GameStop Share Saga Highlights Power Of Modern Platforms

Lafayette, US - December 27, 2016: GameStop Strip Mall Location. GameStop is a Video Game and Electronics Retailer IV
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You’re probably wondering how shares in a video store chain have soared from US$4 to around $US347 a pop. It began on Reddit, and exploded after an Elon Musk tweet.

The owner of EB Games Australia, GameStop is somewhat of a dinosaur in an industry that has moved to largely digital sales of video games, with the company reporting losses over the past decade.

But after the company appointed Chewy Inc co-founder Ryan Cohen to the board, stock market commentator Citron Research predicted a share price drop at the company.

Cohen, who is now GameStop’s third-largest shareholder, is said to have a 12.9 per cent stake in GameStop and wanted the company to focus more on digital sales.

From there, Reddit thread WallStreetBets began saying that the stock was healthy, resulting in people buying GameStop stock in droves and driving the price up exponentially.

The surge has, according to multiple reports, been driven largely by WallStreetBets, which has more than 4 million users.

It later experienced a US$4 billion increase in market cap, after Tesla CEO Elon Musk tweeted out “Gamestonk!!”.

This, however, came after the surge in bought shares put short-sellers—who borrow stock and then buy the stock back to return it to the lender, betting that the stock will drop in price—and hedge funds, who had bet on GameStop’s failure, in a rough spot.

Some of these hedge funds included Melvin Capital Management, which said it has closed out its short position after taking a huge loss.

According to The Guardian, the hedge fund has lost 30 per cent of the US$12.5 billion it manages this year.

WallStreetBets had also propped up stocks in companies the market wouldn’t normally favour.

In what began as a move against hedge fund managers, shares in Nokia, Blackberry, AMC Theatres and even Blockbuster, were up.

But the surge all changed after trading platforms, including Robinhood and Interactive Brokers, restricted trading in GameStop with AMC Entertainment and other stocks.

The move to prop these stocks up had forced short-sellers and hedge funds to buy back stock to cover potential losses in what is dubbed a “short squeeze”, Reuters reported.

GameStop’s 1,700 per cent rally, after previously jumping more than 1,000 per cent in the last week, lost half its value in early trading.

The reaction to Robinhood’s move to limit investors from buying GameStop and other volatile stocks was slammed by many Twitter users who argued the retail trading platforms were trying to protect Wall Street interests at the expense of Main Street.

 

“This is unacceptable,” US Senator Alexandria Ocasio-Cortez tweeted.

“We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.

“As a member of the Financial Services Cmte, I’d support a hearing if necessary.”

Musk tweeted in response: “Absolutely.”

The White House has said that it is “monitoring” the situation.

But the whole incident has caused commentators like billionaire Musk, who was on the receiving end of hedge funds who bet against his company last year, to decry the whole practice of short selling, with social media the weapon of choice.

However, in a bid to counter the wave of anger in the wake of its decision to halt buying, Robinhood said it would allow “limited buys” of GameStop and several other stocks on Friday in New York.

“Starting tomorrow, we plan to allow limited buys of these securities,” the company said. “We’ll continue to monitor the situation and may make adjustments as needed.

“To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to.”

It comes after Bloomberg reported that Robinhood has drawn down some of its credit lines with banks, tapping at least several hundred million dollars.

We’ve witnessed the power of modern platforms in recent months. Twice-impeached former US president Donald Trump was permanently banned from Twitter, while Google-owned YouTube has extended its suspension of his channel.

Additionally, YouTube suspended Trump’s personal attorney, Rudy Giuliani, from receiving a cut of revenue on ads that run alongside his videos, over Giuliani’s involvement in spreading false conspiracy theories that the November election was rigged.

While Forbes notes Giuliani can still make money by hawking products for clients in his videos, the move shows the power of modern platforms to limit the spread of irresponsible incitement, in a constant balance over free speech.

You need a licence to broadcast on television, and radio, but the internet is still largely unregulated.

Featured image source: iStock/jetcityimage

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