The Game Stopped!?!? A call for action

January 28th 2021 will be remembered by many as a day of infamy. I was granted the opportunity to witness history being made.

In case you are totally lost, here’s the background. GameStop (ticker GME) is a brick and mortar store that sells video games in the USA. It hasn’t been doing so well for good reason. If you are an investor in the 21st century, you should know by now that a physical store is an inefficient channel to access your customer from the perspective of capital utilization. This is especially true in the video games industry, where the costs of online distribution is practically nil.

Due to its brick and mortar baggage, GME is a company with poor historical results. Nevertheless, in the past year, new leadership was installed. Some changes were implemented and the dying company has been given the chance to become a turnaround story, blah blah. So far, GME is just another boring corporate story.

Given a bad track record coupled with a poor macro economic outlook, some investors reasonably believed that GME stock should be lower and shorted it. This is where things get interesting. The problem was, the short sellers went overboard. GME was so severely shorted on the market that it was a tinderbox waiting to be lit. And boy, it was spectecular when lit.

On 31st December 2020, GME’s stock price was around US$19. Just 27 days later, it closed above US$347. The situation is still evolving as we speak. If you want to understand the full mechanics of how it happened, you can read it at The Financial Horse’s article. What I want to cover is far more twisted.

On the 28th Jan 2021, multiple brokerages blocked us retail investors from buying of GME stock. Yet they allowed us to sell. This is massive news. What could be the reason for this decision? I have 2 competing theories.

The Benevolent Broker Theory

Some brokerages explained that they were just trying to protect retail investors from a stock mania. Interesting.

I really appreciate your kind consideration for my financial well being, sirs. You letting us have the option to buy shares in NKLA, a company with no product, plenty of promises and a deceptive marketing campaign, must have been a temporary oversight. Not banning Tesla’s stock after its 9 fold increase must have been a similar error. I look forward to seeing these stocks banned from retail buying as well.

I remember all those scary days when everything was crashing. I suppose you guys must have been asleep on the job in March 2020. When my family and friends were selling into the panic, you must have forgotten to protect them.

Don’t worry. I thank you for your kindness and I won’t fault you for the times you fall short.

The Predetermined Results Theory

Usually, when the major exchanges want to protect investors from extreme volatility, they declare that trading is halted for everybody. This is to let emotions calm down. In the GME saga, brokers declared that you can only close your positions.

Remember, in every market transaction, there must be a buyer for a stock that was sold. Since brokers allowed retail investors to sell GME stock, who exactly are the ones the brokers allowed to be the counterparty to buy up the shares sold? It wasn’t me since they blocked all retail investors from buying.

Could it conveniently be the hedge funds that went too far with their short positions?

Could it be the brokerages themselves front running the transactions?

Whoever it was, the winners are anyone but retail investors.

Closing Remarks

US politicians across the aisle remarkably have finally agreed that something is twisted in their financial system and are investigating. Whether it was a case of gross incompetence, naked corruption or something else, I hope they make up their own minds and apply the right punishment to the right people.

I wasn’t affected by this move, because in general I don’t participate in meme stocks or active trading. I am however scared of what this precedent sets for the future. Will my stock holdings be arbitrarily suspended by my broker at a time of their choosing?

I am not sure. I will be watching developments in this case closely.