GameStop Has Been Stopped, But Was It Any Surprise?

The first hint that the grassroots-led movement to bid up the shares of companies like GameStop and AMC Entertainment (-41.20%) would come under pressure was the bipartisan support in Congress to investigate and potentially regulate the matter of retail investors funking up the financial system.

The next hint was popular retail trading app Robinhood putting limits on orders as well as tapping on billions of dollars’ worth of credit lines as market makers (who facilitate the sale and purchase of options) demanded greater amounts of settlement collateral.

And that was really all it took to end the possibly first attempt at a decentralized internet retail-led buying frenzy that minted fresh millionaires and punished hedge funds.

But really, what was anyone expecting?

Ironically, both GameStop and AMC Entertainment represent the exact type of business model that was never designed to withstand the Covid-19 economy – in-person retail and entertainment.

To be sure, fundamentals were never the primary driver of the rally in GameStop or AMC Entertainment, but as the platforms which retail traders use to buy these stocks choked access, both plunged.

GameStop’s retreat also coincided with a sharp reduction in short interest as investors appeared to have covered their positions.

And unlike the initial push to focus on GameStop shares on Reddit, the retail investor-led market machinations have now drawn global media attention – meaning that Reddit’s no secret anymore and forums touting anything from American Airlines (-1.48%) to BlackBerry (-21.05%) are actually diluting retail investor attention.

Because there are no barriers to posting on a Reddit forum, who’s to know which target is next or whether the retail investors will rally in sufficient numbers to pump it?

But investors in cryptocurrencies will note that none of this is new.

In the early days of initial coin offerings or ICOs, pump and dump Telegram groups were the norm – with faceless figures directing the various moves.

But just like in the heady days of ICO investing (gambling), investors thinking of speculating on the likes of GameStop or any other Reddit-touted share or asset should be cautioned that they could lose everything in a heartbeat and these are not shares of companies that are “value” buys for holding long term.

The rally behind GameStop was driven primarily by what’s known as a “short squeeze” – by getting retail investors to buy up bullish call options for GameStop and forcing hedge funds who bet against GameStop to cover their shorts.