The GameStop saga: How the tables have turned for Wall Street

There will be a bunch of people who will lose millions and their minds – if they haven’t already –until the GameStop saga comes to a logical conclusion. And no one will come to their rescue – unless it is the big funds that lobby and squeeze their way onto the desks of government officials whose tight-fisted manners will have to be put aside if they seriously consider bailing out the Wall Street bankers like they did in 2008.

But all that will come later when the share price is defined by what its earnings are, and what its future outlook entails. For now, the chronicles continue even as the share price of GameStop tanks. From $325 on January 29, it has already shed close to three-fourths of its share value after a weekend that probably saw investors tossing and turning, eventually culminating to sleepless nights, wondering where all they went wrong.

This is where the model of the stock market comes under the radar. In a stock-market trade, there is always a winner and a loser. This is how it works. You will not sell something today for $4, knowing that it can climb to $6 in a few days. And no one will buy it for $4, knowing that it will fall to $2. However, trades happen due to a variety of reasons – cash requirements, profit-booking, diverting to another share etc. Combine it with how markets behave, and how participants react, you have a disaster recipe when sentiments overpower true fundamentals.

In GameStop’s case, there was no fundamental reason for its share price to rise from $4 to over $300 in a matter of months. For context, GameStop is primarily a video game retailer, operating thousands of stores in many countries. With the onset of digital transactions, GameStop’s earnings turned red and revenue dipped by almost a third between 2017 and 2020. It made sense for hedge funds to ‘short it’. This is when you make money as the stock price falls. With the onset of Covid-19, footfall reduced further and online transactions boomed as gamers stayed home and shopped online. Hence, sentiments – that the future for GameStop looks better – were just as misguided.

However, the entire episode is not about fundamentals or technical analysis – two most-favoured terms by stock market participants. This was a much-larger challenge. It was a question put forth by a team or teams of social media users who asked the big funds, ‘can you take a dose of your own medicine’. These funds, for a while now, have led market rallies, squeezed the savings of the common person, and lost little sleep as the world braced itself through a financial crisis.

This was a head-on collision but it is still very likely that the savings of the common people will get squeezed yet again. However, big funds scrambled as they were stood up to, challenged, and thrown off their own game – a game they not only played as a club, but by and large won every single time. They did not lose in 2008, when panic ate away small investors and gulped down mid-sized brokerage houses, and they are not going to lose this time either.

But what is different this time is the challenge did not come from the regulators who were asleep at the wheel in 2008. It came from average, small-time investors who have absolutely no pull over the market in the strict sense. It came from social media platforms whose power has gone from being used just for laughs to creating absolute panic among the oldest players in the game situated at the trading hub of the world’s largest economy. The average Joe took the bull by the horns, and guided it past a street where cut-throat capitalism has ended careers, pensions, and savings.

But after all is said and done, one has to wait to see what changes regulators bring in now. We are already seeing trading apps side with Wall Street. After all, it is those eight blocks that will decide who they want to do business with down the road. The markets will continue to function, and money will continue to be made. But spare a thought for those average investors who entered GameStop at $200 or $300 or $325, and are now staring at their portfolios with remorse, regret, and possibly, anger.

But some people have made a lot of money. From $4 to $300, there was wealth-creation for investors at the expense of others. This is what people from the Wall Street do as well. This time, however, it came at their expense. This time, the tables turned. Whatever happens after this, be sure to remember whose side the government, regulators, and the media takes. The stances of these institutions will be enough to understand how the system has worked and how it will continue to work.