GameStop-Related Market Volatility: What Happened?

INSIGHTi
GameStop-Related Market Volatility: What
Happened?
February 25, 2021
This Insight examines recent developments surrounding GameStop stock, online brokers (including
Robinhood), stock market volatility, SEC inquiries, and trading restrictions. It is meant to complement
CRS Insight IN11591, GameStop-Related Market Volatility: Policy Issues, by Eva Su.
Background
The past few years have witnessed a surge in securities trading by retail investors. Bloomberg Intel igence
reportedly estimated that in the first half of 2020, retail investors constituted 19.5% of total domestic
order flow, 50% higher than the 14.9% in 2019. (It should be noted, however, that even with retail
investors at nearly 20% of the market, institutional investors such as mutual funds and pension funds
dominate overal securities trading.) The surge appears to have been buoyed by a combination of factors,
including pandemic-based lockdowns and accessible online trading platforms charging zero commissions
for certain trades. Robinhood, the seven-year-old securities broker-dealer firm, is arguably the “poster
child” for phone-app-based trading with video-game-like features and zero trading commissions. That
zero commission model was later replicated by other major online discount brokerages, including TD
Ameritrade, Fidelity, and E*Trade.
By the winter of 2020-2021, a subset of the nation’s retail traders were playing an outsized role in large
stock price gains by several financial y struggling firms. Many of these traders were mil ennial members
of Wal streetbets, a social media community within the social media platform Reddit comprising mil ions
of subscribers with an interest in securities trading. The firms, whose share prices exceeded analysts’
views on their fundamental value, included AMC, Bed Bath and Beyond, and Blackberry.
GameStop and a “Short Squeeze”
GameStop, a New York Stock Exchange–listed Fortune 500 video game retailer, saw the greatest stock
percentage price gains. Early in 2020, GameStop reported that the consumer shift to online games was
chal enging its business model, and its stock fel to a low of $2.57 a share in April 2020. Its stock price
reversed quickly, reaching $18.84 at the end of 2020 and $483 on January 28, 2021. On January 29, in
Congressional Research Service
https://crsreports.congress.gov
IN11615
CRS INSIGHT
Prepared for Members and
Committees of Congress

---

Congressional Research Service
2
apparent reference to the behavior of stocks such as GameStop, the Securities and Exchange Commission
(SEC) commissioners spoke of “the extreme price volatility of certain stocks’ trading prices… [with] the
potential to expose investors to rapid and severe losses and undermine market confidence.”
Behind the speculative (and, at times, reportedly coordinated) social-media-fueled support for GameStop
shares appear to be various trader motivations, including (1) a belief that GameStop was genuinely
undervalued; (2) “getting back” at Wal Street for losses suffered during the 2008 stock market crash; (3)
a nostalgic attachment to the company whose products they had bought; and (4) the most widely
discussed rationale, attempting to force losses on hedge funds who were short-sel ing the stock—that is,
trading in the hope that the stock’s price wil decline. (Some funds appear to have bought the stock
instead.)
Short-sel ing entails an investor borrowing a stock, sel ing it, and then buying it back to return it to the
lender. If the stock’s share price has subsequently fal en, the investor wil make a profit, but if it rises, he
wil lose money. If a stock appreciates sharply, a short squeeze can occur in which the rising share price
becomes self-reinforcing as traders who had sold a stock short buy it back in order to avoid even greater
losses, thus raising the demand and price for the stock further. In doing so, short sel ers may have to
liquidate other portfolio assets, which can have potential y broad systemic implications.
Figure 1. GameStop’s Stock Performance During the Week of January 25, 2021

Source: CNBC.
As other investors successfully bid the stock up, reportedly according to analysis at Goldman Sachs,
hedge funds that shorted GameStop stock faced short squeezes of a magnitude that had not been seen in a
quarter of a century in the United States. Short-sel ers lost nearly $13 bil ion on GameStop in January
2021, according to the financial analytics company S3 Partners.
Trading Restrictions
Executed stock trades must general y be settled (when the sel er is made whole and title is transferred to
the buyer) within two days (T+2). Central to facilitating settlement are SEC-regulated clearinghouses
such as the National Securities Clearing Corporation (NSCC). To avoid having broker-dealers being
unable to deliver the cash or security, clearinghouses require broker-dealers to post collateral. Extremely

---

Congressional Research Service
3
volatile stocks can intensify the risk that a clearing firm wil be unable to complete a settlement within
the two-day window, thus requiring larger amounts of broker-dealer collateral.
In late January 2021, facing several exceptional y heavily traded and very volatile stocks, including
GameStop and AMC, the NSCC demanded that Robinhood post $3 bil ion in cash collateral, according to
Robinhood’s CEO. That figure was later reduced to $1.4 bil ion when the broker-dealer agreed to restrict
trading in 13 stocks, including GameStop, AMC, and Blackberry on January 28. Trading restrictions were
expanded to 50 stocks on the following day and appear to have been permitted by a service agreement
signed by Robinhood’s customers. Also adopted by a few other online broker-dealers, including TD
Ameritrade (the first to place trading limits), the restrictions led to varying responses. Some Members of
Congress condemned the restrictions while hedge funds were stil free to trade. The House Committee on
Financial Services has conducted related hearings and the Senate Committee on Banking, Housing, and
Urban Affairs announced related upcoming hearings. Some Robinhood clients filed lawsuits al eging
securities violations, breach of contract, and fraud. SEC commissioners said that the agency “wil closely
review actions taken by regulated entities that may disadvantage investors or otherwise unduly inhibit
their ability to trade certain securities.”
GameStop’s share prices plunged after the temporary restrictions were adopted. Robinhood subsequently
lifted the restrictions on February 4, 2021. In February 2021, eight analysts offered 12-month price
forecasts for GameStop that included a high share price of $33.00 and a low price of $3.50. It closed at
$44.94 a share on February 23, 2021.
Related CRS Reports
CRS Insight IN11591, GameStop-Related Market Volatility: Policy Issues, by Eva Su.
CRS In Focus IF11663, Robinhood, the Fintech Discount Broker: Recent Developments and Concerns, by
Gary Shorter.

Author Information

Gary Shorter

Specialist 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.

IN11615 · VERSION 1 · NEW

---