[Updated] GameStop Stock Situation Attracts Government Attention, Retail Apps Close Trading on It

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[Updated] GameStop Stock Situation Attracts Government Attention, Retail Apps Close Trading on It

January 27, 2021

By: Robert N. Adams

 
 

Update #5 (01/29/21, 1:22 PM) – The U.S. Securities and Exchange Commission has put out a statement about the state of the market, GameStop stock included. There have also been some new developments on the Robinhood front.

"The [Securities and Exchange Commission] is closely monitoring and evaluating the extreme price volatility of certain stocks’ trading prices over the past several days," read a portion of a statement from the U.S. federal agency.

"In addition, we will act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws. Market participants should be careful to avoid such activity. Likewise, issuers must ensure compliance with the federal securities laws for any contemplated offers or sales of their own securities."

Government pressure appears to be intensifying; aside from a committee chair and the SEC, several other politicians such as Senator Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) have commented on the recent market volatility.

 
 

On the Robinhood side of things, CNN Business reports that the financial trading app has raised $1 billion in funding from its existing investors. Robinhood reactivated the ability for new traders to purchase some of the more volatile stocks like GameStop and AMC theaters, but only in limited quantities. It also denied that the decision to restrict trading of GameStop stock (and certain other stocks) was due to the influence of a hedge fund or another financial organization.

"I want to be 100% clear. This decision was not made on the direction of any market maker or other market participants," Robinhood Co-CEO Vlad Tenev told CNN Business.

Investing companies may also be reevaluating the fundamentals of short-selling stocks; Citron Research will discontinue publishing short-sell reports after 20 years in the business, Vice reports. It is unclear at this time if that means the company will be exiting having short positions themselves or not.

GameStop stock opened at $372.17 and currently sits at around $325.00 at the time of writing according to Yahoo! Finance.


Update #4 (01/28/21, 4:35 PM) – More interesting developments have arrived in the GameStop stock story including changes to purchase restrictions and hints of government action.

Let's start with the stock's price: GME closed out at $193.60 today according to Yahoo! Finance, shedding nearly half of its price at the close of trading yesterday. However, it came awfully close to hitting the $500 mark in the early hours of trading before it dipped down and eventually stabilized. It should be noted, however, that this is still a pretty high price and it could still prove to be a problem for hedge funds holding short positions.

 

This rollercoaster of a financial battle has attracted even more government attention: Incoming Chair of the Senate Banking and Housing Committee Senator Sherrod Brown (D-OH) has committed to holding a hearing on the state of the stock market (via David Dayen):

"People on Wall Street only care about the rules when they’re the ones getting hurt. American workers have known for years the Wall Street system is broken – they’ve been paying the price. It’s time for the SEC and Congress to make the economy work for everyone not just Wall Street. That’s why, as incoming Chair of the Senate Banking and Housing Committee I plan to hold a hearing to do that important work."

On the trading app front, Webull has reversed its decision to restrict the ability of customers to buy certain stocks. A recent tweet from the company states that GameStop, movie theater chain AMC, and headphone manufacturer KOSS are now no longer restricted.

Finally, the Robinhood side of things has had a rather interesting and worrying development. Some users made unsubstantiated reports that Robinhood was selling their shares of GameStop without their authorization. According to Max Burns, it appears that this may have indeed been happening.

That Twitter thread raises an important point: Robinhood, like many trading platforms, has the ability to force sales of stocks (or make other similar moves) to protect its interests. Exercising such an ability is rare, however, and Burns believes that this will negatively impact people's faith in the trading platform.

 

Update #3 (01/28/21, 2:40 PM) – Representative Alexandria Ocasio-Cortez (D-NY) has shown a greater interest in the GameStop stock situation and the /r/wallstreetbets Discord may have just been saved.

Representative Ocasio-Cortez will be live tonight at 8:30 PM EST on twitch.tv/AOC to discuss retail stock trading and GameStop. This will be her first time on the platform in two months; previously, she hosted a stream of Among Us.

Additionally, The Verge reports (via Tom Warren) that Discord is working with the /r/wallstreetbets community to help it better moderate its new Discord server. This may seem like an unusual move, but Discord has previously helped out larger servers with the challenges of moderating a large community. The new /r/wallstreetbets Discord is rapidly approaching 300,000 members in total.


Update #2 (01/28/21, 1:17 PM) – A lawsuit has been filed against the Robinhood app for its restrictions on trading GameStop stock around the same time Webull enacted a similar restriction.

Fox Business Network's Lydia Moynihan reports that a class-action complaint was filed by Brendon Nelson in the southern district of New York State. Civil Docket No. 21-ev-777 alleges that the trading app "deprived retail investors of the ability to invest in the open-market and manipulating the open-market."

Another trading app has also enacted similar restrictions at around the same time of day — Webull has announced that it is restricting trading on certain stocks.

"Due to the extreme volatility in the symbols AMC, GME, and KOSS, our clearing firm will no longer be able to support clearance on these symbols," read a tweet from Webull. "As a result, Webull is forced to set all transactions in these symbols to liquidate only."

In the political sphere, Representative Alexandria Ocasio-Cortez (D-NY) stated that the Robinhood situation was "unacceptable." Amazingly, Senator Ted Cruz (R-TX) agreed with her on the matter despite the fact that the two politicians frequently butt heads.

Finally, South Korean firm MUST Asset Management Inc. sold off the entirety of its shares in the company according to Marketwatch. GameStop stock sustained a dip in its price to around $125 before climbing back up to nearly $300 again; the stock is currently on another downward trend at the time of writing.


Update (01/28/21, 10:45 AM) – The GameStop stock saga continues: its share price may very well hit $500 today, the SEC has put out a statement, and Robinhood is restricting some transactions.

The most controversial recent development is the restriction of some trades — including GameStop and AMC stock — by the Robinhood app. Redditor /u/Bundaga shared what he says is a message that pops up on the app when looking at GameStop:

You can close out your position in this stock, but you cannot purchase additional shares.

"We continuously monitor the markets and make changes where necessary," read a blog post from Robinhood. "In light of recent volatility, we are restricting transactions for certain securities to position closing only, including $AMC, $BB, $BBBY, $EXPR, $GME, $KOSS, $NAKD and $NOK. We also raised margin requirements for certain securities."

Other apps are having a problem of a different sort. The UK trading App Trading 212 put out a tweet early yesterday afternoon warning customers that there may be "potential disruptions due to excessive market risk of trading extremely volatile stocks." The replies to the tweet are filled with angry people who are, for one reason or another, unable to make trades.

The /r/wallstreetbets Discord server has been banned; the Discord service alleges that the server had "occasional content" including "hate speech, glorifying violence, and spreading misinformation." Discord provided a statement to Rod "Slasher" Breslau in the above tweet, noting that the server was not banned "due to financial fraud related to GameStop or other stocks."

In a similar vein, the /r/wallstreetbets subreddit temporarily went private last night. Following this event, the subreddit's moderation team released a statement, taking the time to mention that @wsbmod on Twitter is the only official account from the subreddit on Twitter in light of several accounts purporting to be associated with them. Unsurprisingly, that same post also took the time to comment on the Discord issue.

"We're suffering from success and our Discord was the first casualty," read a portion of the statement from the /r/wallstreetbets mod team. "You know as well as I do that if you gather 250k people in one spot someone is going to say something that makes you look bad. That room was golden and the people that run it are awesome. We blocked all bad words with a bot, which should be enough, but apparently if someone can say a bad word with weird [Unicode Icelandic] characters and someone can screenshot it you don't get to hang out with your friends anymore. Discord did us dirty and I am not impressed with them destroying our community instead of stepping in with the wrench we may have needed to fix things, especially after we got over 1,000 server boosts. That is pretty unethical."

As for the stock itself, it's already hit a high of $468.49 going by Yahoo! Finance's data in the first house of trading. The price has since slid down to $369.75 at the time of writing.

Finally, the Securities and Exchange Commission — the U.S. federal authority that regulates stock trading — put out a statement echoing yesterday's messaging from White House Press Secretary Jen Psaki.

"We are aware of and actively monitoring the on-going market volatility in the options and equities markets and, consistent with our mission to protect investors and maintain fair, orderly, and efficient markets, we are working with our fellow regulators to assess the situation and review the activities of regulated entities, financial intermediaries, and other market participants," read the joint SEC statement.

Our original story continues below.


Trading of GameStop stock late last week was so unusual that U.S. stock markets temporarily halted trading. Fluctuations in its value have only intensified throughout the week — and now the White House's economic team is watching.

Here's a quick rundown of what's been going on: a number of hedge funds have held "short" positions on GameStop stock. This is essentially a gamble that it can temporarily borrow some stock at one price and sell it back at a lower price, making a profit on the difference.

However, some retail investors have thrown a wrench in these plans in recent weeks by raising the value of GameStop stock. Critically, short positions might have a deadline on them — if a stock doesn't hit the right price then, the companies holding these short positions can lose money. This means that a lot of wealthy hedge funds stand to lose billions of dollars in the coming weeks — and this situation has gotten so serious that it's attracted the attention of the White House's economic team.

White House Economic Team 'Monitoring the Situation'

White House Press Secretary Jen Psaki briefly commented on the situation surrounding GameStop stock, although it should be noted that it's not the only stock experiencing a similar pattern of unexpected growth. Movie theater company AMC Entertainment, tech company Blackberry, headphone manufacturer Koss, and fashion retailer Express have all experienced similar growth patterns, although GameStop has been the clear leader in this phenomenon.

These recent moves in the stock market led to a reporter to asking White House Press Secretary Jen Psaki about the situation, including whether or not the Securities and Exchange Commission — the federal authority that monitors and regulates stock trading in the United States — would get involved.

"Well, I'm also happy to repeat that we have the first female Treasury Secretary and a team that's surrounding her and [questions about the market] we'll send to them," Psaki said as highlighted in a tweet from Forbes. "But our team is, of course — our economic team including Secretary Yellen and others — are monitoring the situation. It's a good reminder, though, that the stock market isn't the only measure of the health of our economy. It doesn't reflect how working and middle-class families are doing. As you all know from covering this, we're in the midst of a K-shape recovery. America's workers are struggling to make ends meet which is why the President has introduced this urgent package to get immediate relief to families."

In short, this was a diplomatic answer by the Press Secretary that essentially says "We are aware of what's going on" — not a surprise considering the flurry of coverage surrounding Gamestop stock and a handful of stocks exhibiting similar patterns. No action has been announced as of yet, nor do we know for certain if the government will do anything at all on this matter.

Either way, several hedge funds may be in for a rough wake-up call according to a recent tweet from Street Insider.

"CNBC's David Faber said he is hearing a number of hedge funds are in similar trouble that Melvin Capital saw in its GameStop $GME and may need to be bailed out," read the tweet.

GameStop Stock Shorting 'Feels Pretty Wrong to Me,' Palihapitiya Says

One of the best encapsulations of this whole situation comes from Canadian-American venture capitalist Chamath Palihapitiya, the founder and CEO of Social Capital. Social Capital is a venture capital firm that was founded in 2011 with the goal of focusing on areas neglected by the venture capitalist community at large; it primarily focuses on technology startups; Social Capital was the leading investor in a funding round for Slack Technologies.

Palihapitiya recently did a phone interview on CNBC, fervently criticizing some of the reaction to the trading of GameStop stock and insinuating that financial media outlets aren't exactly being fair to everyone involved.

"The lack of integrity in the system is the precursor that caused GameStop to be sold short 136% and for people to try to pile on and destroy a company in front of our eyes," Palihapitiya said in an interview with CNBC's Joe Kernen. "That, to me, feels wrong. That feels pretty un-American if you ask me. I think GameStop is a reasonable business. You know, I think what they do is reasonable. And so, the fact that they shouldn't be allowed to exist because all of a sudden we decide that they should be obliterated into the ground. That feels pretty wrong to me."

"The point is: just because you're wrong, doesn't mean you get to change the rules," Palihapitiya added. "Especially when you were wrong, you got bailed out the last time. That's not fair."

Chamath Palihapitiya recently closed an options position on GameStop after making a healthy profit; he pledged to donate the proceeds of this sale (along with his original investment) to The Barstool Fund to help small businesses.

Gamestop stock value January 2021
GameStop's explosive stock growth began in mid-January. Chart Credit: NYSE

Select Brokerages Restrict Trading of GameStop Stock

Although the U.S. government has not yet many any firm moves, some trading platforms are taking initiative and placing restrictions on trading GameStop's stock in response to its recent volatility.

“In the interest of mitigating risk for our company and clients, we have put in place several restrictions on some transactions in $GME, $AMC, and other securities,” a TD Ameritrade spokesman told MarketWatch.

As noted before, GameStop is not the only company exhibiting similar growth; TD Ameritrade is similarly restricting the trading of AMC. Charles Schwab has also enacted its own restrictions. Additionally, the trading platform Robinhood has raised requirements surrounding the trading of some stocks.

GameStop stock trading continued slice

What Happens Next?

At the time of writing, Yahoo! Finance lists GME at $338 — that's more than double the company's highest-ever stock price that was reached earlier this week. That leaves us with one major question: what happens next?

Several submissions on Reddit's /r/wallstreetbets subreddit highlight that the clock is ticking for the hedge funds holding a short position. A weekly and monthly deadline is rapidly approaching; if the price of GameStop stock doesn't drop, there could be hundreds of millions — or even billions in losses.

I don't have any real in-depth knowledge of stock trading (aside from my own successes in spinning gold on the World of Warcraft auction house). What I have seen as an outsider, however, is a serious challenge to the status quo on how stock market trading works. This battle cannot continue forever and one of the two opposing sides is going to lose — it's only a matter of time.

What do you think of GameStop's stock valuation exploding over the last week? What do you think the fallout of this phenomenon will be? Let us know in the comments below!

A photograph of Robert N Adams
Senior Writer

I've had a controller in my hand since I was 4 and I haven't stopped gaming since. CCGs, Tabletop Games, Pen & Paper RPGs - I've tried a whole bunch of stuff over the years and I'm always looking to try more!

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