Usually relegated to the corners of the Marshall School of Business and campus investing clubs, the stock market was on the front of students’ minds this week after GameStop’s stock surged 1000% since last year, capturing the imagination of students hoping to strike it rich overnight.
“Everything about [the stock surge] is really crazy, especially how it happened so suddenly,” said Steve Nguyen, a sophomore majoring in business administration and a founder of quantitative finance club Quant SC.
GameStop surged after an army of non-professional investors on the Reddit forum WallStreetBets decided to target the stock and push its price up, in part motivated by the fact that major hedge funds had decided to short sell the stock. Short selling occurs when investors bet that the price of a stock will decrease, causing them to borrow shares of the stock and sell it, hoping to buy them back at a lower price.
If the stock’s price rises while investors are short selling it, they are forced to cover the shares that they borrowed. This situation, known as a short squeeze, pushes the price of the stock even higher because additional shares are bought.
To initiate a short squeeze of GameStop’s stocks, non-professional investors utilized Robinhood, an app which allows users to participate in commission-free trading, to buy shares of the stock.
“Robinhood precipitated this democratization of the financial markets, [and] it basically took something that was only available to institutional asset managers and money managers with large amounts of capital and … made that [accessible],” said Garret Nourse, co-president of USC Value Investing Group.
Robinhood, with a mission to “democratize finance for all,” was founded in 2013 and had 13 million accounts as of May 2020.
“I think the most interesting part of the whole situation is how trading, especially market making, has become much more equalized as a result of Robinhood … I think the important thing to take away is that this shows a trend of decentralization [in trading],” Nguyen said. “I think it’s a really interesting movement how a lot of older institutions are now becoming more decentralized. People have a lot more power now than they did years ago.”
However, Nguyen doesn’t anticipate that these new trends will alter his investing strategies, instead he prefers to focus on the long-term picture and analysis.
“You can’t create these strategies directly based off what’s happening within the past week,” he said. “It’s not going to be statistically significant.”
Lawrence Harris, the Fred V. Keenan Chair in finance and professor of finance and business economics at Marshall, spoke about the dangers of the current market conditions, particularly for non-professional investors.
“We’re not talking about playing a game here, where the money doesn’t matter. This is real money,” Harris said. “We’re not talking about democracy here, we’re talking about price manipulation. There should not be game playing in the financial markets.”
According to Harris, despite temporary success for non-professional investors, larger hedge funds will ultimately win out.
“There’s going to be a huge number of people who bought the stock at high prices, and they’re going to lose,” Harris said. “In the end, there’s no amount of retail money that can stand against enough institutional [money].”
For Nourse and the USC Value Investing Group, these market trends differed greatly from the stock and finance strategies they study. Members of the organization spend their first year learning about stocks and finance until, at the end of the semester, they pitch a stock to senior members in the group.
“I would call us the antithesis of day-trading. That’s not what we do at all,” Nourse said. “At the end of the day, if you don’t have, in today’s markets, a quantitative or an algorithmic strategy, and you’re not part of the 0.1% of people who are just born traders, then it’s ultimately gambling.”
With GameStop’s stock value already decreasing since its initial surge, Nguyen is still optimistic that the surge was beneficial in increasing interest in trading and investing.
“No matter the reason why you get into it, now that more people are more into investing and their personal finances, I think people are better off as a result,” he said.