In late January, struggling video game retailer GameStop saw its share price increase by 1,500 percent, reaching an unprecedented intraday high of 483 USD. No one foresaw this happening, leaving economists struggling to predict future market trends. To help us understand what GameStop’s wild stock market ride means for the future, Elizabethtown College associate professor in the business department Dr. Petru Sandu answered a few questions.
When Sandu gave background about the GameStop event, he said, “The movement was started in August 2020, through a video posted on YouTube. The video became viral and the WallStreetBets, an investment forum on Reddit, began buying GME [GameStop] shares.”
This simple chain of events led the once struggling GameStop through the ranks into being one of the companies with the highest shares in the market, after being traded at less than 4 USD. The price later went down to 63.77 USD as of last Friday.
This happened when the network of individual investors bought massive amounts of shares to push the stocks up against the betting of hedge funds, short-term sellers that rely on unconventional market techniques. When the share prices of GameStop went up, against the hedge funds’ betting that it would continue to drop, they lost millions of dollars.
This erratic behavior leads us to wonder if the market is fragile against collective displays of protest from the public. However, Sandu does not think that this event “necessarily display[s] the fragility of the market, but the emergence of new business models, technologies and behaviors that could disrupt the market and bring more power to the individual investors on retail trading platforms, such as Robinhood.”
Neither does he believe that this was a practical form of protest: “Some media outlets rushed to embrace it as an anti-establishment movement… However, the markets are never rational as they are moved by greed and fear. The reddit investors were moved by their desire to make money, a form of greed, and started selling when fear of losing their investments emerged.”
With that being said, if what happened to GameStop’s stocks was not a practical form of protest, why did Robinhood halt the buying of shares from the video game retailer? The answer lies in the fact that “Robinhood has to secure several more billions in collateral, for the National Securities Clearing Corporation, to continue trading.” Robinhood, like many of us, were simply unprepared for this incident.
It may now seem that what happened at GameStop was a random blip, neither historic nor meaningful. “Does it make any sense for a business that was valued $200m in April to reach $30bn at its peak? It was not business rational when the stock price went up as GameStop did not restructure or improve its business model. It’s the same company with the same old issues. The ‘revolution’ did not last long as last week GameStop’s stock has fallen almost 80 percent,” Sandu said when asked what the GameStop event meant for the market’s future.
Undoubtedly, the collective ability of the public showed enough strength to stand up to Wall Street and threaten more chaos. For Sandu this presents an opportunity “to deepen the understanding of markets and create mechanisms that allow an even playing field for individual investors and create decentralized financial markets but not in a chaotic manner.”
Indeed, he believed that, if left without regulation, the situation can turn dangerous: “We have to acknowledge the power of social media that can move the markets but also can spread movements and messages not necessarily positive as we have witnessed in the political arena.”
Sandu described this event as the archetypal David versus Goliath story. However, in our case, the people are facing multiple Goliaths that are protected by years of market control and manipulation. If the people wanted to make a difference, they should turn a few Goliaths to their side. SpaceX, Elon Musk’s company, is a start. But it is nowhere near enough.
