For the last two and half weeks, small investors have been bidding up GameStop shares in a bid to punish the hedge fund titans who had been betting on the retailer’s demise. The effort was so successful that the stock rose more than 17 times by the market’s close on Wednesday.
But that support began to crumble Thursday as online brokerages like E-Trade, Robinhood Markets and Interactive Brokers limited access to trading in GameStop shares, causing its stock to plummet by 44% just on Thursday, from $346.57 to $193 a share. The stock is still up 927% for the year.
The rapid rise has led some investors to crow about how they were whacking Wall Street and landing a blow for the little person. “It’s a beautiful thing to see,” said One_Guy_One_Jar on Reddit’s WallStreetBets, a central gathering space for the movement. “I don’t think of my purchase as an investment, but as putting my own skin in the game” to denounce a rigged system.
Critics, however, say the rapid rise seems like a case of market manipulation that should be investigated by the Securities and Exchange Commission. The SEC said Wednesday that it is monitoring the market’s volatility and “working with our fellow regulators to assess the situation.” State regulators have also expressed interest.
GameStop, the Grapevine, Tex., public company at the center of this exuberance, hardly appears to be worth all the attention.
The company reported an operating loss of $399 million in 2019, narrower than the 2018 losses of $701 million. The firm, which had 5,000 stores in ten countries before the pandemic, has been on a steady track to build its online business and close poorly performing locations.
Ryan Cohen, founder of online pet-food giant Chewy, bought a stake in GameStop last year and joined its board, leading some to expect a turnaround.
The company has been helped by stay-at-home mandates in New Jersey and Pennsylvania that have prompted more folks to take up electronic gaming. The shutdowns have also encouraged enthusiasts to buy—and trade in—popular video and streaming hits such as Call of Duty: Cold War, Spiderman, Miles Morales and HitMan 3. Both Sony’s PlayStation and Microsoft’s Xbox put out new gaming consoles before the holidays, further fueling the trend.
With at least a dozen locations in the Greater Philadelphia area, GameStop has emerged as a major beneficiary of COVID claustrophobia.
At the Cherry Hill Shopping Center store in Cherry Hill, customers were too busy playing games to track the hourly gyrations of its stock.
“The hit games have been very hard to keep in stock,” said Ricardo Soto, assistant manager at the Cherry Hill store. The corporate office chose to sell popular games and accessories in waves online, to prevent crowds from gathering in stores, he added.
“After the holidays, business really picked up. We’re breaking last year’s expectations,” Soto said. “That’s due to everyone being home and demand with PS5 and Xbox” releases last fall.
GameStop isn’t the only target for day-traders. Others include American Airlines, the theater chain AMC Entertainment Holdings, Blackberry, retailer Bed Bath & Beyond and other public companies with a significant “short” position, meaning bets made by investors that the share price will go down.
But GameStop’s current sky-high price isn’t rooted in financial fundamentals or reality, says Samuel Rosen, assistant professor of finance at Temple University, and instead are being manipulated.
“It shows the power of these online communities” to drive prices, he said.
Vanguard Shareholder
Hedge funds, large institutions such as Vanguard and first-time traders have all been touched by GameStop.
Vanguard’s index funds are shareholders of GameStop, but the effect has been miniscule, said Jeffrey DeMaso, director of research at Adviser Investments, which tracks Vanguard funds.
The Malvern mutual fund giant is one of the largest institutional shareholders in GameStop, holding roughly 4.17 million shares in its funds as of Dec. 31, according to Bloomberg data.
Those gained roughly $1.6 billion in value, which is a drop in bucket compared with Vanguard’s overall assets of $6 trillion. Among more than 40 Vanguard funds holding GameStop shares, the company’s Total Stock Market Index Fund is the largest shareholder, with 1.2 million shares as of Nov. 30.
And there are no business-related reasons why the share price has shot up over 17 times in one year, DeMaso said.
Instead, it’s a populist movement.
“There are layers as to why people are involved in GameStop—Wall Street bashing, pure greed, people getting their stimulus money. It’s a reflection of people bored sitting at home,” he said.
In addition, day-traders are suffering from the “gambler’s fallacy, the belief that what’s happened in the recent past will keep happening in the future. Your successes tell you you’ll have more success,” he said.
WallStreetBets and other Reddit message boards are rife with new ideas to drive big run-ups in price, a mania reminiscent of the dot-com boom-bust and the 2008 real estate bubble, academics noted.
“It’s a fine strategy, as long as you’re not the last person buying,” said Rosen. Even his students at Temple’s Fox School of Business have been talking about GameStop’s valuation.
“These are due for a crash, similar to the ones we saw in 2010″ among high-frequency traders, Rosen said. “Prices can go down as fast as they went up.”
What about the online trading war between retail and professional investors?
The GameStop trading frenzy “is a fascinating example of collective action through social media. From what I’ve seen, most of the retail investors joining the Reddit movement understand that they’ve taken a reckless position,” said Nathan Fong, associate professor of marketing at Rutgers University–Camden.
To succeed, “they have to convince everyone - including each other - that they’re a little bit crazy and are going to hold onto their GameStop stock. So far they’ve managed to achieve that, in part because they’ve built a subculture that is at once both self-deprecating and hostile to being patronized by the establishment,” said Fong.
Not That Robinhood
Investors opened up 10 million new brokerage accounts in 2020, according to JMS Securities research. And many of them started trading through online-only brokers such as Robinhood.
But not with Robin Hood Funding of Wayne, Pa., which says it has been fielding hundreds of misdirected calls recently from disgruntled Robinhood brokerage customers looking for answers.
In a case of mistaken identity, Robin Hood Funding, which buys legal settlements and annuities, has been flooded with calls from people “who mistake us for the Robinhood investing app,” he wrote in an email.
“It has been a nuisance for a number of years now,” he noted, adding that this week’s controversy surrounding Robinhood has ramped up the calls.
“We’ve had a couple already this morning from app clients who didn’t have the nicest things to say.”
