Gamestop has Shown the Power of the Average Person Against a Skewed Financial System
This Gamestop situation is fascinating. Gamestop is a computer-game selling US retailer who have struggled the past year, partly due to pandemic, partly because they’re a legacy business that sells physical games and partly for other reasons.
Gamestop’s share price didn’t really move much for the first 8 months of 2020; it traded between $3–5 per share, but that changed post Sept when it went up to around $14/share by November. This month (Jan 2020) it skyrocketed to an all-time-high of around $340/share.
That’s an 8500% rise. But what gives? How did a struggling computer-game retailer’s stock price explode by 85x?
Enter Reddit. A redditor on r/wallstreetbets noticed a hedge fund had taken a massive short position against Gamestop.
For those unfamiliar, when you ‘short’ a stock you’re betting on the price of it going down. If it goes down you make money, but if the trade goes against you and the price goes up, you lose money, and the money you lose is directly correlated with how high the price goes. Because a stock could very well rise and just keep rising, theoretically if a ‘short’ trade goes against you your losses could be unlimited.
The redditor who noticed the hedge fund’s short position rallied his fellow redditors to purchase Gamestop shares — many of them did and the price started rising almost astronomically (just to clarify, in investment terms even a 50% short term rise is huge, let alone 8500%). The hedge fund’s short position started losing them billions in the value on their trade, so much so that the losses exceeded the total value of the hedge fund itself and the fund had to close their short position, buy back all the Gamestop shares and declare bankruptcy. Their buyback pushed the price of Gamestop even higher.
Now Wall Street is crying that the public joining together in this manner should be illegal. Popular trading app Robinhood was one of the exchanges which halted their option to retail traders to buy Gamestop shares, along with a couple of other exchanges. This meant traders on those platforms could only sell Gamestop shares (or AMC, Nokia and Blackberry, if they already owned them) but not buy them anymore, which meant the value of those shares could only go down on those exchanges.
Nasdaq CEO Adena Friedman has even said they’ll halt trading on a stock if they feel there’s been ‘unusual activity’ on social media which affects its price.
Some speculate this halting of the ability to trade shares with short term volatility is an effort of large institutions to regroup and rethink their strategy, all at the cost of the retail investor.
Essentially it’s retail investors vs institutional investment. Institutions like big banks, investment houses and hedge funds have billions of dollars at their fingertips to trade with them, but there’s only a few of these large institutions compared to retail investors. Whenever they make a trade they use massive sums of money, and the trades themselves affect the prices of whatever asset they’re trading.
Retail investors on the other hand are ordinary folk — small investors who usually trade with 100’s or 1000’s but who also make up billions of dollars-worth of market share collectively because there are so many of them.
Institutional investors know the game they’re playing; they understand the markets and how they work and they make trades based on that. Some institutions, like quantitative hedge funds, often trade massive sums on money on small market swings, which then can affect the price of that asset. This is essentially what’s happened with Gamestop.
A large number of retail investors have gotten together and all bought the same stock. Individually these investors won’t make much of a difference to the price, but together, hundreds or even thousands of them and they have enough money collectively to move markets, just as institutions do.
Institutional investors can move markets more easily because they understand the game and they have far less people with control over huge sums of money. Retail investors have this power too, but far more retailer investors have to make a concerted effort in the same direction to move markets.
Because far more retail investors have to be involved to make a difference it makes it more difficult to rally them and actually make that difference. When they do get together and act as a community with a single focus, though, they can be as powerful as large institutions, if not more.
The Gamestop situation has shown this is possible, and Wall Street is scared. They’re calling for regulation and saying this type of thing from the public should be illegal, but they’re crying because they’ve been beaten at their own game and they don’t like it.
Like the bully on the playground who steals everyone’s lunch money but goes crying to the teacher when a bigger boy steals his.
Some of those in institutional investment houses have labelled the Gamestop situation as market manipulation, but it’s exactly what institutions have done in the past. If they believe the public buying stock en masse is market manipulation, then what do they call halting the option to buy those those same stocks afterwards so the price can only drop, and they can regroup and figure out how to deal with it and come out on top?
In a free capitalist market any person should be able to buy a stock any time they like. If they cannot (especially when the market is going against those at the top) and that has been the case with Gamestop, then it is a manipulated market, not a free one. It’s manipulated by those whose positions stand to directly lose on what’s happening in the market.
There’s an old adage regarding large investment institutions; gains are privatised but losses are socialised.
This means when bankers win their trades they buy themselves another holiday home, a bigger yacht and more champagne. Their gains are private. When they lose, however, they don’t bear their own losses, their losses are covered by everyone else. Their losses are socialised.
This was most evident after the 2008 financial crisis. Huge and trusted banks and investment firms were selling sub-prime mortgages to would-be homeowners who had no chance of ever paying the loan back, then packaging those mortgages up in bundles and selling them to unwitting investors as attractive investments.
When the interest rates went up and millions couldn’t pay their mortgages those investment vehicles (called CDO’s), full of sub-prime mortgages went belly-up. Billions in value was wiped from retail investment portfolios, pension funds and everywhere else.
Bankers were selling dogshit investments which they knew were dogshit, but they were getting paid large commissions for selling them, so greed won out. When shit hit the fan, the bankers that sold all those worthless investments were bailed out by the taxpayer.
One of the main reasons the government gave billion dollar bailouts was to give banks more money to lend out to the public in order to stimulate spending and kickstart the economy. Bankers took this taxpayer money and paid themselves huge bonuses while keeping tight on lending any money out to the public, all while regular people suffered with redundancy, growing inflation and an ever-uphill struggle to get any kind of loan or mortgage. And none of those bankers who had been complicit in the worst financial crisis in recent history were punished. None were held accountable for the lives and livelihoods they destroyed with their greed. None went to prison. They went to the beach instead on their new yacht.
Institutional investors have also been moaning that the value of Gamestop is purely based on manipulation and not on fundamental analysis.
Fundamental analysis is the process of analysing a company or asset to determine its likely value and possible value in the future. It looks at things like a company’s cash flow, amount of outside investment, position in the market, competition etc., and bases its value of these factors.
It’s a logical and rational way of doing things, and it makes sense, but these people seem to forget that humans are not only (or often) logical and rational.
At the simplest level, the price of any asset is based on how many people buy and sell it. If more people buy than sell then the price goes up. If more people sell than buy then the price goes down.
Human buying and selling behaviour en masse will rarely be connected to logical factors. We are emotional creatures. We are swayed by scarcity, FOMO, fear of loss and potential of gain. Each of these psychological factors deserves an article of its own, that’s how complex and important each one is, but the bottom line is that human sentiment and mass psychology are the largest defining factors of the price of an asset, especially a volatile one.
The price of a stock will rarely reflect its actual value, but even ‘value’ itself is not an objective concept — it’s defined by supply and demand, and supply and demand (especially demand) is defined by human need, desire, scarcity and sentiment.
The value of an asset itself is whatever the market deems it to be, and the market is made up of millions of humans paying what they think is reasonable for an asset based on where they think the price will go.
The bottom line is that we’ve reached a turning point. The Gamestop situation has shown the lowly retail investor has power against the institutional investor, against the large houses that manipulate markets for their own gain.
The retail investor’s power comes in numbers, and now we live in an age where the average person can easily take out their phone and buy any asset they want, and thousands upon thousands can communicate in unison and make a change if they stand together.
The people at the top — the large institutions — are scared. They’re crying out that it’s unfair, when really they’ve realised they can be beaten at their own game.