How GameStop rocked the world

By now, you might have heard about the once in a generation phenomenon rocking Wall Street and the stock market

This episode is one for the history books, make no mistake about it. In just the last couple of weeks, the value of the stocks of the videogame retailer, GameStop, soared by over 1000%. Despite being a company that has been bleeding money and slowly failing over the past few years, its meteoric rise in the stock market has made poor people rich and has sent the financial elite into a frenzied panic. The market, unsurprisingly, is designed to favour the rich over the man in the street – and this was all something that was never supposed to happen.

Our story begins some weeks ago, when an amateur investor on the social media website, Reddit, observed that unscrupulous hedge funds had engaged in a highly risky, dirty practice with GameStop’s stocks. This practice is called short selling. In brief, hedge funds borrowed hundreds of millions of dollars’ worth of GameStop stocks and then immediately sold them, driving the price down. The expectation is that when the time comes to return the stocks, they will buy back the same amount of stocks, but at a much lower price. In this fashion, they make a huge profit, at the expense of GameStop, whose value they have driven into the ground. One hedge fund in particular, Melvin Capital, sold more shares than are even available in the market. How does that make sense? Welcome to the murky, dirty world of international finance, where numbers can be juggled with little connection to reality.

This is a strategy which has been used to drive entire economies into the ground and ride companies to the bottom. Like parasites, the hedge fund was sucking the life out of GameStop, as has been common practice for many years with many different companies. There was just one catch in this case. Somebody noticed an opportunity. An amateur investor realised that if he bought GameStop shares, he would have a guaranteed buyer for them, because Melvin Capital would have to return the shares it “borrowed”. This amateur investor shared the news about how overbought GameStop was with a Reddit community called /r/wallstreetbets, and this led to the community buying GameStop shares. As a result, the price of GameStop rose. This meant that suddenly, Melvin Capital would have to buy back all of the stocks it had borrowed. This time, however, it would be buying them at a higher price instead of a lower price – making a huge loss in the process.

In other words, the Reddit community created massive demand for GameStop stocks, driving the price up, and putting Melvin Capital into a desperate situation. Suddenly, Melvin Capital owed countless normal, average people around the world an increasingly gigantic amount of money. As more people entered the market to buy GameStop shares, the price rose ever higher, driving Melvin Capital into deeper trouble. Before you feel sorry for Melvin Capital, do note that their calculated risk is itself an immoral practice, coming at the expense of GameStop and many other companies and national economies. Many amateur investors shared stories about how this was an opportunity to get revenge on Wall Street, writing personal stories of the poverty they and their families suffered due to Wall Street’s reckless behaviour in the crash of 2008. It was not just about the money. It was personal.

On Thursday 28th

January 2021, however, one of the main brokers in the USA, called Robinhood, suddenly stopped allowing the purchase of GameStop shares. Similar platforms around the world did the same. Their infrastructure, they would claim, could not keep up with the demand. This takes us back to the idea that Melvin Capital had traded more than should logically be possible. The advocates of unregulated market suddenly called for stricter regulations, only to be shamed for their unethical practices.

In spite of this incident, the price remained incredibly high, foiling the efforts of hedge funds to fully recover. The story of GameStop is not yet over by the time of the publication of this article. Yes, this is only a temporary phenomenon in the market, called an “short squeeze”, and it has winners and losers, as these markets always do. Yet for a brief moment in time, the common man has managed to send a message and beat Wall Street at its own rigged game. There is no doubt that change will come from this phenomenon. Who it will favour is not in doubt, however. The free market is free, and the environment matters, until the obscenely rich lose money.

“Our story begins some weeks ago, when an amateur investor on the social media website, Reddit, observed that unscrupulous hedge funds had engaged in a highly risky, dirty practice with GameStop’s stocks.”