GameStop’s volatility could be the start
Trading with GameStop has reached feverish levels and is showing little sign of a break.
Despite falling in price during Thursday’s session after multiple brokers restricted buying and selling, the stock is up 500% in a week.
This may just be the beginning of a new wave for Wall Street.
“People say ‘Screw Wall Street,'” said Alex Imas, a behavioral economist at the Booth School of Business at the University of Chicago.
Imas said we could see a big shift in the power of social media networks when it comes to affecting tradable assets.
“What we saw from this episode with GameStop is that networks like Reddit have the ability to move a stock faster and farther and keep it elevated for longer than anticipated, and the coordination on these platforms enables that.”
Investors have gotten used to a system where the stock market provides a place where people can receive independent signals and decide for themselves whether it’s time to buy or sell. However, Imas said, “These social networks, which can be a platform for the large-scale coordination of an idea, can cause an asset to deviate from its fundamental value.”
Traditional Wall Street analysts looking at the ailing video game retailer clearly don’t believe there is a fundamental reason why the stock was up 1,400% in the first few weeks of 2021. As GameStop climbed to stratospheric levels, Bank of America analysts reported on the The stock again urged investors to take their profits now.
In an investor announcement on Wednesday, it said the stock was only worth $ 10 per share.
“The more the business shifts from in-store transactions, the harder it becomes to sell high-margin used and collectable goods,” which analysts made up 46% of GameStop’s 2019 sales.
Of the six analysts who cover the stock on FactSet, the highest target price is $ 33 per share. On Thursday lunchtime, the stock was trading near $ 215 per share after falling from a session high of $ 483 per share.
There are other examples of when prices have risen and deviated from fundamental value, but not this way – where a group of people suddenly decided to coordinate to get a stock higher. Anything with a dotcom suffix rose during a tech boom in the late 1990s. Exchange experts struggled to explain this.
Alan Greenspan, former Federal Reserve Chairman.
Adam Jeffery | CNBC
In December 1996, then Fed chairman Alan Greenspan warned of “irrational exuberance” on the stock market.
In March 2000 the Nasdaq hit a high of 5,048 before losing 76% of its value over the next two years. The ramp-up was due to many factors, including the emergence of internet chat rooms, but nothing with the force we see on platforms like Reddit today.
Imas said Wall Street will have to grapple with the fact that this new form of grassroots collaborative investment is changing the landscape.
“Investors have shown that they can organize and coordinate kicks like it’s a game and make some real money at the same time,” he said.
He added that there doesn’t seem to be anything illegal about the process, “and I don’t understand why we don’t see more of it and why people don’t get together as a group and make some money.”
The coordination “can apply to anything that is tradable,” he said.
Correction: GameStop is a video game retailer. In an earlier version of this story, the business model was incorrectly stated.