ECONOMY: GAMESTOP

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he start of 2021 saw one of the most seismic and disruptive financial events in years take place on Wall Street.

A large group of gamers saved the US high street relic GameStop, amongst other declining companies, from going under by shorting stock on them, and managed to give the Establishment the middle finger in the process.

The enormity of what took place won’t be completely felt or understood for some time but, in the short-term, billions of dollars have been lost by hedge funds and stockbrokers. To begin to examine what happened, we must first understand what ‘shorting’ is.

Shorting, or short selling as it is officially known, is placing a very risky bet that a company’s stock, or share price, is going to go down and eventually the company will go out of business. The earlier someone invests in a short, the bigger the reward because you earn more the longer the price decreases. Shorting is the reason for the 2008-2009 Financial Crash, where hedge fund managers were shorting on the value of subprime mortgages. To best understand the causes of the Financial Crash and how shorting works, I recommend watching the film The Big Short. In the case of GameStop, there was a ‘short squeeze’ which is when share prices rapidly rise because so many people are buying stock in a shorted company, forcing the investors who placed the short to also buy that stock to limit their losses. This happens when there is more demand for shares than there is supply.

A channel called r/WallStreetBets, on the cult social media platform Reddit, has been operating under the radar for years. It gives people, with no background in finance, advice on stock trading and buying shares. Users were able to call on the gaming community, who were upset at GameStop closing down, to save the company by downloading trading apps like Robinhood in the US and Trading 212 in the UK so they could buy shares in the company.

The GameStop short squeeze took place early January and they managed to increase the share price by 92.7% in a day. Investors were so successful that Tesla and SpaceX founder Elon Musk tweeted the link to r/WallStreetBets which encouraged his 46 million Twitter followers to join in. Immediately after Musk’s tweet, the GameStop share price rose to over $200.

The day after, they saw how much of a disruption they had caused to the global stock markets and they branched out to save other declining companies, including AMC Cinemas, BlackBerry and Nokia. The more the share price rose, the more money

Wall Street bankers and hedge fund managers were haemorrhaging because they had bet so much on GameStop and the other companies tanking. Data analysis company Ortex estimates that Wall Street made losses of around $19 billion in one day. On January 28th, Robinhood and Trading 212 put a ban on purchasing shares in GameStop, AMC Cinemas, BlackBerry and Nokia because they had become so volatile and they blocked new customers from joining in. This posed three very serious questions about how free the market really is.

The first is about market access and who is actually allowed to trade. Wall Street traders were allowed to continue trading these stocks whilst ordinary people were banned. The second is about whether we are likely to see more events like this in the future. These events brought about

some major success stories for ordinary people who took huge gambles by investing hundreds of thousands of dollars into shares and have walked away with enough to pay off loans and mortgages. Just as there was tremendous success, there were also people who experienced heavy losses with some investors losing hundreds of thousands of dollars in a matter of hours.

The third, and perhaps most important question is what happens when the market regulates. The real ‘Wolf of Wall Street’ Jordan Belfort, encouraged the sofa investors to ‘hold the line’ by not selling, thus increasing the price. But Belfort has warned that people could quite easily ‘lose it all’ if they hold for too long. The success of the GameStop short squeeze is very fragile as the prices won’t hold forever and when they drop, those who still haven’t sold could be faced with heavy losses and potentially end up in debt due to the high amounts they invested. Some people even took out loans and invested life savings to participate in the short squeeze.

The tale of GameStop is the ultimate rejection of the Establishment’s stranglehold on the stock market and it enabled ordinary, working class people to have an opportunity to make money in a way they wouldn’t normally be able to. Based on current trends, the future of investment is heading in a direction of armchair investors becoming main players in the stock market.

GameStop needs to be treated as a warning to the Wall Street elites who think investment is an exclusive club and this event should become a parable for the next generation of traders because the legacy of this will be felt for some time.