"GameStonk": How an Internet Movement Could Change Wall Street Forever

source: cbsistatic.com

A month after the GameStop stock market craze, the stock of this video game company rose again. What has happened in recent weeks, and what do these new investors who organize online represent Wall Street?

This has never happened before. The shares of GameStop, a company that sells video games and collectible dolls in the United States and that in recent years had begun to close stores due to financial difficulties, became a battlefield between investors large and small on Wall Street and those who buy shares through applications on their cell phones.

Everything was born with the idea that Keith Gill Drove shared in 2019, under his pseudonym DeepFuckingValue or RoaringKitty, on his YouTube channel and in a Reddit group called WallStreetBets (bets on Wall Street), one of the most popular forums on this page, where ideas are exchanged to make investments in a coordinated way. Gill said that if many people buy shares in a company, even against Wall Street investors' forecasts, they will increase in value, affecting hedge funds.

A fund is a money from different investors raised to invest in securities such as stocks, bonds, money market instruments, and other assets. There are two types of funds: mutual funds and hedge funds. The latter are not regulated by the United States Securities and Exchange Commission (SEC) and cannot be advertised. In fact, its activity is almost secret. Very few people know what hedge funds exist, and only those with a certain profile and financial knowledge can participate in them. That is why many people view it with suspicious eyes and present it as Wall Street's malevolent institution.

These funds reduce the risk of their investments to a minimum, betting that a stock will increase or lose value. When betting on it to lose value, hedge funds borrow shares from companies and sell them, hoping to repurchase them at a lower price later and keep the difference. This is also called short buying. But when the opposite happens, as with GameStop, and there is such a dramatic rally, these funds face huge losses as they must now buy the stock at a higher price than it was when they borrowed it.

When investors and traders act under the assumption that a stock is going to fall and rise instead, this phenomenon of the stock market is called a " short squeeze ." Many people took up the idea of ​​pushing this short squeeze as a cause to attack billionaire Wall Street investors. In an interview with The Wall Street Journal, Keith Gill Drove assured that he never thought that his idea would become a massive movement that revolutionized the US stock market. For many users, he is the genius behind the exponential increase in shares of GameStop: more than 1,600% so far this year.

The craze for GameStop

Buying GameStop shares in mid-January was no longer just a financial investment but a massive move against Wall Street. The share price was then around US $ 418, but in just four days, it doubled and continued to rise in value until it reached the US $ 347.5 on January 27, 2021. Hedge fund investors who bet on it the price would fall; they lost about $ 23.6 billion in GameStop shares alone, according to financial analysis company S3 Partners.

Airplanes flew over cities in the United States with signs that read: "Buy shares of GameStop WSB." In Oklahoma City, investors bought billboards asking people to keep the investment and not sell the shares: "We're not going $ GME." In North Dallas, one appeared with the Wall Street Bets logo and the phrase: "We will not sell $ GME." Even during the Super Bowl, Reddit bought five seconds for a commercial that offered support to its users: “One thing we learned from our communities last week is that the disadvantaged can achieve almost anything when they come together around a common idea ( ...) Powerful things happen when people come together around something that really matters to them.

It is becoming easier for an ordinary citizen to buy shares on the stock market through applications. In fact, hundreds of thousands acquired GameStop through broker applications, institutions that organize transactions, such as Robinhood and Interactive Brokers Group. Seeing the frantic rise in GameStop's share price, these companies decided to cut off their users' access to the market, which quickly sank the share price.

GameStop's price fell only when Wall Street and apps that sell securities banned users from buying more GameStop shares. Lawyers for the Justice Department's criminal division are investigating possible market manipulation during GameStop's operations and recently subpoenaed the Robinhood app's directors to testify. For its part, the US Securities and Exchange Commission, charged with protecting investors, accused this application of "not seeking the best reasonably available terms to execute customer orders." The company agreed to pay the US $ 65 million to dissolve the charges against it.

The challenges to regulate

The social media manipulation of a company's shares and inflating their real value represents Wall Street regulation's challenge. The problem with regulating this behavior is that the GameStop stock buying craze, which disrupted the stock market, has parallels with the disinformation campaigns affecting national elections and the movement that led to the riots on Capitol Hill. In Washington: These are situations in which it can be difficult to assign blame, as Signal Aral, Director of the Digital Economy Initiative at the Massachusetts Institute of Technology (MIT), says.

In May 2010. a London trader who used an algorithm to manipulate the market set off a chain reaction that toppled 9% of the Dow Jones industrial average in minutes. The market recovered quickly, but that act underscored the urgent need for regulators to find tools that identify who is buying and selling through automated tools.