GameStop-Related Market Volatility: Policy Issues

GameStop-Related Market Volatility: Policy Issues

link to page 1

INSIGHTi

GameStop-Related Market Volatility: Policy
Issues
February 3, 2021
Video game chain GameStop triggered a market frenzy in early 2021 when its stock price rapidly
increased from around $18 to wel over $400 in intraday trading (Figure 1). The developments soon
spread to some other stocks and markets. The episode raises several policy issues, including social
media’s influence over investment decisions, zero-commission trading, short sel ing, investor protection,
market functionality, and financial stability.
Figure 1. GameStop Stock Performance During the Week of January 25

Source: FactSet and CNBC.
Congressional Research Service
https://crsreports.congress.gov
IN11591
CRS INSIGHT

Prepared for Members and
Committees of Congress

Congressional Research Service
2
Policy Issues
Multiple issues surfaced during the GameStop-led market volatility that could influence policymaking.
Social Media Influence
Some observers view the GameStop-related market volatility as a form of social rebel ion carried out
through capital markets and amplified by social media. Specifical y, some traders on the Wal StreetBets
message board expressed a desire to target hedge funds that had bet against GameStop’s stock.
Accordingly, some of the interest in GameStop appears to have been driven by resentment toward
financial establishments rather than conventional economic justifications.
Zero-Commission Brokers and the “Gamification” of Trading
The GameStop phenomenon has also cast a spotlight on recent moves to zero-commission trading by
retail brokerage firms. Robinhood, for example, is a zero-commission online and app-based broker
serving more than 13 mil ion mostly young retail investors. The zero-trading-fee business model provides
convenience for investors to participate in savings and investments. It also draws criticisms due to
concerns that the “gamification” of the trading experience—the use of design elements often found in
online games—may give rise to impulsive decisions.
Retail investors’ participation in trading reportedly increased from around 10% to 25% in the first half of
2020 as the Coronavirus Disease 2019 pandemic took hold. Retail investor groups—fueled by social
media messages and equipped with new and convenient tools such as Robinhood—could alter market
functions and change the normal course of company and investor activities.
Short Selling and “Short Squeeze”
Many traders targeted GameStop’s stock because it was heavily shorted. Short sel ers gain when the price
of a stock fal s by borrowing the stock, sel ing it, and then later buying it back—hopefully at a lower
price—in order to return the stock to the lender. A “short squeeze” happens when the shorted stock’s price
goes up substantial y, but short sel ers stil need to purchase shares at the higher price to close their
positions. This put further upward pressure on a stock’s price because of the increased purchase demand
and in turn, could further escalate the losses for short sel ers. The trading in GameStop appears to
represent a classic short squeeze: Hedge fund short sel ers reportedly incurred mark-to-market losses of
around $20 bil ion as of the end of January.
Investor Protection
Some observers believe that the GameStop phenomenon shares characteristics of speculative bubbles and
even signs of manipulation and pump-and dump-schemes. One executive questioned the role of social
media and argues that “anyone can go on these platforms and tout a stock or a commodity they own and
get a big following and then dump it.” Others do not believe such social media actions could amount to
market manipulation. One expert contends that “if someone has been posting on a subreddit [messaging
board] that they are very enthusiastic and are acquiring shares in a company, and al the while they are
sel ing, then you have a potential violation. But if in al of the tweets and postings there is no
misrepresentation, then you could well find that there are no violations in law.”

Congressional Research Service
3
Market Functionality and Financial Stability
During GameStop’s stock ral y, its share price drastical y deviated from most analysts’ assessment of its
economic fundamentals. This type of volatile trading is believed by some to have increased the market
risk for publicly traded companies that could disincentivize these companies from staying public.
Regarding systemic implications, some argue that although speculative activities are present, the
influence is limited to a narrow group of stocks. Others fear that the event may trigger market-wide
contagion.
Others have raised concerns about the implications of the GameStop event for market infrastructure—
specifical y, the system for clearing and settling securities transactions.
Policy Options
Some Members of Congress have voiced concerns about the developments. The chairs of the Senate
Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services
have pledged to hold hearings. Some policy issues that the hearings might evaluate include:
 Agency actions. The Securities and Exchange Commission (SEC) has issued two statements
on January 27 and January 29 to announce its monitoring and reviewing efforts. A former
SEC chairman suggested four steps the SEC could take to address last week’s events: “1) go
after market rumormongers aggressively; 2) evaluate the science behind today’s day-trading
platforms, including the behavioral psychology behind apps like Robinhood; 3) play the role
of ‘Gloomy Gus’ by reminding investors of the risks of speculative excess; 4) improve the
boilerplate warnings that are provided to retail investors.”
 Review of trading restrictions at platforms. Several retail brokers, such as Robinhood and
TD Ameritrade, restricted trading of GameStop and other stocks in the midst of volatile
trading. Robinhood cited its need to comply with SEC net capital requirements and
clearinghouse deposits. While users of the trading platforms claim that they suffered losses
from such restrictions, some argue that brokerages have broad powers to block or restrict
transactions per their customer agreements with users. However, several Members of
Congress have expressed concern that retail investors were cut off from market access while
larger institutional players were able to continue trading.
 Market halts. GameStop triggered existing SEC circuit-breaker halts during high market
volatility. A state securities regulator cal ed for further actions to halt trading in GameStop
stock for 30 days to al ow investors to “cool down.”
 Reevaluation of short selling. Some observers associate short sel ing with high-risk
speculative behavior and have cal ed for more disclosure or bans on short sel ing. In contrast,
others argue that short sel ers perform valuable functions by ferreting out fraud.
 Review of potential naked shorts. A “naked” short is sel ing short a stock without first
borrowing the shares. At one time, the accumulated GameStop shorts were at 140% of its
outstanding stock. This has led to some cal s for regulatory review, while others disagree that
it warrants concern.

Congressional Research Service
4

Author Information

Eva Su

Analyst in Financial Economics

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
permission of the copyright holder if you wish to copy or otherwise use copyrighted material.

IN11591 · VERSION 2 · NEW