ROCHESTER, N.Y. (WROC) — The crossroads of a brick and mortar retail chain, an aggregate, discussion-based social media platform, and a free stock trading smartphone app has created the financial story of the year, so far.
If 2020 was a year unlike any other, 2021 seems determined to not be outdone. The latest example is how GameStop, Reddit, and Robinhood have intersected to create a saga that is dominating social media and news cycles this week.
The story changes seemingly by the second, but we wanted to give a simple — as possible, that is — explanation of what is happening, how it affects the market, how it affects everyday people, and the potential future consequences and ramifications.
To get those answers, we spoke with a local finance expert, George Conboy with Brighton Securities.
Conboy frames this as a “classic battle” between bullish investors and big money bear investors, with a lot at stake.
“We’re taking about billions of dollars on the table,” he said. “What’s actually happened is a group of big money Wall Street guys placed a huge bet, thinking that the company GameStop would decline in value, and maybe even go out of business. A bunch of small traders online — these are the bulls — said ‘we don’t think so. We think GameStop is good. We think it’s going up and we’re going to buy the stock.’ So you’ve got one group trying to push the stock down, and you’ve got another group trying to push it up.”
For some comparison here, Conboy says that two or three weeks ago, GameStop stock was at $18 a share. At the time of this interview (11 a.m. Thursday) it was around $200, and climbed as high as $500 per share earlier this week. It’s changing rapidly.
As a result, Conboy says these small traders have scored a massive win, and the big hedge funds — the bear investors who were trying to push the price down — “had their clocks cleaned.” This method, specifically coming from a stocks trading group on Reddit, has spread into other companies, like AMC, or even Kodak.
Conboy says these kinds of battles happen all the time, but the public aspect of this fight — going from Reddit, to Twitter, to open discussion from members of the federal government — is what makes it “novel” to him.
“This is democratizing that fight quite a bit because for the first time that I’ve seen, you’ve got a very public group of fragmented, small investors connected through the internet, pushing one particular side of this investment battle,” he said.
However, Robinhood has started to shut down some of the trading in response to this. Conboy says despite the name that makes them seem like they’re fighting for the little guy, they also have a vested interest.
“Robinhood is a free app that lets you do all the Wall Street stuff for free. That’s great,” Coonboy said. “Who on Wall Street do you think wants to give you something for free?… What did they get?
“They get with Google gets for giving you maps for free and search for free: They get depth and they use that data and they might use that data to trade in front of you, and make money off your trades by knowing where the herd is headed,” Conboy said. “And if the herd is not heading where they want, maybe they can shut it down. So I think the, the idea that if you thought Robinhood was somebody who was your pal or your grandmother — or wanting to give you something for free — you’re a little bit naïve. There it is a disappointment when they finally pull the plug on some free deal.”
How it affects the consumer
Conboy says this is unlikely to affect the average consumer, unless someone is inspired to take up trading themselves, and starts following these internet trends.
“This kind of trading though is very high risk trading,” he said. “And even when you’ve made a big score, you crushed the hedge fund … The fact is you own a stock that went way up in value until you can sell it. You haven’t really bought that profit. And when you’ve concentrated your trading on one thing, you’re taking a lot of risks; nothing wrong with taking a lot of risks. Just do that with your eyes open and be aware. The amount of risk you’re taking is really big.”
He says most people can benefit the most by tailoring their investments for long-term growth, instead of believing everything you hear on the internet.
How it affects the companies
“If any of [these companies] have the ability to sell stock to the public and raise more capital, they’re doing it right now because their stock is way up,” he said. “If they had the ability to sell more stock to the public, they could do that and bring in some capital and help buttress their business, open more locations or advertise more or whatever they needed.”
He says though that company can’t just sell shares, they have to prepare, but he says company executives also might be taking action.
“All of the managers at these companies who have stock options are exercising them like mad today. They’re not even managing the company,” he said. “They’re on the line with whoever can exercise their options and make them a personal profit. When something of this magnitude happens, everybody who can cash it in, will cash it in.”
After affect & possible consequences
When asked if this whole saga will have any major consequences, Conboy verbally waved his hand, and more or less said that the market will take care of itself; and that any elected officials who get involved won’t be able to tighten anything effectively.
“I assure you that if anybody in government tries to tighten regulations, they’ll do it wrong,” he said. “As soon as the markets adjust — all markets are self-adjusting, right? If the price of something goes way up, someone else will come in to supply more and bring those prices back down. If the price goes way down, people won’t bother the supply. As much in this case, what’s happening is this the hedge fund thought they were going to do what they always did bet on a stock declining and make easy profits.”
He adds flatly that the hedge fund managers who got involved in this were “dumb,” and didn’t take into account the fact that finances, trading, and the market has changed.
“We don’t need regulation because the reality is I don’t see anybody here did anything wrong,” Coboy said. “The hedge funds had the right to go short. Good on you guys. Bet your billions of dollars online guys had the right to go along. You busted the hedge fund, you get the blue ribbon and a whole pile of cash. That’s how markets work.”