GameStop, Meme Stocks, and Robinhood
© Copyright 2020
Taking a step back to look at the big picture...
Aiera Insights
With Aiera’s advanced search Monitors, you can track mentions of terms and concepts across event transcripts, news, filings, and other sources. Add the monitor below (appropriately named "Stonks") to be alerted when any news comes out on this topic.
Winners & Losers
This is the end of the report, now it's your turn...
Short Squeezes: The short squeeze and its attendant, huge, loss-making capability is nothing new and it’s a risk hedge funds have been well aware of for decades. Short squeezes are most likely on companies with large short interest + low free float. Lots of outstanding call options can make it worse, as can various other technical factors. Usually it is other big funds pushing up the stock, not retail, but the result is the same. See the infamous Volkswagen short squeeze of 2008 where the price increased thirtyfold and it briefly became the most valuable company in the world.
Massive Dislocation Between Price & Fundamental Value: It’s called a bubble and it’s been happening for centuries. Tulips anyone?
Momentum Trading: Related to bubbles, momentum trading could, if we were uncharitable, be described as one giant pyramid scheme. I’ll leave it there.
Ebb & Flow of Retail Interest in Active Trading: We see a clear cycle here, but not always aligned with wider financial economic cycles. Anyone remember Pets.com from the late 90s? (If you do, you probably don’t own GameStop shares.) Retail investors pile in, mania ensues, bubble bursts, retail investors get burned and disillusioned, and then pull back for years, chastened and newly conservative. Often we have to wait for the next generation for interest in active trading by the masses to come back.
Price Volatility: Also nothing new and it’s something hedge funds have dealt with for decades. Many are pretty good at managing and profiting from it.
Not an Aiera user?
Reminder:
This report was created primarily from a variety of Aiera's Comprehensive Monitors. You can explore these Monitors and countless more in Aiera's Monitor Gallery.
Winners
- Institutional Investors: Specific funds might lose money, but institutional investors (especially hedge funds) in the aggregate will come out on top, as they have the most resources to be able to deal with volatility
Losers
- Ultimate investors in funds that shorted GameStop and other meme stocks and who couldn’t hold position through margin calls - These might be pension funds so don’t be too gleeful at their losses
- Robinhood: Reputational hit. Can it recover? TBD
- Late Retail Buyers of Meme Stocks: Particularly those still exposed when the music stops
First Thing’s First - What’s NOT New:
The current activity around GameStop and other “meme stocks” has been enthralling over the past week or so. It’s easy to get caught up in the minute-by-minute market fluctuations, especially if you have exposure to any of these names. But if you aren’t directly involved, it’s useful to take a step back and think about what all this means for the future of the market. Many commentators are seeing this as a step change in how Wall Street operates - with the barbarians invading and changing the system irrevocably. Maybe that is true, but maybe not.
As we saw after 2008, the more things change, the more they stay the same….and if we look closely we can definitely see that continuity - with some tweaks to the system at the margin - is still the likeliest outcome. The bubble will pop eventually and some carnage is likely.
"Meme Stocks" Have Our Attention...
PFOF Regulation: Expect Pay For Order Flow (PFOF) arrangements to come under heavy scrutiny by regulators, with possible customer lawsuits as well. The industry will ferociously defend the practice but some amount of oversight or limitation to the practice is very likely. Curtailing this might spell the end of certain business models.
Other Regulation: Securities regulators and exchanges are likely to impose new rules to keep highly volatile stocks from causing capital disruptions for broker dealers, for example increased capital requirements, reduced leverage, and/or automatic trading stops. Traders will grumble but will ultimately be glad for more predictability, rather than the ad-hoc constraints we are seeing right now.
Reduction in Retail Trading (yes, really): Very near term we will continue to see increased retail interest in meme stocks but medium term, new regulations + retail investors getting burned when meme stocks collapse + gradual improvement of pandemic conditions will mean a cyclical reduction in retail interest in high-velocity stock trading generally, for a few years at least.
More Retail Coordination: In new forums, in new asset classes and in new ways - but will remain a semi-niche semi-professional area, and, outside of the occasional big story, it won’t be in the headlines most of the time. Unlike most institutional investors, many traders in these retail forums will have a shorter-term time horizon, but they will still be broadly aligned with the big players. It will be difficult for these groups to apply formal pressure to management or boards in the way activist investors do, without formally amalgamating in some way.
Magnitude & Velocity of Retail Trading: Amplified by gamification, fully realized no-fee platform, and options trading availability.
De Facto Coordination of Retail Investors: This is the real wild card. What could this morph into? But remember stock trading bulletin boards have been around for decades, there is just wider reach now.
What IS New:
What MIGHT Change:
Big money, on the whole, will probably still make the most money out of this, despite the David vs. Goliath storyline being spun - especially hedge funds. This is not necessarily a conspiracy but they just have the capital and other resources to best take advantage of extreme price volatility. (Of course some individual funds may lose money.)
Fundamentals will ultimately prevail (eventually), and GameStop and other squeezed stocks are likely to drop back to earth. The only question is timing - when does the short squeeze run out of juice? Even if GameStop were to experience an operational turnaround, a stock price in the hundreds looks hugely inflated. And just in case you were wondering - there is no feasible way for GameStop, the company itself, to monetize its huge stock run-up … unless of course r/WallStreetBets wants to underwrite a stock offering at the elevated price.
What WON'T Change:
