How the GameStop Phenomenon Rocked Wall Street

The American chain of stores was close to disappearing. (EFE)

To bag Wall Street they shook it. An internet hobbyist initiative caused multimillion-dollar losses to US mutual funds. The unusual play even deserved the attention of Elon Musk, the richest man in the world. The event shocked the stock market so much that analysts consulted by BBC They brand it as a “freak”, “crazy” and something “they have never seen before.”

The result brought out a near-defunct company called GameStop, a network of physical video game stores. To get an idea of ​​how this moribund company came to life, you would first have to look at the numbers. In midweek, GameStop shares reached $ 347.51. The figure contrasts with $ 17.25 in early January. That is, the increase was 134%. Looking at it another way, the value of the shares multiplied by 20. At the end of the week, the shares were located at 325 dollars, an amount that is still important.

It all started on Reddit, a social network similar to Twitter or Facebook that has different forums where people join according to their interests. There, in a group called “Wall Street bets” with more than four million members, the initiative occurred.

With the exchange of advice and conversations in the chat, those people began to buy the shares of the company. The story then began to gain interest.

The technique of “shorting”

He ‘shorting’ The ‘short selling’ (short selling) is a common technique with Wall Street where investors and large funds buy and sell stocks in the short term to make a profit. Usually the bet is on companies about to disappear.

GameStop was one of them, technology and the pandemic hit her. The public for convenience prefers to buy games online or buy them so that they reach their doorstep with companies like Amazon. The previous value of the shares proved it. By April 2020, Michael Burry, founder of Scion Capital and hedge fund investor, bought 5.3% of the company at a price between $ 2 and $ 4.2 a share, the portal said The Republic.

At ‘shorting’, the investor remains on loan with the shares of a company, with the commitment to return them in time. Then he sells them for a certain price because as time passes, he knows that the value of that stock is going to fall. Then he buys them back at a price that actually fell. The result is the profit of the first trade.

Investors ensure that the value of shares does not rise through a network of financial complicity. They publicize the operation so that other players get rid of the financial titles, then the shares fall. The framework is designed to win-win.

Multi-million dollar losses

Reddit forum members opposed those who control the exchange. They began to buy the shares of the chain of stores. And as the basic law of economics says: when demand exceeds supply, the price increases. That happened with the price of the shares.

Every investor who put his money in the “shorting” waiting for the decline of GameStop, now registered multillion dollar losses. In total, those short sale funds would have recorded losses of about $ 5 billion, according to the financial analysis company. S3 Partners.

Elon Musk’s tweet was also a boost. The Tesla CEO only released one comment on January 26 that doubled the stock price. With the term “Gamestonk” he assumed that the business was round, right there he shared the link to the Reddit group. Internet fans achieved a goal that they had started for fun and entertainment.

Melvin Capital, a hedge fund, needed a $ 2.75 billion injection from investors like Steve Cohen and Ken Griffin ‘to weather losses from its multi-million dollar short position, he said. Business Insider. Gabriel Plotkin, its founder, denied bankruptcy rumors.

The veto began

Wall Street ended the week with a loss. Dow Jones of Industrialists, its main indicator, fell 2.03% after another day marked by volatility around the GameStop phenomenon, which is its worst week since October, it reported EFE.

The retaliation was not long in coming. The applications to participate in the stock market began to restrict the operations of other equally moribund companies, which began to see their shares rise.

Robinhood and TD Ameritrade stopped offering operations not only from GameStop, but from companies such as AMC (US theater chain), BlackBerry and Nokia. With the veto, the brands began to fall, 21%, 53% and 28% respectively. Robinhood was accused in a class action lawsuit of “manipulating the free market.”

Citron Research, a well-known bearish analysis firm, decided to change strategy after 20 years of applying the ‘shorting’. He announced that he will focus on offering long-term benefits for retail investors.

The attention of Congress

And like everything that happens in any area of ​​life, politics did not hesitate to get involved. Alexandria Ocasio-Cortez, the staunch left-wing congresswoman, wanted to figure in criticizing mutual funds and stock market applications.

Republican Congressman Ted Cruz also rejected the Robinhood app veto. While Sherrod Brown, Democratic senator announced that from the Upper House they will discuss the situation on Wall Street and the implementation of the rules by the Securities Commission (SEC) and Congress, he reviewed Infobae.

The issue could become a point of debate for both parties amid growing political polarization, especially as Democrats see an opportunity to attack the US economic system. There is no doubt that the GameStop phenomenon set a precedent for the stock market, for the investment world and perhaps for politics.

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