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