The global finance market was rocked this week by the surprise rally of US video game products, consumer electronics and games retailer GameStop, which was founded in 1984 in Grapevine, Texas and operates about 5,509 stores in the United States, Canada, Australia, New Zealand and Europe. Given the advance of online commerce and the crisis due to the coronavirus pandemic, the company was believed to be about to disappear, but then became part of the trading strategy by a group of people who usually meet in the chat-room/wallstreetbets on the Reddit portal, who decided to cause losses to traditional funds of the company, while making money in the process. (1)
Although it came as a surprise for GameStop as well as for Wall Street, the decision to opt for the shares of this company was not strictly a random bet on the part of the users; choosing a company that had had an unfavorable financial streak for a long time (in the last four years, its shares have remained in decline and in 2018 it registered losses of up to $637 million) gave small investors the opportunity to opt for short positions on the company’s shares. (2)
The strategy of the more than 2.8 million organized users is based on the fact that short investors do not buy the shares directly, but rather borrow them from those investors who have previously bought them and put them up for sale for their value. A short investor makes money if the shares go down, but if they go up they lose money, and the investor who initially loaned the shares to the short investor can pressure them to return them and pay the difference. (2)
GameStop being a company that, as mentioned before, had been on a falling streak, turned out to be the best option for retailers to continue betting that it would continue in this trend where the value of its shares would continue to fall, with the intention of inflating its price. Once the company achieved a significant number of short investors, losses began to increase rapidly as share purchases, which were worth $17.25 by early 2021, rose 822% to a $159.18 value. (2)
This surprise rebound under this market strategy is not a first since hedge fund investor Dr. Michael Burry made millions on the sale of short-position shares in subprime mortgages during the 2008 crisis, a story that made to the big screen in director Adam McKay’s “The Big Short.” In fact, Burry’s own hedge fund, Scion Asset Management, reported that in April of last year he bought 5.3% of the same GameStop shares with a price per share between $2 and $ 4.2; in a letter to the company, Burry asked for $300 million buyback authorization, a figure that up to that point corresponded to GameStop’s total market capitalization. However, now Burry himself calls this situation “unnatural, crazy and dangerous” and has made it known that there should be legal and regulatory repercussions, perhaps because Burry himself sold his shares before this rally. (3)
Without a doubt, this event represents a key point in history within the financial market, as it gives a clear vision of the endless struggle between young investors and the finance moguls that was highlighted in the Occupy Wall Street protest movement almost ten years ago.
- https://www.infobae.com/economia/2021/01/27/trolls-vs-wall-street-como-un-ejercito-de-usuarios-de-redes-sociales-influyo-sobre-una-accion-e-hizo-perder-millones-a-grandes-fondos/
- https://www.vidaextra.com/industria/gamestop-espectacular-subida-bolsa-originada-reddit-sus-devastadores-efectos-wall-street-explicada?fbclid=IwAR1NK7O7GxW3ZR-Qw4I9tfwdWr12ssimSz_tOX7TlbmXBptFqsNqCX5fgCs
- https://www.forbes.com.mx/negocios-inversionista-que-exploto-el-valor-de-gamestop-4800-ahora-alerta-de-antinatural-y-peligroso/
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Aldo Weidner Z.
Market Analyst – HF Educational Office – LATAM
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