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GameStop: a controlled explosion

FROM OUR JUNIOR TEAM / 

What has really happened in the Gamestop case and what repercussions will there be? Now that the turmoil is over, our team will try to draw the first conclusions from this event.

Fig 1: Gamestop share price January 2021. Source: journaldugeek

The GameStop[1] affair is indicative of a shift in the citizens’ mobilization, moving in the digital world and towards the economic sphere. Not a totally new thing, but a form of interventionism with new economic and mediatic repercussions that will set the trend in the long term. Will the affair represent a breakthrough? Our team believes it will not, because when you fight against speculation by speculating against speculators, in the end Wall Street is the winner. But this is not a non-event and the issue could lead to new market regulations. In any case, it leaves additional stigmas in the public opinion. Can this be seen as concerted political action aiming to denounce and strike a blow at deregulated finance? No. It is impossible to find any form of social coherence in the amateur investors who have bet on Gamestop, let alone a common political motivation. But in this case, as is often the case, it seems more interesting to focus on the consequences than on the original intention.

The underworld is gradually coming to the surface: chiaroscuro

For our part, this story has resonated with two trends described in our recent GEAB monthly bulletins. On one hand, a quote from the article the resurgence of the world below «with the large crowd of citizens and professionals from public transport to videoconferences, everyone finds himself on different floors but on board the same boat», the boat here being the digital world and the different layers of the internet (classic web, dark & deep web). And on the other hand, in the GEAB’s January editorial «Welcome to the best of worlds«, «unfortunately, in Year 1 of the digital era […] nothing nor anybody is able to bring the whole of human society on the path of this common-yet-differentiated reorganization. […] We’ve yet to add the people to this sketchy outline of the challenges in the coming decade. And in fact, they are likely to be sidelined in the construction phase of this new digital era. We anticipate that they themselves will be encrypted and digitised. They have already lost their capacity to contribute positively to the organizing of the Brave New World: by lack of any shared political vision, inadequate models for education and information, atavistic resistance to change, rejection of scientific rationality,… beyond borders, populations clump together in large communities of certainties, ready to fight with each other.»

Our article on Commodities: The unsustainability of volatility directly identified the risks associated with the arrival on this type of market of new private players who favour volatility. Of course we were then focusing on the commodities market, which does not include Gamestop, but the fact that Wall Street Bets members tried to repeat the move immediately after Gamestop shows that we hadn’t completely missed the point.

We are therefore faced with a heterogeneous, international, yet coordinated group, attacking an institutional player by turning its own weapons against it. «Put in parentheses in the construction phase of this new digital era,» some citizens are inviting themselves into the landscape using only digital tools and imposing their own vision. The whole process is a strange chiaroscuro between the world of before and the world of after. Investors are using an innovative application, RobinHood, to place their investments on the markets. They use it to defend the stock market price of a (physical) video game sales company, which has long been threatened by digital competition (games are now largely bought online or are operated by streaming services, via direct access from consoles). Secondly, the political and media consequences of this affair described above are nothing new and are well known to the general public since the subprime crisis. We therefore have a new community (many of the people who participated were investing in the stock market for the first time) which is aggregating and coordinating itself entirely via social networks, and not to meet physically and confront political power – as it may have been the case for the Arab Spring or the Yellow Vests – but which remains online and directs its action towards the heart of the financialized and globalized economic system: Wall Street.

Intention matters less than results

The main revealing fact of this case concerns the reaction of the RobinHood company. It is a brokerage platform which, via an open and inclusive application, allows anyone to invest money on the stock market and was the very first trading platform not to charge commissions. It is as intuitive to use as any gaming or social network application. It is the tool that was widely used by the Wall Street Bets members to buy GameStop shares. When the movement grew significantly, it became impossible to buy new shares via this application. Only selling them was possible. The stockbrokers then rose up and started a class action lawsuit claiming that they had been cheated by RobinHood who did not respect their freedom to buy the shares they wanted and accused it of market manipulation. Although the justification provided by RobinHood for suspending the sale of Gamestop shares is perfectly valid, users of the application interpreted this decision as a lack of loyalty. According to them, when the situation became tense «Robin Hood» sided with the «rich» and not the «poor».

This is not surprising when you look at its business model and at the distribution of its capital. If it is possible to buy and sell shares without having to pay fees on this application, it is because it then sells access to its data to other high-frequency trading services. These services speculate on market movements (be it bullish or bearish, it doesn’t even matter) and therefore need as much information as possible to predict these movements. RobinHood is owned by Citadelle, the parent company of the hedge fund Melvin Capital. It is most probable that Citadelle put pressure on RobinHood to curb the rise in GameStop’s share price in order to limit Melvin Capital’s breakage. However it cannot be asserted, so the results of the current investigation should be closely monitored. What is important to point out is that Citadelle practices high frequency trading, so the company has benefited from Gamestop’s numerous up and down movements which were the consequence of the concerted action of the Wall Street Bets traders.

Moreover, initial analyses show that this concerted action has been largely amplified by institutional actors such as JP Morgan for example. Georges Ugeux, CEO of Galileo Global Advisor, analyzes for us that here too it is the surveys and analyses that will gradually reveal what really happened. What we can affirm for the moment: «It is obvious that there was something else than just the users of RobinHood and the Reddit forum.» Can we then see a willingness on the part of some institutional players to attack hedge funds or their short selling activity?  «No. What we have to keep in mind is that at least three-quarters of the movements on the stock market are made by computers. Computers are the ones that react to market movements, and behind them they have trillions of dollars. So you have computer trading which has an impact at that moment and when it encounters abnormal situations, the question is whether it blows on the embers, or whether it calms the game down. It depends on what the investor is looking for behind it and how computer trading is programmed,» adds Georges Ugeux.

It is in this way that the explosion of Gamestop’s share price is perfectly controlled. It is by no means a destabilization of the market capable of threatening it. The movement is new and interesting to study because of its source (the Reddit forum, more broadly social networks, and the use of the RobinHood application) but its extent is not unusual, on the contrary high frequency trading programs adapt to it and take advantage of it without the slightest effort. On the other hand, the event, in its political and media dimension, represents an opportunity for those who advocate for stricter regulation of speculative activities on Wall Street.

Never let a good crisis go to waste

The US government was at first somewhat embarrassed by its spokesperson’s initial reaction, which was to describe the case as «interesting». Later on Janet Yellen, the US Treasury Secretary, summoned representatives of the Securities and Exchange Commission (SEC) and the Fed to discuss the matter. No decision came out of this meeting, which was no surprise for Georges Ugeux: «These authorities cannot announce anything until they have access to the results of the investigation. If this investigation shows market manipulation by hedge funds such as Melvin Capital, then the conflict of interest between Melvin and its parent company Citadelle is likely to come to light. New regulations requiring such players to separate these two types of activity could emerge. »

Independently from the investigation, the left wing of the Democratic Party can be counted on to take up the issue and make it a recurring theme of the Biden presidency, as Alexandria Ocasio-Cortez[2] has done. The case may ultimately serve an underlying desire to regulate the markets a little more. Probably because political representatives have understood that the consequences on public opinion of this type of affairs can potentially become socially unmanageable.

What is beyond doubt is that applications such as those proposed by RobinHood (several major brokerage firms are offering them[3] ) will now be viewed very differently and even be welcomed as new institutional players. And therefore they will be subject to the regulations that go with them. According to Georges Ugeux, these could be obligations to maintain equity capital at a certain level, or to limit the number of members, or to correlate equity capital to the number of users. It must be considered that the number of individual investors has doubled as a result of the confinements. For example, in 2 years Robinhood has grown from 6 million to 13 million users[4] . The «affair» is, moreover, a huge publicity operation, accompanied by pedagogy (incitement to caution), which has drawn the attention of millions of people to these new, gamified stock market solutions.

Fig 2: Evolution of the number of Robinhood users. Source: businessofapps

As regards potential repercussions on the European continent, they need to be qualified, taking the example of what happened after 2008 when the investment activities on the markets were separated from the banking part of the big banks in the United States[5]. This can be explained, according to Georges Ugeux, by the fact that in the United States the balance sheet of banks represents between 75 and 80% of GDP, whereas in the European Union it is 250%. «We can therefore count on the incredible strike force of this sector, both in their respective countries and at the European level, to ensure that this type of regulation does not take place. »

_______________________________

To understand the case :

Quand Bernie Sanders rencontre Jean-Pierre Fanguin : une fable du XXIème siècle (15 Marches, 02/02/2021)

Reddit Users Vs. Wall Street Giant In Fight Over GameStop Stock Value (NPR, 27/01/2021)

Affaire GameStop : tout comprendre à la campagne spéculative qui secoue les marchés et Internet (Le Monde, 28/01/2021)

Gamestop coup: Will David triumph against Goliath? (Eurotopics, 02/02/2021)

To go further :

Affaire GameStop : après l’humiliation, la revanche de Wall Street sur les milliers de boursicoteurs (Le Monde 29/01/2021)

GameStop : les dessous de la guerre entre les particuliers et l’élite financière (Boursorama, 03/02/2021)

WallStreetBets : les dessous de l’affaire GameStop (Presse Citron, 03/02/2021)

Was GameStop really a case of the little guys beating Wall Street? Maybe not (The Guardian, 05/02/2021)

On RobinHood :

Robinhood CEO speaks to Cuomo after GameStop stock chaos (CNN, 29/01/2021)

Robinhood’s C.E.O. Is in the Hot Seat (New-York Times, 02/02/2021)

Robinhood appears to be benefiting from the trading controversy, seeing record app downloads (CNBC, 01/02/2021)

The Silicon Valley Start-Up That Caused Wall Street Chaos (New-York Times, 30/01/2021)

On the regulators’ reaction :

GameStop madness presents a challenge for Biden’s potential SEC chief (NBC, 02/02/2021)

Yellen and Regulators Met Amid GameStop Frenzy to Discuss Market Volatility (New-York Times, 04/02/2021)

SEC Hunts for Fraud in Social-Media Posts Hyping GameStop (Bloomberg, 03/02/2021)

After GameStop mania, regulators set to review what led to market volatility (NBC, 04/02/2021)

________________________

[1]We will not go into the technical details of how the case unfolded, much has already been written on the subject and you will find a collection of sources at the end of the article explaining why it happened and going further. To sum up quickly, on a forum of the Reddit website (called Wall Street Bets) some stockbrokers (amateur traders) decided to counter a speculative movement led by hedge funds betting on the fall of the GameStop share price. These funds use the short selling system, where the owner of a share lends it, as for a credit, against interest. The part of the contract that borrows the share intends to sell it at a certain price and then buy it back at a lower price when returning it to the owner, thus making a profit. The risk is that during the term of the loan, the share price will rise rather than fall, so the bet is lost and the borrower will have to buy the share more expensively than he sold it and lose money. This is the fate that Wall Street Bets’ stockbrokers wanted to inflict on hedge funds. By coordinating to buy GameStop shares (among others, the deal also involved shares of other companies) they raised its price and thus inflicted multi-billion losses on hedge funds, including Melvin Capital which lost 2.5 billion, or 50% of its capital.

[2]Source: Money Control, 29/01/2021

[3]Source: Tech Crunch, 02/10/2021

[4]Source: Business of apps, 01/02/2021

[5]Source : Wikipedia

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