The GameStop Saga, Part I – Summarizing the Chaos

February 16, 2021 Hull & Hull LLP In the News, New Media Observations, Uncategorized Tags: , , 0 Comments

Late last month, I and many of my colleagues of the Millennial age were treated to a flurry of headlines that many of us in that age bracket were able to piece together, but which might have left those of a more senior generation scratching their collective heads.  The battle between Wall Street and an army of social media users over stock trading perhaps led to some new terminology entering the lexicon of those beyond the Millennial age group.  No doubt the words ‘Reddit’, ‘subreddit’, and ‘GameStop’ caused a few crossed eyes.  Allow me to explain.

GameStop Corporation is a publicly traded company that, for much of the 1990s and early 2000s, operated a slew of brick-and-mortar retail stores selling video games, consoles, and other associated merchandise worldwide.  As a bright-eyed middle-schooler during the height of GameStop’s market control, many a Friday night was spent wandering the aisles with friends eagerly looking to spend my allowance on the next craze.

As a result of a shift in the direction of the video game industry towards digital and online fare, as well decreased engagement as a result of the pandemic, GameStop’s brick-and-mortar sales model, and retail models more generally, saw a historic decline in sales and revenue.  As the demand for GameStop’s business model declined, so did its share price.

This decline did not go unnoticed by certain savvy Wall Street hedge funds and other institutional investors.  Shares in GameStop were a popular purchase among “short sellers” looking to turn a profit as a result of the company’s misfortunes.  Briefly summarized, short-selling occurs when an investor borrows a particular stock from a stockholder, then sells that stock to a third-party investor willing to pay current market price for the security, on the short-seller’s expectation that the share price will have decreased by the time the loan from the original stockholder is called.  The short-seller would then repurchase the borrowed stock from the third-party investor at the now-lower share price before returning ownership to the original stockholder and earning a profit on the difference.

In the case of the GameStop saga, the short-selling attempts by some large hedge funds and institutional investors did not proceed as planned.  Members of a specific community under the Reddit platform – individually, a ‘subreddit’ – discovered in late 2020 that GameStop stock had been ‘shorted’ to an unprecedented degree.  In essence, hedge funds and investors had bet significant sums on the continued decline of GameStop, intending to turn a profit as the share price was expected to continue dropping.

Members of the ‘WallStreetBets’ subreddit saw an opportunity to ‘squeeze’ the investors by collectively purchasing a significant portion of the available stock in GameStop, driving up the price-per-share to historic highs and decimating the intended ‘short’.  The price-per-share ballooned from around $20 in early 2021 to a staggering $350 per share by the end of January. Many of the investors and hedge funds who had bet on the price decreasing from $20 were now compelled by their loan obligations to repurchase shares at a price many times higher than their initial capital investment, incurring significant losses in the process.

Although the frenzy around GameStop and other publicly-traded companies such as AMC has died down in recent weeks, as of today’s date GameStop is still trading at around $51 per share, more than double the share price at the beginning of the year.  The incident has also drawn the ire of securities regulators as well as the US Congress.  Game over?

The next blog in this series will tie in the concepts of short-selling and the fundamentals at play in the GameStop incident to the obligations of fiduciaries to act as prudent investors.

Thanks for reading.

Garrett Horrocks

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