What happened with GameStop Stocks and Wall Street?

Over the last few days, Wall Street has been in a crazy frenzy and falling into some insane market volatility. 

Some brokerage firms and trading platforms halted the sales of GameStop, AMC, American Airlines, Bed Bath & Beyond, and other stocks. Interactive Brokers also halted option trading for these stocks due to ‘extraordinary volatility in the markets.’ Robinhood’s statement mentioned: “In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AAL, $AMC, $BB, $BBBY, $CTRM, $EXPR, $GME, $KOSS, $NAKD, $NOK, $SNDL, $TR and $TRVG.”

Restricting new trades of GameStop stocks was a result of a massive surge in market buying by Redditors (mostly). They coordinated an effort to what seems to be a message against big hedge funds on Wall Street. They drove stocks like those of GameStop to become ‘the most traded equity on the planet’ according to an article on Bloomberg. Their stock price skyrocketed. 

Let’s take a step back: How did it begin?

GameStop – a publicly traded retail company that mostly sells video games – has seen its stock price falling for a while. It had been struggling already, due to lack of mall footfall, and the pandemic. 

Hedge fund managers decided to ‘short’ the company. 

Let us quickly explain what the word means: a short is when you ‘borrow’ a stock from a brokerage firm, and sell it immediately at its current price. In doing so, you hope that the price will keep going down. If it does, you can buy that stock at a later date, at a lower price. Once it does, you return the stocks borrowed. If everything goes as planned: you bought low, sold high, and pocketed the difference. 

Hedge fund managers made a bet that GameStop stock would continue to decrease, and so, shorted the company. 

In a twist that gave individual investors power, a Reddit subgroup called Wall Street Bets, decided to coordinate and buy into GameStop stocks at once: this drove the price up. Demand drives valuation. 

The GameStop stocks shot up to 14,300% at some point, of course with some crazy fluctuations. The Redditors also went after stocks like theatre chain AMC and tech company BlackBerry too. 

As always, Twitter and other platform communities joined in. 

Many, like Elon Musk and Mark Cuban—began rallying around the Wall Street Bets group with Elon Musk tweeting one word: “Gamestonk.”  It got wild. 

When the Reddit crowd pushed these prices up, some hedge fund companies lost vast amounts of money. 

The Redditors pulled off what is commonly known as a “short squeeze.”

So what is going on now?

The community rallying around these companies says it is doing so to show collective power against the systemic inequalities of Wall Street. Hedge funds are traditionally known to trade for high net worth individuals and are not inclusive to all. 

On January 28th, some brokerage firms like Robinhood Markets stopped the ability of individual investors to buy into GameStop and other stocks – they still allowed selling. 

On their website, Robinhood said it had to limit the transactions to meet financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment’. Basically, they did not want to expose themselves to not having enough capital to cover obligations. Robinhood has had troubles with the SEC before when they agreed to pay $65 million to settle charges from the SEC. This was because of “the company’s repeated misstatements which failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them.”

This triggered yet another massive reaction from the mainstream social platforms communities: they were outraged.  To them, their action prompted a freeze, while the actions of hedge funds were business as usual.

Some called on President Joe Biden and the SEC to investigate why online trading platforms would restrict a stock’s sale in an open market environment – calling it “market manipulation.”

Nasdaq said it will halt trading on a stock if it finds a link to unusual activity on social media. It sees itself as a “self-regulatory organization”  and wants to make sure its markets act in a “legitimate” way. 

At the same time, hedge funds are calling on regulators to step in, and stop their fall, with billions of dollars at stake, estimated at around $5Billion. 

This had some impact on two other giants. Stock prices of Twitter and Facebook succumbed slightly under the pressure. Twitter fell 2% during the trading session, still ending the week with a 5% gain.  Facebook lost 2.5%, down 6% total for the week. Some analysts are saying they can drop even further while at the same time remaining strong over the long term. 

How does this impact you?

Just watching all this is enough to make your head spin. Some are calling out to let individual traders trade, others like Michael Burry – who became famous for betting against the housing market in 2007 and an investor in GameStop stocks – said that this behavior was “unnatural, insane, and dangerous.” The Biden Administration says they’re monitoring the situation. 

Again, welcome to the market. Volatility and fluctuations sit at the core of it. 

At Sarwa, we believe in smart investing. Investing should be done through data-driven, balanced diversification across many class assets, and not just stocks. 

Short-term trading is extremely risky and speculative in nature. No one can predict what will happen in the short term. What happened here is a great example. Capital gains can be high, but losses can also be extremely costly. We see this as pure speculative behavior. It is not what investing should be about. 

As always, stick to your sound plan and stay the course. If you find what is currently happening interesting to you and you want to consider jumping into the game, remember to do it with a small sum that you are willing to lose.