GameStop’s stock surge has softened – so why are investors buying its shares?

GameStop shares have skyrocketed again. The Texan computer game retail chain that was the focus of the stock market drama at the end of January rose from US$44 (£32) to a high of around US$200 on February 26 before falling back to US$120 at the time of writing. Holding investors have a “short position” on the stock, meaning they are betting that it will go down, reportedly incurring a loss of almost US$2 billion from the price increase.

Other stocks involved in the first wave of retail trading such as film group AMC Entertainment followed a similar trajectory, at one point doubling and still rising nearly 50% after calm a few days earlier. So why do investors buy into these stocks?

Reddit’s army of millions of investors from reddit’s WallStreetBets community pushed GameStop shares from US$20 to US$480 in a “short-term restraint” in January, in which they caused hedge funds such as Melvin Capital to suffer heavy losses, after forcing them to liquidate large stakes on the stock.

When GameStop prices fell again in early February, many of these retail investors were counting losses. Since then, there have been countless debates about manic bouts, including a congressional hearing in the U.S. on February 18.

Re-determinations

Online trading apps at the center of the buying and selling craze, such as Robinhood, have been accused of making it too easy for amateurs to take wild risks, allowing market manipulation, risking the financial stability of the wider system and sided with supporters of the Citadel hedge fund by drastically restricting buying into the stocks in question after the price soared.

In the second regard, many users have filed lawsuits against Robinhood and Citadel, although under a provision in Robinhood’s client agreement, all disputes must be resolved in arbitration and not in the civil court system. Robinhood’s chief executive Vlad Tenev has denied the allegations, giving his own explanation at a congressional hearing.

Keith Gill, the passed leader of the WallStreetBets movement, also known as RoaringKitty and DeepFuckingValue

Meanwhile, the passed leader of the WallStreetBets movement, Keith Gill (known as RoaringKitty and DeepFuckingValue on various platforms), has become the subject of a lawsuit. He is accused of misrepresenting himself as an amateur and enticing other users to follow his risky investment strategies. As he memorably told Congress during the February 18 hearing, “I like stocks.” The lawsuit was mocked by Gill and on social media, sparking jokes and the “I’m not a cat” meme.

Understanding phenomena

While all these questions will continue, the new GME share price rally suggests this is not a one-off situation. It’s not entirely clear why the stocks were targeted. It can be linked to the fact that the congressional hearing has passed. It may have to do with GameStop Chief Financial Officer Jim Bell’s resignation, signaling a change in direction within the company. Or it may be due to the fact that short positions on the company’s stock have risen again, which can cause amateur traders to buy bullish options in stocks that will be highly profitable if the price continues to rise.

But at the same time, I would argue that none of these reasons properly explain what is happening here. After years of studying financial markets and especially the highly highly cons investing new cryptocurrency market, I was able to identify the three main reasons behind this phenomenon.

First, it’s about the expansion of fintech and the ongoing decentralizity of financial markets. New technologies such as easy trading applications provide access to financial markets for a large number of amateurs. They allow financial liberalization and autonomy from big banks and other institutions that control the market, like cryptocurrencies, and this has great appeal. Financial scholars have named this effect “cryptocurrency magnification”.

Secondly, it is the expansion of the meme culture of millennials and Generation Z “gays”, in which emotions are expressed by images, sounds, videos, emojis and abstract humor. Social media posts can contain strings of meaningless, inaccessable insults, and never-ending slang.

All of this makes it more difficult to assess the feelings behind them. For example, behavioural finance researchers often use algorithms to extract investor sentiment from Twitter posts, Google search trends, and media headlines. But how will you use academic software to analyze content on r/WallStreetBets? This is a huge challenge.

The third and perhaps least obvious motivation is the pandemic. A generation of young traders has blamed older people for the global financial crisis. The pandemic has increased the sense of social inequality and hatred for the money of booming children, as the younger generation who grew up or studied during the last recession now face another subject of young professionals.

The government’s limitations and the social isolation they inflicted are also said to have increased rebellious sentiment. At the same time, this situation creates the ideal environment for these types of market manipulation.

So if the second GameStop rally surprises you, you don’t really need to find a reasonable explanation for it. GameStop’s stock rally was driven by a combination of cultural and environmental factors. The fact that all this seems to be more important to amateur traders than making money is fascinating and needs to be studied. Besides GameStop, AMC and also the Dogecoin explosion, we will continue to observe more cases like this in the future.

This article by Larisa Yarovaya, Deputy Director of the Centre for Digital Finance, Lecturer in the Faculty of Finance, University of Southampton, is re-posted from The Conversation under the Creative Commons licence.

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