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