GameStop’s drastic increase in stock price has attracted President Biden’s attention. During the White House’s daily press briefing, press secretary Jen Psaki told reporters that Biden’s economic team, including Treasury Secretary Janet Yellen, were “monitoring the situation” in regards to the unexpected stock boom experienced by GameStop and several other companies as a result of grassroots trading driven by the /r/WallStreetBets community on Reddit. “It’s a good reminder though that the stock market isn’t the only measure of the health of the economy,” Psaki said.
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The fact that the Secretary of the Treasury of the United States is “monitoring” GameStop’s meteoric stock rise speaks volumes about the scrutiny surrounding the game retailer’s unexpected rally on Wall Street. Since January 12th, GameStop’s stock has grown from $19.95 to over $300 per stock, driven by a “short squeeze” caused by a grassroot movement founded on Reddit. The retailer’s stock price took an extreme bounce last week after the large Reddit community /r/WallStreetBets took issue with hedge funds such as Citron and Melvin Capital taking “short positions” on GameStop. Hedge funds and brokerage firms will often “short” a stock when they expect a stock’s value to fall by borrowing a stock share and then selling them to another investor. The party who shorts the fund is ultimately responsible for returning the stock they borrowed to its original owner, and they make money based on whether the stock’s value had increased or decreased in value.
In the case of GameStop, many hedge funds took bearish positions and speculated that the company’s stock price would continue to fall as the company deals with the ongoing COVID-19 pandemic, which has hit many brick-and-mortar retailers hard. However, the company did see its price rise after Chewy.com founder Ryan Cohen joined the board to “kickstart” a transformation of its business model, and individual investors led by the /r/WallStreetBets community pushed back on the notion that GameStop’s price would fall. As the price continued to rise quickly, the hedge funds who took a short position were forced to scramble and purchase back the stocks at an immense loss, with some companies claiming they lost $2 billion or more. The buyback of stock by short traders caused GameStop’s stock price to climb even higher.
In addition to GameStop, companies like AMC Theaters and Bed, Bath, and Beyond have also seen their stocks jump as investors pour money into buying as much stock as they can, creating less extreme “short squeezes” and buying frenzies.
As for why the Biden Administration is monitoring GameStop’s stock activity, questions have arisen as to whether /r/WallStreetBets’ push amounted to some form of stock manipulation. Stock exchanges are perhaps the truest form of a free market system, but some are calling the recent activity surrounding GameStop “problematic” and could amount to an illegal market manipulation or collusion. While regulators can take action against investor groups for manipulating a stock’s price, it’s unclear whether the feds would take action in this unique case. Another possibility is that federal regulators will somehow limit the free-to-use trading apps that allowed the traders to quickly make the market transactions that drove the price hike.
GameStop has not responded to press inquiries about the increase in its stock prices.
