GameStop actions have exploded again. The Texas computer game retail chain at the heart of the stock market drama in late January rose from a high of around US $ 44 (£ 32) to a high of around US $ 200 on February 26 before falling back to US $ 120 at the time of the launch. writing this article. Institutional investors who had “short positions” against the stock, that is to say they bet it was going to fall, would have accumulated nearly $ 2 billion in losses from the increases.
Other stocks involved in the first wave of the retail mania, like movie group AMC Entertainment, followed a similar trajectory, doubling at one point and still up nearly 50% from the calm of a few. days earlier. So why are investors buying these stocks again?
The army of millions of investors in Reddit’s WallStreetBets community pushed GameStop stocks from US $ 20 to US $ 480 during the January short squeeze, in which they led hedge funds like Melvin Capital to sell off. heavy losses, after forcing them to liquidate massive bets against the action. .
As the price of GameStop fell in early February, many of these small investors were counting their losses. There have been countless debates on mania since then, including a Congressional hearing in the United States on February 18.
Online trading apps at the center of the buying frenzy, such as Robinhood, have been repeatedly accused of making it too easy for amateurs to take wild risks, allow market manipulation, risk financial stability. system and to side with Citadel hedge funders by severely restricting the purchase of the stocks in question after the price spike.
On the latter issue, several users have filed lawsuits against Robinhood and Citadel, although according to a clause in Robinhood’s customer agreement, all disputes must be settled through arbitration and not through the civil court system. Robinhood CEO Vlad Tenev denied the allegations, offering his own explanation during the congressional hearing.
Meanwhile, adopted leader of the WallStreetBets movement, Keith Gill (known as RoaringKitty and DeepFuckingValue on various platforms), has himself been on trial. He is accused of falsely presenting himself as an amateur and of manipulating other users to follow his risky speculative strategies. As he memorably said to convention at the Feb. 18 hearing, “I love the stock.” The lawsuit was ridiculed by Gill and on social media, sparking ‘I’m not a cat’ jokes and memes.
Understanding the phenomenon
While all of these questions continue, the new rally in the GME share price shows that this was not a one-time situation. It is not entirely clear why the actions were targeted again. This could be related to the fact that the congressional hearing has passed. This could be linked to the resignation of GameStop CFO Jim Bell, signaling a change in leadership at the company. Or it could be because the short positions in the company’s shares had risen again, perhaps prompting amateur traders to buy bullish options on the stock, which will pay off widely if the price continues to rise. .
But at the same time, I would say that none of these reasons properly explain what is going on here. After years of researching the financial markets and in particular the new highly speculative cryptocurrency market, I can identify three main reasons behind the phenomenon.
First, it is the expansion of fintech and the ongoing decentralization of the financial market. New technologies such as easy trading apps give access to the financial markets to a large number of amateurs. They allow financial liberalization and autonomy from the big banks and other institutions that control the market, just like cryptocurrencies do, and it has massive appeal. Financial specialists have called this effect “crypto-exuberance”.
Second, it’s an extension of the millennial and Gen Z ‘zoomer’ meme culture, in which emotions are expressed with images, sounds, videos, emojis, and abstract humor. Social media posts can contain streaks of unidentifiable nonsense, offensive terms, and endless slang.
All of this makes it harder to assess the feelings behind them. For example, behavioral finance researchers would normally use algorithms to extract investor sentiment from Twitter posts, Google search trends, and media headlines. But how would you use the academic software to analyze the content on r / WallStreetBets? It is a huge challenge.
The third driving force, and perhaps the least obvious, is the pandemic. A younger generation of traders has already blamed the older ones for the global financial crisis. The pandemic has amplified these feelings of social injustice and hatred against baby boomer money, as millennials who grew up or studied during the last recession now face one another as young professionals.
Government restrictions and the social isolation they caused also fueled rebel sentiments. At the same time, this situation creates an ideal environment for all kinds of market manipulation.
So if the second GameStop rally surprised you, you don’t really need to come up with a rational explanation for it. The GameStop stock rally is driven by a combination of cultural and environmental factors. The fact that all of this seems to be more important to these hobbyist traders than making money is fascinating and should be investigated. Besides GameStop, AMC, and the decent Dogecoin explosion, we’ll continue to see more cases like this in the future.
This article by Larisa Yarovaya, Associate Director of the Center for Digital Finance, Senior Lecturer in Finance, University of Southampton, is republished by The Conversation under a Creative Commons license. Read the original article.
Published March 2, 2021 – 06:17 UTC