A very interesting phenomenon is happening with the stock market curves of popular video game retailer GameStop in the US. Almost stagnant below $20 beginning of this year, the stock hit $347 on January 26 and then the tumbled 43 per cent to $197.44 two days later after reaching heights of $483 earlier that day. The next day, the GameStop stock continued its upward journey as retail brokerage firms eased some of the trade restrictions as they came under immense public pressure.

The see-sawing in the markets highlighted the migration of trading online, where chat rooms and social media are now gradually playing a bigger role in driving trades and apps make the process of buying and selling stocks feel seamless for individual investors who don’t do so professionally. In spite of the stock having no presence in India, of larger interest is the impact of a cocktail of social media and trade calls and their influence on stock behaviour.

Before getting into issues of right and wrong, let us first summarise in layman’s language, what really happened that the stock became so meme-worthy? A hedge fund had taken a huge short bet on the GameStop stock, that is, it had sold the stock without owning any of it in the belief that the price would fall and the fund would be able to close the transaction at a profit.

Sqeeze of funds

It so happened that a redditter on r/wallstreetbets noticed these transactions and convinced others on the thread to buy GameStop stocks, resulting in the stock price soaring. Eventually, the soaring prices pushed the hedge fund’s losses to over $13 billion which happened to be the net worth of the fund. As the hedge fund neared bankruptcy, the retail investors on the thread turned their attention to other hedge funds with massive short exposures and started buying up those stocks.

What these small investors were doing was putting a short squeeze on the funds, something that is a standard operating procedure that the institutions do. But now these very institutions are out there screaming about the illegality of it all. The media, on the other hand, has dubbed this as an individual-investor-led crusade to incinerate bets from big hedge funds. It’s interesting to note that a large volume of these trades was led by call options.

All of a sudden, the so-called democratic broking apps started putting pressure on retail investors by limiting their ability to trade. Interactive Brokers and the popular app Robinhood drew a backlash after restrictions were put on the GameStop and a few other stocks. The moves by Interactive Brokers and Robinhood follow TD Ameritrade’s decision a day earlier to put restrictions on “some” transactions in the GameStop stock and other securities. That meant that customers couldn’t place new options trades on those names.

The new rules also required that taking long positions on those companies will require 100 per cent margin, and short positions will require 300 per cent margin. However with strong protests from all corners, including the warning of a US Congressional enquiry, a day later Robinhood again allowed trading on the stock with some restrictions.

The public opinion though has been completely with the revolutionary traders. The overwhelming opinion of the social media users pointed out the hypocrisy and double standards of the platforms that believed that only large institutional investors could decide the fate of a stock. Many pointed out that the people who were complaining about the irreverent gambling by the small investors in the market were after all the same people who had through their irresponsible gambling, run the economy to the rocks and had been promptly bailed out despite that.

Most agree that trading restrictions by the platform would end up hurting the small investor and subject the platforms to multiple class action suits. Importantly such moves make a case of partiality and unfair trade practices.

While the social media community goes about milking the moment with timeless tweets, one cannot but be drawn to this new phenomenon of digital profligacy. The power of social media has been magnified and how it has built up crowd-sourcing as a viable business model. This same power of the crowd could be used as a retributive tool by the public in the stock market. But when one looks closely, it is not that hard to do.

After all, brokerage houses putting up stock picks on business channels is nothing but the same price manipulation being done in an established fashion. The same process has been co-opted by the reddit thread. In a world where trading is moving online and stock tips are passed on in shady chat sites, this seems to be the next logical step up the evolutionary ladder.

The writer, former India head of General Dynamics, writes on cyber policy issues.

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