Gaming the GameStop market price

 Jeff Carlson:

Investors and observers alike have been watching the incredible price movement and volatility escalation of the retail gaming company GameStop (GME). On Jan. 11, the stock closed just under $20 per share. On Jan. 28, it traded as high as $450 per share intraday and closed at $193.60.

The stock is currently trading around $350 per share in after-market hours.

At the heart of the incredible price movement lies an intense tug of war between retail investors and at least one large hedge fund—although there have been a number of other hedge funds circling the situation and involved in a variety of capacities. Melvin Capital had established a large short position in GameStop, betting the company’s stock price would fall.

Retail investors discovered this and began a buying spree of epic proportions, driving the price of GME up in the face of Melvin’s short position, leaving the fund vulnerable to huge losses as it had bet GameStop’s stock would fall.

The situation quickly became an open war between the more traditional hedge fund players and the brash, often younger, retail investors. But this war became emblematic of a larger issue, in which the opportunity to participate freely and fully in our financial markets is often slanted toward the large players on Wall Street, combined with a seeming resentment toward everyday investors from Main Street.

Regulators began to look closely at the situation and one brokerage firm, Robinhood, used heavily by the retail crowd in their purchases of GameStop stock, on Jan. 28 suspended all buying activities in GameStop. Not selling by retail investors, just buying. That caused the price of GameStop to plummet intraday and although levels are higher in aftermarket trading, they are still far below the intraday highs.

According to some accounts, Robinhood also began liquidating the holdings of some of its customers without their consent. Whether this was related to margin calls or some “Terms of Service” agreement isn’t entirely clear at this time.

What is clear, however, is that a lower price in GameStop stock provides immediate relief for any hedge funds that held short positions in the company and also helped the circle of other hedge funds that had very likely established their own short positions recently and at much loftier levels. It was the small retail investors who were primarily hurt by these actions.

A pundit on Twitter stated that “undermining confidence in the pricing mechanism of the market to make some quick cash and screw those guys isn’t virtue.” He was referring to the short squeeze applied to the hedge funds by the retail investors.

But pointing the finger toward retail investors misses the mark entirely.

The market provides a long-term determination of value. And regardless of short-term situations, the true undermining of confidence in the market’s pricing mechanism happens when there are attempts to control or regulate the market. Or make an outside determination as to whom is allowed to participate in it.

There is more.

A case can be made that both sides are gaming the market for this stock, but short-sellers are seen as more predatory.  Both are probably short-term plays and at some point, the stock should return to its true value based on the profitability of the company.  It is not clear what Robinhood's game is.  But the people who are buying the stock still want to invest in it they should go to another broker.


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