4 min read.Updated: 31 Jan 2021, 09:37 PM ISTJyotirmoy Saha
The GameStop short squeeze in the US held a lesson for an industry in need of nerd-led disruption
Blackberry is a company that I have tracked very closely over the years. For an entrepreneur, there is much to be learnt from its journey. There is no better demonstration of the need to pivot your business at the right time. Although its chief John Chen has been making interesting moves with the company in recent times, it is still hardly a company that can be counted as an investors’ delight.
Enter 2021. Even as the covid pandemic continued to stress businesses globally, Blackberry’s US-listed shares rose 237% over a period of 14 days, and then fell 43% since Thursday. That’s when GameStop’s stock said ‘hold my beer’. It rose 770% during the same period, then fell 44%, and has risen 67% since Thursday. GameStop is an American video-game retailer with 5,500 outlets worldwide. In 2009, 80% of the world’s video games were sold on discs—many at stores. In 2018, only 17%. The rest were downloaded off the internet. In its current form, GameStop is in a dying business. Most sophisticated investors without specific insider knowledge would stay away from it.
So, what happened? Put very simply, amateur investors organized themselves over social media and flexed their collective trading muscle and sent these stocks to astronomical highs. Blackberry, GameStop and the movie-theatre chain AMC saw some incredible highs, and were traded in unprecedented volumes. On Reddit’s WallStreetBets, people even taught each other how to trade in options.
The stock market is an unusual place. As long as someone is willing to pay a price, it often doesn’t matter what the real value of what you are selling is. Stocks like Apple and Tesla are grossly overvalued. Leading up to the 2008 stock market crash, financial institutions and banks sold meaningless toxic assets to one another and retail investors. When realization struck that these fancy derivatives were just useless paper, the market crashed and retail investors lost hundreds of billions. Even those who had invested through ‘trusted’ AAA- rated financial institutions lost everything as they went belly up. Of course, mega financial institutions that bought insurance against such an eventuality came out of it relatively safe.
Such doom strikes undervalued stocks too. Ironically, Tesla—once a short-seller favourite—stayed stagnant for years peppered with periodic sharp falls. Sophisticated short-sellers (and mostly wealthy) investors would sell large amounts of shares they didn’t possess. As the negative price momentum drove prices lower, short-sellers bought those same stocks at prices much lower than they had sold for. Sounds complicated? It is and therefore a domain of investors that can afford to take a hit if the exercise goes wrong. Countless retail investors routinely lose their hard-earned savings on short-sold stocks to the benefit of rich equity funds.
High-frequency trading platforms, big-fund clout and a relative lack of regulation had stacked the odds in equity markets heavily against small investors. In the past two weeks, though, the tables turned. Small investors in large packs—each armed with little money but invaluable information about short positions held by hedge funds sent some of these stocks skyrocketing. As the prices climbed higher, major hedge funds lost billions on their short bets against these stocks. Just when it looked like Wall Street’s Goliaths were headed for a take down, RobinHood put its thumb on the scale. Founded by Vladimir Tenev and Baiju Bhatt, RobinHood was aptly named to provide everyone with equal access to financial markets, not just the wealthy. RobinHood (and some other brokerages) blocked the buying of GameStop, AMC, Blackberry and a few others. While buying was stopped, selling was not—something that would only benefit large short sellers. Those stock prices tanked. This was the exact opposite of what a platform named after the English folklore-hero was meant to do. It protected rich hedge funds against small investors, and hindered the cumulative effort of millions armed with better information and resources.
While consumers are now joining a class action lawsuit against RobinHood through an app, big short-sellers are probably taking a breather to lick their wounds over this weekend. This trade is not over. The battle over GameStop is no longer being fought on fair value, but is an all-out war between Wall Street’s hedge funds and retail investors. Often, market regulators step in with circuit breakers to stop extreme volatility. But this was a platform doing that against the small investor.
Of all the mob action that has already taken place in 2021, this one I actually enjoyed... Not just because it took me a mere 29 minutes to make 12% on 2,000 Blackberry and 90 GameStop. But because the financial industry has been the same for decades with only periodic changes in efficiency. It is one industry that’s in need of some deep nerd-led disruption. The short squeeze on the shares pursued by Wall Street’s big hedge funds hopefully should have taught them an expensive lesson. The next couple of weeks will be interesting, as small traders switch brokers and go for these stocks again. Whatever their rallying cry, I believe this is good news for the stock market.