GameStop: a deceptive victory over Wall Street?

In Janu­ary 2021, the share price of GameStop (the par­ent com­pany of video game dis­trib­ut­or Micro­mania) was the sub­ject of massive spec­u­la­tion by indi­vidu­al share­hold­ers. The share price was mul­ti­plied by 24, rising from $20 to $482 per share (on 28 Janu­ary at mid-ses­sion) in just a few days. Its valu­ation reached €20bn and then fell back to around €3.5bn. Sev­er­al hedge funds bet­ting on the fall in prices had to hedge their pos­i­tions and suffered losses of sev­er­al bil­lion dol­lars (Melvin Cap­it­al, Cit­ron Research). This unpre­ced­en­ted move­ment ori­gin­ated on the Red­dit com­munity web­site and its Wall­street­bets for­um where sev­er­al mil­lion people met to dis­cuss the GameStop company.

Sev­er­al hedge funds suffered massive losses on GameStop. Did indi­vidu­al share­hold­ers win against hedge funds as some claim?

Not at all! Many small hold­ers arrived on the scene towards the end of the spec­u­lat­ive move­ment and suffered con­sid­er­able losses. We can see it for their com­mu­nic­a­tions on social net­works. They are quick to men­tion their counter-per­form­ances – some­times with sums of sev­er­al tens of thou­sands of dol­lars – in a hero­ic way. This is the polit­ic­al dimen­sion of GameStop. 

How do you explain this phenomenon?

There are three key ele­ments. The first is the abund­ance of cash, par­tic­u­larly from US fed­er­al gov­ern­ment cheques fol­low­ing the Cov­id-19 crisis. The second is a com­bin­a­tion, per­haps a last­ing one, of two tech­nic­al ele­ments: the devel­op­ment of free online broker­age applic­a­tions, such as Robin­hood, and the use of social net­works favour­ing the coali­tion of a host of indi­vidu­al spec­u­lat­ors. Finally, the third is polit­ic­al. Some lead­ers wanted to replay an old Amer­ic­an battle, Main Street versus Wall Street. In oth­er words, small­hold­er cit­izens versus big hedge funds. 

But this polit­ic­al explan­a­tion actu­ally clashes with real­ity. It was rather a ques­tion of many indi­vidu­als who had cash, free time and thought they could make money quickly joined the move­ment. By bet­ting on an action, regard­less of the fun­da­ment­al value of the com­pany, they even­tu­ally adop­ted the spec­u­lat­ive prac­tices of those they claim to fight. One of the first lead­ers of the move­ment was sin­cerely con­vinced that GameStop was under­val­ued and had been say­ing it for years, but he was over­whelmed by a run­away effect in which we even saw Elon Musk encour­aging buy­ing on Twit­ter against the back­drop of an anti-estab­lish­ment culture! 

Many people who had cash, free time and thought they could make a quick buck joined the move­ment… and lost out.

Does this reverse the bal­ance of power between funds and small investors?

Some funds have lost bil­lions and will prob­ably be more care­ful in the future. But that does­n’t change the fun­da­ment­als. The debacle con­firms a great law of spec­u­la­tion: firstly, to win you need to have “deep pock­ets” and be able to with­stand bru­tal fluc­tu­ations; secondly, you need time to be able to hold your pos­i­tion and not be swept away by those move­ments, and finally you need qual­ity inform­a­tion, often in the form of very thor­ough ana­lyses. Many small car­ri­ers had very little inform­a­tion and did not care about the fun­da­ment­als. This pseudo defeat inflic­ted on hedge funds by small investors is prob­ably more a flash in the pan than a real victory. 

Can it hap­pen again?

Of course it can. Oth­er cases, such as AMC (a US cinema chain), have been men­tioned on these for­ums, but the suc­cess of novice spec­u­lat­ors is on the whole not very con­clus­ive. As always, a few win, but the vast major­ity lose. The stock exchange is not a casino, it is first and fore­most a mech­an­ism for fin­an­cing the economy.

What can we do to pro­tect our eco­nomy from these excesses?

It works both ways. There are vul­ture funds that take advant­age of the mar­kets, are nev­er sanc­tioned and are saved in case of crisis. This was one of the major cri­ti­cisms of Main Street against Wall Street after the fin­an­cial crisis of 2008. But we must also look at the oth­er side of the mir­ror: broker­age plat­forms that allow entry and exit without min­im­um guar­an­tees or fric­tion cre­ate con­sid­er­able volat­il­ity that can lead indi­vidu­al share­hold­ers to com­mit stu­pid­it­ies and end up ruined. 

GameStop’s share price plunged back down again when the Robin­hood plat­form tightened trad­ing con­di­tions and as such con­sid­er­ably lim­ited the pur­chase of shares. This is a reg­u­lat­ory issue under dis­cus­sion in the United States. We must there­fore suc­ceed in both curb­ing the hordes of private spec­u­lat­ors who hijack the voca­tion of a stock exchange and intro­duce mech­an­isms that pre­vent cer­tain act­iv­ist funds from dis­mem­ber­ing com­pan­ies in a fright­en­ingly short term. At the heart of the GameStop affair, the issue of short selling (selling secur­it­ies you don’t have by spec­u­lat­ing on their decline) is one of the key tech­nic­al points to be resolved. There is no easy answer, and the debate is tak­ing place in many coun­tries, includ­ing France.

What is the use­ful­ness of hedge funds?

There are two ways of look­ing at it. The first is to con­sider that they are rap­tors who play on price vari­ations, which they pro­voke or amp­li­fy by shak­ing up the mar­kets, in order to get rich quickly at the expense of the real eco­nomy. The second is to con­sider that they have a real dis­cip­lin­ary vir­tue in clas­sic share­hold­er gov­ernance. They do in-depth work on cer­tain com­pan­ies, dis­sect their accounts and strategies, and identi­fy real weak­nesses, going so far as to mobil­ise all sorts of means (law firms, eco­nom­ic intel­li­gence com­pan­ies…) to obtain crit­ic­al inform­a­tion, then use com­mu­nic­a­tion agen­cies to mobil­ise the press and rally oth­er share­hold­ers to their theses. 

Even if they hold only a small share of the cap­it­al, their attacks end up destabil­ising the man­age­ment in place and influ­en­cing their strategy, or even pro­vok­ing their replace­ment. Whilst they are not appre­ci­ated, the user of these act­iv­ist funds are hard work­ers, often highly qual­i­fied, who col­lect high-qual­ity data and do not let go of their prey eas­ily. This func­tion of mar­ket “dis­cip­line” can also make sense against incom­pet­ent man­agers or those who are abus­ing their pos­i­tion. There are many examples of com­pan­ies whose weak­nesses have been brought to light by these play­ers. Recently in France, for example, the com­plex fin­an­cial arrange­ments of the Casino group, raised real ques­tions. Anoth­er is the Ger­man Wir­e­card fintech, val­ued at up to €17bn in Frank­furt, which has deceived the Ger­man fin­an­cial reg­u­lat­or for years with widely dis­tor­ted accounts. It has since col­lapsed as a res­ult of this decep­tion, not­ably thanks to invest­ig­at­ive work and pres­sure from cer­tain funds. 

Should short-selling be regulated?

Yes, it must be bet­ter con­trolled to bring trans­par­ency and clean up cer­tain issues (secur­it­ies lend­ing, settlement/delivery, dead­lines etc.). The object­ive is to main­tain the fin­an­cial, mana­geri­al and eco­nom­ic dis­cip­line that act­iv­ist funds, like oth­er share­hold­ers, bring by lim­it­ing pure spec­u­la­tion. A com­pany can have a moment of fra­gil­ity or weakened man­age­ment without jus­ti­fy­ing attacks that are glob­ally destruct­ive of value.

Interview by Clément Boulle