KF Update – Gamestop Craziness

3 Minute Read

While the price swings in GameStop are getting the headlines, that is just the tip of the iceberg of one of the most incredible stories, and incredible weeks in Wall Street history.  When AOC and Don Trump Jr. are on the same side of an issue, it has to be quite the story!  Let’s dive into what we just witnessed this past week:

What is GameStop?
A brick-and-mortar retail store that sells video games, has been trending towards bankruptcy, and traded at around $20 per share to start the year 2021.

What happened this week?
The price per share skyrocketed to as much as $468 yesterday and is currently trading around the $330s.

Why did the price go up so dramatically?
A group of day traders who had been sharing their trading strategies on the social media platform Reddit, jumped into the stock and then the power of the internet took over.  The news of the buying of GameStop, along with several other distressed companies spread, and day traders around the country piled in, sending their stock prices soaring.

Sounds great for those traders, what’s the controversy?
While it was great for these day traders, some big time Wall Street hedge funds were crushed.  These hedge funds had been betting against GameStop along with several other distressed companies through a trading strategy called “Short Selling.”  If the stock price goes down, the hedge funds make money, but if it goes up, they lose money.  The higher the share price goes, the more the hedge funds lose; in essence, there is no limit on the losses if the stock price keeps rising.

At least one hedge fund, Melvin Capital needed emergency cash infusions.  Worse yet, the trading strategy of “Short Selling,” when it goes really wrong, the hedge funds actually have to turn around and buy the stock at these elevated prices.  This is called a Short Squeeze and is contributing to the dramatic price increases in these stocks.

Disclosure: Kane Financial does not engage in short selling, investing in hedge funds, or any other exotic trading strategies.  We stick to the boring (yet effective) long-term buy & hold strategy using low cost index funds, a strong tilt towards quality and value, diversification, and ongoing rebalancing.

What is Robinhood and where does it fall into this story?
Robinhood is a trading app that you can download onto your phone, and trade using many of the same sophisticated strategies that Wall Street firms can use.  This app has helped to democratize trading and make markets available to anybody for no cost to the user.  This is primarily the way that these Reddit users and day traders around the country access markets and trade these stocks.

So it sounds like a bunch of day traders outsmarted the Wall Street professionals, great story right?
Not so fast, mysteriously, yesterday morning Robinhood suspended trading on GameStop and these other distressed companies that the day traders were piling into.  They only allowed these stocks to be sold, but not purchased.  This in turn sent their stock prices tumbling, and is being speculated, helped the hedge funds stop the bleeding and get out of their short positions.  Trading today resumed and went back to normal.  Many of these day traders were furious.

Why would Robinhood do this, infuriate their clientele and help out Wall Street billionaires?
The million, or in this case, billion-dollar question.  The CEO of Robinhood came out and claimed it was due to Net Capital Requirements, liquidity levels that brokerages must keep in case of market stresses and/or panices.

Others are speculating that Wall Street’s elite leaned on their power/influence to get Robinhood (and several other trading platforms) to change the rules in the middle of the night to tank these stocks and save themselves. 

Is what Robinhood did criminal and market manipulation?
This is where congress and the SEC are getting involved, stay tuned.

Bigger Picture
There was a tear in the matrix, you could say.  Regular investors think the rules of the investing game changed right in front of their eyes to help Wall Street’s elite class. 

Ironically, I think Bitcoin and decentralized finance fits into this discussion as well (another article coming soon).  Bitcoin is a decentralized currency that is not controlled by one person, government, or corporation.  It’s owned and controlled by its users, and that is one of the many reasons for its popularity.  Bitcoin is part of a larger movement of decentralized finance, where third party intermediaries (those that wield the power/influence reference above), are eliminated and transactions occur directly between the parties involved.

I think we could see a dramatic shift in finance over this next decade (for the better), and what happened this week is an important part of that story.

If you have any questions at all, or would like to schedule a meeting you can do so utilizing the button below or simply calling our office.  Have a great weekend!