On January 28, as GameStop's share price reached $469, retail investment app Robinhood imposed restrictions on its users' ability to purchase certain stocks, including GameStop, which had the immediate effect of driving the price down. The restrictions were later reported to be the result of cash flow issues, and limited trading in those stocks was restored the next day. Click here for the update.
One of the more unexpected developments of the week, month, and year is the sudden comeback of GameStop (opens in new tab). And I do mean sudden: After a gentle rise through the second half of 2020 driven by a new Microsoft partnership and promising financial results over the holiday season, the company's share price exploded from well under $20 at the start of January to, as of 1:30 pm on January 27, $325.
That jump has been fueled largely by communities of speculators like the WallStreetBets subreddit (opens in new tab) , which took issue with a cautionary tweet on January 19 from Citron Research warning that the share price would go back to $20 "fast," and that people buying in at higher prices "are the suckers at this poker game." Citron, a GameStop short seller, had good reason to want to see the price go down: The higher it rises, the more the firm stands to lose.
Reddit's furor was also directed at Melvin Capital Management, one of the biggest institutional shorters of the GameStop stock, as seen in this “Battle of GameStop” video meme posted in December:
Simplistically, short selling works like this:
$GME Short squeeze explained nicely:Snake - Melvin Capital & CitronApes - Retail Investors Credit @ the group pic.twitter.com/0vyyg9lsnJJanuary 26, 2021
Reddit wasn't the sole driving factor behind GameStop’s climb, but it "definitely helped push it higher," industry analyst and consultant Michael Futter told us earlier this week (opens in new tab).
"Think of it like amplifying any other kind of trolling. They are creating signal above the noise," he said. "The Reddit stuff is material, because it led to GameStop being the most traded stock on the market on Friday. Without r/WallStreetBets, that doesn't happen."
At that time, on January 25, GameStop's share price had hit a peak of $144, and then slid back down to a little under $80—a big drop, but still a remarkable price given the stock's history over the last year. But the ride wasn't over: The following day, the stock continued to climb, reaching a new high of $148, and then blew past $230 in after-hours trading, helped by none other than Elon Musk.
Gamestonk!! https://t.co/RZtkDzAewJJanuary 26, 2021
On January 27, it opened at a ridiculous $350, and despite some bouncing around remained within shouting distance of that figure by mid-afternoon. All of which leads to one very obvious question: What happens next?
It's hard to overstate the impact that GameStop's sudden ascendancy has had, and continues to have, on the stock market. Hedge fund Melvin Capital Management required an investment of nearly $3 billion from two other funds to stabilize the company in the wake of GameStop's initial rise, although CEO Gabe Plotkin told CNBC that reports the company was on the verge of bankruptcy are false. Melvin says it closed out its position Tuesday afternoon after suffering a "huge loss" on it, according to CNBC (opens in new tab).
BREAKING: Melvin Capital closes out of its GameStop position, a stock which it had a short position on. $GME @andrewrsorkin reports. https://t.co/N69FXufOJD pic.twitter.com/TZg0c8q1O1January 27, 2021
Today international brokerage TD Ameritrade took steps to protect itself and customers from the chaos, imposing "several restrictions on some transactions" involving GameStop and other securities currently targeted by Reddit, such as movie theater chain AMC. "We made this decision out of an abundance of caution amid unprecedented conditions and other factors," the company said in a statement.
One possible—even likely—outcome of all this furious activity is some sort of regulation to keep it from happening again. But how do you regulate against the actions of hordes of mostly faceless commenters, posters, and social media accounts? NASDAQ CEO Adena Friedman told CNBC that regulators need to consider advances in technology that are used to disseminate information about companies on the market as it tries to determine whether this type of online interaction qualifies as a "pump-and-dump scheme," in which investors artificially inflate the value of a company by spreading misinformation before selling their shares, or if it's a separate technological evolution that calls for some new form of regulation.
"As we look at these new technologies that are available ... it's important for regulators to understand that manipulation is manipulation whether it's happening through a new technology medium or it's happening through traditional mail," says @Nasdaq CEO @adenatfriedman. pic.twitter.com/iSP31KoXvmJanuary 27, 2021
"I do think that as we look at these new technologies that are available to everyone, including investors, I think it's also important for regulators to understand that manipulation is manipulation, whether it's happening through a new technology medium, or it's happening through traditional mail," she said. "I think it's just a matter of making sure that we understand what the behavior is, what's underpinning the behavior, and working appropriately with the regulators to manage the situation, regardless of the technology that they're using."
White House press secretary Jen Psaki also confirmed that the US government is "monitoring the situation."
Press Sec. Psaki on GameStop: Treasury Secretary Janet Yellen is “monitoring the situation." pic.twitter.com/4uWOT0ubn8January 27, 2021
Social Capital CEO Chamath Palihapitiya, who bought into GameStop yesterday, described the WallStreetBets activity in a CNBC interview as "a pushback against the establishment," and credited many of the redditors who use it for doing "as good, and frankly a better job" at diligence and analysis than some hedge fund analysts. He also acknowledged the frustration and anger driving much of what the group does.
"Coming out of 2008, Wall Street took an enormous amount of risk, and they left retail [investors, ie average people] as the bag holder," he said. "A lot of these kids were in grade school and high school when that happened. They lost their homes, their parents lost their jobs, and they've always wondered, 'Why did those folks get bailed out for taking enormous amounts of risk, and nobody showed up to help my family?'"
It is perhaps telling, however, that Palihapitiya said in the same interview that he's already sold out of his GameStop holdings, earning roughly $375,000 in the process—not bad for a day's work. He added that he's going to donate the profits, plus his initial $125,000 investment, to the Barstool Fund for Small Businesses, which will no doubt make for a handsome tax writeoff.
It's less clear—that is, completely unclear—what the broader WallStreetBets endgame is. Many are exhorting others to hold onto their shares no matter what, hoping to keep pushing the price higher; in a thread (opens in new tab) entitled "I'm not selling this until at least $1000," for instance, redittor zenslapped said that it is "absolutely realistic" that the price could reach that point, if people stay committed.
"There are more shares shorted than are even in existence," they wrote (opens in new tab). "As the naked shorters get forced into margin calls, they're going to be forced to buy shares at any price. If everyone holding just said 'fuck you - not selling' then theoretically this could squeeze to insanity land."
"Diamond hands (opens in new tab)," stock market slang for people prepared to hold their positions regardless of any risk, is also a common battle cry.
Diamond hands budJanuary 27, 2021
Other experts are striking a cautionary tone: "This is the equivalent of cheering on hackers when they are defacing websites of companies or governments you don't like," tweeted (opens in new tab) Jeremy Owens, San Francisco bureau chief for financial publication MarketWatch. "Please realize that by cheering this on, you are showing support for stock traders convincing unsophisticated investors to buy into struggling companies at objectively unreasonable prices. And it won't end well."
Even among the WallStreetBets crew, there is recognition that the risk of getting caught up in the hype grows commensurately with GameStop's share price. "I just got in at $320, it feels bad. Real bad," redditor Chance-Stage3802 wrote (opens in new tab). "Esp cuz my hand was hovering over the BUY button yesterday at $85. I just can’t sit on the sidelines anymore."
Another, named QU4TTRO, echoed the sentiment, replying (opens in new tab), "Almost exactly the same... hovering at $83 yesterday and bit bullet today at $316."
Regardless of any potential regulatory changes, the impact of GameStop's meteoric rise may have an impact on how investment firms approach their short selling strategies. According to the CBC, for instance, Citron Research founder Andrew Left said his firm will take "a fresh look at how it bets against companies" after suffering a major loss on GameStop.
Interestingly, despite its losses, Citron also appears opposed to new regulations to protect against this sort of shenanigans:
The WH should have more pressing issues than to investigate stock forums on Reddit. We are a nation based on free speech and capitalism. Citron has fought globally for 20 years for that right and no one trading phenomenon should eliminate it. *Our first political tweet everJanuary 27, 2021
And despite all the very clear risks and potential losses, which will no doubt do real harm to at least some of the people drawn in by the excitement, a festive air persists.
https://t.co/lHSxFZo8ut pic.twitter.com/iiFplAX1l0January 26, 2021
Update: A few hours after this story went live, the Wall Street Bets Discord server was banned (opens in new tab)—not for potentially fraudulent behavior, but for spreading "hateful and discriminatory content." In response, the subreddit mods posted a message (opens in new tab) saying that "we're suffering from success and our Discord was the first casualty."
"You know as well as I do that if you gather 250k people in one spot someone is going to say something that makes you look bad. That room was golden and the people that run it are awesome," it says.
"We blocked all bad words with a bot, which should be enough, but apparently if someone can say a bad word with weird unicode UIcelandic characters and someone can screenshot it you don't get to hang out with your friends anymore. Discord did us dirty and I am not impressed with them destroying our community instead of stepping in with the wrench we may have needed to fix things, especially after we got over 1,000 server boosts."
The mods also announced the creation of an official WallStreetBets Twitter account (opens in new tab). "@wsbmod is the only Twitter handle whose statements are directly from some part of the team," they said. "We'll do our best not to pretend to speak for you, but to try to speak with the volume our name now seems to command to get shit done for us."
January 28: Robinhood restricts GameStop trading
Today, GameStop hit a new high mark, surpassing $469 per share, but the wheels came off when Robinhood, an investment app used by many of those in the WallStreetBets subreddit, placed restrictions on GameStop and other stocks, including AMC and Blackberry.
"We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK. We also raised margin requirements for certain securities," Robinhood said in a statement (opens in new tab).
"We’re committed to helping our customers navigate this uncertainty. We fundamentally believe that everyone should have access to financial markets. We’re humbled to have helped many people invest in the markets for the first time. And we’re determined to provide new and experienced investors with the tools and resources to help them invest responsibly for their long-term financial futures."
According to posts in the WallStreetBets subreddit, Robinhood now allows users to sell their GameStop shares, but not purchase any more. It's not clear to me how exactly the statement "everyone should have access to financial markets" jibes with denying people access to financial markets, and I'm not the only one. US Representatives including Ted Lieu, Rashida Tlaib, and Alexandra Ocasio-Cortez had similar thoughts:
Why are brokerage firms like Robin Hood restricting trading in GameStop? Looks to me like a fear of too much profit going to ordinary investors. Can you explain @RobinhoodApp? https://t.co/682yG7ZiqXJanuary 28, 2021
This is beyond absurd. @FSCDems need to have a hearing on Robinhood's market manipulation. They're blocking the ability to trade to protect Wall St. hedge funds, stealing millions of dollars from their users to protect people who've used the stock market as a casino for decades. https://t.co/CGkJxVfzkvJanuary 28, 2021
This is unacceptable.We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.As a member of the Financial Services Cmte, I’d support a hearing if necessary. https://t.co/4QyrolgzytJanuary 28, 2021
WallStreetBets users have been scrambling to find other brokers with which to carry on their business. In less than two hours, GameStop's share price plummeted from $469 to $126. It then bounced back to over $300 again, before slowly tailing back to a little over $200 as of 1 pm Eastern.
GameStop's share price was bound to come back to reality sooner or later, but the brazenness of Robinhood's actions has, predictably, led to a heavily-upvoted WallStreetBets thread calling for legal action (opens in new tab) against the company.
However, attorney Ryan Morrison of the digital entertainment-focused legal firm Morrison Rothman believes that such a class action suit would would only benefit the lawyers. "System is rigged from start to finish," he said.
And shame on the six or seven attorneys who successfully convince enough of you to file a class action lawsuit. You’ll get at BEST a check for twelve or so dollars in the mail. Those attorneys will make enough to let their grandkids retire. System is rigged start to finish.January 28, 2021
Update: A report in the New York Times (opens in new tab) says Robinhood was forced to temporarily halt the purchase of GameStop and other shares because the sudden, massive influx of buyers created cash flow problems that the company couldn't manage. It was forced to draw on a line of credit from multiple banks, in the amount of $500-$600 million, to ensure that it was able to continue operating without further restrictions. The report also says that Robinhood received $1.3 billion in venture capital backing over the past year, and is currently valued at nearly $12 billion.
Robinhood co-founder Vladimir Tenev said on Twitter that the company would begin allowing "limited buys" of the restricted stocks today, although he suggested that ongoing activity on Reddit could continue to cause issues.
We cannot control, however, the lightning-fast spread of information and misinformation that takes place on social media, and for that I am incredibly sorry to our customers and staff for this.January 28, 2021
"As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits," Robinhood said in a blog post (opens in new tab). "Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today."
"To be clear, this was a risk-management decision, and was not made on the direction of the market makers we route to."
The company also detailed the limits that are currently in place (opens in new tab) on transactions, which along with GameStop also impact AMC Entertainment, Bed Bath and Beyond, Blackberry, Koss (who remembers Koss headphones?), Nokia, and several others. The restriction limits GameStop purchases to single shares (subject to change throughout the day), but even so the price seems to be holding: As of 2:30 pm ET on January 29, it was trading at just under $300, far from its peak but more than double what it fell to when Robinhood initially halted new share purchases outright.