and the stock market - it’s levelled the field.”
Trading platforms
Robinhood, the online trading company which makes money through fees charged on Wall Street funds ordered by customers, was the tool in which many of the amateur investors bought and sold their shares. However, on 28 January they (and a number of other firms) limited purchases on GME stocks, effectively blocking share purchases.
The company buckled under huge customer demand and was forced to raise over $1bn in emergency funds to prevent further limits on trading.
This limitation resulted in GME stock price plummeting from $347 to $193 in one day (28 January), according to Freetrade data. Investors are now being met with sign-up waiting times as platforms take a view on the situation.
The decision by multiple broker firms to stop investors from buying/selling GameStop shares sparked outrage. Investors began accusing the brokers of being in favour of the traditional Wall Street investors who were losing out to the amateur investors from Reddit.
Some angry investors are even planning to take legal action against platforms as a result of this pause on investment in certain shares.
Regulators step in
Following these events, the U.S. Securities and Exchange Commission (SEC) warned that: “extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence”, reaffirming they will monitor the extreme price volatility closely.
The UK’s Financial Conduct Authority also weighed into the discussion to say: “Broking firms are not obliged to offer trading facilities to clients. They may withdraw their services, in line with customer terms and conditions if, for instance, they consider it necessary or prudent to do so.
“Firms are exposed to greater risk and therefore more likely to need to take such action during periods of abnormally high transaction volumes and price volatility.”
The FCA also stressed they will “take appropriate action wherever we see evidence of firms or individuals causing harm to consumers or markets”.
Real risks
“Regulators have warned against potential market manipulation, while at the same time reminding consumer and retail investors about the real risks of losing their money”, explained Philippa Kelly, Director at ICAEW’s Technical Strategy Business Group.
Kelly added: “Activity in recent days exposes the tensions of operating in a popular but highly regulated environment where users may not be fully aware of the risks they face.
“Robinhood’s CEO reminding users on Clubhouse on Sunday night that ‘Robinhood is a participant in the financial system’ – emphasising, or perhaps admitting, that disruptive start-ups are required to behave like established firms when it comes to meeting regulatory requirements and playing their part in effective functioning of markets.”
The Reddit army has wasted little time before choosing their next investment project, setting their sights on silver and driving world prices to an eight-year high.