GameStop And The Power Of The Masses

Have you ever heard of GameStop? Chances are you’d never heard of the struggling chain of bricks-and-mortar high street retailers that sell video games, gaming consoles, and other electronics. That is until last week, of course!

GameStop was always going to be a difficult concept to turn a profit from. How many people actually buy console cartridges any more rather than just pay for downloads? The chain’s sales took a hammering due to COVID-19 restrictions and lockdowns, and the company’s bottom-line was firmly in the red.

Some of the most significant hedge funds in the United States were hovering around the company with sort-sells stacking up, hoping to make a killing from what was seen as their inevitable demise.

If you’re unfamiliar with how short-selling works, here’s an elementary primer.

Short-selling is essentially selling something you don’t own in the hope you’ll be able to buy this at a later date at a lower price and fill your delivery obligations. You sell shares in a company at say $100 a share, expecting the price to fall to $50, for example, at which point you buy the number of shares you need and deliver them to where they need to go, making a cool $50 per share in the process.

While short-selling has some other parameters and complexities to consider, this is a very simplified example to illustrate what happened with GameStop.

The short-sellers failed to take into account the power of the masses and the input of one very influential venture capitalist.

The power of the masses takes the form of a Reddit group called WallStreetBets. This Reddit is essentially a chat room for traders and small-scale investors who like nothing more than scuppering deals for the big hedge-funds, in this case, the short-sellers. For many on the Reddit group, it started as nothing more than a prank, something to pass the endless COVID lockdowns with. For others, it represents a real chance to spoil deals for Wall Street and lose them some money in the process.

At most, WallStreetBets was seen as an inconvenience. Irritating but nothing more than an inconvenience.

The was at least until the aforementioned venture capitalist stepped in, namely, Elon Musk.

Elon Musk is known for many things, but being a man afraid to speak out isn’t one of them.

That one-word tweet was enough to send GameStop’s share price soaring. Thousands of traders jumped on the band-wagon, driving the share price close to $400 from the low $ 20’s it had been trading at.

That’s terrible news for the short-sellers as they will need to cover their positions from the open market on a bet that has gone horribly wrong for them. Selling at $20 and having to buy back at over $300 is no way to make money, with some sources estimating losses for short-sellers of the stock over $19 billion!

That’s the power of the masses. Thousands of small-scale traders added up to a mind-boggling $19 billion in losses on a single stock for the big Wall Street players. As the financial data service Ortex put it:

“Regardless of the final outcome, the GameStop saga points to an increasing democratization of the markets, with fairer access and a more level playing field. The information advantage that has maintained the status quo for so long is crumbling, and that has far-reaching consequences for investing, markets, and the industry itself.”

The surge in buying for GameStop shares was so rapid that several online stockbrokers limited deals in the stock or removed it from their asset list altogether. That tactic backfired as it was seen as an attempt to limit trading, resulting in a new round of revenge buys and an even deeper hole for the short-sellers.

This isn’t a one-off either. The scenario is repeating itself across the trading boards in what is being described as “a shift in the balance of power” in the stock market.

Information is both a great enabler and a great leveler. Technology is the driver that uses the power of the internet and Social Media to make information, previously the reserve of Wall Street, available to a far wider audience than the short-sellers ever imagined.

Legal disclaimer: The material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instruments. UR Trade Fix Ltd accepts no responsibility for any use that may be made of these comments and for any consequences resulting in it. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. The analysis does not involve any specific investment objectives, financial situation and needs of any specific person who may receive it. Past performance does not constitute a reliable indicator of future results and future forecasts do not constitute a reliable indicator of future performance.

It has not been prepared in accordance with legal requirements designed to promote the independence of research, and as such it is considered to be marketing communication. Although we are not specifically constrained from dealing ahead of the publication of our research, we do not seek to take advantage of it before we provide it to our clients. We aim to establish, maintain and operate effective organizational and administrative arrangements with a view to taking all reasonable steps to prevent conflicts of interest from constituting or giving rise to a material risk of damage to the interests of our clients. We operate a policy of independence, which requires our employees to act in our clients’ best interests when providing our services.