Visible Hands: Game Stopped 🚀🚀🚀
Debriefing what happened with GameStop and what it all means
Want to support us? Please share our newsletter with a few friends and help us grow!
We haven’t thought about GameStop this much since the early 2000’s. You’ve probably seen the flood of headlines. What does this all mean?
Should’ve seen this coming: In the pandemic’s early days, finance reporters observed the “boredom market hypothesis.” Folks were bored in lockdown, sports betting was at a standstill with postponed seasons, so stock betting became entertainment. These investors weren’t necessarily analyzing company finances, but rather going “to the moon” with meme stocks.
Last summer, everyday investors fueled by r/WallStreetBets (which has its history of being problematic) piled into the stocks of many bankrupt corporations, including Hertz whose stock surged 825% after its bankruptcy. The company considered issuing new shares to essentially pay down their debt with the gambles of these retail investors. It seemed unprecedented for a group of internet day traders to completely shift the trajectory of a company.
As Bloomberg’s Matt Levine said, “The stock market is a way for gamblers to have fun, and it is also a way for companies to raise money. Sometimes those two purposes come together beautifully.”
Let the games begin: GameStop was the perfect storm: a short seller report lambasting “suckers” betting on the company, hedge funds making big gambles that the company would fail, and a band of day traders armed with stimulus checks ready to prove naysayers wrong. We heard about kids making 5000%, investors using their GameStop earnings to buy games for disadvantaged children, and new billboards in Time Square.
Quick finance basics:
A short is when investors sell borrowed shares and hope to buy back these shares at a lower cost. If the price rises, investors must eventually buy the share at the higher price and make a huge loss.
Put options allow investors to benefit from a drop in the price of the underlying asset, while limiting the loss to what the put option initially cost.
Call options are the opposite -- investors have the ability to buy a specified amount of a stock at a specified price within a specified time.
GameStop was one of the only companies that had a short interest over 100%, making it one of the most heavily shorted stocks. As day traders memed the stock up, the hedge funds started bleeding money. One hedge fund, Melvin Capital, was forced to close out its GameStop position and seek out financial assistance from other funds to stay afloat.
Regarding call options, we’ll note that option trading is NOT for novices. Robinhood has been credited with democratizing option trading for the masses, and some GameStop day traders also bought call options. Market makers that facilitate these options (e.g., banks, brokerage firms) had to also buy GameStop stock to manage their risk in these transactions. This created even more demand and caused the price to go “brrr,” as the memers say.
Melvin Capital took on huge risks in hopes of making an outsized return. Instead of just buying GameStop put options, which would’ve limited their losses in a bad bet, the hedge fund also shorted cash stock. Melvin Capital was forced to buy stock to cover their short position to avoid an increasing loss, creating a dire liquidity situation (or a short squeeze). Risky bets, or “widow-making trades” as the industry calls them, are not new; for instance, the recent outperformance of Tesla also led to huge losses for its short-sellers.
Market manipulation? Wall Street billionaires began to decry “market manipulation” by the “Reddit Rebellion.” On Thursday, Robinhood, the main trading platform for millennial day traders, halted trading of GameStop and other meme stocks on its platform. (For more on the role of clearinghouses behind these trade restrictions, check out this Bloomberg article.)
It seemed like Wall Street was calling for a rule change after being beaten at its own game. Elon Musk, politicians from both parties like AOC and Ted Cruz, and Jon Stewart jumped in. Folks also began to scrutinize the relationship between Robinhood and Citadel, a hedge fund also involved in the GameStop craziness.
Many agree that this incident is likely legal in the eyes of the SEC. The SEC stated it would “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.” Though Treasury Sec. Janet Yellen just called a regulator meeting, so we’ll see what she says...
Robinhood raised $1 billion dollars last Friday for a total of $3.4 billion since GameStop started, so this power shift might just be beginning.
Given today’s topic, taking a slightly different approach and focusing only on the actions you as an investor can take:
So about Robinhood?
Many retail investors were furious when Robinhood halted trading of meme stocks and accused the company of forgoing its mission to bend to pressure from hedge funds.
Although most scrutiny was on Robinhood as the main trading platform for r/WallStreetBets, bigger industry players like Charles Schwab and TD Ameritrade also enacted some trading restrictions last week. These firms cited the market volatility and SEC regulation as the reason for these limitations.
Robinhood, founded in 2013, was struggling financially prior to the pandemic. Its key differentiator was offering retail investors free trades. Yet, in recent years, most of its much larger competitors began also removing their fees.
There are now plenty of online stock brokers to choose from; check out Motley Fool’s list here.
The power of everyday investors:
Retail investors own 77% of total market capitalization through stocks, mutual, and pension funds. Yet, only 14% American households are directly invested in individual stocks, even though 52% of households have some level of investment in the market (mainly through retirement accounts).
In 2019, individual investors made up just 10% of the market's trade volume. Nonetheless, there’s been an increasing number of retail investors over the last year.
We talk a lot about the power of individual investors in voting in proxies. Imagine if all these newly engaged retail investors begin voting in support of more corporate transparency and environmental / social / governance best practices.
And imagine if retail investors not only supported stocks for bankrupt companies and struggling retailers but also companies leading the way in terms of sustainability and inclusive employment practices.
The coup we are not talking about: “...asking a surveillance extractor to reject content is like asking a coal-mining operation to discard containers of coal because it’s too dirty. This is why content moderation is a last resort, a public-relations operation in the spirit of ExxonMobil’s social responsibility messaging.”
Can Amazon’s next boss fill Jeff Bezos’s supersized boots?: “Some speculate that such looming political awkwardness may have influenced the timing of Mr Bezos’s decision to stand back. Perhaps. Mr Bezos, for his part, gives every indication of being a man with a higher calling. When Bill Gates stepped down as the boss of Microsoft in 2000, he threw himself wholeheartedly into the Gates Foundation, which, as the world’s biggest private charity, funds everything from malaria-prevention to AIDS research.”
Twitter restricts numerous high-profile accounts in India following ‘legal demand’: “At this point, it remains unconfirmed who all have pursued the legal action that prompted Twitter to restrict these accounts in India. The accounts remain accessible to users outside of the country. At least in the case of political commentator Basu, Twitter told him that Indian authorities had issued the legal demand against some accounts that included his and that it was talking with the authorities.”
How the LAPD and Palantir use data to justify racist policing: “The goal, one captain told her, was simply to get people “in the system”: to capture larger and larger amounts of data on seemingly harmless individuals in the hope that the data would help solve a crime later on. Once an officer had a person in the system, they could set an alert to automatically track changes in that person’s profile.”
The Breaking Point: Thirteen women on being driven from the workforce: “But when the schools announced they would be closing and going 100 percent virtual, I told my employer I had to take a medical leave, and they agreed. After a month, my supervisors gave me an ultimatum: Come in to work or be let go and have it considered “job abandonment.” If you abandon a job, you don’t get unemployment, and you also cannot get hired by any other affiliate stores.”
Stay connected via our Instagram, Twitter, Medium, and, of course, email (firstname.lastname@example.org)! Please invite any friends, roommates, coworkers, armchair activists, and day traders to join the movement. See ya next Thursday!
This situation is a complex one, and I think you've done a great job explaining it. I think allowing short selling is something that should be reevaluated. I don't believe it is an ethical way of making money. Also, it seems like a stupid risk for hedge funds to take with other people's money. When the stock was already very low, they were looking at relatively small potential returns ($5-10 per share) but with an unlimited risk factor. And ultimately, that is what these hedge funds are doing, they are taking our retirement, our life savings, and betting it on a company failing. I'd much rather see them use those funds to invest in companies with solid fundamentals.
And, the fact that some of the retail brokers stopped trading seems like unjust market manipulation. If no one can buy the stock, of course the price is going to do down. It just seems like we have some pretty serious gaps in our economic guardrails.