Sunday 31 January 2021

GameStop: A Distance Observation

When I was with the Securities Commission, one of my responsibilities was to oversee the capital market. This included ensuring all parties in the market such as the stock exchange, brokers and their sales representatives operate in accordance with applicable rules, regulation and expectations. The main objective is to ensure trading is done in a fair and orderly manner to maintain market confidence and to protect investors, especially the retailers.

Last week the investment fraternity was surprised when retail investors in the US ganged up and pushed the price of GameStop when they realised that hedge funds were shorting the counter. The price went up from around an average of USD 18 to somewhere beyond USD 500. Certainly such an upswing would not reflect the improvements of the fundamentals of the company within a short period of time.

Upon some quick research, I noted some interesting facts which behind the battle between the retail community against hedge funds which were considered representing capitalists who did not care about the consequences of their market conducts, as long as they were profitable.

It all started when hedge funds started to short GameStop share due to its weak fundamentals. They borrowed shares mainly from broker dealers and sold them with the idea of buying them at lower prices when the share price drop as what they expected. At the same time, retail investors who were grouping on WallStreetBets, a group at Reddit, started a movement to surprise the hedge funds. They bought shares and options of GameStop to drove the price beyond the expectation.

As the price was moving upwards, the hedge funds were incurring losses and had to buy shares at higher prices to cut loss or to fulfil their obligations with the lenders of the shares under the Securities Borrowing & Lending (SBL) contracts with them. This resulted in more demand for GameStop shares and the price went up further.

Many observers were describing what happened last week as a David vs Goliath episode where the hedge funds were at the losing end and the retailers were victorious. While this could be true in the short term, an unrealistic share price would have to eventually come down. When this happens, those retailers who went to buy the shares towards the peak would find their fingers (and other parts of their bodies and mind) burnt.

It was reported that people who join WallStreetBets were encouraged to "invest" in unconventional manners. One idea which was promoted was to invest in a counter with whatever funds which they had. YOLO - "You Only Live Once", they said. While this could be true, what was not said was, "You may suffer for a long time before you die!"

The Malaysian Securities Commission issued a reminder to investors to be careful with suggestions to ramp up prices of shares as that could breach our securities law. While it was observed that the glove counters on Bursa Malaysia saw price increments, it would not be easy for the GameStop play to happen here.

First, short selling is regulated and limited to specific counters only. Normally, the companies must have sound fundamentals, hence the down side risks is much smaller. Retail investors may have no access to options, which allow them to leverage and bet on share prices.

When there is a sudden surge in share price, Bursa Malaysia will issue a warning which is popularly known as UMA, the short name for Unusual Market Activity. The counter could also be suspended when it breached certain threshold to cool the market and allow investors to reconsider their trading position.

While the number of retail participations on Bursa Malaysia had increased significantly since the Covid-19 pandemic, in similar trend with other markets due to various assistance by governments, the presence of institutional investors remain influential in maintaining market stability. 

I certainly hope that our retail players would do their homework before deciding to be involved with adventures like what happened to GameStop shares. It could be a nice story and narrative but eventually many fingers will be burnt.

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