Who would have thought GameStop, that mainstay of 1980s malls, would be captivating Wall Street in 2021?
But a fascinating drama playing out, which has pitted an army of retail investors against some of the most powerful hedge funds around, has dominated the stock market this week.
As Fortune’s Jeff Roberts wrote Tuesday, “The tusslebroke outearlier this month when retail investors on a Reddit social media forum began hailing GameStop stock as a winner even though the company seemed to be going the way of Blockbuster. This caused the share price to soar, leaving hedge funds who had bet against the stock in a short squeeze—forcing them to buy GameStop shares to cover their position, and driving the price still higher.”
As GME stock swung wildly, on Thursday Robinhood announced it would be restricting trading in the stock. “We continuously monitor the markets and make changes where necessary. In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK. We also raised margin requirements for certain securities,” Robinhood wrotein a blog poston Thursday, referencing shares of AMC Entertainment, BlackBerry,Bed Bath & Beyond, Express, GameStop, Koss Corp., Naked Brand Group, andNokia.
And for those wondering, yes, GameStop is a Fortune 500 company. In our most recent ranking (2020) GameStop clocked in at No. 464 on the 500 largest U.S. companies by revenue. That marked a steady drop from 2010, when it was ranked No. 255. The company, headquartered in Grapevine, Texas, reported revenues in 2020 of $6.4 billion but reported a loss of $470 million. As of 2020 the company had 30,000 employees and operated more than 5,500 stores in 14 countries.
Fortune reported earlier this week that the GameStop short squeeze was one factor dragging down the overall market. “Some suggest it’s possible that the profit-taking in large-cap indexes is in part to raise money to cover short bets made on stocks like GameStop. ‘When people are getting run over and they have to raise cash, I wouldn’t be surprised if there’s a little bit of that going on right now, because God knows more than one hedge fund was short GameStop,’” said Russell Rhoads, head of research and consulting at EQDerivatives.The article went on to state that investors who were short GameStop are currently down over $23 billion year to date in 2021, according to S3 Partners data.
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As an avid observer and expert in financial markets and investment dynamics, I find the recent events surrounding GameStop's stock surge and the ensuing market turmoil to be a captivating and unprecedented spectacle. The intersection of retail investors, social media forums like Reddit, hedge funds, and traditional financial institutions has created a narrative that transcends the typical ebb and flow of the stock market.
The drama began when retail investors on a Reddit social media forum identified GameStop, a seemingly declining company reminiscent of Blockbuster, as a potential winner. The collective enthusiasm led to a surge in GameStop's share price, triggering a short squeeze for hedge funds that had bet against the stock. This forced these funds to cover their positions by buying GameStop shares, further driving up the stock price. This intricate interplay between retail investors and hedge funds has shaken the foundations of conventional market dynamics.
The repercussions of this saga were significant enough for popular trading platforms like Robinhood to step in and announce restrictions on trading certain securities, including GameStop. This move sparked controversy and debates about market fairness, with implications for the democratization of finance and the power dynamics between individual investors and institutional players.
The Fortune article also highlights the impact of the GameStop short squeeze on the overall market, with suggestions that profit-taking in large-cap indexes might be driven by the need to cover short bets made on stocks like GameStop. Russell Rhoads, head of research and consulting at EQDerivatives, provides insights into the possibility of hedge funds raising cash to cover losses incurred due to the GameStop frenzy.
Furthermore, the article mentions GameStop's status as a Fortune 500 company, emphasizing its decline in rank over the years despite being headquartered in Grapevine, Texas, and operating thousands of stores globally. The financials of GameStop, including its 2020 revenues of $6.4 billion and a reported loss of $470 million, provide context to the company's precarious position.
One striking statistic mentioned in the article is that investors who were short on GameStop are down over $23 billion year to date in 2021, according to S3 Partners data. This staggering figure underscores the financial impact and magnitude of the GameStop short squeeze on institutional players who bet against the stock.
In summary, the GameStop saga of 2021 serves as a microcosm of the evolving dynamics in the financial markets, showcasing the influence of retail investors, the power struggle with hedge funds, and the ripple effects on the broader market. This unprecedented event has sparked discussions about market regulations, the role of social media in shaping financial decisions, and the resilience of traditional investment strategies in the face of emerging retail investor movements.
