It was something completely new for the stock market world that happened in January around the previously neglected US stock game Gamestop. Hobby investors on the social media platform Reddit, who had formed an alliance there in the “WallStreetBets” forum, drove the video game retailer’s prices up massively with concerted purchases – especially via the broker app Robinhood. In doing so, they forced several hedge funds to buy stocks as well. Because they had bet with the ailing company through short sales, a forward deal, on a price decline. Since the prices were now going in the opposite direction, they had to quickly stock up on Gamestop shares. Otherwise their loss, which should ultimately add up to $ 12.5 billion, would have been much greater. The spectacular thing about this spectacle: For a short time, the price at Gamestop shot up like a rocket – by up to 1,800 percent.
Similar price capers triggered by Reddit retail investors were recently observed in the silver price, which jumped to an eight-year high in early February, as well as in several US companies, including the cinema operator AMC, the headphone manufacturer Koss and the fashion chain Express. Here “stock market rebels” also dueled in concerted actions with professional investors who had bet on falling prices with short sales. With the result that short-term price gains in two or even three-digit percentages were recorded.
High rise – and deep fall
The se catapult-like upward movements were of course not sustainable – least of all with Gamestop. After a steep downturn and extreme price fluctuations, there is now little left of the extremely lush price gains that have been detached from any fundamental data. Similar to a pyramid game, many Reddit investors at Gamestop & Co. are now sitting on high losses, provided they only got in when the prices were already at light heights or they missed the timely exit.
Monika Rosen-Philipp, chief analyst at Unicredit Bank Austria, therefore believes that against this background one must ask the – also moral – question, “whether one should, as it were, protect small investors from themselves”. When Robinhood, the trading app preferred by Reddit investors, restricted the purchase of Gamestop shares at a certain point in the price rally, this led to “loud protests,” recalls Rosen-Philipp. It was said that the restriction was only intended to protect the hedge funds. “Since the course of Gamestop fell massively as a result, one can also say that small investors were prevented from burning further money,” emphasizes Rosen-Philipp.
Danger of the “playful note”
The Viennese stock exchange expert is critical of the “gamification” of Internet trading platforms, the application of game-typical elements in a context unfamiliar to the game. “Apps like Robinhood add a playful touch to stock market trading that may distract from the fact that this is about real money and real potential losses,” Rosen-Philipp points out.
In any case, she doubts “whether all small investors who bought Gamestop in January were really interested in a long-term investment”. After all, the company is currently in the red and will continue to do so at least for the next year. Side detail: Gamestop is actually deep in the crisis and has meanwhile been considered written off. The branch business with video games no longer has great prospects in times of the online boom and is still suffering from the Corona crisis.
“Wrong stage” for revolts
Also for the chief analyst of Raiffeisen Bank International (RBI), Peter Brezinschek, it is clear: “ The motivation of the small investors was not to bring the hedge funds (as the much criticized epitome of capitalistic greed, editor’s note) a massive loss to save the company Gamestop. ” If it had been about helping an ailing company, then that would be “understandable and worthy of recognition,” said Brezinschek. “But just looking at where most of the short sales are and waging a fight there out of aversion to hedge funds, I consider the function of the capital market to be totally detrimental and unnecessary.” Brezinschek’s conclusion: “ The stock market as a battlefield between stock market rebels against hedge funds or other institutional investors is the wrong stage.
The computer and not the gauntlet should rule the stock market.”
The share in particular is repeatedly misused – also in Austria – for ideological misinterpretations.” From Brezinschek’s point of view, the short-term run on Gamestop shares ensures that everyone involved loses, not just the hedge funds that have been declared an enemy. Both sides “unite short-term pursuit of profit, the long-term component of stocks falls by the wayside,” he criticizes. Equity financing in particular is a “motor for new developments, structural change and innovations” – with a positive influence on economic growth and employment.
“In any case, the WallStreetBets” community bought their success at a high price, “continues Brezinschek. Because the professional investors have moved on, and now the stock market rebels are among themselves at Gamestop. “If you bet on a badly loss-making company that could not make a profit until 2023 at the earliest, the stock market rebels will still have to pay a lot of money,” says Brezinschek. Because the estimated goodwill of Gamestop is 13.5 dollars per share, but the stock market price is around 42 dollars. Postscript: “WallStreetBets will also have to take note of the fact that long-term company valuations determine what happens on the stock exchange.”
Helmut Siegler, member of the board of directors of Schoellerbank, is not happy with the recent stock market battle either: “ The gamestop events had the potential to weaken confidence in the markets,” as he says. Siegler therefore breaks a lance for corresponding regulations: “We support all efforts that ensure transparent and honest trading in the interests of all investors.”
Was it market manipulation?
In the USA, the price rally at Gamestop (and other market values such as the silver future and AMC) has already called the supervisory authorities, but also politicians, into action. The re is suspicion of market abuse and market manipulation. On Thursday, the Gamestop cause was even discussed in the American Congress with media coverage. In addition to hedge fund managers and company bosses, the online broker Robinhood, who was criticized for sudden purchase restrictions, and the YouTuber “Roaring Kitty”, who is considered the driving force of the “WallStreetBets” community with his aggressive advertising for Gamestop, had to appear before a committee of the US House of Representatives to testify on the price turbulence.
A result of the investigations is still pending, but for Brezinschek the situation is already clear: “ The creation of an, artificial price ??, which has no economic foundation in the company, turns the WallStreetBets ?? game stop campaign into a clear market manipulation . ” Even according to the EU Market Abuse Regulation, “actions that influence the price of shares so massively that they reach an artificial price level are criminal behavior,” says Brezinschek. He emphasizes the appointment in social media forums, which is easy for the supervisory authorities to identify. In addition, a broker was primarily used with Robinhood.
Ultimately “small fish”
With a view to possible changes in the financial markets due to cases like Gamestop & Co., Brezinschek believes that more activity by organized small investors can be expected in the future. However, this will only make itself felt in the short term in market fluctuations, especially since the global market capitalization is 95,000 billion dollars and groups like “WallStreetBets” are ultimately “small fish”. The RBI expert also believes that something will soon happen on the New York Stock Exchange. Because the – “wrongly” – allowed more than 100 percent short sales of the existing shares, which sometimes resulted in “short-selling orgies”. Another positive thing is that hedge funds have learned from their lesson that they shouldn’t get too high a share of short sales in small public companies.
“Free brokers like Robinhood, who earn money from the sale of transaction data, will also be looking more closely at whether they are not encouraging market abuse because they sell one-sided information transfer for a fee,” says Brezinschek.
Bitcoin price rises and rises
As for the broker app Robinhood, which has a reputation for attracting a generation of gamblers by offering free stock trading, it has also been offering trading in high-risk cryptocurrencies since the beginning of 2018. With Bitcoin, for example, the record hunt continued this week. The magic mark of $ 50,000 was cracked for the first time.