‘GameStopping’ The System: Wall Street Madness Breeds Unintended Consequences

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You just couldn’t make this stuff up if you tried. That was the consolation prize most of us took into 2021 from 2020: Whatever else happens in this still-young year, at least we’re all immune to shock. But as is often the case, just when we think we’ve seen it all, we get to see something new.

GameStop was this week’s something new. More specifically: the improbable and spectacular rally of its stock price — which, as of this writing, was roughly $336 a share. How it got there is hardly a story of great strategy or inspiring individual effort. In fact, nothing major has changed over the last year about GameStop, a Grapevine, Texas-headquartered video game retailer with shops nestled in malls nationwide.

In fact, GameStop has struggled over the last year, as the pandemic has slowed physical commerce and, over the past few years, competition from downloadable game content has pushed its profitability down and forced it to shrink its physical footprint. This brought GameStop to the attention of two groups that ended up being key to the stock price’s massive growth over the last week. The first group included short-sellers who all invested heavily that GameStop’s share price would continue to fall. The second was a Reddit investing subgroup, r/WallStreetBets.

The GameStop stock had been getting some positive feedback on the Reddit site for some time. But starting in January of 2021, that enthusiasm began coalescing with a distaste for the large institutional investors, such as hedge funds, which were heavily short on GameStop.

In early January,  r/WallStreetBets members began buying up GameStop stock, which in turn pushed up the price. It rose from around $17 a share at the start of January to north of $330 today (Jan. 29). It was, as one r/WallStreetBets told Wired: “a meme stock that really blew up.”

Blew up being the operative concept, as the conflagration set off wild complaints by those institutional investors whose short positions were badly exposed by the onslaught of retail investors, who seemed glad enough to expose them. Robinhood, the day-trading app for retail traders where much of the GameStop buying happened, is now being sued by its users for its decision to halt trading in GameStop and other suddenly explosive meme stocks. That move touched off the interest of legislators.  And the entirely unpredictable situation has set off a flurry of think pieces asking the expected series of unanswerable questions:

Is this a victory for retail investors or the beginning of the end? Is this a David-and-Goliath story about Redditors vs. hedge funds? Is this the first crowdfunded short squeeze in the history of the market? Is this really a pump-and-dump scheme gone prime time? Will this destroy the stock market as we know it?

PYMNTS has answers to none of those questions — they require the crystal ball that remains on order but has not yet arrived. What we do have are unexpected consequences — the things that got a lot less press as the GameStop soap opera unfolded and dramatic statements echoed across the Twittersphere. Here are the things that flew under the radar.

The Movie Industry Is Saved? 

GameStop got all the headlines because its stock price grew so explosively, but it wasn’t the only meme stock that got love from the Reddit investment group. AMC, the nation’s largest theater chain, also rose with the tide, with its stock price up 300 percent in trading on Wednesday (Jan. 27), according to reports. Which, as it turns out, might have been just enough of a boost to help the nation’s largest theater chain, which is also a bellwether for the movie theater industry.

The stock surge allowed the chain to scoot a bit further back from falling over the edge into bankruptcy. AMC erased $600 million of debt through bond conversion as a result of the pickup, and managed to parlay this week’s boost into another $300 million in capitalization.

AMC reported a $900 loss million in the third quarter of 2020, and it has long been speculated that its death was looking increasingly likely. This week’s stock boon, it seems, offered the theater chain another lifeline to make it through the spring and summer — and possibly into the post-COVID era.

And AMC is far from the weirdest follow-on stock that has joined the weird world of the Reddit rally. Blockbuster officially declared Chapter 11 in 2010, more or less ending its run as a company (a single location remains in Bend Oregon). On Wednesday, its stock surged by 302 percent. BlackBerry stocks have also been on fire — up 150 percent since the start of 2021. Redditors, it seems are more bullish on BlackBerry than BlackBerry executives, according to reports. Three BlackBerry executives, including the chief financial officer, unloaded $1.7 million in the firm’s stock in the early days of this month’s meteoric share price spike.

The Mooch Sees Bitcoin’s Big Break in the Making

Will this upwelling of investment enthusiasm translate into a big boost for bitcoin? Anthony Scaramucci, CEO of Skybridge Capital (and briefly the press secretary for former President Donald Trump) certainly thinks so.

“The activity in GameStop is more proof of concept that bitcoin is going to work,” Scaramucci told Bloomberg, adding, “how are you going to beat that decentralized crowd? That to me is more affirmation about decentralized finance.”

And Scaramucci isn’t the only crypto enthusiast talking up the connection — and the possibility that the new wave of investment enthusiasts will flow to their shores. “Do you see this rage? Do you see this community channeling their anger at the system? What do you think happens when they find out what bitcoin actually is?” wrote one bitcoiner, adding, “[the] 2021 bull market could get bigger than any of us realize.”

But there is a pretty good reason to take all of their enthusiasm with a pretty big grain of salt — the WallStreetBets Redditors are decidedly not crypto enthusiasts at present, to the extent that one is not allowed to mention it at all on the message board. The sub’s moderators do not approve any posts or comments with the words “bitcoin,” “Ethereum,” “cryptocurrency” or other related terms. Any violating posts are immediately removed, and moderation is very actively enforced.

“No microcap (less than $1 billion market cap), cryptocurrencies, SPACs or any other worthless securities that are susceptible to scams or pump & dump schemes,” is officially written into the site’s rules.

Could this wave of investors, buoyed by the power of bringing multi-billion-dollar hedge funds to their knees, rush off to feel the rush that is crypto investing? After a meme stock explosion, we aren’t ruling anything out — but we can be fairly certain that unlike this project, they won’t be putting it together on the r/WallStreetBets board.

The Congressional Hearings Cometh

Politics makes for strange bedfellows, or so the saying goes. Not nearly as strange, as it turns out, as Reddit investing, which managed to create something that would have been hard to foresee ever existing — a point of agreement between Representative Alexandria Ocasio-Cortez and Senator Ted Cruz. Both agreed that Robinhood suspending trading on Thursday might require regulatory oversight. As the subsequent Twitter exchange revealed, they will not be working together — but oversight might still be coming.

House Financial Services Chairwoman Maxine Waters (D-CA) put out a statement later on Thursday calling for a hearing. Incoming Senate Banking Committee Chair Sen. Sherrod Brown (D-OH) said in a statement on Thursday that the committee will hold a hearing on the “state of the stock market” in the future.

What happens next? Hard to say — experts are split on whether or not GameStop’s price will begin falling off just as rapidly as it shot up, and if so, when that will happen. What is clear is that if Robinhood’s goal was to disrupt the stock market, it certainly succeeded — though probably not in the way they had expected.

And the disruption begat disruptions, many of which, as this year has proved, no one expected.

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