What Happened During the GameStop Hearing?

The Game stop hearing has certainly raised a lot of questions surrounding investment and the way that ordinary people can change the economic climate. The wide ranging hearing lasted over 5 hours and saw investment platforms criticised for their role in the GameStop rush on stock which took place in January 2021.

The GameStop rush inflated the price of stock for a few days and almost crashed the stock market. Today GameStop stock has plummeted by 80% so anyone who felt they could get rich by playing the markets, without understanding any of it, have certainly lost the bulk of their investment.

Robinhood the trading app at the heart of the trading frenzy was singled out for special criticism. 

Company CEO Vlad Tenev had to apologise for Robinhood’s performance during the crisis, including the policy to restrict trading in stock of GameStop and other largely overlooked companies which were targeted by amateur traders organizing on social media. 

The decision, and similar ones by other online brokers, interfered with the integrity of the trading process. It caught the wannabee investors off guard, and drew a rash of lawsuits, provoking outrage from lawmakers in both parties.

The Game Stop hearing featured testimonies from all the major players. Keith Gill the trader known as roaring kitty on YouTube who started the whole frenzy, Reddit co-founder Steve Hoffman and the CEOs of major investment companies including Citadel and Mervin Capital all faced criticism and are likely to face further investigation by the law makers. 

However it was Robinhood and Vlad Tenet who were singled out for most of the blame. According to the Court, Robinhood has been the company to profit most from the Game Stop mania because the app makes it money from transaction fees. These are hidden from the customer, creating the illusion that Robinhood enables trading for free. 

Republican senator Cindy Axne (D-Iowa) was among those who called the arrangement a conflict of interest that disadvantages the users Robinhood says it exists to empower, Saying to Tenev that” the app’s users “aren’t your customers, they’re your product,”

Tenev acknowledged that Robinhood generates the majority of its revenue from the deals but disputed Axne’s characterization, arguing its business model “has become the industry standard for a reason. It’s because it’s good for customers,” and allows them to trade for free. “

This fact was disputed in the court for a long time getting nowhere as Tenev defended the Robinhood business model and the senators insisting that it was misleading to customers.

A more sombre note entered the courtroom when Tenev was asked about the tragic death of a 20 year old customer last year. Alex Kearns died by suicide last year after being hassled by Robinhood for having a negative balance of $703,000 and being faced with a bill of $178,000. It turned out that this was an accounting error but despite Kearns trying to contact Robinhood he was unable to reach out and eventually took his own life.

How Did GameStop Stock Rise and Plunge So Suddenly in Early February?

GameStop is a well-known fixture of the US Shopping Mall, selling video games, consoles and other gaming paraphernalia. And because the Coronavirus has forcibly closed the stores plus gamers tend to buy online and download games direct to their computers, it has been likened to the Blockbuster Video rental stores and HMV.

The feeling on the street was that GameStop’s days were numbered because the store is increasingly looking like an anachronism. After all why bother leaving your room to go to the store when you can buy your latest game or latest piece of tech online, along with your pizza?

At the beginning of February, something strange started happening with GameStop stock. Everyone started buying GameStop stock in a move that has been described as the storming of the Capitol in January. The rush to buy GameStop stocks was fuelled by gamers’ favourite forum Reddit and quickly spread across the internet.

The prime mover in the GameStop buying craze was started by Reddit user and industry watcher Keith Gill. His rationale for buying stock in Game Stop was that the company had underlying strengths such as a loyal customer base and reward system plus a new set of board members with a background in ecommerce. He felt that the falling price of GameStop shares made the company a good choice for investment so passed this on to Reddit users.

This was not the reason why GameStop stock went through the roof. Most people buying GameStop did not consider the reasons for buying, because it became a movement, similar to a meme and the craze affected people who had never previously considered buying stocks and shares but wanted to get in on the action.

Many gamers found it amusing to invest in GameStop and like the storming of the Capitol, it seemed to represent an idea of “sticking it to the man” in a populist idea of gaining control over the stock market.

The GameStop buying frenzy has had a negative effect upon the companies who bet on GameStop’s failure. Instead of reaping the profits of shorting GameStop, investment companies such as Melvin Capital lost billions of dollars overnight. Do we care? Not really. How does this really affect any of us “ordinary “people and benefit the economy?

The stock market is always volatile and unpredictable. And although many people invest in a company based on knowledge of market trends and political upheavals, the way the market moves is often driven by feelings and desires that cannot be rationalised.

The rise of GameStop is probably over now, and the wave of investment has slowed. Will any of these amateur investors make money from their GameStop shares? It is impossible to say.

Robinhood an investment brokerage has been accused of encouraging amateur investors to invest via their app which works pretty much like any gambling app on the market with lively graphics and gamification. Is this a bad thing for the economy? Stocks and shares is a gamble and has been likened to a game so why not make it accessible and fun for everyone?

One interesting point about the GameStop craze is that it completely derailed the established stock market for a few days.  If it has made the establishment nervous, all those Game Stop investors will probably think it has all been worth it.