Unless you’ve been hibernating for the last few weeks (which would be entirely understandable given both the freezing temperatures and the ongoing pandemic), you’re probably aware of GameStop.
A dowdy retail dinosaur on the brink of bankruptcy, GameStop is, in a nutshell, a video games store that really had no business stealing headlines. And yet, it’s become the accidental protagonist in a Wall Street versus Reddit morality play where no one is quite sure who the ‘good guys’ are or what ‘the lesson’ is.
But whilst the furore around the story is finally dying down somewhat, many believe that we’re only just beginning to understand the repercussions – not least on retail investors. In fact, financial outlets and market experts are keen to emphasise that the immediate hype around GameStop is far less interesting than the long-term and wider significance that this kind of event may have.
As Robin Wigglesworth, the FT’s global finance correspondent wrote, “Situations like GameStop are likely to remain extreme outliers, but the saga could prove symbolic of a new era of greater retail influence over stock markets.”
But wait – what exactly happened?
The nutshell version of what happened with GameStop is this.
In 2020, a group of Reddit investors learnt that GameStop stock was being shorted by Wall Street traders.
Shorting a stock is when investors borrow other people’s stocks and sell them in the hopes of buying them back later on to make a profit. This happens all the time. In fact, lowering the value of a stock is a very common thing to do. And, although they’re not the most popular, as Jim Armitage, finance editor at the Evening Standard points out, ‘they provide an alternative view on a company, keeping share prices honest.’
In the case of GameStop, things went a step further because Gamestop is the most shorted stock on Wall Street. Its sales dropped by a third between 2015 and 2019 and was in the red again in the first nine months of 2020 – yet even whilst the company started losing real value, hedge funders continued to short the stock and make money at their expense.
And then Reddit enters stage right. A group, originating in the subreddit r/wallstreetbets, lead the charge and they decide to buy up a huge amount of GameStop stock all at the same time. From the outside, this looked carefully orchestrated (more on this in a moment) to happen between the 27th and 28th January 2021, and it started a mass purchase frenzy. In the course of a couple of hours, the value of GameStop stock rose from a value of $18 to around $330.
When a stock or other asset jumps so sharply, it’s called a ‘short squeeze’, because it forces the traders who had bet that its price would fall, to buy it in order to forestall even greater losses. Their scramble to buy, of course, only adds to the upward pressure on the stock’s price. (And personally, I think the person who explains this best is Kels, aka @Keally22 on Instagram, who put it into real terms in her viral post, here.)
With GameStop, the story then evolved into a question of ethics. The Wall Street crowd were decrying the Redditors – some would say ironically – for motivating the market in much the same way they do every day. Robinhood, the popular US retail trading fintech, then started making it very difficult for its users to place orders on GameStop and other rising stocks – going as far as to stop them from drawing funds. And then, of course, you have the Reddit investors themselves, whose chat rooms are now being probed by US financial regulators in regard to possible market manipulation.
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The rise of retail investors
There are a number of factors that led to the GameStop saga and retail investors are at the heart of it for a number of reasons. Wigglesworth lists them as: “the advent of commission-free trading; the new ability of retail investors to trade fractional shares; cheap leverage from trading accounts with generous credit and easier access to financial derivatives such as options; “gamified” mobile phone trading apps on superfast internet connections; and the herd mentality of the social media age.”
In other words, greater access to trading forms, credit, insight, and community is leading to an ever-growing rise in retail investor interest. Millions of people have started investing in the last year – some driven by a desperation to find new ways to make money in an economically uncertain world, others by the fact that they’ve been able to save more than usual thanks to various lockdowns and restrictions.
“We are clearly never going to go back to the days of de la Vega, when individuals dominated all stock market activity,” writes Wigglesworth, “Or maybe even back to the 1960s, when dentists, lawyers and accountants were still a force to be reckoned with.”
But there is no doubt that retail investors are an increasing force to be reckoned with – and that’s a good thing. Mostly.
As Edgar de Picciotto, co-founder at ikigai, says, “We all need to be investors – passive and active – in today’s world. Many people feel uncomfortable managing their investments or too time-poor to manage their own investments, but increased economic turbulence means it’s more important than ever to make your money work as hard for you as you do for it.”
He also notes that GameStop has raised a considerable amount of awareness around investing and active trading in a very short amount of time. “Many people got burned by GameStop, but it’s also driven mass awareness of different types of investing. Amongst this has been a rise in discussions around the importance of diversification and long-term investment planning, rather than ‘quick-win’ trading. It’s also called attention to market practices and business models that are, perhaps, outdated or in need of better regulation.”
Claer Barrett, consumer editor for the FT, similarly says she feels somewhat surprisingly positive about the impact of GameStop on everyday investors, not least because of a rise in new, younger investors who have more time to both learn to manage risk and grow in confidence when it comes to taking decision. “I hope the new generation of investors see the benefits of building balanced, diversified portfolios — perhaps allowing themselves to take some calculated risks on a portion of their holdings too,” Claer writes.
The democratisation of risk
But there are, of course, considerations for all of us to be aware of – like the complex role social media plays in all this and the rise in ‘meme stocks’, which ride and die on retail investor enthusiasm.
Social media is without a doubt one of the most powerful tools of our era. We’ve seen it unite strangers, inspire millions and rally change. We’ve also seen it manipulate, undermine, hurt, and disempower. When it comes to investing, the combination of social media and investment and trading apps has opened up those worlds to millions more people. It means that we can share tips, access insights, and learn from each other. It means people can coordinate like the Redditors behind GameStop – or at least get swept up in the hype.
“There’s actually a misconception from many media as to what r/wallstreetbets actually is. Most people think it’s a very well organised community of day traders who coordinated to buy together a stock because they are strategising to make a lot of money out of the operation,” Edgar explains. “Browsing through, it’s actually complete chaos. It’s all about memes, quoting The Mandalorian, and showing off their huge losses (an act commonly referred to as “loss porn”).”
He continues, “There’s a parallel in some ways to what happened with 4chan and the DDOS attacks in 2010 – especially in the sense that most of what generated the activity in the community were memes and motivational speeches about getting revenge against the hedge funds that caused their misery in 2007.”
It’s an irreverent space, full of bravado, powered by the up and downvotes that can lead to snowballing social trends. There are certainly a growing number of everyday investors who are thoughtful and aggressive risk-takers, who genuinely understand and analyse what’s going on, there’s still a far greater contingent who are using the stock markets as a mass casino.
The social media fuelled, app enabled world we live in has democratised finance, but as Mike O’Sullivan says, it’s also democratised risk.
“We’re in an age,” he says, “Where a range of risks, mostly arcane financial market ones, are increasingly distributed across retail investors. The issue is that the man or woman in the street is unprepared for these risks.”
Fintech, regulation and trust
The impact of GameStop on fintech is another area of consideration thanks to the aforementioned actions taken by Robinhood as well as the boom in consumer interest that trading apps have received in the last few weeks – both in the US and the UK.
GameStop acts as a dual-edged sword for fintech. On the one hand there’s a huge rise in awareness – the day Robinhood restricted trading turned out to be the biggest single download day on record for Robinhood, with 440,000 unique first-time installations in the US. Trading apps in the UK similarly saw increased interest and attention. But on the flip side, there’s a huge backlash as calls for congressional hearings and tens of thousands of people posted one-star reviews after being ‘locked out’ of the market. It’s mainstream news about fintech, but not exactly in the way the sector would want.
After all, fintech has positioned itself as the champion of the little guy since the financial crash in 2008. It’s literally been Robinhood and his Merry Men, democratising finance and empowering the everyman at the expense of traditional incumbents. But that positioning was built on trust. No mean feat when financial services are the lowest scoring sector on the Edelman Trust Barometer regardless of the rise of fintech challengers. And now GameStop has highlighted to millions where the limitations of financial technology may lie.
Fintech isn’t nascent anymore. Its customers are no longer a few thousand passionate early adopters who all speak the same language. It’s a fully-fledged sector. It’s modern finance. And their customers won’t put up with outages or poor results in exchange for shiny packaging.
It’s no wonder that regulators are quickly stepping in following GameStop. In the US, Treasury Secretary Janet Yellen is leading an investigation into “whether recent activities are consistent with investor protection and fair and efficient markets.” Globally, financial watchdogs are paying attention and monitoring the landscape. There are growing discussions around what level of regulation may be needed around social media, investment and trading apps in the future.
The future of wealth
There is no doubt that the future means that ‘the little guy’, the ‘everyday investor’, will have more sway in financial markets. A shift is taking place and more and more people are looking at investing to support their lifestyles in the short and long-term.
Edgar notes, “The GameStop saga may not be significant for the impact it had in the immediate term, but it could potentially symbolise a turning point for financial markets and the role of retail investors. More people are investing everyday – and not just through their pensions. They’re actively seeking out investment opportunities because they have more cash, are more connected, and they have the apps and tools to get involved too.”
The future will see more people looking to invest, whether through trading or other wealth management opportunities – but what needs to happen now is for more effort to go on showing people how to invest well. After all, the ‘get rich quick’ mentality isn’t going to work for most people.
“Your investments aren’t a game,” says Edgar. “They’re part of your financial life. That’s why at ikigai, we’ve built the app so you can see your investments right alongside your day-to-day spending and savings accounts. What needs to happen is for there to be an increased effort to empower people to grow their money themselves, giving them confidence around investment decisions and a real appreciation of risk and their own tolerance.”
GameStop has highlighted how the financial world is changing. It’s put an essential conversation front-of-mind at exactly the right time. But now it’s time for regulators to respond, fintechs to decide where they stand, and for all of us to choose what kind of investor we want to be.
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We built ikigai specifically for those who want to bring their lifestyle to the next level, by taking better care of their finances.
ikigai beautifully combines wealth management and everyday banking in one single app. And by doing so, it creates a whole new world of opportunities.
Visit https://ikigai.money to find out more.Maurizio & Edgar, Co-Founders, ikigai
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