For those watching the financial markets, the past week truly has been something to behold.
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Delaware Business Times Editor Jacob Owens[/caption]
Institutional hedge funds took billion-dollar losses on shares of a video game retailer struggling to find its way into a rapidly digitizing world not because of poor research, but because organized individual investors decided to call their bluff.
The hoopla surrounding GameStop Corporation’s stock, as well as others pumped by so-called retail investors like AMC Entertainment, Nokia Corporation, Bed Bath & Beyond, and more, is not a new phenomenon. It’s what’s known in industry parlance as a “short squeeze,” or when those who bet on a stock’s price to fall have to take losses after a surge in buys push share prices higher rather than lower as betted.
Two large hedge funds have publicly disclosed large short positions on GameStop in recent months, betting that the retailer’s poor performance would continue to lead to a decline in its share price. That’s where things get murky for the market and what, if anything, federal regulators may do amid this unexpected scenario.
With many workers stuck at home or laid off altogether, and a generation of college students either learning remotely or taking semesters off, the number of individual investors has skyrocketed during the COVID-19 pandemic. Some 8 million people opened trading accounts in the first three quarters of 2020, and retail traders now make up a fifth of all stock volume in the U.S., according to Bloomberg.
A big reason for that surge is the growth of mobile trading apps, like the aptly named Robinhood, that make the stock market more accessible than ever. These resources, mixed with the growing popularity of online platforms like Reddit and Twitter make investment advice and strategy easier to find than ever, producing the potential for the epic short squeeze that GameStop has seen.
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A GameStop storefront | PHOTO BY COREY COYLE COURTESY OF WIKIPEDIA[/caption]
What is truly remarkable is that individual investors actually stuck together to produce the returns so frequently reported on of late. If just a few had bought in, they likely would have lost easily, but with thousands of investors pouring in hundreds, thousands and in some cases tens of thousands in savings, they forced funds like Melvin Capital to cry uncle.
Suffice to say, the hedge funds were not pleased to sustain more than a billion dollars in losses, but the reality is that what occurred is something such funds strategize to do all of the time. They simply weren’t prepared to take on a legion of often foolhardy, first-time buyers.
Several of the biggest Wall Street names are backing the legion of retail traders though, including Tesla CEO Elon Musk, Social Capital CEO and former Facebook executive Chamath Palihapitiya, and celebrity tech investor Mark Cuban.
The surge in investment interest from the general public and their ability to make considerable profits, often at the expense of entrenched Wall Street entities, harkens memories of the 2011 Occupy Wall Street protests. That short-lived movement sought to highlight economic inequality in America through public protests and encampments, but failed to really make any substantive changes to our capitalist markets. The GameStop mania may do more to accomplish the Occupy movement’s goals because it struck Wall Street where it cares: its wallets.
“It’s a chance for Joe and Jane America — the retail buyers of stock — to flex back and push back on these hedge funds,” Reddit co-founder Alexis Ohanian said in a Jan. 28 CNBC interview. “I don’t think we go back to a world before this because I think these communities [are] a byproduct of the connected internet. Whether it’s one platform or another, this is the new normal.”
"Whether it’s one platform or another, this is the new normal” Reddit co-founder Alexis Ohanian.
That’s where the Biden administration enters the picture. Traditional traders are calling for investigations into whether online message board discussions have risen to the level of “market manipulation” of equities, an argument that few lawyers interviewed by media outlets seem to think has a feasible case since the Reddit discussions were public.
Meanwhile, retail traders have largely questioned why federal regulations allow short interest in excess of 100% of shares, which was the case with GameStop. Adding to their criticisms is the fact that popular trading platforms like Robinhood and TD Ameritrade stopped allowing buys of the most-targeted stocks after the first few furious days, despite the New York Stock Exchange still accepting trades. That led to calls of market manipulation of their own and steep losses for some buyers who had held their position hoping for higher gains.
What position the U.S. Securities and Exchange Commission may take on its stances under the Biden administration remains to be seen. In a statement as of press time, it only had said it was “working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants.” The commission is without a permanent chair, as nominee Gary Gensler has yet to receive a Senate confirmation hearing, further clouding what the regulator may do in the short term.
Jen Psaki, press secretary for President Joe Biden, said the administration was monitoring the rollercoaster markets.
“It's a good reminder, though, that the stock market isn't the only measure of the health of our economy. It doesn't reflect how working and middle-class families are doing,” Psaki replied when asked by a reporter about the White House’s response.
That may be the message of the day: Wall Street traders beware.
jowens@delawarebusinesstimes.com
