GameStop stock prices is not a vindication of the company’s health rather it is a reflection of the battle of the investors. What basically happened is that investors on the WallstreetBets bought in all the shares when the smart money was shorting to a level that there were no shares left in the market to be traded. The hedge funds(Melvin Capital and Citron) had borrowed the shares that they sold in the hope that eventually when the price of the stock falls, they would purchase them at a lower price and so the difference would have been their profit margin. Instead, what happened is that subreddit WallstreetBets investors kept on buying the shorted shares until a time when the loaned shares that must be returned were greater in number than the actual shares for trade in the market. Now, this has lead to a Reddit v Wall Street battle where the ‘short-sellers’ are helpless since, the longer the WallstreetBets investors hold on to their shares, the higher the prices of GameStock will be. (Good, 2021)

QAnon: The Start of an Era in Anonymity

The QAnon is basically a chain of posts that were made anonymously and posted on 4chan, a message board. The person who posted this series had signed off as ‘Q’ and hence the name QAnon. These posts were known as ‘breadcrumbs’ and were pro-trump posts. QAnon army believes that Donald Trump is waging a war against the paedophiles of the government, media and business. They describe themselves as “people who love the country”. (Wendling, 2021)

The main concern with online forums like 4chan is anonymity. Since people can post anything and not be held accountable for it, they forget the difference between right and wrong. It has led to mass manipulations by such people who in the darkness of such online forums can put forth their destructive and unproductive opinions and influence atleast hundreds of thousands of people. In this age of social media influencers and the over accessibility of internet, the people are easily distracted and mislead in a lot of ways.

The QAnon posts and its supporters were eventually banned from many big social media platforms, but the harm was already done till then. QAnon has created many unproven conspiracy theories which are believed by many supporters of QAnon without having asked questions about its authenticity.

QAnon supporters create abusive hashtags and posts against people that they perceive as enemies or people who they do not consider as the true people of the nation, mostly important politicians, journalists etc. This is not only an online threat but also an offline threat to the life of many such people. Many QAnon supporters have also been arrested after such hateful posts. The QAnon supporters are relentlessly posing threat to the society in general and one of the main reasons of doing so is that Mr. Donald Trump had himself retweeted some posts of QAnon, which shows that in some way or the other QAnon has got the support from Trump and even his son had posted QAnon memes during the elections. (Wendling, 2021)

Another QAnon supporter, Marjorie Taylor Greene of Georgia was elected in the US Congress in November. It is rather shocking that such extreme posts and hashtags are being supported by influential people in the US which can perhaps lead to mass destruction of the community as a whole.

All of this could have been controlled if online forums like 4chan did not have the feature of posting anything anonymously. It gets especially difficult to culminate a wrong action if people cannot be held accountable easily for their actions.

GameStop Shares Sold by Robinhood: An Intentional Mishap

Robinhood is a stock trading platform founded in 2013. Recently, Robinhood was in controversy as a number of its users accused the platform to have sold their shares without taking permission from them.

During the last week, many customers of Robinhood posted screenshots on Twitter and other social media platforms claiming that the trading company automatically sold their shares at a low price lower than the price list. (Eric, 2021)

On 28^th January 2020, two users of Robinhood claimed that it had restricted the transactions of GameStop. Robinhood had basically restricted investors to buy shares of GameStop so as to facilitate short selling hedge funds in their tiff with WallstreetBets. Robinhood had further stopped the users to trade on stocks of AMC, GameStop, Blackberry, Bed Bath & Beyond, Nokia etc. Customers who owned shares of these companies were only given an option of selling their existing shares.

These claims have resulted in negative reviews of the trading company on google which lead to a fall in its rating from 4.2 to 1. Later google deleted a good amount of negative reviews to restore its rating at 4.2. There is already a lawsuit filed against Robinhood which claims that the trading company has tried to manipulate and therefore control the market through its actions and that it’s a clear violation of the functioning of the market. (Mathur, 2021)

On the other hand, Robinhood denied of all these claims and the spokesperson of Robinhood has claimed that they had to sell some of the shares to reduce risk since the shares were bought at the margin, whereas the investors have claimed that they bought the shares outright and planned to hold on to them.

Billions of Dollars at Risk: Who Faced the Actual Loss?

As developed from the above, the investors who have faced the loss is perhaps Melvin Capital. This is because they sold the borrowed shares that actually have to be returned at a price that they thought is higher than at what price they would have to buy. But the opposite happened. So here is the fiasco we are talking about. Now they have no option other than buying all the shorted shares in order to return what they borrowed. But since even that is not possible the other option is to sell off everything in the open market. (Good, 2021)

So, Melvin Capital had to take up a huge loss when they closed up their short position on the 27^th of January. Although the exact loss is not known the investor had taken a cash infusion of $2.75 billion from two investment banks to keep itself away from dissolving in the US stock market.

Citadel to the Rescue After the Loss Incurred by Melvin Capital

Citadel funds have invested $2 billion and the rest $750 million will be invested by Point72 Asset Management. They have planned to invest in Melvin Capital in return of a non-controlling revenue share in the hedge fund. Although many investors had given up on short-selling bets, Gabe Plotkin, the owner of Melvin Capital still has his hopes for short selling, even though he has had a bad time in it this year. Ken Griffin, the founder of Citadel has rather shown his confidence in Gabe Plotkin as he says in one of his statements that “Gabe Plotkin and the team have delivered exceptional results over the history of Melvin,”.

Plotkin has shown great interest in working harder with his team to live up to the expectations and the confidence shown to him by both his investors. (Burton, 2021)

Citadel’s Association With Robinhood Receives Scrutiny

Robinhood has spent years to form a relationship with the big market investors called the ‘market makers’ to receive real-time information about their investors and which stocks its users are buying or selling. The online trading app receives a large number of revenues from Citadel Securities. However, after the entire fiasco of short selling, the relationship between citadel and Robinhood is under scrutiny or rather a criticism. (TORBATI, 2021)

This scrutiny has happened after Robinhood has limited trading of certain stocks, namely GameStop stocks. Several Reddit users have accused Citadel founder Ken Griffin to have pressurized Robinhood to limit trading of GameStop shares in order to prevent further losses incurred by the short-sellers. This is because Citadel is an investor of Melvin Capital, the short seller here in context, to avoid any losses further. Reddit users have taken on to Twitter to accuse Robinhood of giving in under the pressure of its big business partner, Citadel as Robinhood does not charge its users so its revenue highly depends on such big companies as Citadel. (TORBATI, 2021)

Since Robinhood is not directly involved in the trading of shares but it provides information to its partners in return of a small fee and privilege to give its users the best prices for trading in the market. However, later in a post, Robinhood has denied the accusations and said that it was a risk management decision to limit trading of shares.

However, it has also taken a political turn as congress has decided to examine Citadel’s agreement with Robinhood and if there is any manipulation of the stock market by the two business partners. Critics have also said that there is a possibility of hidden tax in this entire context. Overall, the recent developments in the stock market of the US has led to increase in the scrutiny of such business relationships to check if such partnerships are hurtful for the average investors in the market. (TORBATI, 2021)

Conclusion: How Can This GameStop Story Probably End?

The entire issue occurred due to the expectation of one investor based on the normal trading behavior of other investors. The stock market simply works on the lines that there will perhaps be a priced to the share than an investor cannot say no to and eventually one has to lose or win. But here the WallstreetBets investors were refusing almost any price to it. In such situations, the other party has to only go through losses. What can perhaps be taken care of, is a better look at the market and opportunities since human behavior can perhaps be very unpredictable.

References

Burton, K. (2021). Citadel, Point72 Back Melvin With $2.75 Billion After Losses. Yahoo! Finance.

Eric, J. (2021). Users accuse Robinhood of automatically selling shares. Insider Paper.

Good, O. S. (2021). GameStop’s stock market explosion, explained. Polygon .

Kastrenakes, J. (2021). Robinhood denies claims that it sold GameStop shares out from under its traders. The Verge.

Mathur, C. (2021). Robinhood reportedly sells GameStop shares without permission from traders. NewsBytes.

TORBATI, D. M. (2021). Robinhood and Citadel’s relationship comes into focus as Washington vows to examine stock market moves. The Washington Post.

Wendling, M. (2021). QAnon: What is it and where did it come from? BBC News.

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“Everybody is a genius in a bull market” — Mark Cuban 

What is a Bubble? 

A bubble is an economic cycle driven by sentiments leading to the rapid growth of index valuation, followed by a sudden downfall. Due to the increase in prices, investors refrain from parking their money in the equity market. This results in a huge sell-off causing the bubble to deflate. This increase in index valuation is dependent on various factors. 

What Might Be the Possible Factors Fuelling the Rally? 

● High Liquidity:- A sudden halt experienced in business activities generated unemployed capital. Businesspersons diverted this unused cash in hand towards equity markets resulting in an increase in demand. They viewed the continuous extensions of the lockdown as a financially gainful opportunity and thus increased investment in the equity markets. Banks were directed to increase liquidity in the economy as well. 

● New Investors:- The interruption of the activities of the tertiary sector and academic institutions created a new group of investors. College students, working professionals and business persons alike started investing vigorously in a not-so-risk-free equity market. DEMAT account openings witnessed a sudden rise of 22.9% in the current year. In India, 

the number of DEMATs accounts has now rallied to 4.9 million. New to the scenario, these investors who have little to no knowledge of stock market operations, blindly followed the bull-run and contributed to the rally. 

● Global Sentiments:- Indian markets have always closely followed the American markets. The Federal Bank of USA has been keen on increasing liquidity in the American economy. Resultantly, NASDAQ and DJIA have reached record highs. Indian stock market has been following the path and now witnessing a continuous rally like their American counterpart. 

● The hope of reopening:- In the initial stages of the imposition of the lockdown, it was forecasted that development would impede for 6-8 months. Panic selling caused equity markets to go haywire. Duly, the indices hit two lower circuits in a single week and wiped out almost Rs. 14.22 Lakh Crore from the equity markets. Remarkably, the economy started getting back on track within a couple of months and the businesses started functioning. Therefore, the equity market went on to correct itself and retraced almost 67.30%. 

Despite these positive sentimental events, the stock market is fundamentally weak and might run into correcting itself soon, causing a fall. 

When Can the Fall Come? 

The ‘Dot Com’ bubble lasted for almost 5 years from 1995 to 2000 which indicates the unpredictable time frame of the crash. Likewise, the stock market might take more than a few days before correcting itself, especially due to the recent vaccine development speculations and hopes of economic recovery. 

What Could Lead to the Fall? 

• Trade War:- China and U.S. are in the midst of a trade face-off. The two superpowers have been in a tussle for a while and any further sanctions might lead to a global breakdown. 
•  Failure in Vaccine Development:- One of the major reasons for the rally in the equity markets was based on hopes of early vaccine development for COVID-19. If the major companies like Pfizer fail do develop the vaccine, a huge sell-off may occur leading to a crash. 
•  Indo-China Clash:- NIFTY 50 had shed almost 150 points in 20 minutes on 16/06/2020 when the news about border tensions between India and China first broke out. This indicated how equity markets reacted to such news. While the situation is stable now, any further actions on this front by either government may break the equity market. 
• Lockdown:- Indian economy has managed to survive the previous national lockdown and the subsequent extensions. Now, the government is posed with the choice of choosing between saving its people or saving the economy. Although a complete lockdown might be required to stop the spread of the virus, further extensions might break the backbone of the Indian economy, potentially leading to a huge crash. 

Indicators of Reversal 

• Fibonacci Retracement shows that the markets might reverse from 11,382 and might go down to 10800, 10350 and might even break to 9900 levels. The markets have already corrected more than 67% and a reversal is on cards. 
• Fundamentals suggest a huge turn around in the markets. With Q1 earnings release round the corner, sentiments can weaken which could be devastating for the markets.
• Shiller PE Ratio The cyclically adjusted price-to-earnings ratio, commonly known as CAPE, Shiller P/E, or P/E 10 ratio, is a valuation measure usually applied to the Indices. It is defined as price divided by the average of ten years of earnings, adjusted for inflation. 

Conclusion

In the coming quarters, there is a risk of GDP growth rate in India taking a negative turn. The sentiments will be conclusive in shaping the equity markets. In addition, vaccine development, economic recovery and global cues might well decide the course of the markets. 

Technical and fundamental analysis of the Indices indicates a potential reversal. Buyers must remain cautious now. 

The indices usually correct themselves abruptly. In such cases, blind investors often get trapped. Consequently, any investment should be made cautiously and any directional trades should be hedged appropriately. 

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