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GameStop Lesson: How Retail Traders Won Over Wall Street

“United we stand, divided we fall” once again proved it is a very meaningful motto. This time for the stock market where individual retail traders formed a critical force to beat Wall Street professionals. Here is how they shifted the balance of power.

The Wednesday’s sensation

Thousands of small traders teamed up to buy in the stocks of the video game retailer GameStop (GME) driving its price to record highs on Wednesday, January 27.

Catalyzed by posts on Reddit forum WallStreetBets, individual traders pumped up the GameStop price and lured Wall-Street short-sellers into traps. The professional investors were left with heavy losses, and this was partially the reason why the entire stock market tanked yesterday, wrote Bloomberg.

GameStop is the American brick-and-mortar video game and consumer electronics retailer that suffered heavily due to COVID-19 pandemic. Last spring the company announced plans to close over 450 stores due to a massive shift to online sales. Its stocks fell to $3.25 in April 2020.

The GME price, however, reached $30 in mid-January 2021 and then skyrocketed to nearly $150 on Tuesday, January 26. And while Wall Street wolves bet it would free fall, the GameStop stocks rocketed another 150% to the new highs of $373 on Wednesday morning.

How did this all happen?

In September 2020 the investor Ryan Cohen, who is also a founder of online pet food chain Chewy, bought 13% of GameStop shares. He then started promoting GameStop as an online video game retailer and even a rival to Amazon.

The small investors then believed in the company’s ambitions and used their chance to buy cheap stocks. Wall Street meanwhile bet against GameStop’s plans to overcome Amazon. However, they lost, some of the hedge funds like Melvin Capital and Citron accounting for nearly $5 billion losses.

The industry reacts

Mike Novogratz, an ex-hedge fund manager and now the CEO of Galaxy Investments that plans to launch Ethereum fund next month called the GameStop’s case “a revolution that started with people not trusting central authority. It’s a call for transparency and fairness”. According to him:

In many ways it's happening in parallel with the social unrest we see in our country. [...] These are all symptoms of a growing inequality that is leaving our markets, our political system, and civil society more fragile than they have been in my lifetime.

Meanwhile, the Redditers congratulate their success and claim that tonight has shown what an average retail investor can do. According to one of them:

In fact, CNBC and other outlets encouraged the young generation to start investing and tell us the stock market is the greatest creation of wealth possible. But when we do, they don’t like us getting it right. They are the pool sharks at the table and they just want us to play to get our money.

On the flipside

  • The GameStop’s case raised concerns that investors are taking excessive risks and pushing stock prices too high due to Federal support for the markets in times of pandemic.
  • Trading of GME was temporarily halted by the New York Stock Exchange nine times.
  • Chat app Discord shut down its WallStreetBets group yesterday, officially due to the repeated hate speech. Elon Musk called the move “even Discord has gone corpo”.

Institutional investors for long have been known as the biggest market manipulators. Despite the positive effects they have on businesses and their stock prices, there is always a power they hold in using massive capital inflows to play the markets.

The retail investors were mostly the casualties of the whales’ games. To be honest, the pump and dump were popular manipulation schemes among retailers as well, especially in the cryptocurrency space. However, the GameStop case was the first with such a big impact on Wall Street to become a sensation. Now even the White House and the United States Treasury Department monitoring the situation.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss

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