Netflix’s Eat The Rich: The GameStop Saga chronicles the history of GameStop (GME) - Get Free Report stock’s trading activity over the past several years. That activity has had truly global repercussions.
In 2021, retail buying activity culminated in an unprecedented short squeeze that led several major financial market players to lose billions of dollars.
(Read more from Wall Street Memes: GameStop vs. AMC Entertainment: Which Is the Better Stock?)
A Sneak Peek at the Netflix Documentary
Until 2020, it seemed there was nothing special about GameStop. The company was an ordinary electronics and video game retailer. Its business model, centered on brick-and-mortar stores, had been struggling amidst the rise of e-commerce and online gaming platforms.
For their part, institutional investors saw GameStop as a business headed for bankruptcy and loaded up on short positions. In early 2020, GameStop shares were worth as little as three dollars apiece. Short interest, meanwhile, reached 140% of GME’s total float - i.e., more shares were shorted than existed.
That situation caught the attention of retail traders and investors, who saw the company as having great short squeeze potential.
GME-related posts on Reddit platforms in subreddit groups such as r/wallstreetbets - a forum for retail investors and traders to discuss stocks - began to generate serious engagement.
The confidence of Reddit-oriented investors was further amplified after Chewy co-founder and former CEO Ryan Cohen bought almost 10% of the company's total shares. GameStop shares continued rallying at a rapid pace.
By the first weeks of 2021, GameStop's popularity among the retail investor community was already catching the eye of major financial and tech figures. Tesla's CEO Elon Musk, for instance, posted "Gamestonk!" to his Twitter account.
It was right around this time that GME shares began their meteoric rise. GME’s $20 shares (which had already made triple-digit gains over the previous several months), soared to $347 per share between January 11 and January 29, 2021.
That sudden “mooning” in GameStop's share price forced many hedge funds to cover their short positions. They lost billions of dollars in the process.
This hitherto unprecedented event showed that retail investors, uniting on behalf of a single stock, had the power to defeat powerful institutional investors.
According to The Wall Street Journal, more than 175 million GameStop shares were traded on January 25. At the time, this was almost the entire float of the stock. A large portion of these trades came from commission-fee broker Robinhood, which was particularly popular among the young retail community.
Robinhood's platform had served as a main avenue for retail investors to bet on GameStop. But right at GME’s height, the broker restricted buying by literally removing the "buy" button. The broker later cited liquidity issues, although retail investors were skeptical, to say the least.
Robinhood wasn’t the only broker to limit buying of GME at the stock’s height - several other large brokerage firms made the same move.
A resulting selloff in GameStop shares halted the frantic short squeeze, and although GME shares still remain well above their pre-2020 levels, they have never again reached their January 21st high.
Among brokerages, Robinhood (HOOD) - Get Free Report received the brunt of retailers’ ire. Investors were furious about the broker's lack of planning for managing high-volume trading scenarios. They were also deeply suspicious of its close ties to market makers via its payment per order flow (PFOF) compensation system.
Why do Retail Investors Like GameStop Stock So Much?
Netflix’s documentary tracks the events that culminated in GameStop's great short squeeze of January 2021. But GME’s history did not stop in early 2021. Well over a year after the squeeze, the stock remains very popular among a diehard group of retail investors. It continues to trade at high volumes.
The GameStop phenomenon is much more than a story about trading. It represented a paradigm-breaking moment within US financial markets. Retail traders collectively achieved the relevance to move the market in a way that only institutional investors had done previously.
GME’s squeeze saw the "dumb money" defeating the "smart money," or, in other words, David defeating Goliath.
The GameStop saga continues to inspire retail investors.
In spite of all the skepticism surrounding the company's fundamentals, bearish Wall Street coverage, and high short selling, GME remains one of the most popular stocks on search engines, Reddit, and other social media forums. It still garners more attention than trillion-dollar tech names such as Tesla and Apple.
The bullishness of a small subset of retail traders has been used to the advantage of GameStop's management, who strategically sold stock to raise capital, pay down debt, and drive their digital-focused turnaround plan. To show his faith in the company, GameStop Chair Ryan Cohen bought even more GME shares this year.
What is Next for GameStop Shareholders?
GameStop investors on social media platforms - especially on Reddit - have led an active campaign to encourage direct registration of GME shares.
Direct registration is done through the Direct Registration System (DRS). The DRS is a service that allows shareholders to electronically move securities held in a book-entry form between the share issuer and the investor's broker-dealer.
In other words, the DRS offers a way for shareholders to hold their assets without needing a brokerage house behind them. Through DRS, then, shareholders can distance themselves from market makers and payment per order flow (PFOF) brokers - both considered the nemeses of GameStop investors.
In theory, if retail investors use DRS enough to transfer their shares to the transfer agent, share availability will decrease. That would be bad news for short sellers, who require a pool of available shares to continue shorting.
Since this practice became a trend among GameStop shareholders, the company itself has begun disclosing quarterly reports on the number of shares registered with its transfer agent, Computershare.
According to the latest Form 10-Q, dated July 30, 2022, 71.3 million shares were registered with the transfer agent through DRS. That comprises about 30% of the total float of GameStop shares.
It is worth noting that directly registering shares with a transfer agent is less practical than through a brokerage house. It’s suitable for those with "diamond hand" mentalities but probably not a good fit for swing traders.
Whether the strategy of directly registering shares will come to fruition, only time will tell. We’re well aware from experience, though, that challenging GameStop retail shareholders is not a great idea.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)