For years, Gamestop, the video game chain focusing on brick and mortar stores, has been struggling to stay in business as more game purchases went online. Because of this, a great number of investors on Wall Street began to short or bet against the stock, believing that it was very unlikely for the company to grow. Then, in January, a group of amateur investors from reddit’s r/WallStreetBets poured in, investing aggressively in Gamestop’s stock(GME). These investments sent the stock price skyrocketing, crippling a few Wall Street Firms and making many reddit investors fabulously wealthy. Since then, the stock price has remained turbulent: rising quickly before plummeting before rising again.

This unprecedented event has shaken our traditional understanding of how the stock market works, and it is unclear whether it is for better or for worse. In this issue, Jack Wang ’22 argues that the Gamestop saga will inspire new and improved economic legislation while Steven Pang ’22 discusses the rough ramifications of gamifying investing.

TO THE MOON!

By Jack Wang ’22

The Gamestop revolution against hedge funds seems groundbreaking and unprecedented, but it is in many ways grounded in history. Sparked by retail traders eager to make a statement against institutional investors, Gamestop and all the drama surrounding it has been coined the “French Revolution of Finance.” By threatening to continue messing with Wall Street until there is fair trading regulation, the common people are expediting true democratization in the stock market.

The event of Gamestop surging from under $20 dollars on January 12 to over $347 dollars on January 27 is known as a “short squeeze,” which occurs when investors pump up the price of a stock by buying more shares and forcing the people who bet against it (borrowed shares) to exit at a loss. Although short squeezes are executed more frequently by hedge funds than by individual traders, rebellious short squeezes by individuals are prevalent throughout market history. “Meme” stocks and rebellions against Wall Street are nothing new.

In 1923, Piggly Wiggly, a supermarket chain that still exists today, was heavily shorted by big investment firms. Just like the Gamestop short squeeze, the idea of rich people threatening actual businesses and employees for their profit infuriated news readers and especially Piggly Wiggly’s founder Clarence Saunders. According to Ali Noland of the Arkansas Times, Saunders got a loan to buy up the majority of outstanding shares, forcing Wall Street to buy back their borrowed shares with huge losses. But then, just as modern brokerages helped hedge funds by placing buying restrictions on Gamestop, the New York Stock Exchange bailed out Wall Street by halting Piggly Wiggly trades and allowing firms to buy back shares slowly and at greatly reduced market prices. 

Cornelius Vanderbilt’s short squeeze of the Harlem Railroad stock also preceded Gamestop in being an “irrational” bet, and Vanderbilt even said: “I don’t care half so much about making money as I do about making my point, and coming out ahead.” 

In reality, the stock market has always been speculative, emotional, and human, so the seemingly disruptive short squeeze of Gamestop does not actually challenge the historical role or proper functioning of the market.

This time, however, the world is much more aware of these events, and Gamestop serves a greater purpose as a catalyst for enforcing market integrity. Before Gamestop surged, it was 140% short, which means that 140% of its shares were borrowed, mainly by hedge funds. The act of borrowing non-existent shares is illegal because it puts artificial downward pressure on stocks and fosters opportunities for collusion, damaging market integrity. Evidently, the ban has not been respected. Since the intervention of brokerages in Gamestop trading, there has been widespread public outrage and united political condemnation from lawmakers like Ted Cruz and Alexandria Ocasio-Cortez—who never agree on anything—about trading restrictions and hedge funds’ bailout. Due to the consensus among people to investigate and terminate hedge funds’ (illicit) competitive advantages, regulators will be pressured to crack down on brokerages’ competence and illegal shorting. 

Throughout history and even during Gamestop’s rise, institutional investors have also had superior trading accessibility—an unfair advantage that is now under threat because of Gamestop. While hedge funds traded Gamestop whenever they wanted, Robinhood and Interactive Brokers, two of the most prominent platforms for retail investors, only allowed sales and not purchases of Gamestop, directly contributing to the fall of the stock price. Robinhood justified its limitation by claiming that Gamestop’s extreme volatility threatened its capital obligations (simply put, Robinhood did not have enough money to facilitate the extreme activity). Although the brokerages had every right to their actions, they screwed their clients and showed the hidden opportunity costs to “free” trading. Now, these popular zero-commission brokerages, facing the risk of losing customers, are under pressure to raise capital and ensure similar situations do not repeat themselves. 

All retail investors have done with Gamestop is expose long-existing, inherent problems with the stock market using the same strategies investment institutions have exploited for decades. While the ability for regular people to trade through simplified applications without minimum capital requirements has in a way democratized the stock market, the next step is evening the playing field, and the greater populist revolution beginning with and represented by Gamestop will do just that. 

Gamestop and Gambling with Stock Market

By Steven Pang ’22

“Send GME to the moon!” reads a Reddit post on r/WallStreetBets from January 27th. Gamestop’s Stock ($GME) was at an all-time high — $483(up more than 2500% since January 1st). Unfortunately for that Reddit investor, in the days following this message, the stock spiraled downward, and, as of February 17th, has dropped by over 90%.

By this time, we’re all more or less familiar with the GameStop craze, but the stories we hear often only shed positive light on the situation. BBC News, for example, hailed the situation as a “David vs Goliath” story —  a tale in which heroic individual investors finally gained the upper hand on evil Wall Street firms. The truth is, however, that GME’s meteoric rise and precipitous fall have only demonstrated the serious harms that arise when the public starts treating the stock market like a casino.

Individuals who band together on online forums may have a lot of combined purchasing power, but they aren’t the same as an investment firm. Because even though these online traders generally act together, each person is ultimately choosing when to invest and when to sell on their own. Thus, since each person is making a slightly different decision, many traders wind up losing money from an investment, even if there are a handful of winners.

In Gamestop’s case, even though investors collectively made more money than they lost, that doesn’t necessarily mean they experienced a net-positive change in their standard of living. For one, many professional investors and firms joined the Gamestop frenzy and ended up making a lot of money. As for the rest of the money, a great deal of it went to more wealthy and better educated online investors who could put in more capital and select more opportune times to sell. While these professionals and wealthy individuals have been made fabulously rich, they never really needed this money to live comfortably.

For online investors who were less educated or had less capital, however, the Gamestop story was not so pleasant. While some number of these less affluent individuals made money, the vast majority of them did not, especially since many of them got in relatively late in the whole Gamestop episode. Anyone who bought Gamestop stock between January 26th and February 1st, for example, would have lost 70% – 90% of their investment by now(February 17). 

Unlike wealthy or well-educated online investors, individuals who lost money generally needed the money a lot more. People took out mortgages on their homes or dug deep into their savings to get more money to invest, and now that most of their money is gone, many are in serious financial trouble. 

In many ways, making trading more accessible has turned investing from a safe and responsible way to handle your money into a game of Blackjack. Sure, there is some calculus that you can do to maximize your chances of winning, but, save for a select group of highly skilled players, most people are going to lose. Similarly, while many online investors are going to make money, on average, since people’s decisions generally underperform index funds(in which they would otherwise store their money), there is going to be a lot of loss and a lot of pain.