The frenzied rise of GameStop’s share price baffled Wall Street and panicked the US Treasury. What does the GameStop story reveal about American stockmarkets? Our experts answer your questions.
Chapter titles:
00:00 – GameStop surge explained
00:55 – Was Robinhood right to restrict trade?
01:56 – Short selling and short squeezes
03:05 – Is the stockmarket fair?
06:03 – Will it lead to more regulation?
06:51 – Is the US stockmarket overheated?
10:09 – Is this a trend?
Further content:
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Find all of our finance and economics coverage:
Read more about the GameStop frenzy:
Why retail investors often learn the wrong lessons from success:
Why you should ignore the siren call of market timing:
What explains investors’ enthusiasm for risky assets?
Why stocks are still cheap relative to bonds:
Should you buy European shares?
Why value investing is struggling to remain relevant:
First-time investors are flooding Brazil’s stockmarket:
Shares in emerging markets have hit a record peak:
Meet the data firms cashing in on the quant-investing boom:
Have banks now got too much cash?
Is the financial establishment coming round to bitcoin?
Will central-bank digital currencies break the banking system?
What the Big Mac index tells you about currency wars:
The market v the real economy:
What is the economic cost of covid-19?
Why a surge in inflation looks unlikely:
Its a reminder that if people unite, they can do the unthinkable!!!
I really think that this stock can actually break the entire system. if millions buy it how can they pay? They can’t. What happens when it goes to 10000? I do believe that the options markets are completely fraudulent and leverage is a mistake in trading it in itself is manipulation. That is the problem
People just wanted a even playing field..if things don’t change wall street will be punished
@anothaview USS Liberty 1967
Labour unions for poor workers.. Stock-marked unions for capital with no hope of a better future.
@Ellen Gran That’s a one way street to the breadline
Hedgers shorted Gamestop by 140%, viciously intending to bankrupt Gamestop. Should be illegal. But they’re crying foul, when they are squeezed on a greedy, imprudent bet.
@Nickle gamestop is not bankrupt.
@Mary St. Amand It’s going to go bankrupt. It can’t avoid it. That means its bankrupt now. There are two conditions. Either suffices
1. Inability to meet cashflows as they fall due
2. Liabilities exceed assets and no prospect of a reversal. [ie. New capital]
It’s bust
@Nickle The ex-head of Chewy bought $9million of Gemstop stock recently and came on its board of directors. They can also issue more stock at the now inflated price and float quite a while.
@Mary St. Amand Buying stock is not new capital. That’s basic investment.
Can they issue new stock? Dilutes the price, makes a share worth less.
It’s dead.
What’s more serious is the market breakdown either coordinated by the regulator, or by colusion.
Hedgers? Trying to crash the price? 😆
Something tells me you do not know what hedger means.
Let’s be honest robin hood blocked buying of gamestop stock because they wanted to give their buddies in the hedge fund time to get their act together.
This only happens when retail investors are making money. And they still let them sell, this isn’t a “volume” problem.
A bit too conveinient in my opinion.
@Krombopulos Michael Citadel is one of Robinhood’s biggest customers
@pre nuptials Exactly, accounting for almost 100 million in just a quarter!!
@Tadeusz Drożniak Not denying, but it’s extremely advantageous for shorters to cover losses for people only selling not buying! DTCC could’ve said, ok, this is getting out of hand, we won’t accept any GME, period, for equal market conditions, but they didn’t.
@pre nuptials not Citadel as a hedge fund, but Citadel Securities, which is a market maker and they’re making a lot of money on these volatile stocks transactions. So it does not really make sense for them to engage in this conspiracy.
@Faust Von Barley i’m not shure really if DTCC can really just halt all trading of these securities
Melvin Capital was shorting GameStop. They lost money so Citadel LLC bailed them out for 2.75 billion. Citadel is also heavily invested in Robinhood. That is why robinhood stopped letting people buy GameStop stock. That is also why the interm attorney general recommended that the department of justice should investigate all three for market manipulation.
@Tadeusz Drożniak Who knows if that is true. GME was $100 on Tuesday when Melvin said they had fully covered. But with 79M outstanding shares, it would have cost them over $10B (to cover a 130% short).
GME was trading around $300 for the last 3 days, so I think someone is still exposed, because Robinhood (and others) are still banning all GME buys.
@Tadeusz Drożniak that’s what she said
Tadeusz Drożniak Wrong Melvin have no money to cover their short until they are bailed out by Citadel by injecting several billions of dollar.
@Tadeusz Drożniak Thank you so much for your input…
I (and I assume many others) would love a deep analysis of this case.
@Tadeusz Drożniak yeah, I picked up on that which is why I came to the economist for clarity…🙄
Well done The Economist. The fund managers are not to blame. Disgraceful
@Torok Mark GFYself
Not a single word of shorting the stocks over 140% of available supply!!
They did mention that tbf, just not the percentage.
Maybe because most these people are BAs and MAs in Econ vs BSs and MSs in Econometrics. They love to write but lacks details. This magazine is equvalent to tabloids usually at the checkout stand. They even could not make their own graph.
@Tadeusz Drożniak do you think this should be allowed? Do you think this has any “value”?
Economist justify such instruments/possibilities by saying it helps the price finding.
Would you agree?
They did
@Money printer go brr Can you please comment timestamp the moment someone said “over 100%”? You can’t? Thought so..
IT’S NOT ABOUT MONEY IT’S ABOUT SENDING A MESSAGE. EVERYTHING BURNS 🔥
We all just want to be able to sell stuff we don’t own..seems reasonable
@Chinook GME LONG=Trump supporter.
@Syarif HT Please read your comment. Then articulate your thoughts better.
@Jeffrey Knight idk why r u still here if u didnt know any of this, and accusing people donald trump supporter is just pathetic play right there. So NO
@Syarif HT YES please clearly and concisely explain your initial comment. No need to add extra layers of drivel. You can wait until after you discover that the GME Long’s are like the MAGA PAWNS of January 6th.
1. The brokers all used the same excuse. That it was volatility
2. Problem for them, there are lots of examples of other stocks, with higher volatility, that they didn’t curtail the trading.
3. They didn’t curtail the trading for the hedge funds.
This just goes to prove what real investors were preaching for ages: there is no reliable way to predict short term market fluctuations, as they’re created by human emotions and not by changes in company’s performance. Day trading is gambling for people who’d like to pretend that they are doing something other than gambling.
agreed. day trading is sort a gamble. And large financial institutions call the shots. Unfortunately that is the way the market is structured. There is information asymmetry. Large financial institutions have better access to the market and more financial resources. So it is a fight between large funds and retailers. But this should serve a reminder to large funds about what retail investors can do.
@bob blob interesting. never heard of it. could you explain how it works ? and exactly what is meant by inaccurate assumption ? An assumption cannot be inaccurate, can it be ? It can either be true or false but not exactly inaccurate ?
@bob blob I do not agree with this. Let me tell you I always knew that Tesla and Apple were going to do well. And this has nothing to do with my emotions, or gender. I knew they were going to do well simply on the basis of my information and understanding. Unfortunately I did not have the time as duration or the resources to invest in them. The best thing an investor or a trader needs is experience. And some practical knowledge. Other than that its not very difficult.
It’s called a short squeeze. This isn’t a typical day trade. It actually makes sense
It is a shame that, as a profesionals, you guys missed the big picture here. It is one sided story. Why no one ever mentioned that big funds has short shell up until 140%? It is their greedy that ruined them. Anyone who knows about such facts will rush to buy, thats the nost logic thing. Why? Because those who short HAS TO BUY. But there are not enough stocka to cover that greedy 140% amount. Besides, the short sell appreantly already happen since a couple of years ago. The big funds, HAS CORNERED the company so that they dont have access to fund due the equity keep decreasing. What they do with such aggresive short sell is to drive previous share owner away, thus the price will keep going down. It is a market manipulation
Are you surprised? The Economist has always been “pro-market”, exactly the stance of those hedge fund cronies.
Gamestop doesn’t have a business model. Accept this and move on with your life.
@Pham Nuwen did you even read the comment you replied to?
High short interest was mentioned TWICE.
@hydrolife tech Yes.
“Should small investors have access to these highly leveraged derivatives?” – I think the better questions are, do these highly leveraged derivatives add any production to society? (Spoiler, most of them don’t) And should they even exist? Buying puts has a defined loss and allows you to bet against a stock. This fills the role of price discovery. Short selling, especially on margin, is incompetently risky and maybe shouldn’t be allowed for any “investor” in the first place. But the hedge funds knew this and did it anyway. Isn’t the capitalistic response to let them fail for their bad choices?
@Leo R True Capitalism TM, all hail the free market
lol
Agree, totally about the short selling.
Hi guys, just helping out. Short selling empirically improves liquidity and price discovery in markets. As more people are able to execute directional views, the resulting price will actually reflect what people think the value is.
@TheShreester Right?! Like, the reporting is sooooo bad. Melvin Capital and others got spanked and *deserved* it for taking that insane short position. You don’t buy at peak, so you shouldn’t short a stock when it’s tumbled already. Anyone reporting on this that doesn’t remind us of the figure *140%* or that when the squeeze started last year, the price was so low that no motivation is needed past “solid opportunity to make money.”💰 No different than the extra cash I invested in April 2020 on the idea that stocks were “on sale,” which the types reporting here would compliment.
@Eric Tan The necessity of short selling for price discovery is debatable, especially when the information isn’t included with the stock price. However, I believe the issue here is OVER shorting.
she didn’t address why Robinhood only halted the “buy” feature and enabled the “sell” feature on the stock essentially leveraging one side of the trade and driving the price down
@J C. Oh excuse me… Is there an option to respond to multiple people?
@Jonas Johanson The Youtube Page I’m unaware, it seemed like alot of posts that were long, fwiw.
@Jonas Johanson The Youtube Page
The risk is on the Store. So the store sets the rules. The app has to follow them.
Think of it like someone who had money in their pocket (the buyer) has to be face to face to hand the money to the seller. Where as the other option is to use someone who has a cash box at the store can phone the order in for you (the app) and the store can remove the cash from THAT box and pay for the item/ring it up at the register, to send to you. You still have the Store who is selling you the item that NEEDS the cash box in THEIR hand in this equation. (You seem to think the DTCC sells on credit and not collateral that is pre-paid in advance)
You may be giving that person the cash BUT if their “cash box” is low on funds they can’t buy anything until that cash is taken to the store and their “box” replenished.
The store isn’t going to accept that the app has your cash in “their” hand. That means nothing to THE STORE. They require the cash to have been sent BEFORE the transaction was made. So an app that “freezes funds” wouldn’t help. Frozen funds are still on the wrong side of the transaction. The cash has to be in the store so it can be placed inside the register before the item is sent.
Like I said, Robinhood was told at 0330 PST to send $3 billion in ANTICIPATION for the transactions they would authorize LATER in that day. How can you “Freeze” money from people you don’t know will buy what and send it in ADVANCE? You have to use your OWN money and when they hit the buy button you get paid back from the account balance.
As to regulation:
There is already regulation that if the stock is safe, you don’t need that pre-paid balance to cover the whole price. (Remember back when you could “layaway” some stuff. You could put that new TV on layaway and pay it over time without interest? But it was limited and didn’t cover food, holiday items, as-is, clearance, etc?)
The DTCC allows for “haircuts”, which is that down payment price. It can be as low as 2%.
IF the item is volatile the risk is too great and the deposit must be 100%.
THIS was the problem. No matter if the funds are frozen it would still not be in the DTCC’s “hands”.
You hit the buy button when the item is $10. That cash is Frozen in the app. the app says, I froze this guys $10 bucks, give me the stock. The stock rises to $50 when the app hands over the cash. Either the app has to pay the extra $40 or the store takes that loss because it is at THIS point that the register becomes involved. NEITHER is going to do that. Especially if the store is worried the intermediary will go bankrupt in the middle of the transaction. Cause the Store has to pay the owner of the stock that very second when they sell it to you. How can they pay the stock owner if the money isn’t in the “cash box”.
Regulating so that the DTCC allowed a bigger haircut for volatile items may sound like a cool idea but if that happens and the stock fails, that could cause another Great Depression. And don’t even get me started on saying the market should take the loss.
(Remember Ocean’s 11? The casino has to have the cash on premise to cover ALL bets BEFORE the bets are made. The DTCC has to have the cash in THEIR vault – it can’t be in the bank vault (or in the app’s frozen accounts)
@Jonas Johanson The Youtube Page I dunno. But you seem to assume we should adjust rules to embrace what happened. Are you sure collective action pump-and-dump schemes are a thing you want to grease the wheels for?
“Short sellers are easy to villainize, but they… they aren’t always necessarily the villians.”
This wasn’t one brokerage that had an unforeseen circumstances this was a concerted effort by five or six apps that halted trading on certain stocks at the exact same time the evidence is right in front of everybody’s face. Can anybody seriously argue that five or six brokerages happen to come to the same conclusion at the exact same time to Halt trading on certain stocks BS. Calls where made period imo
Hear, hear!
Yes. That happened on my brokerage. Robin Hood is the straw man.
@Jamey Simms
(I think you’re looking for the term “scapegoat”, not straw man, okthxbai :P)
I found this video completely misses the issue. Many brokers who blocked buy orders did so because they couldn’t afford the margin calls made by the clearinghouses, who were scared that the big hedge funds (who are leveraged to the max) on the other side of these call options could go under. The hedge funds know this, so yet again we have another example of “too big to fail” where the little people always pay the price.
TLDR: the presenters don’t know what they’re talking about, WSB has done the market a favor by exposing how rigged the system is – something you’d think they should be interested in as economic journalists….
Basically:
Hedge Funds do it: “we think is nice”
Normal people do it: “heeeey, that is illegal, regulate that”
prison or death
Do you have evidence?
Wall Street Billionaire Hedge funds: “Only WE are allowed to manipulate the markets”. 😈
Let’s see about that 😏
@Allen Lau the 2008 stock market crash….massively shorting a stock with billions of dollars in order to single handedly drive the stock into the ground…boy have u not been paying attention lol? If a hedge fund managing BILLIONS of dollars in funds enters into one position with it, how is that not manipulating?
@Allen Lau u salty billionaire.
biden is supported by wall street, no wonder the mainstream media is protecting these hedgefunds
Karma is a first-class B-word, isn’t it?
I love that the economist is always able to give an interesting but most importantly an unbiased analysis of current events. I wish I could write for them.
“Halt trading” – No. They halt buying while allowing selling. Unprecedented way to crash the price.
The Gamestop “problem” was caused by over leveraged hedge funds AND shorting >100% shorting >40% is a problem…
Simply the Hedge funds took on to much risk, that is unprofessional, if they had not done that they could not be squeezed.
These past few weeks has been crazy, I just saw my portfolio gained over 500points thanks to GameStop. Who would have thought a downgraded stock like GameStop which was tipped to me by my financial advisor would soar and be one of my best performing stocks in a few weeks.
@Aldrick Laurent I think the top institution limited how much of GameStop you can own, like in Robinhood you can only exercise the sell options and not buy.
I really missed out on this stock, @Mark Cyrus how did you come by this stock.
@Anthony Foster few weeks ago it was recommended to me by my financial advisor Jeff Allen Dakin, I never knew much about gamestop before only that it’s a stock with huge upside potential and can become big in a few months so I jumped on it.
@Mark Cyrus my portfolio hasn’t been performing well of recent, and I have always wanted to diversify into other assets in the market but not much experience. If it’s ok with you I would love to reach out to your financial advisor, I want to share some thoughts with him.
@Anthony Foster Alright, you can always write him on his telegram handle at “infiniteoptions” his active there.