Smalltime investors break Wall Street over GameStop shares
Smalltime investors rallied on Reddit and used online trading apps to ‘break’ Wall Street after a GameStop share-buying frenzy.
The stock-buying surge followed calls to action on Reddit’s wallstreetbets, and was then facilitated via online trading portals, including the aptly named commission-free, stock trading and investing app, Robinhood.
GameStop’s share price soared as the cheap stock was shorted by hedge fund giants jumping on what they saw as an ideal opportunity to profiteer from a dying company.
Wall Street’s decision to “short” was reportedly motivated by a bet against Amazon that looked set to fail. Shorting is the risky business of 'borrowing' company shares and selling them, intending to buy them back at a lower price and then pocketing the profit.
However, when GameStop share prices jumped from $3.25 each, up 145% and then 300%, the smalltime investors held on tight to their stock. This created an upward spiralling share-price frenzy that resulted in the New York Stock Exchange ceasing to trade nine times on Monday.
Since then, the rising price loop of GameStop shares has continued, as trading by individual investors leads to ‘outsize stock market swings’.
“A largely-ignored company, GameStop suddenly became the focus of market attention. This was because shares in the company pretty much doubled from below $20 to $38 in a single session.”
From all indications, the shorted shares looked like a good investment for large-scale players, points out Morrison, as the value had stayed low and unmoving for months. Shorting the shares and then pocketing the profit seemed a safe bet.
“Bear in mind that last summer the stock struggled to break above $5,” he explains. “But once it started to rally, the company attracted a lot of attention from investors looking to short the shares. That is, borrowing and then selling the stock in the expectation that the price will drop allowing you to buy it all back and make a large profit.”
The company seemed the perfect fit for short-selling due to its traditional, store-focused set-up. “Why was GameStop such a target for short-sellers? Because it’s an old-style ‘bricks and mortar’ company without a strong online presence whose ‘time has come’. Sound familiar?” says Morrison.
Hedge funds and other large investors are considered market experts, their privileged position usually meaning they make a good judgement call. But the GameStop short-selling was different because large-scale investors were apparently unaware that the company had hired three new, high-flying executives in recent months, to turn the company around.
It was this information that added to the initial share price rise, and their subsequent losses that amount to billions.
“This contributed to that big move on January 13th,” says Morrison. “But if you look at the chart today, you’ll struggle to identify that move. Just two weeks later nearly made, GameStop hit a fresh all-time high of $379 - a gain of roughly 1800%. That’s a life-changing trade if you were smart enough to buy, and brave enough to hang on. It’s also a life-changing trade if you were short, and not in a good way. Billions of dollars have been lost by short-sellers.”
Meanwhile, Reddit users celebrated the moment with streams of victorious comments. “We broke it. We broke GME [GameStop’s stock market ticker] at open,” wrote one Reddit user following the halted NYSE trading.
Speaking to the Guardian, Ihor Dusaniwsky, a managing director at the data analytics company S3 Partners, said established investors were still hoping GameStop’s share price would collapse, were ignoring their earlier losses “and using any stock borrows that become available to initiate new short positions in hopes of an eventual pullback from this stratospheric stock price move.”
David and Goliath
The story of GameStop’s victory has garnered worldwide appeal, even attracting the attention of the Biden administration earlier this week, which stopped play to announce it was ‘watching the situation carefully’.
Felix Salmon, the chief financial correspondent at Axios, describes it as “a simple morality tale. A scrappy band of Wall Street outsiders, armed with little more than moxie and their stimulus checks, have not only made millions for themselves, but have also humbled big-name fund managers who had dared to bet against a blameless retailer.”
In essence, the entire debacle (on the part of the big investors) has been viewed as a victory for the small-time trader, with the underdog beating the giants at their own game.
“There’s scant sympathy for them,” says Morrison. “The whole business is seen as a trump for the little traders, the Robinhood account holders who use Reddit to get their financial information.”
He continues, “On the other side is the Wall Street players who would happily see GameStop go out of business and people lose their jobs if its brought for a profit. Of course, life is never that simple, and the GameStop story is far from over as traders hunt out other heavily-shorted stocks.”
He adds, “But it’s a salutary tale of our times and a timely reminder of the dangers that can lurk when shorting individual stocks."
Islamic fintech Wahed plans UK expansion: Hires expert GM
Wahed Inc has hired a leading industry expert to take Islamic finance forward in the UK marketplace.
Umer Suleman has been appointed as General Manager of UK operations for Wahed Inc.. His role will include overseeing Wahed Invest’s nationwide growth strategy and strengthening the firm’s position as a leading provider of ethically focused investment services.
Suleman’s track record includes over 15 years of regulatory, risk, and strategy consultancy roles, as well as advisory positions across a variety of businesses and sectors including positions at UKIFC, Daiwa Capital Management, and Ernst & Young (EY).
He also spent seven years at HSBC as Head of KYC Risk globally within their Global Banking and Markets business, Head of Business and Conduct Risk for MENA within Retail Banking, and headed up the CCO function for Digital (GLCM) within the UK with a global remit.
Wahed and the growing role of Islamic finance
The startup fintech was founded in 2017 and is an American company based in New York City. Since its inception, it has grown from strength to strength and in July 2019, launched the first exchange-traded fund in the US that was compliant with Sharia law.
Islamic finance typically refers to the way businesses and individuals raise capital in accordance with Sharia, or Islamic law. It also refers to the types of investments that are permissible under Islam.
Wahed currently operates in 130 countries and has offices in Washington D.C, New York, London and Dubai. It has also developed an easily accessible digital platform that balances ethical finance with modern investments, attracting over 200,000 active clients from around the world with features such as free portfolio recommendations and no hidden fees.
Wahed UK expansion plans
According to reports, the UK is highly receptive to services in the Islamic finance sector and is also one of the fastest-growing markets globally. It has a three million-strong Muslim population and one of the most developed Islamic finance sectors outside of the traditional Muslim regions, with global population figures projected to double over the next forty years.
It is hoped Suleman’s leadership of Wahed will address the underbanked needs of the Muslim community while also serving the increasing number of retail investors currently seeking ethical alternatives to wealth creation.
Speaking about the new role, Wahed CEO, Junaid Wahedna, explained “Mr. Suleman’s appointment reaffirms our commitment to providing innovative and outstanding ethically driven financial services to a market that, historically, has been underserved.
“We’re delighted to welcome Umer to the team and firmly believe that with him at the helm, our operations in the UK will continue to go from strength to strength and provide customers seeking ethical investments with accessible, trustworthy and innovative solutions.”
The appointment follows on from Wahed’s recent investment round and its acquisition of the UK-based fintech Niyah.
These events will support the company in its plans to build an Islamic marketplace that meets growing demand for socially conscious investors – and not just those of Islamic faith.
The fintech firm also plans to utilise the UK’s position as a leading hub for Islamic finance as a springboard into other European cities, and believes it has a central role to play in providing Shariah-compliant services that address inclusion and inequality.
The Islamic finance industry is currently valued at around US$2.4trn and is expected to grow steadily by 10-12% over 2021 and 2022, having experienced rapid growth in recent years.
THREE reasons why Islamic finance is a growing sector
- The UK Muslim population is growing - and has been traditionally underserved by incumbent banks. The Muslim population is growing twice as fast the world’s non-Muslim population and Islamic finance address this group’s needfor Shariah compliant financial products.
- It encourages financial inclusion. According to the World Bank, financial inclusion is defined as individuals and businesses having access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.
- It supports Sharia compliant products. Transactions that work with industries forbidden in Islam (gambling, usury and speculation) are forbidden. Islamic banking only works with businesses that adhere to their ethical and moral standards.
Image credit: Wahed Inc team