SOFIA UNIVERSITY „ST.

KLIMENT OHRIDSKI”

FACULTY OF ECONOMICS AND BUSINESS

ADMINISTRATION

Abstract Paper

“GameStop“

Prepared By: Read By:

Gabriela Pashkunova, 701270 Associate Professor Bozhidar
Nedev

Sofia
 2024

Table of Contents

What actually happened with GameStop.................................................................................3

The rise of the everyday trader.................................................................................................3
Flailing companies rally...........................................................................................................4
But retail traders aren’t necessarily winning...........................................................................5
Hedge funds reassessing...........................................................................................................5
Regulation hasn’t materialized.................................................................................................6
Investigations............................................................................................................................6
Congressional hearing..............................................................................................................7
Lawsuits.....................................................................................................................................8
Regulation.................................................................................................................................8
Reactions...................................................................................................................................9
Sources....................................................................................................................................10
 What actually happened with GameStop

GameStop is an American brick-and-mortar retailer that specialises in video games,

consumer electronics and gaming merchandise. It was widely deemed a company in declining
health—indeed, its mere existence as a physical shop was viewed on Wall Street as being
decidedly outdated, and its business model was hurtling towards failure. This bearish view
was only further reinforced by GameStop’s share price, which had been on a long-term
downtrend—from just below $50 at the start of 2014 to a mere $3 about a year ago.
In early 2021, millions of ordinary people across the United States began buying shares
of the declining video game store GameStop in increments of tens, hundreds, or thousands of
dollars. Their investments were mocked by financial experts, who cited the store’s poor
underlying metrics. But the masses’ collective action proved shockingly powerful: they
pushed GameStop’s price from under $3 to as high as $483 in late January 2021, causing the
hedge funds that had bet against it to lose billions of dollars.

The rise of the everyday trader

The first undeniable impact of GameStop: It sparked the imagination of many people
across the country who had never cared about or understood the stock market. Most of stock
trading is still done by professional traders, many of them on Wall Street. Seeing the rise of
GameStop’s stock gave novices an impetus to open brokerage accounts on platforms like
Robinhood and TD Ameritrade, allowing them to easily participate in a vast financial system
that had previously seemed inaccessible.
These new-found traders also gathered online on Reddit’s r/WallStreetBets sub-forum
and Stocktwits, a finance-centric social media company that has since added the ability for its
users to buy and sell stocks.
When the GameStock craze exploded, Stocktwits had to expand its infrastructure by 10
times just to keep its servers up and running, says CEO Rishi Khanna.
Khanna says that activity on Stocktwits has since receded by half. Activity on
r/WallStreetBets is now a fraction of what it was during the more manic period.
 By December 2022, one market commentator described meme stocks as “way past,”
comparing them to fads of yore like Soulja Boy and the Macarena.
But Khanna also says that Stocktwits has nonetheless grown by four times what it was
in 2020 and has hundreds of thousands of daily active users who continue to use the site to
share information and predictions. And one JPMorgan strategist estimated in February that
retail traders still account for 23% of market orders, which he said was nearing an all-time
high.

Flailing companies rally

In the past, the act of hedge funds shorting a stock—i.e., betting on it to fail—could
signal a death knell for a struggling company. But during the meme stock craze, retail traders
were able to stop—or at least delay—the demise of several companies that might have
otherwise been chewed up by hedge funds. GameStop was able to stave off bankruptcy
thanks to r/WallStreetBets’ support—and in March, the company turned its first quarterly
profit since 2021.
The movie theater company AMC was also staring down the barrel of bankruptcy in
January 2021, when a flurry of ardent fans dumped money into its stock, injecting the
company with much-needed capital at a time when most movie theaters were closed due to
the pandemic. As a result of the stock’s meme-ification, the company was able to shore up its
balance sheet, reduce its debt, and expand its content and concession offerings. AMC’s stock
has since been on a wild ride and has recently nosedived after the company executed a risky
stock split. But it’s possible the company would not have made it to this point without retail
investors.
The rebound of those two once-prominent entertainment companies overturned a long-
held notion that individual investors had no impact on the stock market in the face of
institutional funds. The craze showed that a bunch of Davids working together could save a
cherished piece of culture while also seriously harming a Goliath (in this case, Melvin
Capital, which bet big on GameStop’s decline, lost billions and shut down in 2022). The
craze also reinforced the idea that while stocks may derive some of their worth from
performance data, they don’t actually have a “true” or underlying value and are heavily
influenced by market sentiment.
 “Stocks are totally disconnected from fundamentals in every sense,” Scanlon says. “The
funny thing about the economy and the stock market is that if you believe in something, it
kind of happens. So that became much more apparent.”

But retail traders aren’t necessarily winning

Just because more traders have been introduced to financial concepts or helping save
companies doesn’t mean they’re getting rich. Dumb Money (the movie made to tell the story
of GameStop) highlights the big winners and losers of the GameStop craze, including those
who bought in at the top lost thousands of dollars.
“People were ill-informed on what to do,” Scanlon says. “They would post in the forum
and then lose a bunch of money. And once you lose a bunch of money a bunch of times, you
have no more money to lose.”

Hedge funds reassessing

Nevertheless, this influx of retail traders has forced hedge funds to change their tactics
and manage their risk more carefully. After seeing Melvin Capital lose billions from shorting
GameStop, many hedge funds now monitor financial discussions on Reddit and other social
media platforms to see what’s bubbling. Some hedge funds have become more wary about
shorting volatile stocks in case they face a counter-movement from invigorated retail
investors. Andrew Left, a once prominent short seller, took an eight-figure loss amid the
meme stock craze and said in January 2021 that his firm Citron Research would stop
publishing its research on short positions.
Hedge funds’ ability to place risky bets has also been dented by larger macroeconomic
conditions. In 2020 at the beginning of the pandemic, the Federal Reserve cut interest rates to
zero, which allowed investors to borrow more money and generally take bigger financial
risks. This, in turn, helped to juice an economy rendered sluggish by COVID restrictions. But
these easy-money policies resulted in massive inflation, so the Fed started raising rates again,
causing many players to curtail their risky behaviors, like aggressive short-selling.
Still, many hedge fund managers are doing just fine—including Melvin Capital’s Gabe
Plotkin, one of Dumb Money’s central villains. While Plotkin took heavy losses during the
meme stock craze, he still scrounged up enough money to lead a group that bought the NBA
basketball team Charlotte Hornets recently at a $3 billion valuation.

Regulation hasn’t materialized

Dumb Money culminates in a depiction of the real-life Congressional hearing in which
Keith Gill, Robinhood’s Vlad Tenev, and other central players were grilled by the likes of
Rep. Alexandria Ocasio-Cortez. Several Congressmen railed against hedge funds, with
California Representative Maxine Waters saying, “private funds engaged in predatory short
selling to the detriment of other investors must be stopped.”
The GameStop craze brought regulatory scrutiny to the world of short-selling and
prompted calls to protect retail investors by restricting risky types of trades and reducing the
gamification of trading apps. But there has been very little concrete change in Washington
thus far. Several bills were drafted in Congress—including Maxine Waters’ Short Sale
Transparency and Market Fairness Act—but did not advance.
December 2022, the Securities and Exchange Commission (SEC) proposed reforms to
securities markets after its Chair Gary Gensler pledged to “drive greater efficiencies…
particularly for retail investors” in the wake of the meme stock craze. The proposals sparked
fierce debate, and actual reforms have yet to come into effect.

Investigations
On January 27, 2021, White House press secretary Jen Psaki said that Treasury
Secretary Janet Yellen and others in the Biden administration were monitoring the situation.
Yellen convened a meeting of financial regulators, including the heads of the U.S. Securities
and Exchange Commission, Federal Reserve, Federal Reserve Bank of New York, and the
Commodity Futures Trading Commission, to discuss the volatility surrounding the short
squeeze. Because Yellen had received speaking fees from Citadel before becoming treasury
secretary, she sought and received permission from Treasury Department ethics lawyers
before convening the meeting. The regulators were not seen as likely to view the volatility as
creating any systemic risks.
 Speaker of the House Nancy Pelosi said that Congress would also be reviewing it.
Senator Sherrod Brown announced that the Senate Banking Committee would hold a hearing
on the state of the stock market and the alleged market manipulation surrounding the
GameStop short squeeze. Representative Byron Donalds called for Congress to launch "an
immediate investigation into Citadel, L.L.C. and Robinhood".
On January 29, 2021, the U.S. Securities and Exchange Commission announced it was
reviewing the incident with the aims "to protect retail investors" from "abusive or
manipulative trading activity" and "to identify and pursue potential wrongdoing".
Attorney General of New York Letitia James confirmed in a press release that her office
would look into the matter, saying "We are aware of concerns raised regarding activity on the
Robinhood app, including trading related to the GameStop stock".
Texas Attorney General Ken Paxton said he would also investigate the decision of
brokerages to limit the buying of securities related to GameStop and other stocks, saying that
it "stinks of corruption". His investigation has extended to 13 entities, including Discord,
Robinhood, the trading platforms Interactive Brokers and TD Ameritrade, and Citadel
Financial.

Congressional hearing
On January 28, 2021, the House Financial Services Committee announced that it would
convene a hearing to discuss online trading platforms. On February 18, 2021, the committee,
chaired by Representative Maxine Waters, held a remote hearing titled Game Stopped? Who
Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide. Witnesses at
the hearing included Reddit user and investor Keith Gill, Citadel CEO Ken Griffin, Reddit
CEO Steve Huffman, Melvin Capital CEO Gabe Plotkin, Cato Institute financial regulation
expert Jennifer J. Schulp, and Robinhood CEO Vlad Tenev. Representatives focused their
attention on Robinhood's role in the event, asking Tenev why the brokerage had limited the
trading of some securities and if it had clearly communicated its business model to its
customers. They also questioned whether Robinhood was encouraging its customers to take
excessive risks in order to generate a profit and whether it had the appropriate infrastructure
and funding to handle influxes of new clients. Several committee members expressed
skepticism at the practice of payment for order flow and pressed Griffin and Tenev on the
issue. Representative Brad Sherman accused Griffin of trying to evade his questions. At
various points during his initial testimony and questioning, Gill made references to memes.
Committee members also discussed increasing short-selling regulation.
On March 17, 2021, the Financial Services Committee held a second hearing, which
focused on the regulation of payment for order flow and gamification of investing.

Lawsuits
A Robinhood customer filed a class-action lawsuit against the company on January 28,
2021, for halting trading on GameStop. The lawsuit, which was filed in the United States
District Court for the Southern District of New York, claimed that Robinhood "purposefully,
willfully, and knowingly removing the stock 'GME' from its trading platform in the midst of
an unprecedented stock rise thereby deprived retail investors of the ability to invest in the
open-market"; the lawsuit also accused Robinhood of "manipulating the open-market".
Several other investors began using the app DoNotPay to automatically join the lawsuit.
A second class-action was filed in the Northern District of Illinois claiming that
Robinhood's decision to halt trades of BlackBerry, Nokia and AMC was made "to protect
institutional investment at the detriment of retail customers". Similarly, a man in Colorado
filed a federal lawsuit against Robinhood as well as Citadel, Charles Schwab, Interactive
Brokers, Open to the Public Investing, TD Ameritrade, and Webull, alleging he "was forced
into a situation by which he was essentially forced to sale his equities at a drastically reduced
position given the new market condition set by these supposedly neutral brokerage houses,
taking significant losses and being incapable of trading in these publicly held equities that he
had performed significant due diligence and research on, and relied upon over the course of
his job as a day trader." As of February 2, 2021, Robinhood was facing 34 separate class-
action lawsuits. In January 2022, a federal court ruled that investors could not pursue
negligence and breach of fiduciary duty claims, citing Robinhood's customer agreement
which allowed for restrictions on trading. The same judge had previously dismissed a lawsuit
alleging that there was collusion between brokerages and Citadel Securities.
A lawsuit was filed in a court in Massachusetts by securities class action firm Hagens
Berman Sobol Shapiro on behalf of an investor against Keith Gill. The suit alleges Gill
misrepresented himself as an amateur investor to inflate the stock price.
Regulation
On February 8, 2021, the U.S. Securities and Exchange Commission released a sample
letter providing guidance to companies seeking to raise capital during periods of "extreme
price volatility". It requires that companies outline the related risks in their financial
disclosures and encourages companies to contact the SEC prior to launching such offerings.
In reaction to the short squeeze, some Democratic politicians have expressed support
for a financial transactions tax, arguing that it would raise revenue and curb speculative
betting.
In June 2022, a 140-page report released by the United States House Committee on
Financial Services called for the Securities and Exchange Commission and the Financial
Industry Regulatory Authority to craft new rules to address market risks highlighted by the
events of January 2021, including a liquidity rule and framework governing liquidity
planning for clearing brokers.

Reactions
A variety of politicians and commentators across the political spectrum made
statements in support of those driving up the price of GameStop and other stocks, as well as
against Robinhood and other companies' decision to limit these trades, including
Representative Alexandria Ocasio-Cortez, Senator Ted Cruz, Representatives Ro Khanna,
Ted Lieu, and Rashida Tlaib, Fox Business host Charles Payne, and conservative political
commentators Rush Limbaugh, Ben Shapiro, and Donald Trump Jr.
Senator Elizabeth Warren criticized both the short sellers and the buyers and argued that
more regulation was needed. She stated that the large investors and hedge funds who were
criticizing the rally "have treated the stock market like their own personal casino while
everyone else pays the price". She also called for stronger regulatory action from the U.S.
Securities and Exchange Commission "to ensure that markets reflect real value, rather than
the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on
those traders."
In an interview with CNBC, Massachusetts Secretary of the Commonwealth William F.
Galvin criticized the investors' behavior as based on reckless speculation and called for a 30-
day suspension of trading GME stock, stating "I think we've all recognized the current
pandemic has created a unique situation where many have gotten into day-trading and really
have no idea exactly what they're doing ... I think small-time investors like that,
unsophisticated investors, are going to be hurt by this." In another CNBC interview joined by
Canadian businessman and Shark Tank investor Kevin O'Leary, O'Leary disputed Galvin's
assertions, saying that real-world education was positive; that the risk of being targeted by
"social media vigilantes" would dissuade hedge funds from aggressively selling short stocks;
and zero-commission brokerage apps such as Robinhood had sparked a growing interest in
retail investing.
On January 28, New York State Comptroller Thomas DiNapoli told reporters that the
state pension fund, which had 647,500 shares in March 2020, had sold off hundreds of
thousands of shares since then, benefiting from the squeeze.

Sources
1. https://en.wikipedia.org/wiki/GameStop_short_squeeze
2. https://internationalbanker.com/brokerage/gamestop-what-happened-and-what-it-
means/
3. https://time.com/6312307/gamestop-meme-stocks-dumb-money/
4. https://www.cato.org/cato-journal/fall-2021/gamestop-episode-what-happened-
what-does-it-mean#game-stop-goes-crazy-in-an-interesting-way
5. https://www.vox.com/money/2023/9/15/23873474/dumb-money-gamestop-stock-
keith-gill-melvin-capital-review