Recently, the video game retailer where we used to sell our games became the center of the most recent stock market frenzy. The GameStop saga began when its stock value surged in late January, spurred on by one very determined group of Redditors. Using new technology and trading apps like Robinhood, individual traders disrupted the market, nearly bringing major hedge funds to their knees. However, there are plenty of rumors and questions remaining in the aftermath.
What Caused the GameStop Saga and the Stock Market Surge?
When Redditors got into a sparring match with Wall Street over floundering stock prices, certain share values soared to record heights. While GameStop is at the forefront of this market fluctuation, it has also affected AMC and a few other stocks as well. However, GME captured headlines on January 27. It closed at an all-time high $483.00 per share, more than 800% of its current valuation.
The institutional investors betting against the company had to back out. In a move known as a “short squeeze,” short sellers had to repurchase stock for a higher price. Although this is not an unusual investing move, the GameStop saga did introduce new factors. New technology and trading platforms are changing the way people invest. It is democratizing trading by making it accessible to everyone. However, you can be certain it has also caught the attention of both investors and regulators worldwide.
Why Was Everyone Up in Arms?
The problem began when Robinhood began limiting trades on their platform. The app founded its mission on bringing investing to more people. So, some individual traders interpreted the restrictions placed on GME, AMC and other stocks as a personal attack. This group became indignant when they discovered their access had been limited. They were unable to buy stock while the hedge funds still had access to them.
In truth, Robinhood simply did not have the capital on hand to cover the flood of trades. Clearinghouse trades can take a few days to settle. The amount of money moved around during the trading frenzy was more than Robinhood could handle. So, they put the restrictions in place to cover any potential losses and slow trading until it could raise more capital.
However, there are plenty of rumors floating around and some speculation of illegal activity. Questions of conflicting interests and collusion are popping up across the web. For example, some claim that professional traders encouraged the classic pump-and-dump scheme. They say they promoted the price pumping within the Reddit crowd, intending to get out before stock prices stabilized again. Other accusations say traders ignored the rules. There is some evidence of illegally shorting stocks without ownership or control of the borrowed shares. We all anxiously await to see what new information will come to light about these allegations.
Will the Sheriff of Wall Street Shut Down Robinhood?
One thing is abundantly clear as financial experts analyze this event: lawmakers and regulators are not happy with Robinhood. Furthermore, the individual traders using the app feel slighted since Robinhood impaired their ability to purchase stock. While it was a vital resource for individuals to purchase stock, many users are now cashing out and moving their funds. The future of the trading platform could be in jeopardy.
The fate of Robinhood depends on the outcome of several investigations and lawsuits. The first class action suit was filed on January 28 in the Southern District of New York. The lawsuit claims that Robinhood “purposefully, willfully, and knowingly removing the stock ‘GME’ from its trading platform in the midst of an unprecedented stock rise… (it) deprived retail investors of the ability to invest in the open-market.”
This is likely just the beginning of legal action taken against Robinhood. Tens of thousands have already joined the first class action lawsuit. However, the investing app could be facing more than 30 more in the days ahead. In addition to investigations by both the state of New York and the U.S. Securities and Exchange Commission, members of Congress have also come forward in support of a Congressional hearing on the matter.
Despite all the legal actions already filed, Robinhood’s CEO Vlad Tenev is standing firm in their decision to implement restrictions. He said they “had to conform to our regulatory capital requirements” and only allow limited buys. Many of these limits remain in place. Individual traders have maximum number of shares they can buy, no trading options, no buying on the margin, no fractional shares, and no recurring investments. However, the maximum number of shares available to purchase has been raised.
What Did We Learn from the GameStop Saga?
There are a few important takeaways looking back on the GameStop saga. If nothing else, it is a harsh reminder that there are just as many losers as winners in stock market buying frenzies. Many Redditors who bought too late during the highs have now suffered significant losses. This has further alienated individual investors from trading apps like Robinhood. However, shorting is a risky gamble for professional and amateur investors alike.
It is also important to point out the inaccurate comparisons being used to describe the event. The biblical analogy of David vs Goliath is powerful, but not entirely accurate in this situation. In this instance, individual investors pumped up these stock’s valuation. Some did so in an effort to defend the underdog. Others were attempting to stick it to the arrogant hedge fund managers who have often been accused of stock market manipulation. However, these sharp declines affect their clients more than their management.
At the end of the day, the GameStop saga upended some long held conventions about trading and the influence of individual investors. Whenever you play the stock market, investors take a huge risk by joining these trading frenzies. Everyone wants to bet on the long shot, but only those who bought shares early on saw significant gains. It has become a cautionary tale to many green investors who bought in late when shares reach their highest value now left with nothing.