The Legal Escape (issue #8)
A round-up commentary of leading commercial news in the UK and worldwide.
February 2021
GameStop STONKS!- Prank Of The Century!?
I cannot help but chuckle at the calamity that has arisen from this story. So what's happened?
GameStop, a videogame and electronics retailer in the US, have been on the decline for years and worsened throughout the pandemic. With global media switching to digital, the demand for disc media is quickly dying away. GameStop have been on their way out.
Towards the end of January 2021, a collection of average-Joe retail "meme-traders" on the popular social news and forum website, Reddit, have perhaps caused one of the most disruptive events on the NYSE. Intending to 'punish' the big boys for betting against any success of GameStop, Redditors worked together to artificially inflate GameStop stocks, reap profit for themselves and cause hedge funds to buy back their borrowed stocks at a loss through short-selling.
Here's a basic explanation of 'short-selling' extracted from the BBC:
- Imagine you borrow some Pokemon cards from a mate, because you think the price of them is about to drop, and agree to give them back in a month.
- Then you sell them to someone else for ￡5 per pack.
- You work on the assumption that you'll be paying less than a fiver for them after a month when they're not so new and exciting anymore. Let's say you buy them back for ￡3.
- Congratulations, you've made ￡2!
- Think of it as gambling. If your bet was wrong and the price actually rises instead of falling, you'd lose money.
Wall Street have lost billions through this debacle; one fund at the centre of the GameStop saga who had bet against the company, Melvin Capital, lost $7 billion. With the vast amount of money being moved around from this episode, it caught the attention of the US Treasury and regulators such as the Federal Reserve, the Commodity Futures Trading Commission, the Federal Reserve Bank of New York and the Securities and Exchange Commission, whom are all either reviewing or will investigate the matter shortly.
Robinhood, a US commission-free stock trading app, initially stopped users from purchasing shares in GameStop. This led to uproar from retail traders arguing collusion and market manipulation between the funds and Robinhood, The subreddit, r/wallstreetbets, initiated this plan in 2020 where a user pointed out GameStop stocks were undervalued. The Reddit community banded together exchanging thoughts on why they wanted to do this and seemingly ran with the idea that they were hell-bent on ruining Wall Street (probably for a laugh but who knows!).
What's happened now?
Well, the GameStop frenzy is inevitably losing its momentum dropping 65% in value on Tuesday 2nd February so it looks like this episode is coming to an end. Today, Robinhood lifted all its trading restrictions including GameStop and AMC shares. They said the restrictions were necessary for it to cover potential losses. Robinhood recently made the following statement on their website:
“With individual volatile securities accounting for hundreds of millions of dollars in deposit requirements … we had to take steps to limit buying in those volatile securities to ensure we could comfortably meet our requirements".
Also, it would not be surprising at all if Robinhood get stuck in treacherous waters. It is likely they will be entangled in a myriad of lawsuits - many arguing the company shutting down trading caused users to intentionally lose money so the trading app's future may not look bright in the short-term. Just expect more regulators and politicians to get involved to prevent events like this happening again.
It's practically guaranteed that financial players are keeping close dibs on the Reddit forums in anticipation for another similar attack. If the so-called "meme-traders" were intending to simply embarrass the global financial markets, to an extent, they certainly did!
Adeel Butt