GameStop Share: The Most Important Questions and Answers

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GameStop store in New York: game retailer in the center of a virtual flash mob

Photo: NICK ZIEMINSKI / REUTERS

It doesn't happen every day that a stumbling American video game chain hits the headlines in Germany - but the chaos surrounding GameStop's shares is no longer just a concern for financial professionals: When a group of risk-taking shareholders invested in powerful hedge funds in the financial market, even the traders of overrun the demand - and restricted trading in the GameStop shares.

#GameStop has been trending on Twitter for days, and on Thursday evening the American Congressman Alexandria Ocasio-Cortez streamed a discussion on the subject.

But what exactly happened there?

The most important questions and answers about the GameStop hype:

What is this all about?

Stop!

First of all, it's interesting what it's not about: GameStop, a recently struggling retail chain for video games and equipment, has become a plaything on the financial market.

Little has changed at GameStop itself; business has been going badly for years.

Even so, the company's shares were suddenly valued at $ 24 billion on the stock exchange.

How could that happen?

Two players in the financial market had discovered the share for themselves: On the one hand, large hedge funds that manage billions and had bet on a crash of GameStop shares.

The funds had to make some of these deals public.

This was noticed by risk-taking traders - apparently including many private individuals.

They called for buying GameStop stock or options.

These traders are at home on social networks, above all in the r / wallstreetbets forum on Reddit.

There they post self-made memes, refer to each other as "retards" and "autistic", but also write long essays about why a certain stock is undervalued or overvalued and which investment strategy they follow.

A mixture of real expertise, dangerous half-knowledge, lust for chaos and a pinch of arrogance that has now developed real market power.

GameStop shares shot to astronomical heights.

And GameStop is no longer the only case: The shares of the cinema chain AMC and the Canadian software and smartphone manufacturer Blackberry became the target of Reddit investors and posted massive price increases.

In Germany, investors wondered about price movements at battery manufacturer Varta and biotechnology company Evotech.

What role do the hedge funds play in this story?

Hedge funds collect capital from investors and invest it in the financial market.

The funds not only buy stocks or bonds, but also rely on riskier forms of investment.

At GameStop, several hedge funds had bet on falling prices with so-called short sales.

The funds borrow a share and sell it again immediately.

The calculation: If the price of the paper falls, the short sellers can buy back the shares for less money - and thus make a profit.

But at GameStop it currently looks as if the funds have gambled themselves heavily.

Because because other shareholders purposely drove the price of GameStop shares up, the hedge funds got into trouble.

The American fund Melvin Capital, which had bet on a crash of the GameStop papers, had to be supported by other investors with about three billion dollars.

The Point72 and Citadel funds also got their fingers burned.

Private investors who sold their GameStop shares in time, on the other hand, could look forward to substantial price gains.

But the story is not over yet: The price of GameStop shares can fall again quickly, and then small investors face heavy losses.

And what do neotraders like Robinhood and Trade Republic have to do with it?

The Neotraders are made for social media investors: They allow easy access to the stock market, they are cheap to trade and all you need is a smartphone and a little available money.

"Our mission is to democratize finances for everyone," writes the Neotrader platform Robinhood on its website.

Like the new generation of investors, the financial apps represent a new culture in which stock trading is fun, financial news is "snackable", ie can be consumed quickly, and distributed via newsletter, podcast or Twitter feed.

That seems to be working: Last April, the German neobroker Trade Republic spoke of 150,000 users, today it is estimated to be 600,000.

The fact that the new trading platforms are so easy to use should not be misleading: not all of their users are inexperienced or have no understanding of the financial system.

WallStreetBets in particular often offers detailed analyzes of market movements.

The fact that many of the people there also use the Neotrader became clear when the apps suddenly prohibited the purchase of GameStop shares.

Immediately screenshots and angry comments piled up on Reddit.

That didn't seem to deter users from joining in: On Friday, Robinhood was the most downloaded app in Apple and Google stores.

How does the Neotrader business model work?

The business model of neotraders like Robinhood or Trade Republic is simple: For every customer order that they pass on to a trading venue, they collect a commission.

Up to three euros per trade can come together according to the terms and conditions.

So companies earn more the more their customers act.

The trading venues, in turn, earn money by making a spread between the buying and selling price of a share in an order.

Especially with rather small stocks that are not traded that often, significantly more is generated than the up to three euros per order that you transfer to Trade Republic.

Unlike conventional online banks, Trade Republic customers do not have the choice between different trading venues.

The aim is to lower entry barriers and not overwhelm the inexperienced.

Because only experienced investors should know whether it is better to buy a share from Tradegate, Lang & Schwarz or the Stuttgart Stock Exchange.

Radical simplification is the apps' recipe for success.

The three clicks until the share is in the Trade Republic depot are offset by an average of 12 steps with conventional brokers - at least that is how the Trade Republic financier Project A Ventures advertised.

The neotrader Robinhood has another source of income that is heavily criticized in social networks: "Massive conflict of interest between Robinhood and Citadel," writes one user, pointing out that the hedge fund is one of the most important paying customers of the Neotrader: Citadel pays namely for data on the order flows, i.e. the transactions, of Robinhood's users.

However, in a CNN interview on Thursday, Robinhood boss Vlad Tenev denies any connection.

Why did the Neotraders simply suspend trading in GameStop shares?

That is not yet entirely clear: It is certain that some trading platforms temporarily collapsed under the onslaught of private investors.

Robinhood in the US and Trade Republic in Germany experienced system failures on Thursday.

But the providers got really into trouble because they surprisingly restricted trading in GameStop and other contested stocks.

Trade Republic customers could sell their GameStop titles on Thursday afternoon, but could no longer buy new GameStop shares - the restriction was lifted on Friday.

The trade restrictions led to a shit storm on the Internet.

Customers gave a number of bad reviews in the app stores and threatened legal action.

Some investors accused the brokers of teaming up with hedge funds.

Because the price increase of GameStop shares was slowed by the measures, which took pressure off the short sellers.

At times, the paper lost drastically in value - and with it the investments of the small shareholders.

Did the platforms nod off to pressure from hedge funds?

Trade-Republik founder Christian Hecker rejected this on Thursday: "We did not take the side of the hedge funds, we want to protect our customers," said Hecker.

Neo brokers may have come under pressure from the run on GameStop shares, but also from other sources.

For example, American clearing houses required Robinhood to deposit higher securities.

The clearing houses take care of the processing of securities transactions in the background - and look closely at the possible risks if one party fails.

In the United States, Robinhood collected around half a billion dollars from banks on Thursday, according to media reports, to be deposited as collateral.

In Germany, a Trade Republic spokeswoman did not want to comment on the extent to which clearing played a role in the trade restrictions.

Trade Republic did not raise any additional equity and no further loans.

Financial regulator Bafin may also have played a role in the decision to resume trading.

Because in the past few days a number of investors had complained about the disruptions at Trade Republic.

These complaints are already being investigated, said a Bafin spokesman.

Trade Republic was "emphatically advised to comply with the regulatory requirements and to provide customers with all services in accordance with regulatory law and without disruption." Trade Republic states that there was no pressure from the Bafin.

It has always been the goal to make trading in the shares possible again for all users.

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