GameStop battle: ‘Nerds’ v Wall Street
AN EPIC battle is unfolding on Wall Street, with a cast of characters clashing over the fate of GameStop, a struggling US chain of video game retail stores.
The conflict has sent GameStop on a stomach-churning ride with amateur investors taking on the financial establishment in the mindset of the Occupy Wall Street movement launched a decade ago.
GameStop, a well-known retail chain whose business model of selling games on discs appears to have been overtaken by a move to the internet, has been the target of “short sellers,” often big hedge funds that bet on a decline by selling borrowed shares in the hope of repaying at a lower price.
But a group of amateur investors, organizing via the online platform Reddit, has fought the trend. A group calling itself WallStreetBets, with some three million members who exchange tips and boast about beating “the system”, is credited with pushing up GameStop shares and roiling the Wall Street establishment.
Some analysts have described the situation as a “nerds vs Wall Street” battle.
WallStreetBets founder Jaime Rogozinski said the movement “is able to do what Occupy Wall Street was never able to do but on a completely different angle.
“Occupy Wall Street was fed up with this saying: ‘It’s a game we can’t play, you’re forgetting the little guy.’ Now the little guy figured out a different way around it,” he said.
The WallStreetBets forum had restricted access to those outside its 3.6 million subscribers for a few hours on January 27 evening, but was again visible to the public by 0115 GMT early on January 28.
The WallStreetBets followers have been on a GameStop buying spree, which not only pushes up the shares but puts pressure on short sellers to make purchases to “cover” their bets to avoid steeper losses.
This is known on Wall Street as a “short squeeze” and can result in a dizzying rally by forcing short sellers into becoming buyers.
As a result, GameStop surged 18 per
cent on Monday, January 25, another 115 per cent on January 26 and had leapt 135 per cent on January 27. That followed a stunning 50 per cent jump on Friday, January 22.
Short sellers, while reviled by some market players, are nonetheless seen as playing an important role in the markets by providing liquidity and driving down overpriced shares.
But at least one GameStop short seller said he walked away from the stock after what he claimed was harassment and threats by an “angry mob”.
The extreme volatility has raised concerns about manipulation, which could lead to an investigation by stock market regulators, and has even drawn attention from the White House.
White House spokeswoman Jen Psaki said: “Our economic team including Secretary [of the Treasury Janet] Yellen and others are monitoring the situation.
“It’s a good reminder, though, that the stock market isn’t the only measure of the health of our economy.”
Late on January 27, the US Securities and Exchange Commission (SEC) said it was monitoring the activity.
An SEC statement said: “We are aware of and actively monitoring the ongoing market volatility in the options and equities markets and . . . we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries and other market participants.”
Jacob Frenkel, a former enforcement lawyer with the SEC, said the situation warrants regulatory review.
One option would be “a trading pause for 10 days to ensure that all investors would have access to accurate and timely information”, Frenkel said.
Senator Elizabeth Warren also called for scrutiny. She said in a statement: “For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price.
“It’s long past time for the SEC and other financial regulators to wake up and do their jobs.”
The GameStop drama is far from over. And there are signs the movement may be spreading to other shares hit by short sellers.
Tesla founder Elon Musk – who has waged his own battle with short sellers before seeing spectacular gains for the electric carmaker – appeared to encourage the movement by tweeting a link to the Reddit forum along with the cryptic comment “Gamestonk!!”
Billionaire Chamath Palihapitiya fuelled buying this week by buying options, but later told CNBC he had closed out his positions.
He told the financial news channel: “I’d encourage anyone who is dismissive of this to go into WallStreetBets and read the forum.”
AMC Entertainment Holdings shares jumped 300 per cent on January 27 and BlackBerry was up some 33 per cent with apparent support from the rebel trading group.