GameStop Power To The Players

Journal of Insurance and Financial Management, Vol.
6, Issue 4 (2022) 95-116
GameStop: Power to the Players?

John H. Stiebel a,*
a
Heinrich-Heine-University Duesseldorf. Research Assistant at the Chair of Financial Services, Germany
ARTICLE INFO ABSTRACT

Article History Having a look at the GameStop share very recently
Submitted 17 Jan 2022 raises the question of how such a phenomenon of
Accepted 23 Jan 2022 enormous price explosion can arise. Technological
Available online 22 Jun 2022
and financial innovations such as the internet and
JEL Classification commission-free trading platforms entail the
G12 emergence of new phenomena that were previously
G14 unknown and unimaginable. Since dueling
G41 narratives surrounded the stock’s future
opportunities which are reflected in investor
Keywords expectations, one community in particular stands
GameStop
out as the traditionally uncoordinated and retail
Short Squeeze
Pricing Anomalies investor-driven side. In this context the subreddit
Herding behavior wallstreetbets became very prominent recently, as it
is clear that many investors have coordinated their
activities there. This short paper argues in a case-
based research manner that a novel configuration of
driving influence factors has led to this novel
phenomenon which reveals that private investors
can now participate in trading activities which were
previously reserved for professional investors.
Journal of Insurance and Financial Management
*Corresponding Author:
john.stiebel@hhu.de
Acknowledgement: I would like to thank Benjamin Schröder and Yannic Neuhaus for their helpful suggestions.
Author(s) retain copyright of the submitted paper (Please view the Copyright Notice of JIFM).
This work is licensed under a Creative Commons Attribution 4.0 International License.
Journal of Insurance and Financial Management (ISSN-Canada: 2371-2112)

96 Stiebel J. H. / Journal of Insurance and Financial Management, Vol. 6, Issue 4 (2022) 95-116
I. Introduction
The price of GameStop shares exploded in the wake of a short squeeze from USD 18.84
at the end of 2020 to a maximum of USD 483 on January 28, 2021. To approach the
phenomenon of the so-called GameStop short squeeze, the terminology must first be clar-
ified, which will be done using an example from the recent past. One prominent concerted
"squeeze" of short sellers was the so-called "Volkswagen short squeeze" in October 2008
(Allen et al. 2017). Back then it was rational for Hedge funds to hold massive short posi-
tions of the Volkswagen share, meaning that they expected falling prices per share. In a
short sale, securities are borrowed and sold, only to be bought again at a lower price and
returned to the lender when the price has fallen, and the expectation has materialized. At
the same time, Porsche announced the takeover of Volkswagen and consequently, when
Volkswagen’s share price rose after Porsche’s announcement, many short sellers had
trouble buying Volkswagen shares to cover their short positions. Expiring short options
then cause a positive feedback loop, as short sellers have to buy the scarce shares at al-
ready increased prices, so that the price rises enormously and eventually spikes.
Volkswagen was thus briefly the most valuable company in the world in terms of market
capitalization as the price spiked at EUR 1,005 (market capitalization of EUR 296 billion
or USD 370 billion). An event like this is known as a "short squeeze". When looking for
more examples of short squeezes, one comes across names like Tilray in 2018, Phunware
in 2019, as well as others. These examples will not be discussed in detail. Though looking
at Volkswagen’s share price in October 2008 might give a similar impression to the de-
velopment of the GameStop stock in January 2021, the present case of the 2021
GameStop "short squeeze" is fundamentally different from the Volkswagen case and
needs to be clearly distinguished by the parties involved.
Neither the concerned company, GameStop Inc., nor any of its related companies or other
professional investors are involved in the short squeeze as main drivers. Instead, a new
phenomenon is emerging: an economically troubled games retailer is sold short by hedge
funds and opposing, decentrally organized users of an online forum who represent the
traditionally uncoordinated and retail investor-driven side "fight" against it. This phenom-
enon is accompanied by both financial and technological innovation.
Since there are research approaches that are particularly suited to making new phenomena
tangible, a case study research approach according to Eisenhardt (1989) seems appropri-
ate here. She describes the process of inducting theory using case studies and points out,
Stiebel J. H. / Journal of Insurance and Financial Management, Vol. 6, Issue 4 (2022) 95-116 97
that this approach is particularly suitable for areas that are relatively new. In addition, this
approach focuses on understanding distinctive dynamics in individual situations. It allows
to combine various data collection methods as well as different types of data (quantitative
or qualitative). In this case, the application is based on a main observation in which indi-
vidual driving factors are considered separately and become tangible based on qualitative
as well as quantitative information. The idea behind the approach’s claim to be able to
form theory stems from the fact that researchers continuously match theory with data, so
that in an iterative process they ultimately arrive at a result in which theory and data
closely match. In this paper, only one data point is considered, the GameStop short
squeeze. Even if other shares of other companies such as Blackberry, Nokia, AMC En-
tertainment as well as others were subject to similar activities at the same time, the price
increases of these shares resulted from the same configuration of driving factors so that
an analysis of these sub-cases can be dispensed with as only a minimal incremental con-
tribution to the formation of the theory can be expected from them. Following this view,
a kind of theoretical saturation is then reached, which means that incremental learning is
very low, since phenomena are considered that have already been analyzed before (Glaser
and Strauss 1967). As argued here, this new phenomenon can be made more comprehen-
sible using this framework so that this paper ultimately aims to frame the phenomenon as
an observation embedded in a novel configuration of driving aspects. From the case
comes the realization that private investors are now empowered to engage in trading ac-
tivities previously reserved for professional investors, conditioned by the development of
some key drivers. In this context, the diminishing relevance of transaction costs on trading
platforms, which is considered as the financial innovation, should be highlighted. In ad-
dition, Internet platforms exist together with the Internet as the technological innovation,
which on the one hand promotes information diffusion and on the other hand also enables
decentrally organized coordination. Combined with the social phenomenon of herd be-
havior, this results in an interaction of three main aspects, which shows that new "players"
in the capital market must be perceived as existing or at least considered as possible in-
fluencing or even risk factors. The interaction of the main influencing factors is summa-
rized in figure 1.
Figure 1: Novel Configuration of Driving Aspects
The remainder of the paper is structured as follows. First, the performance of GameStop
stock is examined, and the company’s performance is put into context with its large short
positions. Then, implications of commission-free trading are discussed. Before further
perspectives are given, an explanation of herd behavior as a mechanism triggering price
anomalies and the role of the social media platform Reddit follows.
II. The Development of the GameStop Stock during the last years
GameStop Corp. (NYSE: GME) is a US based company that operates as an omni-channel
digital retailer offering games and entertainment products in its more than 5,000 stores
and extensive e-commerce offerings in 10 countries. As the industry generally shifts to
non-physical gaming business which intensifies competition through online environ-
ments operated by Sony (PlayStation Network), Microsoft (Xbox Live), Nintendo (Nin-
tendo Switch Online), Valve (Steam), as well as other online retailers and other major
consumer electronics retailers such as Amazon, Media Markt, Saturn etc., GameStop is
struggling with decreasing sales and an overall decreased profitability. GameStop is fac-
ing the challenge, as they acknowledged in their 2019 financial statement, to "de-densify
their global store base" while competing with companies that are better aligned with the
trend of games being distributed more online and digitally (GameStop Corp. 2019). Not
only general trends and intensifying competition challenge the company, but also the on-
going global pandemic due to which many of the stores have to remain closed. The per-
ceived decline is also echoed in the share price, which reflects the company’s battered
performance and points to the diminishing success of the underlying business model. In
the past the stock was valued at USD 62.50 on 24/12/2007, this high point was followed
by a valley and on 11/11/2013 the stock reached again a local maximum at USD 56.53.
Since then, the market capitalization has increasingly declined since to its minimum at
USD 2.80 per share on 30/03/2020, indicating that GameStop is an expiring business
model. But in 2020, the largest individual investor in GameStop Corp. (12.9 %), Ryan
Cohen, who has experience in building internet platforms, is pushing management to im-
plement a strategic realignment. According to him, the number of physical stores should
be reduced to improve ecommerce instead, as well as to discover more tech-driven busi-
ness opportunities, for example in esports, mobile gaming and streaming. Also, a strategic
partnership with Microsoft continues to fuel the vision of creating the "ultimate gaming
destination" for gamers while being the premier omni-channel customer access point for
video game products (GameStop Corp. 2020). Furthermore, optimism sparked after the
latest generation of video game consoles were launched in November and the demand for
entertainment, in particular games, has increased due to the ongoing pandemic.
GameStop’s stock price was USD 18.84 at the end of 2020. Since there are obviously
competing narratives regarding GameStop’s future, there are many investors who have
bet on falling share prices, so-called short sellers institutionalized in hedge funds, among
others. As reported by Bloomberg, short interest as a percentage of the public float was
exceeding 100 %, so that the short interest was even higher than the shares outstanding.
This is possible when the same shares are lent out again and again for short selling. At
this point, the subreddit wallstreetbets becomes important, as many players were able to
coordinate and collectively "agree" in an internet forum without much effort to buy
GameStop shares as well as options on them in order to put the hedge funds in distress
due to their short positions. One investment fund that heavily shorted GameStop - Melvin
Capital - allegedly lost over 50 % of its value by the end of January 2021 and had to be
supported by other funds with emergency aid (Wall Street Journal 2021). If the short
sellers are forced to cover their short positions because their losses would otherwise be-
come too high, they have to buy the shares on the market at already high prices, which in
turn leads to even further increasing prices. This is called a short squeeze and has been
invoked by the reddit crowd. So, after some hedge funds realized big losses as the stock
price went as high as USD 483 during January 28, it crashed to about USD 45 in mid-
February. As of February 25, 2021, the short interest as a percentage of free float was
approximately 52 % and 20.36 % of the shares outstanding according to Yahoo Finance.
Then, on March 10, the price of the share again reached a local maximum at USD 348.50
and closed at USD 209.81 on March 17, 2021.
Figure 2: GameStop’s share price (USD)
III. The Novel Configuration Driving Aspects

1. The Rise of Low-Cost Trading Platforms (and Implications for Users)
Although commissions for stock trading have declined over time, the advent of commis-
sion-free brokerage has greatly facilitated market access, especially for retail investors.
The fact that there are no commission fees for stock trading naturally raises the question
of how else brokers generate revenue. The online trading platform "Robinhood Markets,
Inc." was the first provider of commission-free trading and generates revenues with a
premium service, lending margins to counterparties, investing uninvested cash in interest-
bearing bank accounts, and debit cards offered in conjunction with a brokerage account
(Robinhood Markets 2021). Robinhood also receives payments for directing orders to
different parties for trade execution. This practice is known as payment for order flow
(PFOF). As Angel (2021) describes common trading venues or exchanges like the NYSE
bring together trading partners and do not take a position in trading themselves. To main-
tain the elaborate computing infrastructure, they charge money from brokers for the mar-
ket orders they forward. In contrast, market makers step in as counterparties to customer
orders and have a willingness to pay brokers to get the opportunity from them. So, market
makers offer to buy from counterparties at their bid price and sell to them at their ask
price which is a little higher, therefore, they gain from the spread between the ask and bid
price, the so-called "bid-ask spread". Obviously intense competition between market
markers reduces this spread. Market makers prefer being the counterparty in small retail
investor transactions because they are typically less well informed than, for example, in-
stitutional investors such as hedge funds. Better-informed counterparties such as institu-
tions pose a risk to market makers, as potentially bad information regarding a stock could
occur after institutions sell large positions to market makers. Therefore, competition
among market makers for retail investors’ order flow is even more intense, resulting in a
high willingness to pay for order flow and the offering of "price improvements" (prices
that are better than the national best bid and offer (NBBO) prices). This ultimately subsi-
dizes commission-free trading which Robinhood formulates as "Rebates from Market
Makers and Trading Venues" (Robinhood Markets 2021). Even if this practice is legal,
the question of a conflict of interest arises on the part of the brokers. Best execution means
that brokers must choose the execution venue that is most advantageous for the customer
and not for the broker itself (FINRA 2021). So, are brokers fulfilling their obligation to
execute customer orders in accordance with best execution principles or are they selling
the orders to the market maker who pays the most for them, regardless of the quality of
order execution. The SEC as a supervisory authority monitors the best execution practices
and fines them if they are violated. Additionally, brokers are obliged to disclose where
the orders are sent and how much a broker is paid (according to SEC Rule 606). However,
it would be interesting and necessary to have information that would allow the evaluation
of the best execution quality of an order for the purpose of monitoring. As Macey and
O’Hara (1997) point out, best execution practices should consider parameters such as
market timing, order size, speed of execution, the commission charged, and the trading
strategy employed. The authors also conclude that individual monitoring on the part of
investors would be too costly. It is therefore necessary for supervisory authorities to mon-
itor these processes. Ultimately, competition between trading venues leads to the costs
associated with execution - as a central assessment measure for the quality of execution -
being kept as low as possible. Nevertheless, as Angel (2021) adds, best execution quality
statistics published by brokers could help investors choose the broker that is right for them
a priori. This requirement should be discussed in further research, addressing efforts to
further develop regulations in the US but also in Europe with MiFID. Since best execution
principles have been known to be flouted at Robinhood before, and the SEC has imposed
penalties for doing so (U.S. Securities and Exchange Commission 2020), it is particularly
interesting in the context of the GameStop story to see whether the principles were fol-
lowed, or whether a lot of order flow was sold to Citadel without authorization. Citadel
is a market maker that participated in shoring up hedge fund Melvin Capital, which
faltered as a result of large uncovered short positions on GameStop, to the tune of USD
2.75 billion. Furthermore, it is of course interesting to see what impact trading platforms
like Robinhood, or Trade Republic in Germany, have on the market in general, assuming
that these platforms are used by private retail investors in particular. Beck and Jaunin
(2021) develop a structural model to quantify this impact and find that Robinhood traders
contribute to over 7 % of the cross-sectional variation in stock returns in the second quar-
ter of 2020. A similar approach would be interesting to answer the question to what extent
the price development around the GameStop share was driven by retail investors or
whether professional investors were significantly involved. Also important are further
efforts regarding whether private retail investors, using commission-free trading plat-
forms, have a quality enhancing or diminishing effect on the market. In contrast to other
evidence, Eaton et al. (2021) suggest that private retail investors using commission-free
trading platforms aggregately act as noise traders and tend to have a degrading effect on
the quality of the market and its efficiency. So, if these investors tend to be noise traders,
then they might tend to be sentiment oriented and participate in herd behavior.
2. Herding Phenomena and Pricing Anomalies

Herding is a widely acknowledged phenomenon in finance and especially behavioral fi-
nance literature and describes the effect that individuals imitate actions of other individ-
uals or align their decisions with those of others (Spyrou 2013). Consequently, investors
trade in the same direction (Nofsinger and Sias 1999) and disregard private information
to follow the current trend instead (Avery and Zemsky 1998). This behavior occurs, for
example, when fund managers fear for their reputation due to poorer performance com-
pared to competitors and consequently reallocate their assets to more successful funds or
funds that follow industry and stock sentiment. In such a situation, fund managers are
exposed to incentives to perpetuate bubbles, since feared reputational damage is greater
if all other managers make correct investment decisions while one is wrong than if all
make wrong decisions (Scherbina and Schlusche 2014) This phenomenon is also referred
to as the "dumb money" phenomenon because the (predicted) long-term returns on in-
vestments in securities with high sentiment are lower (Frazzini and Lamont 2008). In a
stylized model in which two diverse managers compete, in equilibrium the decisions of
the "first mover" are adapted, regardless of their own private information. Although the
incentive to anticipate herd behavior diminishes when managers are interested in their
own performance and not only in maximizing their reputation, the model provides insight
into mechanisms that threaten to reinforce bubbles (Scharfstein and Stein 1990).
As Chiang and Zheng (2010) put it, herding describes the correlation in trades resulting
from interactions between investors. These correlated trades can affect whole populations
(Bikhchandani, Hirshleifer, and Welch 1992) leading to severe asset pricing anomalies
like asset price bubbles (Chiang and Zheng 2010). The notion of a speculative bubble is
the subject of a long-standing controversy and, on the one hand, is rejected outright by
proponents of the market efficiency hypothesis, while other economists certainly
acknowledge its existence (O’Hara 2008). The most commonly used and operationally
useful definition of a speculative bubble is a persistent and significant deviation of the
price of an asset from its fundamental value, defined as the risk-adjusted present value of
all expected future cash flows (Brooks and Katsaris 2005; Tirole 1985; Scherbina and
Schlusche 2014). Research regarding the identification of speculative bubbles offers a set
of various methods, but the possibility of using unit roots or "mildly explosive" processes
to test for bubbles has become very feasible through the "sup ADF" test and the general-
ized version, the "GSADF" test, which were introduced by Phillips, Y.Wu, and Yu (2011)
and Phillips, Shi, and Yu (2015) respectively. Thereby sequences of recursive augmented
Dickey-Fuller (ADF) unit root tests with variable window sizes are implemented. The
generalized version (GSADF) extends the sample coverage by using the double-sup cri-
teria of recursion over a range of flexible windows (Phillips, Y. Wu, and Yu 2011; Phil-
lips, Shi, and Yu 2015). Applying the GSADF test to the inflation-adjusted price-dividend
ratio of the GameStop stock reveals a massive bubble even at 1 % significance level as
can be seen in figure 3. According to Datastream GameStop payed an (annualized) divi-
dend of USD 1.52 per share until end of May 2019. Since GameStop has not paid a divi-
dend since, the last dividend of May 2019 is extrapolated over the entire time series which
is a very conservative approach in view of the global pandemic and the resulting sharp
drop in sales, but which is primarily due to the feasibility of the method. The data for this
test are all from Datastream. So, since GameStop’s stock price was obviously subject to
massive overvaluation and herd behavior is a mechanism that can explain such a devel-
opment, the following provides an attempt to understand the herding phenomenon around
GameStop stock even better.
Even if herding is widely recognized as irrational behavior decreasing market efficiency,
there exist situations in which herding is at least similar to rational decision making. How-
ever intentional herding can be promoted by (irrational) incentives even if such a decision
is not supported by fundamentals at all (Bekiros et al. 2017). Additionally, there is the
related phenomenon of herd mentality or group-thinking, where certain views or percep-
tions regarding information and risk can be moderated by social, psychological, and in-
stitutional channels. The amplification of risk takes place in the information transmission
stage e.g., via media, where each message possesses not only factual content but also
symbolic content. This information transmission also depends upon the structure of the
underlying information network and as Olsen (2011) points out, if this network is a “small
world” with many “weak” ties, information travels fast while being subject to considera-
ble amplification. Investors who are part of networks are well connected through the in-
ternet and share homogeneous expectations and beliefs about risks (Bekiros et al. 2017).
Figure 3: Bubble Period in Price-Dividend Ratio, GSADF and 1 % Critical Value
3. An Internet Community on the Rise

Reddit is a community-driven platform for submitting, commenting, and rating links and
text posts. Its impact has grown exponentially since its founding in 2005 and evolved to
a large platform covering many distinct sub-communities with specialized interests and
topics (so called subreddits). Since the reddit community reinforces its own user-gener-
ated content it has changed from being an open gateway to the web to being an
increasingly self-referential community (Singer et al. 2014). The platform combines char-
acteristics of social media platforms where content can be shared in networked groups
(Boyd 2010) with those of internet message boards where users act anonymously, sub-
jects are specified, and volunteer moderators (Baym 2000) enforce something like the
integrity of a subreddit. Reddit incorporates a "karma" system which enables users to vote
on content so that a "net" score, the "upvotes" minus the "downvotes", influences the
visibility to others. The individual user’s karma from submissions and comments is em-
bedded in their profiles. Many subreddits are subscribed by millions of users. The mod-
erators are among the users, but they can be recognized by their name highlighted in
green. (Volunteer) moderators fulfill a direct role of governance as they can "flag" a post,
block users, delete comments or reject submissions and therefore constitute an effective
feudal governance structure (Squirrell 2019). Moderators face the problem that on the one
hand subreddits with an increasing number of users also gain a higher rate of spam, re-
petitive or low-quality posts. On the other hand, if the governance exercised by modera-
tors is too strict, they risk losing many users since users can participate in several subred-
dits with a single account (Massanari 2015) and easily switch to different subreddits. This
creates a sensible user-moderator-relationship (Squirrell 2019). Squirrell (2019) addition-
ally emphasizes the role of FAQs as a consensus- and trust-building institution as they
codify norms and behavior rules. These rules are written or maintained by moderators
and therefore reflect their vision of the subreddit while offering a stabilizing set of infor-
mation and facts which can guide discussion. In an anonymous space on the internet, it is
impossible to identify those who are trustworthy ex ante and therefore users are in "epis-
temic quandaries where they must decide who to believe when others make competing
claims." FAQs can be used to mediate these issues as an attempt of shaping "an ongoing
dialectic between subreddit threads and core users’ attempts to establish a special kind of
community" (Squirrell 2019).
One subreddit that gained great popularity very recently is concerned with financial mar-
kets and is called r/wallstreetbets, or WallStreetBets (WSB). Boylston et al. (2021) ana-
lyze the humorous thread which is primarily dedicated to "irreverent memes and high-
risk options trading" by applying community design principles together with social psy-
chological theory. Even though trading options is not very exceptional, WSB users are
characterized by their very high-risk affinity, as they usually buy cheap options that are
far out of the money, thus amplifying their risk positions. It seems as if the users are
playing a game in which the stakes are very high profits, but also enormous losses, so that
in a way they are reminiscent of the behavior of gamblers, disregarding central principles
from finance theory, such as diversification. Except from highlighting the closeness be-
tween WSB trading and lottery, Boylston et al. (2021) additionally point out that the sec-
ond central characteristic of WSB’s users is their tendency to behave inappropriately
which means that the community is sometimes very offensive. As this explication argues
that WSB qualifies as one of the before mentioned media channels for enabling group
thinks etc., further supportive information must be detailed. First, the user structure is
very heterogeneous in terms of the level of trading experience, so new users can join at
any time, which ultimately also contributed to the forum’s rapid growth. Due to the self-
referential nature of the forum, the regulars have a special role to play as they preserve
the special jokes, niche humor and vocabulary over time. The special jargon, i. e. derog-
atory language, and humor expressed in memes and in a memorable linguistic style play
an essential role in reinforcing group affiliation. The language acts as a signal according
to which everyone belongs to one group. It is virtually a specific culture that has devel-
oped in WSB. Moreover, the in-group cohesion is further strengthened by not letting room
for pretenders, meaning that any kind of advice, idea or trading suggestion which is given
by users must be credibly substantiated by demonstrating that the users actually invested
in it. Then other users might consider taking this advice or idea seriously, otherwise they
would probably mock the person. The moderators also are an essential part of the thread,
as they enforce rules on the one hand, and engage in the special sense of humor on the
other and even plan events like trading contests. The decentralized control of different
moderators should be re-emphasized, as this allows sufficient space for new content from
the community. In the same way, the FAQs function as a "content guide", as an institution
shaping the discussion, providing basic information on financial terms on the one hand,
but also explaining the specific rules of conduct of the forum on the other. According to
Oldenburg (1999) making a community "feel like home" requires social warmth which
arises from friendship, support, and mutual care for each other and additionally talking
about intimate topics like money reinforces the feeling of community. So, Boylston et al.
(2021) summarize that "it appears that many users actually consider WSB as a second
home and feel a deep sense of belonging." Therefore, WSB can be described as the kind
of social hub which enables group thinking, resulting in herding phenomena. Figure 4
gives an impression of the interconnectedness between the closing price of the GameStop
stock and the activity on WSB, proxied by posts and comments. The huge short-term
increase in activity on WSB is not due to a general influx on Reddit, as an analysis of the
10 largest subreddits has shown. The data used to create the post and comment graphs is
obtained from Subredditstats1, the data for the closing prices is taken from Datastream.
Figure 4: Closing Price of the GameStop stock, Posts and Comments on WSB
As an empirical examination of the event to argue that herding happened may be not
purposeful, the events may nevertheless help to make improvements to existing methods.
However, another aspect is very interesting. Since the event was accompanied by numer-
ous, partly competing narratives, it is worthwhile to also consider these in the context of
triggering herd behavior.
On the one hand, almost classically, there are the opposing narratives of the parties be-
lieving in either the rise or decline of a company. As explained above, the hedge funds’
high short positions are based on the narrative that GameStop’s business model is no
longer sustainable, which is also reflected in pandemic-hit fundamental numbers. In con-
trast, the belief in the future of a revitalizing company, which is interwoven in the oppos-
ing narrative, has led many investors or users of the subreddit WSB to build long positions
1
https://subredditstats.com/r/wallstreetbets
in GameStop (in shares or options). This second narrative certainly needs to be differen-
tiated many times over again. While some investors, the "carriers" of this narrative, post
due diligence analyses and "promote" GameStop as a real buying option, or at least ad-
vocate for it, others again join the buying as they have intrinsic motives to damage the
hedge fund as a representative of the so-called financial elite. Anecdotally, individual
examples of this can be found from the forum, mostly referencing the financial crisis of
2007-2009 as an event through which many Wall Street professionals made a lot of
money and were not really punished for their excessive risk taking and alleged greed,
even though the rest of the population suffered greatly from the consequences of the fi-
nancial crisis. Subsequently, frustration has built up that seems to have been discharged
in the effort to put pressure on hedge funds. This post by the user space-peanut on WSB
on January 29, 2021, is just one example.
This is for you, Dad

I remember when the housing collapse sent a torpedo through my family. My father’s
concrete company collapsed almost overnight. My father lost his home. My uncle lost his
home. I remember my brother helping my father count pocket change on our kitchen
table. That was all the money he had left in the world. While this was happening in my
home, I saw hedge funders literally drinking champagne as they looked down on the Oc-
cupy Wall Street protestors. I will never forget that.
My Father never recovered from that blow. He fell deeper and deeper into alcoholism and
exists now as a shell of his former self, waiting for death.
This is all the money I have and I’d rather lose it all than give them what they need to
destroy me. Taking money from me won’t hurt me, because i don’t value it at all. I’ll burn
it all down just to spite them.
This for you, Dad.
This intrinsic motive could be used to describe the action directed against hedge funds as
an example of predatory trading, where investors take advantage of other investors’ urge
to liquidate some positions. In a stylized model Brunnermeier and Pedersen (2005) show
that if a trader needs to sell, other traders also sell and subsequently buy back the asset,
which ultimately leads to price overshooting and lower liquidation proceeds for the trad-
ers under pressure. Additionally, forced liquidation on the part of larger traders is espe-
cially feared when other traders know of the need to sell. This framework is well trans-
ferable to the users of the forum who know about the high short positions of the hedge
funds on GameStop. They exploit the fact that a rising price of GameStop stock increas-
ingly leads to the hedge funds having to liquidate positions.
To be sure, many are also driven by far less impactful emotions or motives, such as red-
ditors investing in GameStop because it is a "meme stock". As stated before, the forum
thrives on a lot of humor, which of course in this case has also provided for many memes
and furthermore stylized investing in GameStop as a solidary act of the WSB community,
true to the principle that only if everyone invests, the short squeeze can happen. Investors
acting according to these motives are joined by those who simply want to profit from the
enormous price increase and the high volatility by means of speculation. At this point, it
would be interesting to estimate how large the share of retail investors and professional
investors was who "rode" the price development or the bubble. Institutional investors,
who can have a greater influence on prices, could have monitored and followed the for-
mation of opinion to invest early (DeMarzo, Vayanos, and Zwiebel 2003). Besides, this
interpretation is a good example for the so-called "Greater Fool Theory", where the play-
ers buy overvalued shares and are convinced that they can sell the share to an even greater
"fool" (Kindleberger and Aliber 2005).
Another scenario could be that of a "pump-and-dump" scheme. A pump-and-dump
scheme is a case of fraud or market manipulation that can be differentiated in three main
phases. In the first phase, manipulators typically accumulate an asset over a longer period,
i. e. incrementally, so that the price does not rise abruptly before the pump phase. In the
pump phase, the price of the asset is artificially inflated by spreading misinformation so
that in the final phase, the dump phase, the assets are resold at the higher price to unsus-
pecting buyers. Usually, the price then falls again because it was previously artificially
inflated. The buyers who bought the assets based on the false information suffer losses
(Kamps and Kleinberg 2018). Benabou and Laroque (1992) offer a model which shows
that if someone has privileged information regarding an asset and the person or his infor-
mation is considered credible, then the person can profit from the manipulation by making
misleading statements. According to a Bloomberg article, one of the most influential users
who endorsed GameStop has become the subject of a class action lawsuit. Keith Gill, who
goes by the nickname DeepFuckingValue on Reddit and has an account on YouTube
under the moniker "Roaring Kitty," is accused of falsely posing as an amateur investor
while manipulating the market for his own profits (Bloomberg 2021). As political interest
in the case increases, a testimony was given by various witnesses on February 18, 2021,
before the House Financial Services Committee, including Keith Gill. There he testified
that he "did not solicit anyone to buy or sell the stock for [his] own profit" (U.S. House
Committee on Financial Services 2021). Although it might be difficult to determine the
intention in a legally correct way to make a judgment, this narrative seems straightfor-
ward. Articles reporting of hints of significant bot activity in the forum support this. So,
repeating similar messages in the forum may have ultimately led to amplification of mes-
sages endorsing GameStop as an lucrative investment opportunity. Indications like that
strengthen the narrative, although it should be emphasized that this is not verified
knowledge. However, this is again supported by the fact that authorities have issued warn-
ings. The SEC stated that it was "monitoring the extreme price volatility of certain stocks’
trading prices" and that they "will act to protect retail investors when the facts demon-
strate abusive or manipulative trading activity that is prohibited by the federal securities
laws" (U.S. Securities and Exchange Commission 2021b). The education page of the SEC
additionally warns that due to anonymity in internet spaces and the fact that "users can
hide their identity behind multiple aliases", you can never know whether someone is cred-
ible. "One person can easily create the illusion of widespread interest in a small, thinly
traded stock by posting numerous messages under various aliases" (U.S. Securities and
Exchange Commission 2021a). The number of users of the forum has increased to 9.5
million users in a very short time, as figure 5 shows.
Figure 5: Number of Subscribers to the Forum r/wallstreetbets

On the one hand, this can be explained by the fact that the (media) attention for the
GameStop issue was very high. On the other hand, the development also offers reason to
believe that many bots were active in the forum. This question needs further investigation.
Anyway, as argued above, the forum primarily deals with risky investments, which, if
proposed by users, must also be supported with evidence for the purpose of authentica-
tion. Since an investment in GameStop can be classified as such a risky investment (high
volatility) and DeepFuckingValue has provided the evidence implicitly required by the
community (screenshot showing the purchase of the papers), it is understandable that
even users with high incurred losses cover or endorse DeepFuckingValue. Since all the
narratives presented here hold to some extent, even a deep analysis is unlikely to reveal
that one or another narrative is the correct or true one. Since the degree of coordination
in a forum can be high, as this case has revealed, but is nevertheless smaller than in the
case of investment funds, for example, the coexistence of the various narratives is cer-
tainly an appropriate compromise. Ultimately, it will be the task of further research to
shed some more light on further aspects that led to this, e.g., institutional bottlenecks, and
above all to disclose legal aspects, if indeed fraud should have been involved. Although
there is ambiguity about the narratives, the case is a good example of herd behavior trig-
gered by (social) media.
IV. Perspectives
Technological and financial innovations such as the internet and commission-free trading
platforms entail the emergence of new phenomena that were previously unknown and
unimaginable. Internet forums ensure that many investors can organize themselves in a
decentralized manner. Commission-free trading enables these private retail investors to
participate in trading at very low cost. Together with herding behavior these aspects in-
teract and demonstrate that private investors can now participate in trading activities that
were previously reserved for professional investors. In a case-based research strategy
these three aspects were identified as the main drivers and together, ultimately stand out
as a novel configuration of influencing factors leading to a novel phenomenon. Since the
price of GME rose again to USD 348.50 on March 10 without the primary reason being
the induction of a short squeeze, it strengthens the argument that the configuration of the
three aspects allows for temporary price increases. Even though it is difficult from a sci-
entific theoretical point of view to develop a theoretical statement from a single empiri-
cally observed phenomenon (Popper 1989), in this specific case it seems as if the three
interacting influencing factors have a high explanatory power to make the phenomenon
around GameStop more understandable.
While events may tempt one to speak of a paradigm shift, it is important to note that this
is more of an occasion to review risk management strategies in hedge funds. But certainly,
as the in-depth analysis of each aspect reveals, there are still many questions or aspects
that need to be answered or discussed, respectively. In this regard, the requirement to
publish best execution quality statistics to evaluate ex ante best execution quality before
opening a brokerage account should be discussed further. Furthermore, it would be inter-
esting to know to what extent the price development around the GameStop share was
driven by retail investors and whether professional investors were significantly involved.
In this context the impact of commission-free trading platforms on markets should be
examined. The event may even be helpful in improving the methods to identify herding
behavior, e. g. through adding components that consider coordination and activities in
online forums. From a supervisory perspective, the question of whether the event was
accompanied by a pump-and-dump scheme should be addressed. This also includes the
question of whether the high user numbers in the WSB forum were caused by real people
or possibly by bots.
Bibliography
Allen, F./Haas, M./Nowak, E./Tengulov, A. (2017): Market Efficiency and Limits to Ar-
bitrage: Evidence from the Volkswagen Short Squeeze, Swiss Finance Institute
Research Paper Series 17-64, 1-100.
Angel, J. (2021): Gamestonk: What Happened and What to Do about It, Working Paper,
online available at: http://dx.doi.org/10.2139/ssrn.3782195, (date of access:
22.03.2021).
Avery, C./Zemsky, P. (1998): Multidimensional Uncertainty and Herd Behavior in Fi-
nancial Markets, American Economic Review, Vol. 88(4), 724–748.
Baym, N. K. (2000): Tune in, Log on: Soaps, Fandom, and Online Community, Third
Ed., Sage Publications, Inc.
Bekiros, S./Jlassi, M./Lucey, B./Uddin, G. S. (2017): Herding behavior, market sentiment
and volatility: Will the bubble resume?, The North American Journal of Econom-
ics and Finance Vol. 42, 107–131.
Benabou, R./Laroque, G. (1992): Using Privileged Information to Manipulate Markets:

Insiders, Gurus, and Credibility*, The Quarterly Journal of Economics, Vol.
107(3), 921–958.
Bikhchandani, S./Hirshleifer, D./Welch, I. (1992): A Theory of Fads, Fashion, Custom,
and Cultural Change in Informational Cascades, Journal of Political Economy,
Vol. 100(5), 992–1026.
Bikhchandani, S./Sharma, S. (2000): Herd Behavior in Financial Markets, IMF Staff Pa-
pers, Vol. 47(3), 279–310.
Bloomberg (2021): ‘Roaring Kitty’ Sued for Securities Fraud Over GameStop Rise,
online available at: https://www.bloomberg.com/news/articles/2021-02-17/-roar-
ing-kitty-sued-for-securities-fraud-over-gamestop-rise, (date of access:
22.03.2021).
Boyd, D. (2010): Social Network Sites as Networked Publics: Affordances, Dynamics,
and Implications, in: Papacharissi, Z. (ed.): A Networked Self: Identity Commu-
nity, and Cultureon Social Network Sites, First Ed., New York: Routledge, 39–
58.
Boylston, C./ Palacios, B./Tassev, P./Bruckman, A. (2021): WallStreetBets: Positions or
Ban, Georgia Institute of Technology.
Brooks, C./Katsaris, A. (2005): Trading Rules from Forecasting the Collapse of Specula-
tive Bubbles for the S&P 500 Composite Index, The Journal of Business, Vol.
78(5), 2003-2036.
Brunnermeier, M. K./Pedersen, L. H. (2005): Predatory Trading, The Journal of Finance,
Vol. 60(4), 1825–1863.
Chiang, T./Zheng, D. (2010): An empirical analysis of herd behavior in global stock mar-
kets, Journal of Banking & Finance, Vol. 34(8), 1911–1921.
DeMarzo, P. M., Vayanos, D./Zwiebel, J. (2003): Persuasion Bias, Social Influence, and
Unidimensional Opinions*, The Quarterly Journal of Economics, Vol. 118(3),
909–968.
Eaton, G./Green, T. C./Roseman, B./Wu, Y. (2021): Zero-Commission Individual Inves-
tors, High Frequency Traders, and Stock Market Quality, High Frequency Trad-
ers, and Stock Market Quality (January 2021), online available at: https://pa-
pers.ssrn.com/sol3/papers.cfm?abstract_id=3776874, (date of access:
22.03.2021).
Eisenhardt, K. M. (1989): Building Theories from Case Study Research, The Academy
of Management Review, Vol. 14(4), 532–550.
FINRA (2019): FINRA Fines Robinhood Financial, LLC $1.25 Million for Best Execu-
tion Violations, online available at: https://www.finra.org/media-center/news-
releases/2019/finra-fines-robinhood-financial-llc-125-million-best-execution,
(date of access: 22.03.2021).
FINRA (2021): 5310. Best Execution and Interpositioning, online available at:
https://www.finra.org/rules-guidance/rulebooks/finra-rules/5310, (date of access:
22.03.2021).
Frazzini, A./Lamont, O. A. (2008): Dumb money: Mutual fund flows and the cross-sec-
tion of stock returns, Journal of Financial Economics Vol. 88(2), 299–322.
GameStop Corp. (2019): Annual Report 2019, online available at:
https://news.gamestop.com/static-files/9d2139e1-31c7-498f-ad9563db1e6d085a,
GameStop Corp. (2020): GameStop Announces Multi-year Strategic Partnership with
Microsoft, online available at: https://news.gamestop.com/news-releases/news-
release-details/gamestop-announces-multi-year-strategic-partnership-microsoft,
Glaser, B. G./Strauss, A. L. (1967): Discovery of grounded theory: Strategies for qualita-
tive research, London.
Huang, Y. C./Cheng, Y. J. (2015): Stock manipulation and its effects: pump and dump
versus stabilization, Review of Quantitative Finance and Accounting, Vol. 44(4),
791–815.
Kamps, J./Kleinberg, B. (2018): To the moon: defining and detecting cryptocurrency
pump-and-dumps, Crime Science, Vol. 7(1), 1-18.
Kindleberger, C. P./Aliber, R. Z. (2005): Manias, Panics, and Crashes: A History of Fi-
nancial Crises, 5th ed., John Wiley & Sons.
Macey, J. R./O’Hara, M. (1997): The Law and Economics of Best Execution, Journal of
Financial Intermediation, Vol. 6(3), 188–223.
Massanari, A. (2015): Participatory Culture, Community, and Play: Learning from Red-
dit, Bern.
Mei, J./Wu, G./Zhou, C. (2004): Behavior Based Manipulation: Theory and Prosecution
Evidence, online available at: https://papers.ssrn.com/sol3/papers.cfm?ab-
stract_id=457880, (date of access: 22.03.2021).
Nofsinger, J. R./Sias, R. W. (1999): Herding and Feedback Trading by Institutional and

Individual Investors, Journal of Finance, Vol. 54(6), 2263–2295.
O’Hara, M. (2008): Bubbles: Some Perspectives (and Loose Talk) from History, The Re-
view of Financial Studies, Vol. 21(1), 11–17.
Oldenburg, R. (1999): The Great Good Place: Cafes, Coffee Shops, Bookstores, Bars,
Hair Salons, and Other Hangouts at the Heart of a Community, Hachette Books.
Olsen, R. (2011): Financial Risk Perceptions: A Behavioral Perspective, Advances in En-
trepreneurial Finance: With Applications from Behavioral Finance and Econom-
ics, 45–67.
Phillip, C. B./Shi, S./Yu, J. (2015): Testing for Multiple Bubbles: Historical Episodes of
Exuberance and Collapse in the S&P 500, International Economic Review, Vol.
56(4), 1043–1078.
Phillip, C. B./Wu, Y./Yu, J. (2011): Explosive Behavior in the 1990s NASDAQ: When
did Exuberance Escalate Asset Values?, International Economic Review, Vol.
52(1), 201–226.
Popper, K. R. (1989): Logik der Forschung, Tübingen.
Robinhood Markets, Inc. (2021): How Robinhood Makes Money, online available at:
https://robinhood.com/us/en/support/articles/how-robinhood-makes-money/,
Scharfstein, D. S./Stein, J. C. (1990): Herd Behavior and Investment, The American Eco-
nomic Review, Vol. 80(3), 465–479.
Scherbina, A./Schlusche, B. (2014): Asset price bubbles: a survey, Quantitative Finance,
Vol. 14(4), 589–604.
Singer, P./Flöck, F./Meinhart, C./Zeitfogel, E./Strohmaier, M. (2014): Evolution of Red-
dit: From the Front Page of the Internet to a Self-referential Community?, Pro-
ceedings of the 23rd international conference on world wide web, 512-522.
Spyrou, S. (2013): Herding in financial markets: a review of the literature, Review of
Behavioral Finance, Vol. 5(2), 175–194.
Squirrell, T. (2019): Platform dialectics: The relationships between volunteer moderators
and end users on reddit, New Media & Society , Vol. 21(9), 1910–1927.
Tirole, J. (1985): Asset Bubbles and Overlapping Generations, Econometrica, Vol. 53(6),
1499–1528.
U.S. House Committee on Financial Services (2021): Hearing: Game Stopped? Who
Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide,
online available at: https://docs.house.gov/Committee/Calen-

dar/ByEvent.aspx?EventID=111207, (date of access: 22.03.2021).
U.S. Securities and Exchange Commission (2020): SEC Charges Robinhood Financial
With Misleading Customers About Revenue Sources and Failing to Satisfy Duty
of Best Execution, online available at: https://www.sec.gov/news/press-re-
lease/2020-321, (date of access: 22.03.2021).
U.S. Securities and Exchange Commission (2021a): Internet and Social Media Fraud,
online available at: https://www.investor.gov/protect-your-invest-
ments/fraud/types-fraud/internet-and-social-media-fraud#Social-media, (date of
access: 22.03.2021).
U.S. Securities and Exchange Commission (2021b): Statement of Acting Chair Lee and
Commissioners Peirce, Roisman, and Crenshaw Regarding Recent Market Vola-
tility, online available at: https://www.sec.gov/news/public-statement/joint-state-
ment-market-volatility-2021-01-29, (date of access: 22.03.2021).
van der Beck, P./Jaunin, C. (2021): The Equity Market Implications of the Retail Invest-
ment Boom, Swiss Finance Institute Research Paper No. 21-12, 1–46.
Wall Street Journal (2021): Melvin Capital Lost 53% in January, Hurt by GameStop and
Other Bets, online available at: https://www.wsj.com/articles/melvin-capital-lost
53-in-january-hurt-by-gamestop-and-other-bets-11612103117, (date of access:
22.03.2021).

GameStop Power To The Players

Uploaded by

Copyright:

Available Formats

GameStop Power To The Players

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

GameStop Power To The Players

Uploaded by

Copyright:

Available Formats

Journal of Insurance and Financial Management, Vol.

6, Issue 4 (2022) 95-116

GameStop: Power to the Players?

ARTICLE INFO ABSTRACT

Journal of Insurance and Financial Management

Journal of Insurance and Financial Management (ISSN-Canada: 2371-2112)

Figure 1: Novel Configuration of Driving Aspects

Figure 2: GameStop’s share price (USD)

III. The Novel Configuration Driving Aspects

2. Herding Phenomena and Pricing Anomalies

Figure 3: Bubble Period in Price-Dividend Ratio, GSADF and 1 % Critical Value

3. An Internet Community on the Rise

This is for you, Dad

This for you, Dad.

Figure 5: Number of Subscribers to the Forum r/wallstreetbets

Benabou, R./Laroque, G. (1992): Using Privileged Information to Manipulate Markets:

Nofsinger, J. R./Sias, R. W. (1999): Herding and Feedback Trading by Institutional and

online available at: https://docs.house.gov/Committee/Calen-

You might also like