A group of small investors who came together via social media launched a challenge on GameStop shares, which Wall Street giants were pressuring to sink by investing in the decline. Large investors lost billions of dollars. The White House also made a statement on the subject. So, what is this GameStop incident?

The conflict that started between small and large investors on the US stock exchange over GameStop shares is on the world's agenda. Analysts state that this situation can also be seen in other stocks and may pose a risk for some investment institutions.

The challenge launched by a group of small investors who came together via social media against professional investors over the shares of some companies suddenly became a hot topic in the markets and the world.

This challenge, which started with the shares of US video game retailer GameStop, caused unusual movements in some stocks and created concern for the entire stock markets.

While the country's authorities stated that they were closely monitoring the volatility in the markets, analysts warned that the conflict between small and large investors could pose a risk for other stocks as well.

GAMESTOP SHARES RISE TO $400

US video game retailer GameStop announced plans to close nearly 450 stores in 2020, as it experienced economic difficulties due to the impact of the novel coronavirus (Covid-19) outbreak. The company, whose stock market value fell due to the economic difficulties it experienced, became one of the most "short-sold" stocks by the end of last year, meaning that investors predicted it would fall further.

Investment fund Melvin Capital tried to make money from the decline in GameStop’s stocks, which were around $17 last year, by “shorting” them. When the group of investors who came together on the social media platform Reddit realized this, they started to buy the stock in an organized manner. Taking a “short position” means borrowing from investors who own a stock by paying a certain rent and selling it on the stock exchange. Thus, if the price of the relevant stock falls, the investor who takes a “short position” makes money, and if the price rises, they lose.

Amateur investors organized through a forum called WallStreetBets bought GameStop shares and increased their price, while the number of participants in the group increased day by day. The group expanded further when American billionaire Elon Musk shared the link to the WallStreetBets forum on Twitter on January 26 by writing "Gamestonk!!"

GameStop's share price, which was previously around $17, has risen to as high as $400.

MUTUAL FUNDS LOSS MORE THAN $5 BILLION

GameStop shares, which Wall Street predicted would fall further in value and which large investment companies tried to sink by investing accordingly, gained over 1,700 percent in value in the last 2 weeks due to large purchases by small investors, causing investment companies to suffer losses contrary to their plans.

Melvin Capital and Citron Research are among the investment firms that lost money on the GameStop rally, with the investment funds losing more than $5 billion, according to data from financial analysis firm S3. Melvin Capital was forced to close its position on GameStop on Tuesday after its big loss.

Similarly, the shares of companies such as US home decoration products store Bed, Bath and Beyond, cinema chain AMC, and phone manufacturers Nokia and BlackBerry, which have lost popularity recently, which have suffered economic losses during the pandemic, have also started to rise.

"A DANGEROUS PRECEDENT"

Analysts warned that the clash between small and large investors could pose risks to other stocks, and that it could "create headaches" for markets more broadly, and that the wave could grow.

Earlier this week, JP Morgan released a list of 45 stocks that are susceptible to short squeezes, including real estate firm Macerich and restaurant chain Cheesecake Factory.

In a note shared by JP Morgan analysts, it was stated that the GameStop incident created a "dangerous precedent" for the markets.

Analysts noted that the rise in GameStop and similar stocks would not last long if it was disconnected from fundamental indicators, but could cause significant problems in the markets.

ECONOMIC MANAGEMENT IS WATCHING DEVELOPMENTS

The rapid rise in GameStop and similar stocks has also been on the Biden administration’s agenda. The U.S. Securities and Exchange Commission (SEC) said in a statement on Wednesday that it was actively monitoring market volatility and working with regulators to assess the situation of market participants and examine their activities.

White House Spokesperson Jen Psaki also stated in a press conference held on the same day that the economic administration, including US Treasury Secretary Janet Yellen, is monitoring the situation. Psaki made the following assessment regarding the GameStop incident: "It's a good reminder that the stock market is not the only measure of the health of our economy."

US Federal Reserve Chairman Jerome Powell declined to comment on the GameStop incident when asked about it at a press conference on Wednesday.

RESTRICTION ON PURCHASE OF GAMESTOP SHARES

Stock trading platforms Robinhood and Interactive Brokers announced on Thursday that they were restricting the purchase of shares of GameStop and other companies.

In a statement made by Robinhood, which was established with the aim of "providing access to financial markets for everyone, not just the rich," it was reminded that the platform's mission is to "democratize finance," and that they constantly monitor the markets and make changes when necessary.

The platform's statement said that in light of recent volatility, restrictions were imposed on the trading of stocks including GameStop, American Airlines, AMC, BlackBerry, Bed, Bath and Beyond and Nokia. Only the sale of these stocks was allowed, while purchases were prohibited. Following the restriction, GameStop shares lost nearly 50 percent of their value.

REACTION TO RESTRICTIONS WAS NOT DELAYED

While the restrictions imposed by stock trading platforms such as Robinhood on the trading of these stocks were met with backlash, this situation caused Robinhood to become the focus of criticism and caused small investors to turn to other platforms such as Webull.

Democratic Rep. Alexandria Ocasio-Cortez tweeted that Robinhood's blocking of GameStop and similar stocks was "unacceptable."

Cortez said more information was needed about the decision to block retail investors from buying stocks while mutual funds were free to trade as they pleased, and called for an investigation.

Republican Senator Ted Cruz also supported Cortez in his response.

Another Democratic Rep. Ilhan Omar tweeted that Wall Street had made billions of dollars after the worst recession since the Great Depression, adding, "And this is the moment when ordinary people beat them at their own crooked game."

Democratic Senator Elizabeth Warren also said, "The GameStop rally shows what can happen when the stock market is gambled away and the SEC can't or won't stop market manipulation. If we want a healthy stock market, we need police who will do their job."

LIMITED PURCHASES ALLOWED

Following the backlash, Robinhood announced on Thursday evening that they plan to allow limited purchases of stocks like GameStop starting today and that they will continue to monitor the situation.

Robinhood CEO Vlad Tenev said in a statement on a television program on Thursday evening that the decision to halt certain speculative transactions was in the interest of the company and its millions of users.

Tenev stated that they wanted to avoid restricting their customers as much as possible in accordance with the conditions and regulations, and said, "It pains us to have to implement these restrictions. We will do our best to make trading in these stocks possible as soon as possible."

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