GameStop and the Unchaining of the Trading World

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Historically, stocks and shares trading has been an industry reserved for the wealthy. With the rise of FinTech and discount brokers, that is no longer the case. This disruption may be for the better, but the road is going to be bumpy.

GameStop

Here in the UK, we were all sad when Woolworths disappeared. It was our own fault, of course, we didn’t go there anymore. Still, we had nostalgia for the brand. The same can be said of GameStop, the American video game retailer. Over the course of 2020, their stock price was falling, and institutional investors had begun to bet against it recovering by ‘short selling’ its shares.

r/wallstreetbets

Reddit is a site often associated with, for want of a better term, nerds. There may be many categories of nerd, but one thing they usually have in common is a love of video games. r/wallstreetbets is a Reddit community that follows the stock market, offering speculative tips on what to invest in or sell.

In late 2020, some users of r/wallstreetbets claimed that the big investors were wrong to bet against GameStop, and that the stock was hugely undervalued. This community began buying up shares, causing the stock price to rise.

Going Viral

In January of 2021, this story of a small subreddit going against the “fat cats” of the investment world gained the attention of wider corners of the internet. People began using discount brokers such as Robinhood to hop on the bandwagon in order firstly to save this brand that they were nostalgic for and secondly to stick it to the Wall Street traders who stood to lose something in the process. They did this not because they believed in the company, as such, but for the meme.

The Outrage

Wall Street traders were not happy, to say the least. The bet they had made, which months ago had seemed a sure-fire way to make a profit, had now cost them billions. This is because short selling, the practice they were engaging in, requires the short seller to buy back the shares they had originally sold. Their hope is that when they do this, the share price is far lower. In this case, it was far higher.

‘Market Manipulation!’ cried the traders. They argued that the price of the stock had been artificially inflated, that everyone only bought it because everyone else was buying it, not because they actually thought the company was worth something.

‘Hang on a minute,’ came the reply from the public, ‘isn’t that exactly what you guys do all the time? Isn’t that the basis of speculative trading? Why is it suddenly breaking the rules when regular people are the ones benefitting from it?’

‘That’s different,’ grumbled the traders, but they didn’t really do a very good job of explaining why.

The Response

The ability to drive up the price of a stock by getting a group to buy up shares in order to screw over short sellers has always existed. But, it’s usually been employed by secretive professionals within the industry. Such a public example of it has demonstrated the destructive power of market manipulation, prompting certain governmental and regulatory figures to call for an examination of short selling and other “abusive” practices.

As for hedge funds, many have surprisingly taken the sobering message on board, resolving to focus more on investing in companies they foresee growing, rather than betting against the ones they think will fail. 

Conclusion

As trading becomes more commonplace among amateur investors, the GameStop event was a dramatic and, some would argue, necessary demonstration of the power held by the people. No longer do the markets respond only to those on the top floors of lofty skyscrapers with drawn blinds.

FinTech is dragging the trading world, kicking and screaming, from the private shadows into the public light. 

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