GameStop the Market: Big Bets on Stock Make Wall Street Look Like a ‘Casino’

Posted on: January 27, 2021, 05:50h. 

Last updated on: January 28, 2021, 10:10h.

Steve Bittenbender Read More
Expertise: Legislation, Sports Betting, Horse Racing.

The biggest bets made over the past couple days haven’t been placed in a casino on the Las Vegas Strip. Instead, the action’s taken place on Wall Street, as a group of stock traders on Reddit have aimed at hedge fund traders, who have made high-stakes wagers that businesses like GameStop and AMC Entertainment would stumble.

GameStop
A GameStop retail storefront at The Grossmont Center in La Mesa, Calif. The company has seen its stock price soar in recent days, thanks to online speculators targeting hedge fund investors who have short-sale positions on them. (Image: GrossmontCenter.com)

GameStop, the brick-and-mortar retailer of video games, saw its shares end Wednesday at $347.51, up nearly $200. The rise is meteoric, as just a week ago, shares were trading at $39.12. Movie-theater chain AMC’s rise hasn’t nearly been as big, but its move just started. It closed Tuesday at $4.96, and on Wednesday the price more than tripled to $15.70.

Through it all, Elon Musk got involved and spurred the online investors to keep it up. Then, as some raised concerns and called on the government to intervene, US Rep. Alexandria Ocasio-Cortez called out critics as she compared investors to gamblers on the Strip.

One investor who took advantage of the GameStop surge was venture capitalist and former Facebook executive Chamath Palihapitiya. Palihapitiya, now a co-owner of the Golden State Warriors, said he made $500,000 through his trades and donated it all to the Barstool Fund, the fund Barstool founder Dave Portnoy founded last month to help small businesses that have been affected by COVID-19.

Short Selling Explained

It all started, according to CNET, when Reddit users in the group “Wallstreetbets” took it upon themselves to game the stock market. That’s after learning that a hedge fund investor targeted GameStop for a short sell because a higher number of video games are now sold online as digital downloads.

A short sell is a risky and somewhat controversial practice where a trader borrows shares of a stock and sells them.

So, for a generic example, if you borrowed and sold 10 shares of Company X at $10, you’d have $100. Then, you’d have two weeks to pay back the value of the borrowed shares. If Company X was selling at $5 at that point, you’d pay $50 for the 10 shares. The investor gets to pocket the rest, after paying interest, as profit.

However, if the stock was selling at $20, then the short seller must pay out the $100 difference. In theory, as the Reddit traders are proving, the losses when a short sale goes wrong can be massive.

In defending the Reddit users, Alexis Ohanian, co-founder and executive chairman of the social media site, said they’re simply doing to Wall Street what many have felt Wall Street has done to Main Street in recent years.

He also gave a word of warning that’s applicable for any bettor.

I know they’re all ‘random people on the internet,’ but there’s a lot more empathy and community there than people realize,” said Ohanian, who is also married to tennis star Serena Williams. “It’s why I’ve been saying for 15 years that (online) community is still massively undervalued.

“And also – please – don’t invest money you can’t afford to lose, ESPECIALLY in risky investments.”

SEC Monitoring GameStop Situation

The trading has caught the attention of the US Securities and Exchange Commission. However, as of Wednesday night, no letup appears in sight, as the phenomenon is now targeting Blackberry.

“We are aware of and actively monitoring the on-going market volatility in the options and equities markets, and consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants,” commission officials said in a statement.

Some online stock trading sites, including eTrade, Robinhood, and TD-Ameritrade, reported outages as the stocks soared. In addition, TD-Ameritrade announced it capped trades on GameStop and AMC, calling it a risk mitigation move.