The Gamestop Earthquake on Wall Street
For many following the market, whether as regular investors, traders or enforcers, what is happening now with Gamestop trading is reminiscent of watching the OJ Simpson car chase from live-stream cameras above a highway in California. Something dramatic will happen but no one can say what or how.
Hedge funds and Wall Street Institutions have already lost billions as the result of a swarm of day traders acting on investing leads posted on the social media site Reddit. In a nutshell, Gamestop, which is a brick-and-mortar video game retail chain, is generally perceived by the market to be in a dying industry, and as a result many hedge funds have taken significant “short” positions on its stock, betting that it will go down in the future.. Enter the day traders of Reddit as a collective force, individually buying Gamestop stock so aggressively that its price precipitously rose, which put the hedge funds’ significant short positions at risk and caused them to “cover” their shorts by also buying the stock, which, in turn, only made the price of Gamestop go higher and cause more buying in a positive feedback loop. Gamestop’s meteoric rise has made these day traders very rich, with some claiming to have made millions, and at the same time caused hedge funds billions of dollars in losses, forcing at least one to close altogether. And the pattern has been repeated, albeit to slightly less dramatic effect, with other heavily shorted stocks such as BlackBerry, AMC, and Nokia.
Some are applauding the recent “democratization” of investing that has enabled these non-professional industry outsiders to work together, likely from the comfort of their homes, and get rich while taking on industry insiders. This democratization is generally attributed to the proliferation of social media platforms like Reddit, which theoretically allowing millions of people to coordinate and act as one collective market participant, and the industry shift to “no fee” online retail brokerages like Robinhood, which has erased the transaction costs that might have otherwise deterred these outsiders’ market participation. And their aggressive spirit is explicitly intended to predate upon industry insiders, motivated on its face by the rampant wealth inequality (disproportionally felt by the younger generation primarily on social media sites like Reddit), for which Wall Street is typically held as the most egregious example.
Yet on the other hand, others are appalled by these non-traditional market forces that have seemingly brought Wall Street to its knees, as the price of Gamestop stock is, at least for the time being, totally decoupled from its underlying metrics and true value. In that vein, some see this trading as a sort of market nihilism, reflective of an attitude which threatens the market as a whole.
This ongoing event is worth your time to observe as it may radically alter today’s market structure. . STAY TUNED