On January 27, 2021, users on Reddit, a social networking platform, caused the price of GameStop’s stock (GME) to swell by over 1,700 percentage points, alarming hedge-funds and concerning Wall Street investors. The stock was initially priced at around $18 but surged to a peak of $483 per share on January 29. Although the stock has since lost much of its value, such price volatility is nearly unprecedented in the financial market. The GameStop mania has been met with both praise and criticism, with further action against market manipulation in the future a possibility.
Many investment funds had shorted the GameStop stock, a practice done by hedge-funds to profit should the stock’s price fall. Investors short if they believe that the company’s stock will go down in the near future. Headquartered in Grapevine, Texas, GameStop is an American video game retailer. With a brick-and-mortar business model, the company has been hurt by the switch from physical discs to digital videos. Some speculated that the company was due for bankruptcy after the pandemic forced stores to close.
Despite the expectations that the GameStop stock would continue to fall, the stock saw a rise of about 928% in a week, indicating extreme volatility. Through coordinating their actions on the Reddit subreddit r/WallStreetBets, investors (in this case, the Reddit users) performed a “short squeeze,” meaning they simultaneously purchased a surplus of stock to artificially inflate the stock’s price. The Reddit investors were able to profit from the speculative trade as the stock’s price rose.
Though many were involved in the short squeeze, Keith Gill was identified as the person largely responsible for leading the stock’s surge on Reddit. The former employee of the Massachusetts based “Mutual Life Insurance Co.” stated that he “didn’t expect” the price surge. Gill explained in an interview with the Wall Street Journal that the story about GameStop’s mania was “so much bigger than him,” stating instead that he simply wanted to help the struggling video-game retailer. Gill’s fortune came at the expense of numerous hedge-funds, such as the venture capital firm Melvin Capital. The company reportedly took a $2.75 billion cash infusion to make up for its losses. Despite this, Gabe Plotkin, a spokesperson for Melvin Capital, has dismissed rumors that the hedge-fund may file for bankruptcy.
Despite Gill’s efforts, GameStop’s stock price has fallen significantly from over $300 to about $80 on February 4, 2021. Additionally, the widely-used app Robinhood closed all trading on the GameStop stock, causing controversy and significant backlash from numerous politicians.
Lawmakers such as Congresswoman Alexandria-Ocasio Cortez of New York’s 14th District (D) and Senator Ted Cruz of Texas (R) have raised concerns that the Robinhood’s decision to freeze trading unfairly benefits Wall Street, hedge-fund managers. Additionally, media personalities such as Elon Musk and Mark Cuban have praised the Reddit users for “taking on Wall Street.” Musk himself tweeted out a link to a message board for Twitter users to discuss the recent occurrences.
White House Press Secretary Jen Psaki has also reported that the federal government is “monitoring the situation.” It is currently unclear if the Biden Administration will take executive action to ensure minimal stock volatility. Still, no formal action has been announced to counter potential market abnormalities. This may be because all action taken on r/WallStreetBets, although disruptive to the market, was done legally. The Security and Exchange Commisionies would be unable to press any formal charges as no laws were broken during the short squeeze, and they have yet to find any conclusive evidence of market manipulation. Despite this, Congress has discussed potential legislative action that can be taken to prevent similar events from occurring in the future.
Although the GameStop stock is currently on the decline, it is yet to be seen how the stock will fare in the long term. Similarly, it is unclear how private investors, hedge-fund managers, and government officials will respond to GameStop’s meteoric rise and subsequent fall.