Wild times on Wall Street

 

Wild times on Wall Street

The trading frenzy over shares in the ailing US video games retailer GameStop has to be the most sensational business story of our age, It’s a David and Goliath tale in which the big beasts of Wall Street were humbled by a “flash mob” of amateur day traders – a group of people who, rather like the rioters who stormed the US capitol, felt powerless in the face of “a system of American oligopoly” and so rose up to strike a blow against it.

GameStop was a company that looked set to die, It has had to close 450 outlets because its core business is selling games on disc, whereas gamers prefer increasingly to download them online. And sensing blood, the big hedge funds have for some years been “shorting” the company – selling GameStop shares that they’ve borrowed but don’t actually own, waiting for the price to fall, then buying the same quantity of shares at far lower cost and returning them to the lender. As a result, the company’s stock nosedived from $56 a share in 2013 to between $3 and $10 a share for much of last year. But two weeks ago something extraordinary happened, said Tom Leonard in the Daily Mail. The struggling video game seller’s stock price skyrocketed. By the end of January, it had hit a high of $483 and the company was valued at about $10bn – more than American Airlines. And as the price soared various hedge funds found themselves in deep trouble: instead of buying back the shares they’d borrowed at a lower price, they now had to do so at a massively higher one. In total, short sellers are believed to have lost $19bn on GameStop.

So “a raging mob of angry small-time retail investors” brought down the “short-selling money bags”, said Jeremy Warner in The Daily Telegraph. And one should raise a cheer for them: it is a victory for the small guy. These day traders do most of their trades on a commission-free online platform called Robinhood and compare notes on WallStreetBets, a message board on Reddit. A band of them, led by a trader whose YouTube name is “Roaring Kitty”, had been cooking up ways of putting the squeeze on short sellers for months, said Derek Thompson in The Atlantic. But their detailed plan to buy up GameStop’s stock and push up the price wasn’t just an act of high-minded revenge; they saw it as “a tasty investment”. And for some it certainly was, said Jack Rivlin in The Spectator: the user who first pitched GameStop on Reddit has seen his investment of $50,000 peak at $50m. So let’s not get too sentimental about the WallStreetBets crowd. They’re mostly bored young men addicted to risky bets. As this one turned out to be, said Joseph Rachman on Reaction. life. This week the stock price crashed, after Robinhood, fearful it couldn’t meet its obligations, had to put a halt to trading in GameStop shares. And so we end up with the familiar story where the few who buy early and sell early “make fortunes at the expense of the laggards”, said Ross Clark in The Spectator. What we’ve here is not a noble populist crusade, but “a Ponzi scheme in moral clothing”.

Comments