By now it's clear that the term 'GameStop effect' or getting 'GameStopped' will not only be recurring memes on the internet but actual terminology which will be added to the economic lexicon. The miraculous rally of GameStop stocks contrary to the expectations of Wall Street professionals is being billed as a real-life 'David and Goliath' moment when an army of day-traders decided to fight back against what they perceive as the insular nature of stock market trading.
To briefly recap, this extraordinary turn of events came to be when short-seller Andrew Left of Citron Capital made what he thought was going to be a fairly standard bet against GameStop. Short selling is a fairly standard if risky practice of an investor borrowing the stock of a company that they think is about to sink in stock prices. This stock is sold before the stock price goes down, brought back again at a lower price and then returned to the lender. The difference between the selling price and the buying price is then the profit made. It must be noted that short-selling, while a fairly common practice, is actually quite risky as there is technically no limit to how much the investor may lose if they misread the situation or their bet is otherwise waylaid by the stock somehow rising. This is why not many firms actually indulge in such risky bets and short selling is usually the preserve of sophisticated firms or advanced traders who have experience in such matters. Andrew Left is apparently such a man, one with plenty of experience and prior success. What he wasn't counting on, this time around, was the anger and desperation of the many day traders who decided to make a stand against Left, his bet and Wall Street through him. In a collaborative effort apparently organised on Reddit, retail traders pushed the stock of GameStop the other way, making it go over 1300 per cent of its December 31 value.
In what has become a war of attrition now, there have already been a few casualties as seasoned investors had to beat a hasty retreat under mounting losses. For now, it is unclear what the effects of this extraordinary event would be in the long term as regards the stock market at large. Experts say that GameStop stocks and the stock of a few other companies like AMC and Nokia which were favoured by the retail investors on Reddit will eventually recede back to normal. For now, they are fluctuating wildly as the battle continues. There are indications that this trend will continue, not because it is truly profitable for the retail traders but because this is a sign of things to come.
Apps like Robinhood that allow free trading have allowed more people to access the stock market. While they are typically treated as 'dumb money' by the Wall Street establishment, these same traders have dealt a surprising upset to the establishment. This is not to say that everyone is laughing or moving forward with this as an exercise in good humour and teaching humility. Andrew Left, the figure at the centre of this firestorm has become a target of significant hate with death threats and hacks coming his way as people suffering from a pandemic-ridden economy see him as a symbol of a system that profits from their misery. Left recently made a statement that the continuing situation was "extreme capitalism gone wild" and that America was turning into a "nation of gamblers". Many experts have warned retail traders against ridding the high train of chasing these wildly erratic stocks in the hope of getting a slice of the action. It is also somewhat unfortunate that short-selling specialists like Left are being made to be the face of corrupt Wall Street. Left is what is commonly referred to as an 'activist short-seller'. These are activist investors who while profiting from stock market declines also play a role in policing the stockmarket by acting as whistleblowers against potential corporate fraud by reporting when a corporate stock is overvalued and bloated. Experts say that in teh case of failure of regulators, these activist short-sellers play an important watchdog role even if they benefit from their role.
It seems likely that this wave of euphoria anger that this drawing organised groups of retail traders may continue. It is unclear now what the authorities can do as it is hard to say whether the actions of these traders can be construed as actual market manipulation. The Biden administration has however stated that they are watching the situation closely.
In closing, it is hard to conclusively say whether this a turning point towards better, worse or just a different kind of chaos. Those looking to curb the Wall Street culture of treating the stock market as their personal fiefdom will be delighted, however, that this could well be the one event that forces regulators to take a more active role in regard to the stock market.