GameStop Market Manipulation: What Clients Need to Know

GameStop, Reddit, and Robinhood have dominated the headlines in the past couple weeks. AAFCPAs Wealth Management fielded several questions recently and outlines below what clients need to know.

What Happened?

GameStop Corp. (ticker: GME) is an American video game, consumer electronics, and gaming merchandise retailer. Some of the major Wall Street hedge funds had short positions on GME, betting the stock would suffer as the largely brick & mortar retailer continues to face the pressures of a digital world. (A “short” position is generally the sale of a stock you do not own. Investors who sell short believe the price of the stock will decrease in value, at which point they buy shares at a lower price to repay what they borrowed and make a profit.) However, members of the stock-trading Reddit community known as WallStreetBets whipsawed financial markets and executed a multi-billion-dollar short squeeze in what is being called by many amateur investors as a power shift from Wall Street to Main Street.

The higher the stock went, the greater the losses incurred as those who bet against GME were then forced to buy those shares back, whatever the cost. The stock was trading at about $18 before it took off last month and rose to as high as $483 per share. This squeeze forced some of Wall Street’s prominent hedge funds to close their bearish bets against GME with hefty losses in the $Billions.

What’s Next?

We expect Congress to step in, including hearings to discuss Robinhood’s basis for restricting trading in several securities on Thursday and how the actions of the free-trading app may disadvantage investors or otherwise unduly inhibit their ability to trade certain securities. Just this week, politicians including Senator Ted Cruz and House member Alexandria Ocasio-Cortez agreed that Robinhood was wrong to do so. We expect that many small traders will lose the unrealized gains they built up.

We also expect congressional discussions on Wall Street abuses by hedge funds. Many folks on both sides of the aisle have rallied against what they view as a cozy relationship between Wall Street firms. They are calling for more regulation on market manipulation. We expect volatility as the situation continues to evolve.

What We Advise:

The market is efficient. Public company information is known. Earnings and debt on a company’s balance sheet are known. Competitors are often known. Because of this, stocks generally trade within a range that factors in all known information. The prospects for GameStop are not suddenly better. They are still a struggling video game seller in an increasingly digital world. Just this week, a Bank of America analyst put a $10.00 price target on the stock. The GME stock dropped by more than 30% today.

AAFCPAs Wealth Management discourages clients from chasing short term stock gains as they can be counterproductive to your long-term goals. We recommend a disciplined approach to investing to weather all market cycles.

If you have any questions please contact: Andrew Hammond, CFP® at 774.512.4143, ahammond@nullwealth.aafcpa.com; or your AAFCPAs Wealth Management Wealth Advisor.

AAF Wealth Management is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where AAF Wealth Management and its representatives are properly licensed or exempt from licensure. This blog is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by AAF Wealth Management unless a client service agreement is in place.