GameStop: How a horde of individual investors is shaking Wall Street

Posted on Jan 29, 2021, 2:48 PMUpdated Jan 31, 2021, 5:14 PM

1 What is the origin of the phenomenon?

GameStop is an American video game distribution brand based in Texas which has owned the Micromania chain of stores since 2008. Rolled over in recent years by the boom in online games, it has become a prime target of a hedge fund category, the “short-sellers”. The stock was the best-selling short of the entire U.S. listing in 2020, according to S&P Global. Short sellers borrow shares of companies that they predict will drop in price, hoping to buy them back at a lower price and pocket the difference. This technique is very risky because the losses are theoretically unlimited if the title goes up instead of down.

But now, since the beginning of the year, GameStop has become the darling of legions of individual punters who find themselves on the Reddit forum titled “WallStreetBets”. His title started to take off on January 12, driven by changes to its board of directors with the goal of doubling digital sales. Still evolving at just under 20 dollars, the share price first rose gradually, before taking off on the 25th. Encouraged by a tweet from Elon Musk, the founder of Tesla, on the 26th, the stock marketers then sent the title into space, hitting $ 483 Thursday in session, to close again at $ 325 Friday night. In all, the stock has taken more than 1,600% since the start of the year.

2 Who are the members of “WallStreetBets”?

Individuals looking for thrills? Geeks nostalgic for vintage brands? The Reddit forum, which already had 2.2 million members on Wednesday morning, had more than 7 million on Sunday. Behind the most eccentric pseudonyms, the members of “WallStreetBets” exchange tips and brag about their stock market gains with a lot of screenshots and memes. Their objective ? Hide the hedge funds that sell short securities.

One of the initiators of this campaign, DeepF *** ingValue, who ran a YouTube channel under the nickname “Roaring Kitty”, featuring images of kittens, has been identified as a 34-year-old American financial advisor. He had been campaigning for GameStop since 2019, posting his earnings and repeating that the company was undervalued. His messages ended up attracting attention. On Saturday, his last post showed a gain of more than 4,000% on GameStop to reach a value of 46 million dollars. When the showdown with hedge funds hardened, messages also multiplied on the forum to encourage stock marketers not to sell their shares.

3 Why are hedge funds trapped?

Short selling hedge funds have literally been caught in their own right. Their losses have run into billions of dollars since the beginning of January. On the title GameStop alone, short sellers have accumulated nearly 20 billion in losses, according to specialist S3 Partners. Hedge funds have reduced their bets by 8% downward over the past week, the firm said, but they are still far from disarming: GameStop remains the third most targeted title in value.

It doesn’t matter to individual traders whether GameStop’s stock valuations – or others – are totally out of touch with reality. The low liquidity on these securities, the mechanisms underlying the short sale and the use of tools such as derivatives allow them to have a very strong impact on the market. This strategy game, in which they turn the techniques and tools of professionals against them, has turned into a real showdown.

Individuals have identified themselves with the people, left behind, who are revolting, while hedge funds become the symbols of an establishment that takes advantage of the “system” to get richer. Excesses are common. Steve Cohen, head of the Point 72 hedge fund, deleted his Twitter account on Friday after being harassed on the platform. He had become a prime target for stock marketers since his fund had come to the rescue of Melvin Capital. This hedge fund had to resort to an injection of $ 2.75 billion in capital after recording losses of more than 50% on its portfolio in January alone, according to the Dow Jones agency. Melvin Capital was one of the first to throw in the towel in the face of the stock market sling. Citron Research, for its part, announced Thursday that it was giving up its position on GameStop, before decreeing Friday to end all its research activity that could encourage short selling, its main activity for twenty years. A decision that caused a stir on Wall Street: Citron Research was one of the first operators to track down fraud in the markets.

The others are waiting for the storm to pass. Carson Block, boss and founder of the hedge fund Muddy Waters, told Les Echos that he had taken the decision on Wednesday to significantly reduce all his non-American short positions, and to put on hold any plan to launch new sales campaigns. discovered.

4 How the movement is internationalizing

Encouraged by this first victory, the individuals were emboldened. Short sellers then went from being market predators to being prey. By coordinating on forums and social networks, stock marketers began to target other companies that were in the sights of “short sellers”. The cinema chain AMC, Nokia, BlackBerry, the Polish video game publisher CD Projekt and Unibail-Rodamco-Westfield have become the new fronts in the battle against short sellers, causing the phenomenon to become international. Amateur investors have even turned to silver, a precious metal that has fueled conspiracy theories for decades.

Stock marketers also took to bitcoin, which soared on Friday, after Elon Musk posted “#Bitcoin” followed by his emoji on his Twitter profile. The price jumped 16% to exceed $ 38,000, before falling back to $ 33,000.

5 Why trading platforms suspended trading in the most speculative stocks

The tension was such on the markets in recent days that Robinhood, the pioneer of “zero commission”, and main weapon of stock marketers had to suspend Thursday purchases of GameStop shares and a dozen other titles. A decision experienced as a real betrayal by the users of the online broker, who have already filed more than 18 complaints against him.

Robinhood is not the only platform to have put an end to speculation. Most of its competitors also have restrictions in place. Indeed, the unusual volatility of these securities has prompted the US clearinghouse, DTCC, to revise its capital requirements upwards. Given its clientele, Robinhood has been hit hard. The broker had to multiply by ten the regulatory capital, that is to say the sums set aside to secure its transactions in the equity markets, the company said in a blog post. To deal with it, the broker has urgently raised $ 1 billion from its shareholders and drawn on its credit lines.

Robinhood, however, maintained a number of restrictions. About fifty titles are concerned. On GameStop, its users can purchase a maximum of one action and up to five options. The European IG Group, for its part, announced on Saturday the suspension of transactions on GameStop and AMC, another target of American stock marketers.

What does the regulator do?

The phenomenon ended up attracting attention. New US Treasury Secretary Janet Yellen said on Wednesday that she “Monitored the situation”. The gendarme of the American markets, the SEC, for its part indicated Friday “Monitor and closely assess the extreme volatility of the price of certain stocks”. Following the cessation of trading on GameStop and other securities decided by certain brokerage platforms on Thursday, the SEC will verify whether these measures have been able to “Disadvantage investors or unfairly limit their ability to invest in certain securities”. The SEC has warned traders against illegal maneuvers to drive up the price of shares and said it was working to “Identify and prosecute potential embezzlement”.

After the outcry over the temporary suspension of trade on Thursday, vilified by American elected officials from all sides as well as by many Internet users, the platform announced “A limited resumption of purchases of these securities” starting on Friday.

Fading or systemic risk?

Brought together by social media, the hordes of retail investors have shown they have the power to change the rules of the game on Wall Street. Forgotten are the economic fundamentals, from the level of profits to the growth dynamic, on which professional investors rely. Analysts are also confused by the sometimes political motivations of these stock marketers, some willing to lose thousands of dollars just to take part in the movement. Is it still possible to invest in such an environment? ” This question is far from anecdotal and without risk for financial stability. Indeed, this perception could encourage many investors to abandon equity investments. How to invest long-term savings if valuation no longer depends on a rational business valuation model, but on discussions on social networks? »Emphasizes Aurel BGC.

The perplexity of professionals is all the more important as the markets are at their highest. Last week, the International Monetary Fund (IMF) itself felt markets were too optimistic about economic reality. And nearly 9 out of 10 professionals identified bubbles in the financial markets – mainly in cryptocurrencies and tech stocks – according to a study carried out in mid-January by Deutsche Bank.

A sign of growing feverishness on Wall Street, the fear index, the VIX, remains high at more than 33 points after posting its largest increase in one session last Wednesday since the collapse of the markets in March.

The increase in volatility weighs on the markets

The action of individual traders caused a significant number of stocks to go on a roller coaster and ultimately destabilized the US and European markets. The latter have signed their worst week for three months. The S&P 500 lost 3.3% for the week and the Dow Jones index almost as much. Both are now down since the start of the year. The Nasdaq Composite, meanwhile, lost nearly 3.5%. In Europe, the CAC 40 fell by 2.88%, its biggest drop since the end of October. The rise in volatility has forced investors to reduce their risk-taking. Hedge funds in particular had to sell securities to bail out and free up liquidity, which weighed on all markets. These phenomena affected companies like Apple (-5.11% over the week), which benefited from mobility restrictions, as well as stocks weakened by the crisis like Boeing (-5.6%).

Marion Heilmann, with BB and S.Ro.

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