Investments in the stock markets are subject to a myriad of market risks that arise out of the uncertainty of how the players in the market would react. Investors in the stock market can be classified into two categories: Retail Investors and Institutional Investors. Retail Investors are individuals who trade equities in a personal capacity, Institutional Investors refer to corporations, who may or may not use public deposits, deal in equities and have deep pockets. Institutional investors have larger funds, highly skilled personnel, and access to information that may not be available for retail investors, hence, institutional investors are involved in high volume trades. The word ‘Elephants’ is often used to refer to institutional investors who have the power to sway the market prices to their advantage. Generally, Retail Investors do not have control over the market prices and carry out low volume trades. The Stock Market is very turbulent, people with years of experience with dealing in equities cannot quite predict the exact future, and the tables can turn at any instant. One of the most recent yet remarkable incidents that shook Wall Street was the GameStop Incident.
Trading in the stock market is not only confined to the purchase and sale of shares, people can make by making bets on the price of a particular stock, this is known as shorting. Shorting refers to the borrowing of a particular number of shares and then selling these borrowed shares with a promise to buy these shares back and return them. When traders speculate a fall in the price of a stock, they go short, which means they borrow and sell these and sell these shares at a higher price and buy them back later as the price falls, hence the difference is the profit earned by them.
To illustrate how shorting works, read this example: Assume that you borrow an orange from your friend and promise him/her to return an orange at the end of the day. In the morning the market price of an orange is Rs 5 per piece, you sell the orange at the prevailing market price speculating a fall in the price, and in the evening your prediction proves to be accurate, and the price of an orange falls to Rs 2 per piece. At this price you buy an orange and return it back to your friend, thus making a profit of Rs 3 in the transaction. In a real-life scenario, the lender of the shares charges a certain commission on the borrowed stock. In this way, one can earn money even at falling prices. This also comes with its own set of risks, the GameStop fiasco being a prime example.
GameStop is an American video game retailer. Investors speculated the prices stock price of GameStop was gonna decline as fewer people were buying video games in a physical store during the pandemic and there was a rapid shift in purchasing games online as a few variants of the new generation of gaming consoles did not offer a CD drive. Many Hedge Funds had placed their bets on GameStop. A Reddit forum named “wallstreetbets”, that had more than four million people in it, speculated a high volume short trade. Tips were passed on the group, and Elon Musk also sent out a tweet encouraging people to buy the stock, and people began buying shares and consequentially the demand surged due to which the prices shot up. On 13th January one share of GameStop was priced at $31.40, the price increased to $ 39.12, and on 27th January the stock was at its all-time high closing price at $ 347.51! All the hedge funds who had shorted their prices, and hence, lost billions believing that the prices would fall had to buy these shares at high lions of dollars. Everyone was flabbergasted seeing this situation, it was all over the media that how amateur investors had outwitted the pro players of Wall Street. People say that this was an experiment carried out to see the influence of internet communications over the markets, popular threads on Reddit called this as a payback to the big money companies for causing the 2008 financial crash, and some call this as an act of “modern-day Robin Hoods” as a lot of people who gained money donated it for charitable causes.
Robinhood, a popular trading app among millennials in the US, received serious backlash as it decided to freeze certain shares thereby actively preventing investors from buying GameStop shares. The company cited “market volatility” as a reason for their move. Investors could only sell their shares, later the company also placed a maximum limit of 500 shares for buying these shares. The company explained it was required to keep a substantial amount of money on hand in order to process all the trades happening through its clearing house, which is the part of the company that sends shares and money back and forth to other clearing houses to complete trades. Investors became indignant as restrictions were imposed on them whereas Hedge funds traded shares as usual. Following this, GameStop is facing nearly 50 lawsuits.
Hence, the GameStop fiasco serves as a perfect example of market risks involved in the stock market as Wall Street traders with years of expertise were outwitted by amateur investors. It shows that the stock market can be uncertain and anything can happen at any instant.
Analysis of the GameStop Incident –
The financial investors who sent stocks of GameStop and a few different organizations to beforehand unbelievable statures depended on a Reddit-based discussion as a platform highlight talk about exchanging systems, egg each other on and move as one to press mutual funds that had shorted stocks. Regulators are analyzing whether any of their movement was illicit. In any case, regardless of whether it was, the online media stage bears little danger from its clients’ action, on account of a shield from claims known as Section 230 – which Congress passed to supersede a court choice in a claim brought against the financier firm highlighted in the 2013 Martin Scorsese blockbuster “The Wolf of Wall Street”. That provision of the 1996 Communications Decency Act is as of now under investigation in Washington from Republicans, who fight it has permitted online media firms to victimize traditionalists, and from Democrats, who say the organizations have taken cover behind its securities instead of get serious about perilous conduct. The Securities and Exchange Commission is exploring whether anybody may have overstepped the law, for instance by misleading raise the cost of GameStop shares, just to sell their own offers in a supposed siphon and-dump plot. “Reddit’s site-wide policies prohibit posting illegal content or soliciting or facilitating illegal transactions,” said a Reddit spokeswoman in an email. “We will review and cooperate with valid law enforcement investigations or actions as needed.”
In the event that regulators locate that a few clients went excessively far, Section 230 would generally protect Reddit from risk. That has some online media experts inquiring as to whether Section 230 damages monetary business sectors. Some say it’s impossible a gently directed discussion, for example, Reddit would even exist without Section 230, not to mention permit such a hypothesis and stock advancement that saw GameStop shares rise 1,700% very quickly. Without the act, “platforms would have to become more responsible — almost overnight,” said Dipayan Ghosh, a former Facebook Inc. official and a White House technology policy adviser in the Obama administration. “And that wouldn’t be a bad thing,” said Ghosh, who is now a fellow at Harvard Kennedy School’s Shorenstein Center on Media, Politics and Public Policy.Reddit has lobbied Congress, including the
House Energy & Commerce Committee that oversees tech policy, in support of keeping Section 230 intact, according to a person familiar with its efforts. Reddit has only been lobbying for about four years, relying on outside lobbyists. It spent about $200,000 a year in the past three years and $60,000 in 2017, its first year, according to its disclosures.
In an unexpected contort, Section 230 itself was made to some extent as a reaction to obscure stock plans. In 1995, the financier established by Jordan Belfort, who was played by Leonardo DiCaprio in the film, “The Wolf of Wall Street,” sued a mysterious online release board banner for trashing Belfort’s firm. The claim incorporated a now-dead web access supplier, Prodigy, as a litigant since it facilitated the discussion. The adjudicator decided that Prodigy could be expected to take responsibility for its clients’ substance since it had effectively tried to direct the discussion, here and there by bringing down posts. Expecting that the decision would provoke incipient stages to dodge obligation by leaving up all substance, legislators proposed what at last became Section 230 out of a law that meant to control obscene material on the web. The Reddit resistance emerged from a conjunction of the online media upheaval achieved by Section 230, fiercely well known applications that permit free stock exchanges, a large number of pandemic-exhausted retail financial backers and long-rotting abhorrence toward Wall Street top dogs.
- VOA News, Controversy Over GameStop’s Stock Market Saga Explained, VOA News January 30, 2021, https://www.voanews.com/economy-business/controversy-over-gamestops-stock-market-saga-explained
- Joe Light and Ben Brody, GameStop Mania Stirs New Ire for Social-Media Shield Trump Hates, Bloomberg February 3, 2021, https://www.bloomberg.com/news/articles/2021-02-04/gamestop-mania-stirs-new-ire-for-social-media-shield-trump-hates