- Why you need to know :GameStop Stock, Reddit and Robinhood
GameStop is a videogame retailer. The astronomical increase of the stock which started 2021 at $18.84 to trading Friday, January 29, 2021 above $340 has attracted global concern. Why the concern if people decide to invest the way they chose? New Americans Business is following the Wall Street Journal on developments in the GameStop stock:
By By Jenna Telesca, Krista Kjellman Schmidt and WSJ staff
How traders online drove the videogame retailer’s stock to new highs and caused a crazy week in markets
The stock of videogame retailer GameStop started 2021 at $18.84. On Friday, its share price traded above $340. And it isn’t the only surprising stock seeing big gains. Below, we catch you up on the latest developments in the GameStop stock market mania.
What is happening with GameStop, AMC and some other stocks?
Amateur investors, a rising force in the markets, flexed their collective trading muscles this week, sending seemingly unremarkable company stocks to new highs. The investors have cheered one another on through social media forums like Reddit’s WallStreetBets to buy stock and options in videogame retailer GameStop, movie theater company AMC Entertainment Holdings and others.
As the stocks skyrocketed, some day traders profited and some hedge funds with short bets against the companies suffered losses. This dynamic created a short squeeze, where heavy stock buying forces short bettors to buy shares of the stocks to limit their losses, therefore increasing the stock price even more.
As small investors continued to buy up more shares on Thursday, mobile trading app Robinhood and several other brokerages restricted access to stocks popular with those traders. The traders were left with the choice of holding their stocks or selling them. Small investors were furious with the brokerages. GameStop and AMC stocks sank in response to the restrictions.
Robinhood Markets Inc. opened up trading again early Friday for shares and options, and GameStop and AMC stock prices soared again.
Why did Robinhood and others block trades of these stocks?
Robinhood and other brokerages, including WeBull Financial LLC, E*Trade Financial Corp. and Interactive Brokers Group Inc., restricted access to trading volatile stocks and options to meet increased deposit requirementsfrom clearinghouses.
The Depository Trust & Clearing Corp. operates the main clearinghouse for U.S. stock trades, helping to process and settle trades. Because of a lag between when investors buy or sell a stock and when their cash is actually exchanged for securities, brokerages like Robinhood have to maintain deposit accounts at the clearinghouses to show they are good for the money. In risky times, the clearinghouses ask brokerages to put up more of their own cash to cover transactions and insure against losses. When Robinhood and others experienced a surge in trading volume in recent days, DTCC requested a cash increase.
In an interview Thursday, Robinhood Chief Executive Vlad Tenev explained that Robinhood saw an unprecedented increase in its deposit requirements. By restricting investors’ ability to purchase shares in GameStop and 12 other companies, the online trading platforms tried to limit future increases in those requirements.
Robinhood customers weren’t happy with the restrictions. A group of individual investors filed a class-action complaint against the company Thursday, alleging it “deprived their customers of the ability to use their service” as well as potential gains from trading for “no legitimate reason.”
How did WallStreetBets on Reddit build so much momentum?
Reddit’s WallStreetBets forum fosters a devil-may-care approach to investing. The community, created in 2012 by a consultant who now lives in Mexico City, actively eschews convention, adopting offensive descriptions of its users, aka “autists,” their investment decisions and their resulting wins and losses. The community has a heavy meme culture and tongue-in-cheek celebration of big investments gone wrong. At WallStreetBets, the finance world is fun and funny whether you win or lose.
It is also the place where the amateurs go after Wall Street power players, sharing their glee when the pros suffer steep losses. The amateur trading world exploded during the Covid-19 pandemic thanks to volatile markets and isolation from lockdowns, buoyed by low-cost trading and a proliferation of accessible mobile trading apps. Federal Reserve intervention in the markets in March rewarded amateur traders who “bought the dip,” purchasing stocks at low prices and profiting as they later rose. Discussions on social media have the potential to go viral and send stock prices up.
Amid a lot of new GameStop activity on the forum, the moderators temporarily took the forum private on Wednesday, citing difficulty keeping on top of all the posts and comments, but then opened it up again an hour later. Chat service Discord on Wednesday banned WallStreetBet’s server, which users used to talk in real time, for violating community guidelines.
While participants on WallStreetBets are in no way representative of the millions of amateur traders, the now six million strong community proclaims itself as the place for the everyman investor.
What is Wall Street saying?
Several highflying hedge funds with short books, or bets against companies, are suffering double-digit losses in the volatile market, including Melvin Capital Management, Maplelane Capital, Candlestick Capital Management, D1 Capital Partners and billionaire investor Steven A. Cohen’s Point72 Asset Management.
Online brokerages have struggled with technical issues and service disruptions amid the frenetic trading.
Some amateur investors on social-media platforms have attacked Wall Street pros online, lobbing insults and threats on Reddit, Twitter, Discord and Facebook. Short sellers are no strangers to criticism, but the social-media users are sharing personal information, hacking social accounts and texting family members.
Short seller Andrew Left, a target of internet attacks, said he would discontinue sending short seller reports. “When we started Citron, it was to be against the establishment. We’ve actually become the establishment,” Mr. Left said in a video.
Some professional investors have been questioning the tactics of amateur traders working en masse and whether posting online is stock manipulation.
What comes next?
It is anyone’s guess what’s next in this “nerds vs. Wall Street” feud.
As of Friday, Robinhood eased trading restrictions for customers on 13 volatile stocks after raising more than $1 billion from its own existing investors. As a result, GameStop and AMC bounced back from Thursday’s declines.
Several hedge funds have suffered steep losses and pulled back their exposure to the stock market on both the long and short sides of their portfolios.
GameStop the stock and GameStop the company tell two very different stories. GameStop the company is still “a retail chain of more than 5,000 stores struggling to stay relevant in a business shifting to digital,” as Heard columnist Dan Gallagher explains. While the company has recently made some smart moves, it is still expected to report double-digit revenue declines for the second straight year. Meanwhile, the stock is up more than 25-fold in the last three weeks.
And GameStop isn’t alone. From AMC to Bed Bath & Beyond to Blackberry, several stocks are seeing their stock prices surge, in contrast to what their company performance would suggest.