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GameStop Explained: How a ‘Failing’ American Videogame Chain Got Wall Street Shook

GameStop Explained: How a ‘Failing’ American Videogame Chain Got Wall Street Shook

Jan 30, 2021   •   Matthew Arcilla

Over the past year, day trading and individual investment have seen a boom. Personally, I suspect that depressed incomes and little work to do have driven the most quarantined of Americans to congregate on Reddit and use platforms like Robinhood to participate in the market. It’s been a source of dismay among trading institutions, annoyed at the unpredictability of small-time investors. So what? It’s not like “the little investors that could” really matter, right?

In the case of this week’s developments? The answer is yes, they do matter. And they’ve got Wall Street quaking in their shoes. An army of traders on the Reddit forum r/WallStreetBets rallied together to create a meteoric rise in the stock price of GameStop, a videogame retail chain that has for years, been beleaguered by challenges in the ever-shifting landscape of videogame commerce.

And like any story where massive amounts of money are concerned, it’s emerged to be this week’s most captivating David vs. Goliath story. Shock market jock Jim Cramer called it “the squeeze of a lifetime” while Bloomberg’s Matt Levine appeared to be distressed by the Reddit crowd’s “utter nihilism [… best described by] a series of rocket emojis.”

So, what happened? Here’s an explainer for people who don’t follow markets at all, from a writer whose expertise in finance is limited to those two years he played Hollywood Stock Exchange.

 

What is GameStop?

GameStop is America’s largest retailer dedicated to videogames, gaming hardware and accessories, and games related merchandise. The company can trace its beginnings to 1999, when a chain of Babbage’s software outlets rebranded themselves as the retail destination for gamers. In 2002, the chain went public on the New York Stock Exchange and the company maintained steady success for many years.

But in recent years, the rise of digital distribution and questionable pivots in store design have led to the decline of GameStop’s fortune. Videogame pundits have been anticipating the chain’s demise for years now, but as a company with real assets and liquid volume, it’s been able to stave off bankruptcy, even during the COVID-19 pandemic that hit all sectors in physical retail.

 

How did this all begin with short selling? What IS short selling?

Given the volatility of GameStop’s business, the company’s stock has become popular for short selling, which is when investors place bets on it going down in value. Investors can basically make money off a stock they expect to fail by borrowing a share from the broker and selling it for the current market price, while pledging to buy it back at a later date, with the hope that they can profit off the difference.

 

Okay, how did Reddit get involved?


One big hedge fund firm called Melvin Capital is one of the more noteworthy firms that gambled on a drop for GameStop. They wrote a piece about the wisdom of shorting the company’s stock and this attracted the ire of the then-modest number of Redditors at “WallStreetBets,” a subreddit populated by eccentrics that make weirdo plays and, in one writer’s words, are “lunatics that treat the stock market like a casino.”

The people at WallStreetBets have a bizarre obsession with what they call “meme stocks,” which have a low market cap and a cheap stock price that they can play around with like a cat does with string. GameStop is one of those stocks, and when they caught wind of Melvin Capital’s plans, they busted out their phones and their apps and began the most uncoordinated retaliatory buying to save their precious meme stock.

 

What’s this short squeeze going on?

WallStreetBets describes itself as “4chan found a Bloomberg Terminal” and that insanity persists in what followed: a collective design to keep pushing GameStop’s price higher and higher and “to the moon.” The intended result is an epic “short squeeze”, which is when purchases drive up the cost of the shares to the point that anyone who tried to short it will end up paying. Over the weekend, Melvin Capital and anyone else would have to buy back every share for every dollar over the price they shorted GameStop at.

 

Did they win?

They absolutely fucking did. As of this writing, the army of amateur investors — not just WallStreetBets — pumped up the price of GameStop and completely obliterated Melvin Capital’s play. That’s despite intervention from hedge fund titans like Point72 and Citadel and a sudden restriction on trading from Robinhood, the investment app that empowered these amateur investors. $19 billion was lost among short-sellers.

 

What’s the fallout from all this?

A lot. In fact, there’re so many revelations from all this they could fill out another 8List. Point72 and Citadel’s attempt to pump investment into Melvin Capital and save it from bankruptcy exposed the lengths to which hedge fund institutions will go to protect their own. Finger wagging from infamous fund managers like Michael Burry over what constitutes natural market behavior highlights the hypocrisy of the investment class.

Robinhood’s attempt to restrict trading and “protect” the market from the gleeful anarchy of these Reddit led trades has drawn backlash against the company, which had long prided itself on “democratizing finance for all,” and a purported belief that “everyone should have access to the financial markets.” Other investment platforms are looking to restrict the trading of stocks like AMC, Blackberry, and Koss — i.e. stocks that are deemed vulnerable to similar plays.

 

Where are the adults in all this?

If by “adults” you mean authority figures and regulators? Haha. The Securities and Exchange Commission, the regulatory body charged with overseeing the stock market and protect investors and banks from any possible upsets, has naturally observed all this volatility and has been monitoring the situation closely. Its immediate concern is whether or not market manipulation has occurred on either side of this battle.

Meanwhile, members of the US Congress are now trying to figure out whether legal action is necessary to address any of the events that have occurred. Rep. Ilhan Omar is calling for jail time for any wealthy investment folks found to have pressured services like Robinhood to bar Americans from trading during this week and the likes of Alexandria Ocasio-Cortez and Ted Cruz are both calling for a congressional hearing.

 

I still don’t understand what happened…


What am I writing this for then? Okay, here’s the short version:

The stock market, a massive financial game board where people buy and sell based on their feelings about individual companies, and previously played mostly by large investment firms and fund managers with millions at their disposal just got owned by the Internet.

Through sheer collective mischief — and just a smidgen of billionaire resentment — Redditors challenged a mighty investment firm to a high stakes standoff for several days. And despite the intervention and institutional support of other moneyed groups, that firm lost. No one can be sure about the wisdom of the crowd, but harness enough chaos and the wealthy reveal their true belief that the stock market is not meant for everyone.

 

Got it? Still confused? Sound off in the comments below.


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