On Wednesday, February 10, James Milne, Head of Product at AlphaCert sat down with Stephen Huppert, Independent Consulting and Advisor, to discuss the GameStop stock saga. In particular, looking at what prompted the initial spike and what potential long-term implications the event boasts for small investors, startups and large hedge fund firms in the future.
The fundamentals: How the GameStop Saga started
Hi, it’s James Milne here from AlphaCert labs. I’m the head of product. And I’m here with an industry leader, Steven Huppert. To talk about what’s been going on with GameStop. It’s something that we’ve been watching very closely from our desks here at AlphaCert, watching the ups and downs and how the price has been moving, and what the background is to all of this action on the stock market. So Stephen, how did we get here? What’s the background to the to the GameStop story?
It’s been fascinating, James, and thanks for having me on. I guess there’s a couple of streams coming together here. There’s the Wall Street bit and the Reddit/subreddit. For people who are unfamiliar with Reddit, it’s a social media platform where people discuss common interests in forums known as subreddits. Lots of simple, fairly crude forums, but it’s a great place where people can have dialogues and conversations about things. And there’s lots of communities (subreddits) available to join. One of them is the subreddit called, Wall Street Bets where lots of people share trading jokes and lots of jargon related to the stock market. It’s a real community, almost like a subculture that’s built up. About 12 months ago, there was a bit of chatter around the GameStop stock. GameStop have shops in suburbs in the US and in shopping malls, and they sell computer games. There were plenty around here in both Australia and New Zealand, in the late 90s into the 2000s.
What was that first lot of chatter around? What were they analysing there?
They were questioning the fundamental valuation aspects of the stock. Like many bricks and mortar stores, there was questions about whether the business would continue. There was some contrary here between the Wall Street Bets people. There were some suggestions that there was a bit of nostalgia for it, because many of the users on Wall Street Bets would have been the sort of people that would frequent the GameStop shops in their youth. But there were also some different people coming on the board and looking at those questions about whether GameStop could be able to translate into an online store and become a much higher value stock.
Within the last month the chatter really took off around the short positions and that was when people in the Wall Street Bets subreddit realised that the number of very large hedge funds were shorting the stock – which means that they were borrowing the stock, selling it, hoping it will go down, and then being able to make a lot of profit of it – and so the Wall Street Bets people saw a great opportunity to have a lot of fun with these large hedge funds, by just pushing the price up. Doing what they call a ‘short squeeze’ – meaning that the short position these hedge funds were holding, would cost them a lot of money.
How current affairs played a role in the GameStop saga
Yeah, and in the background, there’s been some other factors at play out there. What do you think about the background overlaying this with the global pandemic that’s going on and the rise of Robin Hood as an investment platform for the small investors and the day traders? How does that all layer into it do you think?
Yeah, it’s really very much what we call a perfect storm, isn’t it? So, I think anything that we look at in the last 12 months, whether it’s personal or economic, or professional has to be overlaid by the pandemic, which changes a lot of things. So with the pandemic, you know, in the United States, a lot of people working from home or not even working – a lot of stimulus checks. There were people sitting around with their stimulus checks. One of the other hypotheses I’ve come across is that many of these people did lots of sports betting and because there were no sports going on, or professional sports going on, they shifted their attention from sports betting to day trading. And so that was one factor. And then you mentioned Robin Hood, and Robin Hood’s been around for a few years now. It’s an online broker application that people can buy and sell shares, more importantly, even fractions of shares. Their whole premise is to take the friction out of it and make the average person able to access the share market and certainly, this GameStop episode showed it in spades. Really, when we saw it go up to $483 it was at its high, today we’re sitting just under $50 at $49.90. So, it’s truly been a roller coaster ride for GameStop. Quite amazing and, you know, as I’ve been reading some of the information about it and about what the Wall Street Bets people were doing. They weren’t even concerned about how high it was, people were just buying in and boasting, you know, posting screenshots online of them buying in at $300 or $400, because it was all about pushing the price up. You know, the hedge funds have their rules and the way they approach their short positions, and as the market goes up, and they want to get out, that pushes the market up even higher.
We call that unintended consequence, a variety of different, independent actions all coming together, that pushed the price up over $400. It became, at the end of the day, for the Wall Street Bets crowd, about sticking it to the man and watching the pressure put on these hedge funds.
The long-term implications of the GameStop saga
As we look at it now. It’s gone ahead. It’s at its peak, and it’s now on the way down. I’m sure there have been winners and losers out of this. That will all shake out over the next little while. But what do you think of the long term implications of something like this? We talked a little bit about the power of the small investor, how do you see that over the next little while in the investment market?
Yeah, so if I look at that, there’s two parts to me. One is the behaviours of people in the investor markets – the small investor versus the big institutional investor, something that’s been playing out for a long time. And that will continue to play out. Also the impact with technology, with social media, we’re able to see the small investor have more and more short-term impact, at least on markets. Now, whether that’s a long-term impact or not, as you say, we’re back down to $50. So you know, when we step back in perspective, it’s a blip. But for a short period of time, the collective power of the individual was certainly significant. I wonder whether that’s going to have any sort of long-term implications at all in that sense. But I think for institutional investors to try and understand the individual investor and the behaviours of it, things like that will be important. Then the other implication, I think, is that on the FinTech side. So Robin Hood, you know, this looked like a payday for Robin Hood, suddenly, there was huge amounts of money being traded through their platform, but one of the problems that occurred was they ran into a liquidity problem and had to stop trading for a period of time. So again, I think for anybody with a start-up, or even a three, or four, or five-year-old business like Robin Hood, you’re still a small business and there’s implications there as well. So, I think it’s important to look at that from a FinTech perspective as well.
Absolutely. Yeah, a number of lessons learned and I’m sure investment managers in FinTech companies and large hedge funds, certainly across the board.
And for regulators. That’s one of the interesting things that’s happening in the US as well, and we’re seeing a lot of discussion now, at both government and regulatory level about: Is this something we need to do something about; What can we do something about; Was this just a blip that we don’t need to take any action on?
Yeah. Especially it is, it is.
It’s been a lot of fun. I think one of the things for me has been seeing, you know, rather than just in the
business or trade media’s it’s been all over popular media on TV and on talk shows, everyone’s talking about it. It’s been very interesting.