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GameStop, Reddit, and Robinhood

I can’t seem to get enough of the Reddit GameStop stock story this week. It’s seeming to become more interesting by the day.

Jason Koebler, writing at Vice, has a great summary of how we got to this point:

What is going on is that GameStop, a company that sells physical copies of video games next to Auntie Anne’s pretzel shops in dying malls, is the most highly traded asset in the United States, a “meme stock,” and currently the primary front in a micro class war. GameStop’s stock price jumped from $4 last summer to $20 at the end of 2020, to $40 two weeks ago. It was worth $100-ish at times on Monday and Tuesday, and as I write this it is worth close to $300. Essentially, many normal-ish people have made a huge bet against gigantic financial institutions and are currently winning. In practice this means we are seeing one of the largest wealth transfers from the financial ruling class to the middle and middle-upper classes in recent memory, so it is, understandably, the only thing anyone is talking about.

Other redditors and [Reddit user] DeepFuckingValue eventually caught on that something else was happening with GameStop stock: It was the most shorted stock in the entire stock market. That, combined with what DeepFuckingValue described as “strong fundamentals,” suggested that, at some point, these short sellers would be forced to close their positions. The opportunity, as I mentioned earlier, is that short sellers overextended themselves and would only be able to close their positions: A) at a loss and B) if suddenly a bunch of people who own GameStop stock sold their stock, which would drive it down.

Yesterday things escalated even more when Robinhood, a stock trading app with no user-fees, blocked purchases of GameStop and other stocks targeted by Redditors. Robinhood was an app of choice by many of the Reddit users, so this is particularly impactful to them. Robinhood, as of this morning at least, is now saying that users can only sell their positions in GameStop and others. They aren’t the only trading provider to stop activity on these stocks, but they are the most prominent in this market.

This move by Robinhood has seen some pretty interesting agreement from a very diverse group of people.

US Representative Alexandria Ocasio-Cortez tweeted yesterday:

This is unacceptable.

We now need to know more about @RobinhoodApp’s decision to block retail investors from purchasing stock while hedge funds are freely able to trade the stock as they see fit.

As a member of the Financial Services Cmte, I’d support a hearing if necessary.

And even got a “fully agree” from the Senator from Texas.

Next up: this morning it was announced that Robinhood is attempting to raise more than $1 billion from its investors.

Robinhood still needed more cash quickly to ensure that it didn’t have to place further limits on customer trading, said two people briefed on the situation who insisted on remaining anonymous because the negotiations were confidential.

It seems that this was the real issue all along with Robinhood suspending the trading on GameStop and other stocks: they apparently don’t have the liquidity or cash to handle it. If that’s the case, why not just come out and say that? The damage to its brand and reputation is going to be extremely difficult to fix.

What a week!