Remember the movie Trading Places?
The hit comedy from 1983 features Eddie Murphy and Dan Aykroyd as unlikely buddies who corner the market on frozen orange juice concentrate futures. Their goal is to make a fortune while doing serious damage to wealthy investors – the Duke brothers. Trading Places, loosely based on the Hunt brothers’ failed attempt to manipulate silver markets in 1980, captures everything you need to understand about the wild moves in shares of GameStop Corp. (GME-N), BlackBerry Ltd. (BB-T) and a handful of other stocks that have built massive followings among online investors.
As in the movie, these price swings are playing out swiftly, and the motivation is as much about socking it to the rich as making a buck. However, the money being made and lost in trading stocks is very real. And unlike the feel-good movie, the drama around GameStop or BlackBerry speaks to an anger and cynicism among many retail investors that bodes poorly for capital markets.
Read their posts on websites such as the Reddit forum WallStreetBets, and you find individual investors who piled into GameStop over the past month were motivated in part by a desire to cause pain at high-profile hedge funds. They targeted funds such as Melvin Capital and Citron Research, which were betting the video-game retailer’s share price would fall by short selling its stock while talking about their positions on social media.
The Main Street crowd soundly beat Wall Street’s finest. GameStop’s share price soared and the hedge funds abandoned their positions this week after booking significant losses. Melvin Capital needed a US$2.75-billion bailout from two other hedge funds.
Robinhood and other online brokerages moved to limit trading Thursday in GameStop, BlackBerry and a handful of other stocks, citing justified concerns over their volatility. This prompted investors on Reddit to complain of a conspiracy between the trading platform and hedge funds. That doesn’t hold water. Robinhood’s brand, based on democratizing finance, is far too important to risk on a favour to fund managers. The company only limits trading if its operations are in jeopardy.
On a smaller scale, investors indulged in the same sort of conspiratorial theories when The Globe and Mail published articles that pointed out BlackBerry’s stock price had tripled in three weeks. The move, which came after the Reddit crowd got behind the stock, prompted the software company to put out a press release stating no material changes had taken place, while several investment banks restated price targets that were well below where the stock was trading.
“What you fail to miss (sic) in your research is a myriad of information about the current BlackBerry value proposition that has been suppressed by banks and Wall Street for years,” said a BlackBerry shareholder in an e-mail on Tuesday. The company’s share price dropped by 40 per cent on Thursday. The idea that companies, the media, banks and fund managers somehow suppress information, to the detriment of individual investors, is simply ridiculous.
The market event that goosed GameStop and BlackBerry this month is known as a short squeeze. Another one played out in the silver market 40 years ago, and there was another at Volkswagen Group in 2008 – the automaker was briefly the largest company in the world. More recently, in 2018, the shorts were squeezed at cannabis producer Tilray Inc.
What’s changed today is the size of the market move, or the scale of the squeeze, factors driven by social media and platforms such as Robinhood that offer free trades. Tilray chief executive Brendan Kennedy said on CNBC this week that short sellers likely lost US$600-million on his company, “which actually pales in comparison to what I’ve been reading about GameStop.”
When the Hunt brothers tried to manipulate the silver market, the U.S. government stepped in, changing the rules to limit abusive behaviour. Today there’s very little authorities can do to contain the anger and greed that underlie recent short squeezes. As Mr. Aykroyd’s character said in Trading Places, as he strode into the futures trading pit, “Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness.”
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.