GameStop Isn’t a Popular Uprising

An exclusive look at the data indicates that big players are driving the price, not the little guy trading “stonks.”

The investors’ struggle over the video game retailer GameStop has been cast as a David versus Goliath story. Allegedly, this is the tale of scrappy, small online day traders buying shares of a beleaguered company to thwart a hedge fund scheme to take it down. Like GameStop’s stock, this narrative is mostly speculation because the facts about the buyers and sellers and their trades are hidden in the records of Robinhood, the new online trading platform, as well as Charles Schwab and other traditional broker-dealers. Only the SEC could demand to inspect those records.

Yet, certain facts are publicly available, including GameStop’s daily trading volume, its daily prices, the number of short sales of its stock, and how many shares are held by big institutional players. Those facts suggest that the Reddit online traders have been on the sidelines of a trading war among a handful of big institutional investors. The SEC should subpoena the records because the hard data also suggest that some big players may be using trading strategies used in the past to manipulate stock prices.

Let’s start with the trading data. GameStop is a company with 65.75 million outstanding shares, of which 46.9 million shares can be traded (its “float.”) For more than a year, the stock languished in moderate trading. For example, in July of last year, GameStop’s price averaged $4.13 per-share on daily volume, averaging 2.5 million shares. The stock began to move up in September and October when Ryan Cohen, the founder of Chewy, a pet supplier, got involved, disclosed a 10 percent stake in the brick-and-mortar video game seller, and called for a new internet-based strategy for the company. By December, GameStop’s share price had shot up to an average of $16.48 on a daily volume of 11.4 million shares.

The nearly five-fold jump in GameStop’s average trading volume from July to December signaled that large institutional investors were buying the stock. SEC filings show that they bought 40.8 million shares in 2020 and another 18.2 million shares in January of this year. These are banks, insurance companies, hedge funds, and mutual funds that manage large holdings on behalf of sovereign wealth funds, “high net worth” individuals, pension plans, 401(k) plans, and endowments.

There are hundreds of institutional investors, but 38 major ones each manage financial assets of more than $500 billion, totaling $37.8 trillion in assets among them. They trade stocks in blocks of 10,000 shares, and their trades accounted for an estimated 90 percent of all daily U.S. trading activity in 2019. By some accounts, their sway has ebbed to 75 percent of all trading since the pandemic began. Still, either way, decisions by some 20 or 30 investment committees of the biggest players typically determine whether most stocks rise or fall on a given day.

Their dominance is the rule because money talks in stock markets. By these measures, “retail” investors—the rest of us—are just along for the ride. On occasion, small investors move as a herd into or out of a particular stock, purportedly the current story of the Reddit crew and GameStop. The truth is, in most cases, the herd follows a big price increase or decline from the big players buying or selling large blocks of shares.

Based on the data, that is what happened when GameStop’s share price and trading volume took off. Big players were driving the price up (and sometimes down), not the rascally Reddit crowd. On January 13, the stock’s trading volume ballooned to 145 million shares, and its price jumped from $19.95 to $31.00. In one day, the total shares held by all investors (46.9 million) turned over more than three times – and that was only an overture. By Friday, January 22, GameStop’s share price reached $56.04 on volume of 197 million shares, and the following Monday, it jumped to $76.79 per-share on trading of 178 million shares. Over the rest of last week (January 26-January 29), GameStop’s share prices gyrated from $148 to $347 to $194 to $325 on average trading volume of 126 million shares per day.

Unless most of the Reddit bunch have assets in the top one-tenth of one percent of Americans, they were mere bystanders to last week’s trading of 682 million shares at an average price of $218.20 – purchases totaling nearly $150 billion in a wildly volatile market. Only institutional investors have such resources to trade stocks, not self-styled populists with Robinhood on their iPhones. Since most big players are regulated public corporations with fiduciary responsibilities to avoid the enormous risks involved in this high-stakes game of chicken, the GameStop players almost certainly are all lightly regulated hedge funds.

The trading volume and price gyrations also suggest that those hedge funds may be manipulating the market. The financial media has made much about Melvin Capital, a short-selling hedge fund that thought GameStop was overpriced at $31 per share (its January 13 price) or perhaps even at $16.48 (its average price in December). Believing the price would fall, Melvin Capital directed its broker-dealer to borrow millions of shares held by other institutional investors and sell them on its behalf to someone else. Those short sales were Melvin Capital’s bet that GameStop’s price would fall, so it could buy cheaper shares to replace the shares it had borrowed—and pocket a fortune.

But the data tells us that Melvin Capital was not the biggest short-seller and that much of the short-selling of GameStop shares was manipulation. A stock’s short sales are publicly reported twice monthly.

On January 15, when the feeding frenzy was accelerating, there were 61.8 million outstanding shorts on GameStop. That comes to 15 million more shares allegedly borrowed than existed in the entire market. The gap is even greater than that because SEC rules bar short-sellers from borrowing any of the shares owned by retail investors. So, some 20 million or more of the GameStop shorts were never borrowed and never delivered to their buyers. They were what the SEC calls “naked shorts.” The SEC has banned naked shorting as abusive market manipulation because large-scale naked shorting artificially drives down a stock’s price. Given the volume of short sales and overall trading in GameStop, large-scale naked short-selling was clearly involved when GameStop’s share price fell $153 last Wednesday (from $347 to $194) and again this Monday when the price plummeted from $325 to $225.

If a manipulator used naked shorts to sell 500,000 shares last Tuesday (at nearly no cost to itself) and got out last Wednesday, he or she walked away with $76.5 million in pure profit. Based on the price slide on February 1, a manipulator who sold 500,000 shares as naked shorts on January 29 pocketed $50 million for that one day’s work.

The data also suggest a bigger story of possible manipulation involving the huge increases in GameStop’s share price. The wild swings in those share prices reflect hundreds of millions of shares being traded each day, mostly in big blocks and presumably from one hedge fund to another. When the price rose, one fund got out and took huge profits while another bought in, expecting the price to rise further, and yet another sold short, expecting the price to fall.

Consider again a manipulator who bought 500,000 blocks of GameStop shares when the market closed last January 26 (at $148 per share) and sold them as the market closed on January 27 (at $347 per share). He or she walked away with nearly $100 million in profits. If another manipulator pulled the same trick from the market close on January 28 (at $194 per share) to the market close on the 29th (at $325 per share), he or she pocketed $65.5 million in profits. And all of the trading in this period appears to involve a relative handful of large buyers and sellers carrying out trades so large that they drive the price up or down.

In effect, hedge funds may have manipulated GameStop in opposite directions, wringing out profits daily or even two or three times a day. If this is correct, the GameStop saga is not some populist uprising but a rolling version of “pump and dump,” a classic form of manipulation and naked shorting. At a minimum, the facts already known call for an SEC investigation with subpoena power focused on the broker-dealers’ handling of these transactions.

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Robert J. Shapiro

Robert J. Shapiro, a Washington Monthly contributing writer, is the chairman of Sonecon and a Senior Fellow at the McDonough School of Business at Georgetown University. He previously served as Under Secretary of Commerce for Economic Affairs under Bill Clinton and advised senior members of the Obama administration on economic policy.