The last several days have been consumed by the GameStop battle between a Reddit message board called WallStreetBets and hedge funds, which has been fascinating to watch. The back story is that GameStop has been struggling, as more games are streamed online vs bought (or traded in) at brick-and-mortar retail stores. As GameStop was closing stores, with its profits declining, hedge funds took positions assuming the stock price would go down - selling short (borrowing stock to sell it now and then buy it back at a lower price, and pay back the shares later).
WallStreetBets apparently encouraged its followers to buy the stock to drive the price up, which would cause hedge funds shorting the stock to lose money. It worked in the short term. In 2021 alone, the stock has gone from roughly $17.25 to an intraday high of $483, and back down to $225...without any material difference in its revenues, earnings, or business outlook. As I write this, the stock is declining, coming back to earth.
I was recently among a group of people financial services asked about this phenomenon on LinkedIn. My response can be found here. The summary is that, to me, this seems to be a continuation of what we have seen in recent years in a number of forms throughout society: a group that is "unheard" wanting justice in some form. The optimist in me thinks that WallStreetBets's actions could be considered a form of protest. The pessimist thinks that it could be a more current version of a "pump & dump" scheme by someone with less than honorable intentions who is motivated by greed.
Technology is a great equalizer that has made trading easier & more accessible for the masses. They have the same right to trade as the hedge funds do, regardless of sophistication. There are some looking to make some quick money, and I'm sure that some will end up losing money in this phenomenon as the stock comes back to a reasonable level. I expect that there will be more regulation on both hedge funds and trading apps as a result of these events.
I would love to hear what you think about this, and who you consider to be right or wrong. Send an email with your thoughts, or post them on our social media pages.