FINANCE TODAY | ISSUE NO.25
GAMESTOP'S BRIGHT BEGINNING TO THE NEW YEAR
With the first month of 2021 coming to a close, January has unexpectedly bestowed the gift of gains on GameStop. Previously, GameStop (NYSE: GME) was in the spotlight for gaining a prominent new investor and creating a plan to become a viable competitor in the e-commerce realm. Analysts were skeptical of GameStop’s efforts to be successful since they had been in such a poor financial position since the early 2010s.
This year however, has blessed the retailer with a bizarre increase in capital gains in only a short matter of time. The sudden surge in their share price has quickly prompted amateur investors to pour additional funds into GME shares, while simultaneously causing experienced investors to question the entire rally. The cause of the GameStop rally also resulted in investors raising concerns regarding stricter regulations on markets.
THE GAMESTOP RALLY SO FAR
After consistent losses throughout all of 2020, the massive rally began for the retailer on January 12th, when the share price jumped from US$19.95 to US$31.40. After remaining steady within the $30-$40 range for the next few days, the stock saw its next major increase on January 22nd when its price closed at $65.01, a 51% increase from the previous day. As of today (January 27th), the share price of GameStop sits at $347.51, an astounding 1642% increase since the beginning of the rally on January 12th. Below is a graph of the company’s share price for the past 6 months to help visualize how absurd the rally truly is. At the beginning of the graph, GameStop’s share price sits just above $4.
WHY IS THIS HAPPENING?
The GameStop rally has virtually nothing to do with the company’s recent performance. The cause of the rally stems from retail investors and day traders buying the stock in massive quantities as a means of exercising their power over institutional investors. Hedge funds have typically targeted failing companies such as GameStop for short-selling opportunities, meaning they would borrow shares of the stock to sell, essentially guaranteeing the institution makes a profit as the financial health of the underlying show telltale signs that the price would fall, allowing the institution to repurchase shares of the shorted stock at a lower price to return those borrowed shares. Retail investors who were unhappy with this practice banded together via discussion website Reddit to initiate a short squeeze on the stock after noticing the massive short interest in GameStop. These retail investors are buying shares solely to raise the share price and subsequently forcing short sellers to cover positions and further push the price up. However, the massive short squeeze has not gone without its consequences.
The Securities and Exchange Commission (SEC) has stated that it has noticed the volatility and would be taking a closer look at the situation (Choe, 2021). In a statement made on January 27th, the SEC said, “Consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants” (Epstein & Fabian, 2021). To put things simply, the SEC may be looking to build a case of market manipulation against individuals who were involved with initiating the short squeeze on GameStop. Industry professionals say that the SEC would likely look at whether the messaging by investors holding the stock long-term and activists betting against it was manipulative (Prentice & Schroder, 2021). It is worth mentioning the SEC may also be looking into actions taken by Melvin Capital to drive down the price of GME.
THE LASTING EFFECTS OF THE GAMESTOP RALLY
The GameStop rally is without a doubt one of the biggest recent events on the stock market , and the facts of the situation deem it unprecedented. The outcome of the SEC’s investigation into the rally has the potential to alter the current investing landscape in some capacity. If the SEC were to find these investors guilty of market manipulation, the results of the case could see more restrictions placed on retail investors, limiting their trading capabilities. Restrictions could arise in the form of limits to quantities of shares which can be traded. Some stock exchanges have already begun limiting some transactions for GameStop. NASDAQ’s chief said the exchange would halt trading in a stock if it seemed linked to unusual social media chatter (Sorkin et al., 2021). More concerning may be the impact it will have on Reddit channels like r/WallStreetBets, which pioneered the current events. Will they be aggressively censored moving forward? As the events continue to unfold, some form of change seems to be on the horizon for investors. Only time will tell whether the change will be for better or worse, and how exactly serious it will be.
Choe, S. (2021, January 28). EXPLAINER: Why GameStop’s stock surge is shaking Wall Street. Retrieved January 28, 2021, from https://www.thestar.com/news/world/us/2021/01/28/explainer-why-gamestops-stock-surge-is-shaking-wall-street.html
Prentice, C., & Schroeder, P. (2021, January 27). EXPLAINER-Why regulators may scrutinize GameStop’s Reddit-driven retail stock surge. Retrieved January 28, 2021, from https://www.reuters.com/article/gamestop-regulator-idUSL4N2K246P
Sorkin, A., Karaian, J., De La Merced, M. J., Hirsch, L., & Livni, E. (2021, January 28). How Does This End? Retrieved January 28, 2021, from https://www.nytimes.com/2021/01/28/business/dealbook/reddit-gamestop-trading.html