ExclusiveGameStop Saga: We The People vs. Wall Street?

Hello, welcome to FocusTalk. My name is Jenny. Today is Friday, January 29th. Today we'll be talking about the battle between traditional Wall Street and small individual investors taking place over GameStop stock. GameStop is a retailer, Video Games, known for providing an active market in used games. At the start of January, the stock was trading at around $17. The stock has been on a tear and closed today at $325. GameStop's price action has been described as a war between small investors who continuously bid up the stock and traditional Wall Street short sellers who place opposite bets. So far, Wall Street short sellers have lost billions. On Thursday, the story took a dramatic turn as new trading apps such as Robinhood restricted trading in GameStop and other stocks. This caused an uproar, with many criticizing Robinhood for towing to traditional Wall Street and changing the rules in the middle of the game. Some even made the comparison to Parler, where their tech clients acted in coordination to shut down the small social media firm. Wall Street and large capital firms teamed up to pressure Robinhood, the new trading platform that specifically caters to small investors. More broadly, can this be interpreted as a continuation of the debate of putting Americans first versus that of globalist international organizations? We are fine with the free market as long as Wall Street is making money. The second it starts to lose money, oh well, that can't happen. The rules must be changed. We will be talking with Professor Jason Ma about these issues. Hello. Welcome to the show. Hello, Jenny. Thanks for having me. I briefly summarize the recent trading of GameStop. Why do you think this story is getting this sort of publicity? It is very emotional. We're seeing this described as a war, a David versus Goliath battle for the ages. There is a huge amount of media coverage. Why all the attention? There are many factors. First and foremost, as you mentioned, the price action itself warrants a lot of media attention. It has risen over 17 times in just one month. When any stock or commodity experiences this type of price movements, it's newsworthy. Of course, the reasons behind the price action are even more interesting. Traditionally, it's the large financial firms and their big capital customers who drive Wall Street. They produce the research, the recommendations. They control the money through mutual funds, hedge funds, banks, etc. Individual investors were an afterthought. This time it's the individual investor collectively who took over Wall Street. A large group of small individual investors took aim at GameStop, a heavily shorted stock by hedge funds. By buying the stock and its call option to drive up the price, this created an upward momentum that became unstoppable as the short sellers had to also buy the stock as their losses mounted. A classic short squeeze. It's fair to say this was unimaginable just a few years ago. Individual investors were never organized and often just invested through traditional Wall Street avenues like mutual funds. This event showed the collective power of the individual investor. Hedge funds who were shorting GameStop are looking at over $19 billion in losses. In addition to the loss, this event served as a warning to the entire business model of these firms who take large short positions on distressed companies. The same thing is happening to AMC Theaters, another heavily shorted stock. Not only is this happening in the U.S., individual investors are also looking at heavily shorted stocks in Europe. So this is quickly becoming a global phenomena as individual investors exploit this long-established market practice of shorting. The overall stock market sold off today with all the indexes down around 2%. This may be related to the actions around these shorted stocks. As short sellers continue to lose billions in these stocks, they must liquidate other holdings to cover the losses. There are some analysts, maybe 20 to 30%, who believe that this banding together of individual investors away from traditional Wall Street institutions presents a huge challenge overall, and their impact cannot as yet be measured. It's fair to say that this is a historical unprecedented event. Stock shorting has been around forever. Why do you think it is happening now? This is probably the most interesting part of the story. It's hard to say how much capital is actually controlled by these small investors, but we don't believe it's very much. It's hard to fathom how they are able to create this kind of turmoil. But we have to remember one thing, Wall Street is about making money. As regular stock market participants, such as the market makers, see these short squeeze forming and developing, it makes sense to just follow along. So the amount of initial capital required may not be prohibitively large. As the squeeze happens, everyone piles on. You may not like the company or want to buy the stock, but there's easy money to be made, so you jump in. Individual investors take the lead, and as the small money draws in more money and more money, it quickly becomes a tsunami. In a sense, it's just a function of the market, a technicality around short selling that was never fully realized by Wall Street before. Look at AMC Theatres, whose stocks went from $2 to $20 in a month. Obviously, there's very few actual customers in theatres right now, but it doesn't matter. The same thing is happening as they attack the short sellers. The underlying company doesn't matter. The phenomena is about exploiting those stocks that have been heavily shorted. Obviously, it's not just a handful of individual investors doing this. I read that a million small investors got into buying GameStop. What's the reason for them targeting the short sellers this way? I've seen reports that some of them are taking revenge for the 2008 recession, which they believe Wall Street caused. As we know, the government bailed out Wall Street, while the average person suffered through the recession. Is this the reason, or perhaps one of the reasons? This is a very complex situation. I've seen a lot of discussions online about this. We know the latest actions were coordinated on Reddit, but a year ago I already seen reports that the shorting of GameStop had reached dangerous levels and could be exploited. Also, let's remember that trading apps like Robinhood appeal to a younger customer base, people who grew up with GameStop, and may have strong feelings about the company. So you have these younger investors who have an emotional attachment to GameStop. You have people who hate Wall Street for various reasons, including 2008. This is perhaps the core group of individual investors most committed to this trade. Remember the stock was around $3 for most of last year, and it was around $20 at the end of the year, which is already a very nice gain. As this trade gathers momentum, it draws in more and more people and money until it culminates in what we saw this past month. Platforms like Robinhood appeal specifically to the small investor. They don't have minimum requirements. They don't ask for trading experience. It's a free platform, if you will. Invest however much you want, however you want. So this was also a key aspect of the story. Without Robinhood, many of these people probably weren't even involved in the stock market directly. I view what happened as a situation where millions of people end up taking the same action for reasons of their own. But when you have this many people acting in concert, it becomes a force to be reckoned with. Of course, the name Robinhood for a trading app is very interesting. From the beginning, they played up the idea that they're for the little guys against big money. Now, people are calling them traders to their own name because they help the rich by restricting trading to these stocks on Thursday. It disallowed their users for buying, only selling. I think they took this controversy to a new level. People as far apart ideologically and politically as Ted Cruz and AOC are all aligned in condemning trading apps like Robinhood, that they're helping the Wall Street hedge funds and acting against the individual investors. What do you think? It absolutely did have the effect because it helped the short sellers who were being squeezed. When the announcement came out, GameStop dropped from around $500 to $100, so it was a reprieve, a chance for the short sellers to cover their positions. But the public pressure was so extreme that Robinhood had to relent somewhat and allowed what they called limited buying Friday. As you said at the beginning, the stock closed today at a little over $300, so it recovered off its low yesterday. The entire episode furthers the narrative that the game is rigged against the small investor. Institutional investors have direct access to the stock market and don't need trading platforms like Robinhood, which can be pressured or forced into changing its policy. If we look at this as a war, the small investors were winning big time. Suddenly it's as if you took all their weapons from them. They did change the rules in the middle of the game and it's patently unfair. Yes. If you believe there's a systematic problem with short selling and it needs to be fixed or reformed, go ahead and do it with legitimate rules and regulations. You can't just essentially stop one side from buying while letting other sides get out of their losses. This is changing the rules mid-game. I've seen a lot of commentary that this is a similar treatment to the treatment of Parler. When millions of users chose to use Parler over Twitter and Facebook, the tech giants worked together to shut down the platform. They chose to eliminate the competition rather than compete fairly. What are your thoughts on this? I agree. Whether it's Wall Street or high tech companies, the establishment has crossed the line of fairness and going about protecting itself from the competition. Robinhood has stated the trading restrictions it imposed on Thursday were necessary because it had to meet its own financial requirements at clearing houses. Yes, the reasons may be completely legal, but what actually transpired was that you helped large Wall Street firms and harmed your own customers, the small individual investors who made you what you are. This led me to think about the idea of the elites. All these systems, financial, technological, are set up by the participants in the system themselves, the elites. Whether it's high tech or finance, they seem to always do well no matter what happens because they design the system for their benefit. So as the small player, whether you're the individual investor or Parler, you can work as hard as you want. You can do all the right things. At the end, it won't matter. The system will get the better of you. It made me think of the idea of the We the People movement. That is the people collectively who ought to be in charge. That the country should work for them but is prevented from doing so by endemic corruption, by behind-the-scenes connections that the public doesn't see, by the swamp. I see it in this episode as well, especially when it comes to Melvin Capital, a hedge fund that has taken billions in losses. Melvin Capital is owned by Citadel. As an industry giant, Citadel supposedly provides Robinhood 40% of its revenue. There are just all these financial conflicts of interest within the establishment and the little guy will always be sacrificed. Citadel has many entities and Citadel Securities does a lot of business with Robinhood. Citadel itself invested over $2 billion in Melvin Capital as it was fighting the short squeeze. So yes, there are absolutely financial conflicts of interest behind the scenes. Citadel had said it took no part in Robinhood's decision of restrict trading. But I think an independent investigation is warranted in this case because the conflict of interest is just so obvious and blatant. Speaking of investigations, I've heard that the SEC is going to investigate the trading restrictions implemented by Robinhood. I've also heard that the Congress is looking to investigate the entire short squeeze situation around GameStop, including the small investors who gathered on Reddit. So it looks like both From the individual investor's standpoint, I don't think they have too much to worry about. Yes, market manipulation is prohibited. But these are small investors who are just talking about stocks and they're protected by freedom of speech. Their net capital is probably negligible. It would be nearly impossible for anyone to link chat room discussions of a bunch of outsiders to market manipulation. So legally, I don't think they face any real problems. But there's another motivation. This serves as a warning to the small investors to maybe think twice before making these trades. Again, instead of reforming the system, which clearly has a major weakness, they're looking to make the small guys the bad guys. What do you think will come out of the Robinhood investigation? Robinhood was clever and acted quickly. The very next day it announced it was removing the trade restrictions, even though there are still some limited restrictions in effect. So I think that the promptness with which they handled it and the fact that they blame the whole thing on a technical financial requirement helped them. I personally don't believe much will come out of this investigation. I've heard references to this as the ugliest day on Wall Street, that this is not how a free market should operate. To end our discussion with an anecdote on the ideas of elites working together within the system, Google has apparently deleted over 100,000 negative reviews of Robinhood, which had dropped it to a one-star rating. It is once again a four-star business. Yes, it's incredible. Somehow, someway, like the rom-com couple, the elites always end up together. Great point. We have to leave this for next time. I want to thank Jason for joining us tonight. Thank you for watching.