tag:theconversation.com,2011:/au/topics/robinhood-99333/articlesRobinhood – The Conversation2021-10-07T10:40:28Ztag:theconversation.com,2011:article/1690672021-10-07T10:40:28Z2021-10-07T10:40:28ZStock market: many companies are choosing not to be listed – here’s why<figure><img src="https://images.theconversation.com/files/425072/original/file-20211006-16-1faatuv.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">All the bull can be a lot to bear. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/businessman-watching-bull-bear-concept-stock-297104294">Bacho</a></span></figcaption></figure><p>Stock markets reached <a href="https://tradingeconomics.com/united-states/stock-market#:%7E:text=Historically%2C%20the%20United%20States%20Stock,updated%20on%20October%20of%202021.">all-time highs</a> in 2021, bringing huge value to the companies riding the wave, even when you allow for the dip in recent weeks. We are also in the midst of a <a href="https://www.cnbc.com/2021/07/26/ipos-are-on-track-for-a-record-year-as-companies-cash-in-on-sky-high-stock-prices.html">boom year</a> for flotations, with many boards taking advantage of investor enthusiasm for shares. Yet companies have been delisting from the stock market in even <a href="https://www.investors.com/news/publicly-traded-companies-fewer-winners-huge-despite-stock-market-trend/">larger numbers</a>, and, in fact, this trend has been going on for some time. </p>
<p>The number of listed companies worldwide peaked at 45,743 in 2014 but had slipped to 43,248 by 2019 <a href="https://data.worldbank.org/indicator/CM.MKT.LDOM.NO">according to</a> the World Bank. The numbers in major markets such as the US, UK, France and Germany have all been trending down. </p>
<p><a href="https://citywireusa.com/professional-buyer/news/investors-expect-more-listed-companies-to-go-private-in-2021/a1440407">In 2020</a>, there were 47 deals to take companies private worth a total of US$40 billion (£29 billion), which was well down from the 62 deals worth US$88 billion in 2019, though the numbers were considerably up in Asia. On the other hand, 2021 has been a huge year: going private is already beyond its previous peak from 2007, with a record number of transactions that has already <a href="https://www.ft.com/content/5c1e4817-0a42-4de5-a281-baad2149a40f">surpassed US$800 billion</a>. </p>
<p><strong>Total listed companies worldwide</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing the number of listed companies worldwide over time" src="https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=349&fit=crop&dpr=1 600w, https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=349&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=349&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=439&fit=crop&dpr=1 754w, https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=439&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=439&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://data.worldbank.org/indicator/CM.MKT.LDOM.NO">World Bank</a></span>
</figcaption>
</figure>
<p>Some of these decisions to go private are being driven by aggressive buying by private equity groups such as Blackstone, KKR and Apollo. In the belief that there are corporate bargains in the wake of the pandemic and Brexit, these investment firms did <a href="https://www.jdsupra.com/legalnews/private-equity-firms-hunt-for-value-in-9564289/">US$113.5 billion worth</a> of deals in the first half of 2021 alone. That’s more than double the previous six months and the strongest half year since the first half of 2007. </p>
<p>Yet the lure of private equity is not the only explanation for companies walking away from the stock market. So what’s going on, and are they doing the right thing?</p>
<h2>The big turn-off</h2>
<p>For one thing, there is enough money to be found elsewhere that companies don’t need to raise funds through a flotation. The world’s central banks have been increasing the money supply by slashing interest rates and “printing money” via quantitative easing (QE) since the financial crisis of 2007-09, but the latest round of QE in response to the pandemic has taken this to a whole new level. The current rate of money-supply expansion is <a href="https://wolfstreet.com/2021/07/17/too-much-money-chasing-too-few-goods-and-services/">faster than</a> the growth <a href="https://www.ft.com/content/3e45991a-ce3a-4cda-b439-1c18f74ad0c5">of economies</a>. With lending rates so low, all this money is chasing investments. A stock-market listing begins to seem tedious when you can just borrow money very cheaply instead.</p>
<p>The second attraction with being private is regulation. Listed companies have become <a href="https://www.ipohub.org/new-pressures-public-company/">tightly regulated</a> on the back of corporate-governance disasters such as <a href="https://www.mbaknol.com/business-ethics/case-study-worldcom-accounting-scandal/">WorldCom</a>, <a href="https://www.bbc.co.uk/news/business-58026162">Enron</a>, <a href="https://ethicsunwrapped.utexas.edu/wp-content/uploads/2018/07/Raj-Rajaratnam-Insider-Trading.pdf">Galleon Group</a> and more recently <a href="https://www.reuters.com/article/us-germany-wirecard-inquiry-timeline-idUSKBN2B811J">Wirecard</a>. These constraints <a href="https://www.forbes.com/sites/forbesfinancecouncil/2020/02/26/why-more-businesses-are-choosing-to-stay-private/?sh=1ee628586400">have motivated</a> many a company to skip public scrutiny by choosing to be private instead.</p>
<p>Another problem with public markets is how illogical they have become. Now that amateur traders can buy and sell shares easily through platforms like eToro and Robinhood, company valuations are at the mercy of their whims. Witness GameStop and other shares going through the roof earlier this year thanks to the Reddit group <a href="https://theconversation.com/gamestop-im-one-of-the-wallstreetbets-degenerates-heres-why-retail-trading-craze-is-just-getting-started-154584">WallStreetBets</a>. </p>
<p>Amateur traders can also choose to automatically copy the trades of professionals or celebrity traders on a platform like eToro. One celebrity trader’s decisions in the market can mean that many people make the same trade, increasing volatility across hitherto unrelated assets. </p>
<p>Equally, tweets and memes can send valuations soaring or sinking. A good example was <a href="https://theconversation.com/bitcoin-what-elon-musks-u-turn-on-tesla-payments-means-for-future-of-crypto-160891">Elon Musk</a> driving up the price of dogecoin by making positive noises about the cryptocurrency on Twitter, including referring to himself as the #Dogefather. No wonder many company boards would rather keep away from such a volatile environment. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1392030108274159619"}"></div></p>
<h2>Is it worth it?</h2>
<p>Sometimes when business leaders have decided to go private in the past, they have reversed this later. <a href="https://www.theverge.com/2018/8/13/17644234/michael-dell-enterprise-technology-consumer-laptop-private-public-emc">For example, Michael Dell</a> took his computer company private in 2013 only to re-list it five years later. He had got the business into a stronger position that he felt would be recognised by the markets. Musk himself <a href="https://www.cnbc.com/2018/08/08/elon-musk-wants-to-take-tesla-private--heres-what-it-means.html">has mused</a> about taking Tesla private, having felt that the car company was being undervalued by the markets in the past, though now it’s a different story after the share price has surged in the past couple of years. </p>
<p>Neither is an improvement in a company’s market sentiment the only argument for staying listed. The greater transparency can be a selling point to investors, and selling shares to them is not the only way to take advantage of this. Companies can always opt for loans or bonds as alternatives – and hence limit their exposure to social media influencers and amateur traders. </p>
<p>And instead of living in fear of negative sentiment, companies might see it as a challenge and reflect on how to better respond. This might involve intensifying their public relations, advertising and lobbying strategies to better explain the company to the outside world. </p>
<p>Company executives can still be hurt by big shifts in their share price because this is typically one of the performance indicators that determines what they get paid. But again, delisting isn’t the only way around this problem. Instead, companies can rethink their performance indicators – perhaps putting more emphasis on environmental performance, for example, in anticipation of the fact that regulations in this area are bound to increase. </p>
<p>One other potential medium-term advantage to being listed relates to regulation. The more companies that go private, the more likely that regulators will impose more rules on them to protect their investors and prevent fraud. They might even be tempted to increase taxes on private companies to make up for the lack of regulatory scrutiny. In this sense, the allure of going private might turn out to be fool’s gold.</p><img src="https://counter.theconversation.com/content/169067/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Despite a boom in IPOs, a larger number of companies are going in the opposite direction.Karl Schmedders, Professor of Finance, International Institute for Management Development (IMD)Patrick Reinmoeller, Professor of Strategy and Innovation, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1560132021-03-25T12:24:14Z2021-03-25T12:24:14ZRobinhood app makes Wall Street feel like a game to win – instead of a place where you can lose your life savings in a New York minute<figure><img src="https://images.theconversation.com/files/391554/original/file-20210324-23-6q6sul.jpg?ixlib=rb-1.1.0&rect=267%2C327%2C5484%2C3500&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Casinos can make gambling away next month's rent feel like playing a game.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/casino-electronic-roulette-wheel-royalty-free-image/489693974">mbbirdy/E+ via Getty Images</a></span></figcaption></figure><p>Wall Street <a href="https://seekingalpha.com/instablog/14584222-viking-analytics/5329589-is-wall-street-casino">has long</a> <a href="https://wallstreetonparade.com/2019/06/these-charts-suggest-the-whole-wall-street-casino-has-become-taxpayer-backstopped-and-too-big-to-fail/">been likened</a> <a href="https://www.nytimes.com/2010/04/28/opinion/28wed1.html">to a casino</a>. Robinhood, an investment app that <a href="https://www.bloomberg.com/news/articles/2021-03-23/robinhood-is-said-to-have-filed-confidentially-for-u-s-ipo?sref=Hjm5biAW">just filed plans for an initial public offering</a>, makes the comparison <a href="https://www.casino.org/news/big-bets-on-gamestop-make-wall-street-look-like-a-casino/">more apt than ever</a>. </p>
<p>That’s because the power of the casino is the way it makes people feel like gambling their money away is a game. <a href="https://doi.org/10.1016/j.jenvp.2007.03.002">Casinos are full of mood lighting</a>, fun noises and other sensory details that reward gamblers when they place coins in slots. </p>
<p>Similarly, Robinhood’s <a href="https://dx.doi.org/10.2139/ssrn.3715077">slick and easy-to-use app</a> resembles a <a href="https://www.ft.com/content/9336fd0f-2bf4-4842-995d-0bcbab27d97a">thrill-inducing video game</a> rather than a sober investment tool. The color palette of red and green is associated with mood, with <a href="https://doi.org/10.1021/es301685g">green having a calming effect</a> and <a href="https://doi.org/10.1037/0096-3445.136.1.154">red increasing arousal, anger and negative emotions</a>. Picking stocks can seem like a fun lottery of scratching off the winning ticket; celebratory confetti drops from the top of the screen for the new users’ first three investments.</p>
<p>But just as people can lose a lot of money gambling at the casino, the same thing can happen when you trade stocks and bonds – sometimes with disastrous consequences, such as last year when a <a href="https://www.cbsnews.com/news/alex-kearns-robinhood-trader-suicide-wrongful-death-suit/">Robinhood user died by suicide</a> after mistakenly believing that he’d lost US$750,000. </p>
<p><a href="https://www.libarts.colostate.edu/people/fielderj">I study how people behave inside game worlds</a> and <a href="https://doi.org/10.1080/15512169.2018.1446343">design classroom games</a>. Using gamelike features to influence real-life actions can be beneficial, such as when a health app uses rewards and rankings to encourage people to move more or eat healthier food. But there’s a dark side too, and so-called <a href="https://www.gamify.com/what-is-gamification">gamification</a> can lead people to forget the real-world consequences of their decisions. </p>
<figure class="align-center ">
<img alt="A stock trader presses his hand to his head on the floor of the New York Stock Exchange." src="https://images.theconversation.com/files/391555/original/file-20210324-17-hxmyt3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/391555/original/file-20210324-17-hxmyt3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/391555/original/file-20210324-17-hxmyt3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/391555/original/file-20210324-17-hxmyt3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/391555/original/file-20210324-17-hxmyt3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/391555/original/file-20210324-17-hxmyt3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/391555/original/file-20210324-17-hxmyt3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Even the investing pros have bad days.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/APTOPIXFinancialMarketsWallStreet/60915311a2214b04b35fcc494cd62447/photo?Query=New%20York%20stock%20exchange%20plunge&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=316&currentItemNo=6">AP Photo/Richard Drew</a></span>
</figcaption>
</figure>
<h2>Games explained</h2>
<p>Generally speaking, games – whether played on a board, among children or with a computer – <a href="https://doi.org/10.1016/j.ijhcs.2014.09.006">are voluntary activities</a> that are structured by rules and involve players competing to overcome challenges that carry no risk outside of their virtual world. </p>
<p>The reason games are so captivating is that they challenge the mind to <a href="https://www.gamasutra.com/view/news/179084/Raph_Kosters_Theory_of_Fun_ten_years_on.php">learn new things</a> and are generally safe spaces to <a href="http://gamescriticism.org/reviews/lorentz-1-2/">face and overcome failure</a>. </p>
<p>Games also <a href="https://books.google.com/books/about/From_Ritual_to_Theatre.html?id=zNoOAQAAMAAJ">mimic rites of passage</a> similar to religious rituals and draw players into highly focused “<a href="https://cacm.acm.org/magazines/2007/4/5692-flow-in-games-and-everything-else/fulltext">flow states</a>” that dramatically alter self-awareness. This sensory blend of flow and mastery are what make games fun and <a href="https://www.tandfonline.com/doi/abs/10.1080/15213260802669458">sometimes addicting</a>: “Just one more turn” thinking can last for hours, and players forget to eat and sleep. Players who barely remember yesterday’s breakfast recall visceral details from <a href="https://press.uchicago.edu/ucp/books/book/chicago/S/bo5949823.html">games played decades ago</a>.</p>
<p>Unlike static board games, <a href="https://doi.org/10.1177/1555412016655679">video games</a> specifically provide <a href="https://www.doi.org/10.1007/978-3-319-15985-0_3">visual and auditory feedback</a>, rewarding players with <a href="https://www.youtube.com/watch?v=dHTEmObdte4">color, movement and sound</a> to maintain engagement. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/dHTEmObdte4?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The video game Sonic the Hedgehog uses color, movement, sound and the gathering of rings to engage users.</span></figcaption>
</figure>
<h2>The power of angrier birds</h2>
<p>The psychological impact of game play can also be harnessed for profit. </p>
<p>For example, many free-to-play video games such as <a href="https://www.angrybirds.com/games/angry-birds-2/">Angry Birds 2</a> and <a href="https://www.epicgames.com/fortnite/en-US/home">Fortnite</a> give players the option to spend real money on in-game items such as new and even angrier birds or <a href="https://www.techradar.com/news/fortnite-skins-march-2021-all-the-skins-coming-to-fortnite-and-how-to-get-them">character skins</a>. While most people avoid spending much money, this results in a small share of <a href="https://www.bloomberg.com/news/articles/2011-07-06/zynga-s-quest-for-big-spending-whales">heavy users spending thousands of dollars</a> in an otherwise free game. </p>
<p>This “free-to-play” model is so profitable that it’s <a href="https://www.thegamer.com/free-to-play-gaming-industry-impact/">grown increasingly popular</a> with video game designers and publishers.</p>
<p>Similarly, subscription-based “<a href="https://www.lifewire.com/the-top-mmorpgs-813063">massively multiplayer online roleplaying games</a>” such as <a href="https://na.finalfantasyxiv.com/">Final Fantasy XIV</a> <a href="https://www.mayoclinichealthsystem.org/hometown-health/speaking-of-health/are-video-games-and-screens-another-addiction">use core game play loops</a>. These are the primary set of actions a player will carry out during a game – such as jumping in <a href="https://www.academia.edu/30307394/Short_Game_Analysis_of_Super_Mario">Super Mario Brothers</a> or <a href="https://www.techradar.com/news/happiness-is-a-warm-gun-how-borderlands-3s-loot-blows-away-the-competition">continuously upgrading weapons</a> in the Borderlands series – that encourage constant play to keep users playing and paying. They’re so effective that, for a small number of people, playing the game can even become an <a href="https://doi.org/10.1016/j.jad.2017.08.045">addiction</a> that interferes with their mental well-being.</p>
<p>Gamification, however, goes one step further and uses gaming elements to influence real-world behavior.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/rLl9XBg7wSs?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Frequent jumping is a key element of the Super Mario Brothers experience.</span></figcaption>
</figure>
<h2>Gamification for good</h2>
<p>Gamification is the use of gamelike elements in <a href="http://gamification-research.org/2012/04/defining-gamification/">other contexts</a>. <a href="https://doi.org/10.1007/s00779-014-0783-2">Common elements</a> include badges, points, rankings and progress bars that visually encourage players to achieve goals. </p>
<p>Many readers likely have experienced this type of gamification to improve <a href="https://www.degruyter.com/document/doi/10.1515/mopp-2018-0037/html">personal fitness</a>, get better <a href="https://www.khanacademy.org/">grades</a>, <a href="https://www.acorns.com/">build savings accounts</a> and even <a href="https://fold.it/">solve major scientific problems</a>. Some initiatives also include offering rewards that can be cashed in for participating in <a href="https://www.govtech.com/civic/GT-September-2017-Boosting-Engagement-by-Gamifying-Government.html">actual civic projects</a>, such as volunteering in a park, commenting on a piece of legislation or visiting a government website.</p>
<p>They all rely on the behavioral concept known as <a href="https://doi.org/10.1007/978-3-319-10208-5_1">extrinsic motivation</a>, which occurs when a person pursues goals with the expectation of a reward, such as a student who hates calculus but desperately needs an A to graduate. Extrinsic motivation lasts only as long as the player feels appropriately challenged and rewarded. Games exploit this by tapping into the <a href="https://doi.org/10.1080/17530350.2021.1882537">pleasure of earning rewards</a>. </p>
<h2>Gamification for bad</h2>
<p>There’s a fine line, though, between using extrinsic motivation to help people lose some weight and using it to obscure the complexity of investing in stocks and other financial instruments behind a fun, gamelike environment. </p>
<p>Robinhood built its app to <a href="https://www.c-span.org/video/?508545-1/gamestop-hearing-part-1&event=508545&playEvent">delight people who are new to active investing</a>, taking advantage of the same psychological motivators that drive game behavior. Robinhood’s simple interface is replete with <a href="https://www.ft.com/content/0e451231-fa4c-4686-bf2f-a5e107f337b9">emojis, push notifications, digital confetti and backslapping affirmation emails</a>. Its “game play loop” is making stock trading easy while providing sensory feedback. </p>
<p>I opened an account to see for myself.</p>
<p>The gamelike thrills start at sign-up when Robinhood offers new users a free stock, which they select from three face-down golden cards. This gives a casinolike illusion of choice, with the <a href="https://doi.org/10.1086/593946">color gold</a> lending an air of sophistication. </p>
<p>But rather than merely pick a card, users actually “scratch” it, like a lottery ticket, after which the stock is revealed with affirming congratulations and a screen full of confetti. Other sensory appeals such as colors and gamified imagery such as gift boxes encourage continued use. </p>
<figure class="align-center ">
<img alt="Digitalized gift box is opened revealing cash, next to the words, 'Invite more friends. Get free stock.'" src="https://images.theconversation.com/files/391563/original/file-20210324-19-8n7c4c.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/391563/original/file-20210324-19-8n7c4c.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=256&fit=crop&dpr=1 600w, https://images.theconversation.com/files/391563/original/file-20210324-19-8n7c4c.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=256&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/391563/original/file-20210324-19-8n7c4c.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=256&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/391563/original/file-20210324-19-8n7c4c.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=321&fit=crop&dpr=1 754w, https://images.theconversation.com/files/391563/original/file-20210324-19-8n7c4c.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=321&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/391563/original/file-20210324-19-8n7c4c.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=321&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The gift imagery in the Robinhood app taps into the extrinsic promise of a reward for both the sender and receiver.</span>
<span class="attribution"><span class="source">Robinhood app</span></span>
</figcaption>
</figure>
<p>By delighting users, Robinhood creates players rather than investors. This helps them overlook the fact that speculative investing is <a href="https://www.thesimpledollar.com/investing/why-dont-professional-investors-beat-the-market/">very difficult</a> and could cause them to lose lots of money – even if they’re professionals who spend hours and days <a href="https://investorjunkie.com/investing/leave-investing-to-the-professionals/">scrutinizing companies and trades</a>. </p>
<p>Robinhood isn’t the only financial app that uses some of these gamelike effects. But unlike Robinhood, apps like <a href="https://www.acorns.com/">Acorns</a> and the <a href="https://www.longgame.co/">Long Game</a> encourage users to save money rather than spend it.</p>
<h2>Games make learning fun</h2>
<p><a href="https://www.ludogogy.co.uk/article/start-on-day-3-liminality-in-high-stress-wargames/">In my own work</a> studying player interaction and decision-making in games, I’ve largely found them to be positive psychological tools. </p>
<p>And there are lots of real-world applications of game play, such as for improving health, furthering education and saving money. But I believe simply encouraging people with little investing experience to buy and sell stocks is not one of them. </p>
<p>As Robinhood prepares to go public, it could use the opportunity to rethink how it interacts with users. Rather than celebrating a trade, for example, it could reward them for taking an investment education program. </p>
<p>As any good game maker knows, the best games not only are <a href="https://www.gamasutra.com/view/news/179084/Raph_Kosters_Theory_of_Fun_ten_years_on.php">big on fun and socializing but emphasize learning too</a>. </p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklybest">Sign up for our weekly newsletter</a>.]</p><img src="https://counter.theconversation.com/content/156013/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr. Fielder is affiliated with the Games Manufacturing Association and the North American Simulation and Gaming Association.</span></em></p>Robinhood’s trading app uses features commonly found in video games and casinos to make investing more fun, which also obscures the real risks involved.James "Pigeon" Fielder, Adjunct Professor of Political Science, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1560832021-02-26T17:42:34Z2021-02-26T17:42:34ZGameStop: WallStreetBets trader army is back for a second share rally – here’s how to make sense of it<figure><img src="https://images.theconversation.com/files/386711/original/file-20210226-23-1nrmia9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The degenerates strike again. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/montreal-canada-february-3-2021-wallstreetbets-1909231093">denniszn</a></span></figcaption></figure><p><a href="https://uk.finance.yahoo.com/quote/GME/history?p=GME">GameStop</a> shares have gone soaring again. The Texan computer games retail chain at the heart of the stock market drama at the end of January surged from US$44 (£32) to a high of around US$200 on February 26 before sliding back to US$120 at the time of writing. Institutional investors who had “short positions” against the stock, meaning that they were betting it was going to go down, were <a href="https://markets.businessinsider.com/news/stocks/gamestop-short-sellers-billions-losses-reddit-traders-wallstreetbets-rally-gme-2021-2-1030125873">said to have</a> racked up nearly US$2 billion losses from the rises.</p>
<p>Other stocks involved in the first wave of retail trading mania such as cinema group <a href="https://www.tradingview.com/symbols/NYSE-AMC/">AMC Entertainment</a> have followed a similar trajectory, doubling at one point and still almost 50% up on the calm of a few days earlier. So why are investors buying these stocks again? </p>
<p>The army of millions of investors from Reddit’s <a href="https://www.reddit.com/r/wallstreetbets/">WallStreetBets</a> community pushed GameStop shares from US$20 to US$480 during the January “<a href="https://theconversation.com/gamestop-hedge-fund-attacks-have-opened-up-powerful-new-front-against-wall-street-154284">short squeeze</a>”, in which they drove hedge funds like Melvin Capital into heavy losses, after forcing them to liquidate massive bets against the stock. </p>
<p>As the GameStop price fell back in early February, many of these small investors were counting their losses. There have since been countless debates over the mania, including a <a href="https://www.theguardian.com/business/live/2021/feb/18/gamestop-hearing-live-news-updates-robinhood-ceo-trading-app-testimony-congress">congressional hearing</a> in the US on February 18. </p>
<h2>The recriminations</h2>
<p>Online trading apps at the centre of the buying frenzy, such as Robinhood, have been variously accused of making it too easy for amateurs to take wild risks, enabling market manipulation, risking the <a href="https://www.fxstreet.com/news/can-gamestop-gme-stock-destabilize-the-entire-market-202102251239">financial stability</a> of the wider system, and siding with hedge fund backers Citadel by heavily restricting buying in the stocks in question after prices rocketed. </p>
<p>Over the latter issue, multiple users filed lawsuits against Robinhood and Citadel, though <a href="https://www.cnbc.com/2021/02/17/robinhood-faces-lawsuits-after-gamestop-trading-halt.html">according to</a> a clause in Robinhood’s customer agreement, all disputes are to be settled in arbitration and not in the civil court system. Robinhood CEO Vlad Tenev has denied the allegations, <a href="https://www.theguardian.com/business/2021/feb/18/gamestop-hearing-latest-robinhood-founder-testimony-vlad-tenev-stocks-app">offering his own</a> explanation at the congressional hearing. </p>
<p>Meanwhile, the adopted leader of the WallStreetBets movement, Keith Gill (known as RoaringKitty and DeepFuckingValue on different platforms), has become the subject of a <a href="https://www.bbc.co.uk/news/business-56106824">lawsuit himself</a>. He stands accused in misrepresenting himself as an amateur and manipulating other users to follow his risky speculative strategies. As he memorably told congress during the February 18 hearing, “I like the stock”. The lawsuit has been ridiculed by <a href="https://www.reddit.com/r/wallstreetbetsHIGH/comments/louzb7/roaring_kitty_keith_gill_defends_himself_i_am_not/">Gill</a> and on social media, triggering “<a href="https://www.reddit.com/r/law/comments/lgbc1b/im_here_live_im_not_a_cat/">I am not a cat</a>” jokes and memes alike. </p>
<h2>Understanding the phenomenon</h2>
<p>While all these questions will continue, the new GME share price rally shows that it was not a one-off situation. It’s <a href="https://www.reuters.com/article/uk-retail-trading-gamestop-idUKKBN2AQ1FQ">not completely clear</a> why the shares have been targeted again. It <a href="https://www.ft.com/content/50eaa1b5-d244-4b3e-b460-736828c049cd">could be linked to</a> the fact that the congressional hearing has passed. It could be linked to the resignation of GameStop chief finance officer Jim Bell, signalling a change of direction in the company. Or it could be to do with the fact that short positions on the firm’s shares <a href="https://www.reddit.com/r/GME/comments/lspfus/finra_data_now_shows_over_58_million_gme_stocks/">had risen again</a>, possibly prompting amateur traders to <a href="https://www.ft.com/content/50eaa1b5-d244-4b3e-b460-736828c049cd">buy bullish options</a> in the stock which will pay out handsomely if the price keeps rising. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Meme featuring the words 'I just like the stock' over screenshot from The Matrix" src="https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=411&fit=crop&dpr=1 600w, https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=411&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=411&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=517&fit=crop&dpr=1 754w, https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=517&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/386725/original/file-20210226-15-54rtg2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=517&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Meme circulating on Reddit’s WallStreetBets during the second GME surge.</span>
<span class="attribution"><span class="source">Reddit</span></span>
</figcaption>
</figure>
<p>But at the same time, I would argue that none of these reasons properly explain what is happening here. After years of researching financial markets and specifically the new highly speculative cryptocurrency market, I can identify three main reasons behind the phenomenon. </p>
<p>First, it is about the expansion of fintech and the ongoing decentralisation of the financial market. New technologies such as easy trading apps provide access to financial markets to a large number of amateurs. They enable financial liberalisation and autonomy from the major banks and the other institutions that control the market, just like cryptocurrencies do, and this has mass appeal. Finance scholars have named this effect “<a href="https://www.sciencedirect.com/science/article/pii/S0929119920302030">crypto-exuberance</a>”. </p>
<p>Second, it’s an extension of the meme culture of millennials and generation Z “zoomers”, in which emotions are expressed with images, sounds, videos, emojis and abstract humour. Social media posts might contain sequences of unidentifiable nonsense, offensive terms and never-ending slang. </p>
<p>This all makes it harder to assess the sentiments behind them. For example, behavioural finance researchers would normally use algorithms to extract investor sentiments from Twitter posts, Google search trends and <a href="https://www.tandfonline.com/doi/full/10.1080/1351847X.2020.1737168?af=R">media headlines</a>. But how would you use the academic software to analyse the content on r/WallStreetBets? This a huge challenge. </p>
<p>The third and perhaps least obvious driving force is the pandemic. A young generation of traders already blamed the older ones for the global financial crisis. The pandemic <a href="https://www.cebm.net/2020/10/has-covid-19-highlighted-social-injustice-built-into-our-cities/">has amplified</a> these feelings of social injustice and hatred against the money of the baby boomers, as millennials who grew up or studied during the past recession are now facing another one as young professionals. </p>
<p>The government restrictions and the social isolation that they have caused have also arguably spiked rebellious sentiments. At the same time, this situation creates an ideal environment for all sorts of market manipulations. </p>
<p>So if the second GameStop rally has surprised you, you don’t really need to find a rational explanation for it. GameStop’s stock rally is driven by a combination of cultural and environmental factors. The fact that these all appear to be more important to these amateur traders than making money is fascinating and should be studied. Besides GameStop, AMC and also the decent <a href="https://www.telegraph.co.uk/technology/2021/02/24/bitcoin-bounces-jack-dorsey-invests-170m-live-updates/">Dogecoin explosion</a>, we will continue to observe more cases like this in the future.</p><img src="https://counter.theconversation.com/content/156083/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Larisa Yarovaya does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Shares in the gaming chain and other stocks like AMC and BlackBerry are soaring once again.Larisa Yarovaya, Deputy Head of the Centre for Digital Finance, Lecturer in Finance, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1550842021-02-11T19:09:07Z2021-02-11T19:09:07ZInvestors swoon over Bumble’s IPO – but what exactly is an initial public offering?<figure><img src="https://images.theconversation.com/files/383870/original/file-20210211-23-1gdqo2i.jpg?ixlib=rb-1.1.0&rect=332%2C7%2C4826%2C3426&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bumble's IPO raised $2.15 billion for the women-go-first dating app.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/an-afp-journalist-holds-his-phone-showing-the-dating-news-photo/1203460431">Eric Baradat/AFP via Getty Images</a></span></figcaption></figure><p>Bumble <a href="https://www.investors.com/news/technology/bumble-ipo-initial-public-offering-trades-thursday-bmbl-mtch/">raised US$2.15 billion in an initial public offering</a>, or IPO, late on Feb. 10, just in time for Valentine’s Day. Investors swooned over the women-go-first dating app, buying more shares and at a higher price than initially expected, valuing the company at $8.3 billion. </p>
<p>But what exactly is an IPO? </p>
<p>As a <a href="https://wvu.academia.edu/JFluharty">finance professor</a>, I believe understanding IPOs are an important part of knowing how markets work. More interesting to me, however, is how a new type of IPO is growing in popularity – including among the Redditors who are upending financial markets – and allowing more investors than ever to buy into the “hype” when a company goes public.</p>
<h2>Why companies go public</h2>
<p>Companies use IPOs – known as “going public” – to access the deep pockets of the U.S. stock market. At the end of 2020, <a href="https://siblisresearch.com/data/us-stock-market-value/">the IPO market was valued at over $50 trillion</a>.</p>
<p>To <a href="https://www.investopedia.com/terms/i/ipo.asp">understand what an IPO is</a>, think about starting a private business. You might deposit $50,000 into a bank account, purchase equipment and start operations. However, eventually, you will run out of money if you need to expand – especially if you are growing quickly.</p>
<p>To make life a little easier, you may attempt to obtain money from your friends or family or secure a loan from a bank. Similarly, public companies can access the stock market to raise money from investors in exchange for the promise of future profits and returns.</p>
<p>But in order to do that, first the company must go public.</p>
<p>When a business decides to go through with an IPO, it first goes to an investment banker – the same way you might go to a real estate broker when you decide to sell your house. The banker does all the same things that a broker might do, such as appraising the business by determining its value and risk and trying to match the company that is going public with well-heeled buyers who might be interested in buying a share of it. </p>
<p>In some cases, the banker might act more like a used car dealer, in which case the investment bank buys the company’s shares for a set price and then sells them to other investors later on at – it hopes – a profit. </p>
<p>In any case, the company going public doesn’t sell its new shares to “regular investors.” Instead the banks handling the deal turn to their favored wealthy clients, who initially buy shares and then sell them on to the public when the stock begins trading – usually at much higher prices than they paid. <a href="https://www.sec.gov/rules/final/2020/33-10824.pdf">Legal restrictions</a> mean the average individual cannot buy shares directly from an investment bank. So you typically need to be an accredited investor to be qualified, and trading app Robinhood’s army of day traders likely wouldn’t be eligible. </p>
<p>Success for an IPO typically means two things: The company gets as much as or more money than it aimed for, and the price “pops” on the first day of trading. </p>
<p>In Bumble’s case, <a href="https://www.sec.gov/Archives/edgar/data/1830043/000119312521025246/d20761ds1a.htm">it initially offered 34.5 million shares</a> at a price of $28 to $30, but <a href="https://seekingalpha.com/news/3660867-bumble-sets-ipo-at-39-dollars-a-share">overwhelming demand meant</a> it was able to sell 50 million at $43. That allowed it to raise well more than double the capital it had earlier planned on. </p>
<p>As far as whether early investors will get a first-day boost, <a href="https://finance.yahoo.com/quote/BMBL/">BMBL surged to $70.31</a> on Feb. 11 in its first day of trading on the NASDAQ stock exchange, creating a hefty profit for investors who bought into the IPO and sold their shares.</p>
<h2>Rise of the SPAC</h2>
<p>However, there’s a new IPO method in town that is becoming an increasingly common way for companies to go public: the SPAC IPO. </p>
<p>SPAC stands for special purpose acquisition company, and they have suddenly become the next big thing among <a href="https://www.reddit.com/r/wallstreetbets/comments/gy62lm/basic_introduction_to_spacs/">Redditors on WallStreetBets</a> who <a href="https://www.cnn.com/2021/01/27/investing/gamestop-reddit-stock/index.html">fueled the skyrocketing prices</a> of GameStop, AMC, silver and other securities in recent weeks. The zero-comission trading app Robinhood, which had been the Redditors’ favored place to buy stocks, <a href="https://www.pymnts.com/news/ipo/2021/robinhood-marches-on-with-ipo-despite-gamestop-trading-debacle/">is even considering doing a SPAC</a> rather than a normal IPO as it seeks to go public. </p>
<p>The difference is that a SPAC is like an IPO in reverse. An investor-led fund does an actual IPO – raising money from other elite Wall Street types – but with a shell of a company that has no operations. Known as a “blank check” business, its entire purpose is to eventually purchase an unspecified private company, thus making it public as well, and <a href="https://www.sec.gov/corpfin/disclosure-special-purpose-acquisition-companies">typically has two years to do it</a>.</p>
<p>In 2020, there were about the same number of <a href="https://insight.factset.com/u.s.-ipo-market-spacs-drive-2020-ipos-to-a-new-record">traditional IPOs as SPACs</a> for the first time <a href="https://www.econstor.eu/bitstream/10419/177392/1/2017-02-12%20SPAC%20IPOs%20Chapter%20SSRN.pdf">since the first SPAC was created in 2003</a>.</p>
<p>The upshot is that essentially anyone can invest in a SPAC and acquire a piece of the once-private company. Of course, this is also a very speculative investment, and it’s easy to lose everything. But that can be true of any IPO, which <a href="https://www.barrons.com/articles/SB52133021052493823286804580163941038934092">have historically underperformed the market</a>. </p>
<p>In other words, as always, <a href="https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/">buyer beware</a>.</p>
<p>[<em>Insight, in your inbox each day.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=insight">You can get it with The Conversation’s email newsletter</a>.]</p><img src="https://counter.theconversation.com/content/155084/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan T. Fluharty-Jaidee does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A finance scholar explains what an IPO is, how it works and a new way companies are going public that’s winning the hearts of WallStreetBets Redditors.Jonathan T. Fluharty-Jaidee, Assistant Department Chair and Professor of Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1545842021-02-03T15:21:07Z2021-02-03T15:21:07ZGameStop: I’m one of the WallStreetBets ‘degenerates’ – here’s why retail trading craze is just getting started<figure><img src="https://images.theconversation.com/files/382250/original/file-20210203-21-14zslwq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We're not going away. </span> <span class="attribution"><a class="source" href="https://theconversation.com/drafts/154527/edit">Rafapress</a></span></figcaption></figure><p>I joined the WallStreetBets forum on Reddit almost two years ago. But I was far from the image of the typical “bored, young Reddit trader” that has been portrayed in the media lately. I had worked in banking, and been a retail investor for more than 15 years – in addition to teaching financial management at a Russell Group university for more than eight years. </p>
<p>The average profile of members was similar to mine in terms of knowledge and experience – only much younger and with much deeper pockets than me, I think. The forum had just above a million members and it was a good source of learning and information. </p>
<p>The users referred to themselves as “degenerates” or “retards” (an anagram for “traders”) and, when they posted their analysis of possible trading opportunities, it was known as “DD” or due diligence. These DDs would be very detailed, just like the kind of analysis that the now famous <a href="https://www.wsj.com/articles/keith-gill-drove-the-gamestop-reddit-mania-he-talked-to-the-journal-11611931696">Keith Gill</a> – aka DeepFuckingValue – <a href="https://www.youtube.com/watch?v=GZTr1-Gp74U">would later post</a> on computer games retailer <a href="https://www.reddit.com/r/wallstreetbets/comments/jl84wk/gamestop_technical_dd_on_how_this_gaming_cycle/">GameStop</a>, which led to the 100-fold price surge that has recently taken the world by storm.</p>
<p><strong>Keith Gill’s July 2020 analysis of GameStop</strong></p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/GZTr1-Gp74U?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>These DDs were scrutinised and discussed by members and any discrepancies in arguments or data were usually identified quickly. Existing members continually reminded newcomers about the risks involved with suggested trades and cautioned that anyone putting more than 2% of their total capital into a risky trade was <a href="https://www.reddit.com/r/wallstreetbets/wiki/money_mangement">making a mistake</a>.</p>
<p>The most important feature of the forum was transparency. Members regularly shared the status of their trade – both losses and profits. Traders like Gill even <a href="https://www.reddit.com/user/DeepFuckingValue/">regularly posted</a> the status of their portfolio, <a href="https://www.reddit.com/r/wallstreetbets/search?sort=top&q=flair%3ALoss&restrict_sr=on&t=week">including losses</a>. </p>
<h2>The games begin</h2>
<p>The forum started discussing GameStop around a year ago. But at that time it was just a trading opportunity. There wasn’t any talk of taking down hedge funds or a war with Wall Street until two months ago. In January 2021, based on the discussion in the forum, I bought 11 shares in GameStop, in gradual steps ranging in price from US$80 to US$350 (averaging US$200) as a calculated trade based on the available information at the time. </p>
<p>By late January, it had become a frenzy as forum members piled into GameStop and other stocks, including BlackBerry and cinema group AMC Entertainment, using low-fee trading platforms such as Robinhood. This was based on <a href="https://theconversation.com/gamestop-hedge-fund-attacks-have-opened-up-powerful-new-front-against-wall-street-154284">the knowledge</a> that many hedge funds had bet heavily on these share prices to go down (known as “short positions”), and that driving them up would cost big investors a fortune. In the event, the damage has run to billions of dollars and some players, including <a href="https://www.cityam.com/hedge-fund-melvin-capital-bags-billions-from-investors-following-gamestop-debacle/">Melvin Capital</a>, <a href="https://www.bloomberg.com/news/articles/2021-01-27/hedge-fund-maplelane-loses-about-33-on-short-bets-this-month">Maplelane</a> and <a href="https://www.cnbc.com/2021/01/29/citron-research-short-seller-caught-up-in-gamestop-squeeze-pivoting-to-finding-long-opportunities.html">Citron</a>, got burned. </p>
<p>The WallStreetBets forum has grown exponentially. The number of members now stands at 8.4 million and still rising, and it is almost impossible to follow the discussion or extract information from the barrage of posts. Even the founders of the forum <a href="https://markets.businessinsider.com/news/stocks/wall-street-bets-founder-says-reddit-fueled-frenzy-is-a-train-wreck-2021-1-1030019048">have complained</a> that it is a victim of its own success. </p>
<p>The response from the trading apps has been questionable in my opinion. They either <a href="https://www.theguardian.com/business/2021/jan/28/gamestop-shares-robinhood-app-ban-blackberry-amc-nokia-reddit">stopped or severely restricted</a> buying by individual traders while allowing everyone to sell, thus suppressing demand and price. And these restrictions were only for retail traders - not hedge funds. </p>
<p><a href="https://www.ft.com/content/17450cc8-506d-4c3c-928c-628f5f92efa8">Outraged retail investors</a> are bringing more than <a href="https://www.pcmag.com/news/robinhood-now-faces-over-30-class-action-lawsuits-for-blocking-stock-buys">30 class-action lawsuits</a> against Robinhood, and a <a href="https://www.coindesk.com/us-congress-plans-hearings-on-gamestop-market-pumps">house committee hearing</a> by US lawmakers is expected later in February. The New York attorney general, Letitia James, <a href="https://ag.ny.gov/press-release/2021/attorney-general-james-reviewing-robinhood-app-activity">is reviewing</a> Robinhood’s reaction, while prominent figures like CNN host <a href="https://www.youtube.com/watch?v=6fs_lyGn4YA">Chris Cuomo</a>, <a href="https://www.telegraph.co.uk/technology/2021/02/01/robinhood-boss-promises-elon-musk-relax-gamestop-limits-live/">Tesla’s Elon Musk</a> and tech investor <a href="https://www.institutionalinvestor.com/article/b1q912xzmy84jm/The-Triumph-of-Dumb-Money">Chamath Palihapitiya</a> have openly questioned whether Robinhood imposed the restrictions to favour hedge funds with short positions. <a href="https://www.livemint.com/companies/news/gamestop-frenzy-puts-spotlight-on-trading-giant-citadel-securities-11612204544485.html">Notably</a>, one of the main customers for the user data that Robinhood sells is Citadel Securities, which is one of Melvin Capital’s backers. </p>
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<p>Robinhood <a href="https://www.pcmag.com/news/robinhood-now-faces-over-30-class-action-lawsuits-for-blocking-stock-buys">responded that</a> it <a href="https://fortune.com/2021/02/02/robinhood-gamestop-restricted-trading-meme-stocks-gme-amc-vlad-tenev-nscc/">imposed the restrictions</a> temporarily <a href="https://gulfnews.com/special-reports/mystery-surrounding-robinhood-app-and-gamestop-price-spike-now-unravelled-1.1612267566233">while it raised</a> additional funding to cover a huge hike in the amounts the clearing houses were demanding to cover the period until each trade settled. It has <a href="https://techcrunch.com/2021/02/01/robinhoods-long-weekend-brings-a-total-of-3-4-billion-to-its-balance-sheet/?guccounter=1&guce_referrer=aHR0cHM6Ly9uZXdzLmdvb2dsZS5jb20v&guce_referrer_sig=AQAAANwPecrjxzzYBqpItNsS5kuuTSMm8tDwZoqpbRd_OZINbpFNVm3u7FFH7OML7Mzmqy0vOg2ERShvn3Irq9vdq_SDISNnz-QwG0vt3MHqrKi1y6fSpooEHa7HGJKA3_wYjV8ijmlszRWVuCnq219_se463svUoot2nksOzDQM4IHz">since raised</a> over US$3 billion from backers and has partially lifted the restrictions. </p>
<h2>The new rock’n’roll</h2>
<p>Beyond this individual Reddit forum, a wider change seems to be taking place. For the past few weeks, most of the fastest-growing communities on Reddit are related to investment and trading discussions. And this trend is spreading across the world. Similar forums have emerged in the <a href="https://www.ft.com/content/acc1dbfe-80a4-4b63-90dd-05f27f21ceb2">UK, Europe</a> and <a href="https://www.ft.com/content/f26a2ed8-3fea-41b6-9de7-066ef2be3bf2">Malaysia</a>.</p>
<p><strong>Reddit’s fastest growing communities</strong></p>
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<a href="https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Reddit's top-growing communities" src="https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=380&fit=crop&dpr=1 600w, https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=380&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=380&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=477&fit=crop&dpr=1 754w, https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=477&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/382222/original/file-20210203-23-76w011.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=477&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://frontpagemetrics.com/">Reddit</a></span>
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<p>There is also the realisation among institutional investors that social media users working collectively are capable of exposing carefully hidden information and spreading it like wildfire. It may mean that more people may choose to manage their own investments in future rather than paying generous fees to hedge funds and other financial institutions to do it for them. </p>
<p>It may also lead to significant changes in <a href="https://www.investmentnews.com/advisers-ponder-systemic-risks-to-markets-as-gamestop-spins-out-of-control-201984">risk management</a> and disclosure practices. For example, Citron, which specialises in taking short positions, says it will <a href="https://financialpost.com/investing/citron-research-andrew-left-stop-short-selling-research-publishing">no longer</a> put its research into the public domain. </p>
<p>On a more social level, this phenomenon appears to have made young people <a href="https://www.theguardian.com/commentisfree/2021/feb/02/my-teenage-son-joined-gamestop-gold-rush-how-worried-should-i-be">much more interested</a> in how the financial markets work. Social media forums and commission-free trading appears to be creating a <a href="https://www.vox.com/business-and-finance/2020/7/9/21314119/stock-market-day-trading-reddit-dave-portnoy-barstool-robinhood">new generation</a> of investors. </p>
<p>This <a href="https://www.theguardian.com/business/2021/jan/28/sending-a-message-gamestop-investors-on-why-they-bought-shares">democratisation of capital markets</a> may be a solution to <a href="https://www.theatlantic.com/business/archive/2015/10/retirement-savings-dont-blame-people/408283/">the indifference</a> that has long existed among the ordinary population towards saving and investing - reversing a trend that has existed for more than three decades. </p>
<p>As for me and my 11 shares in GameStop – currently worth US$990, or about half of what I paid for them – I plan to hold them for two reasons. The company now has the support of 8.4 million WallStreetBets members as potential customers, many of whom are also the primary customers for its gaming products. GameStop is now also a well recognised brand among young social media users across the world. Wish me luck.</p><img src="https://counter.theconversation.com/content/154584/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mohammad Rajjaque owns shares in GameStop and a member of Wallstreetbets forum. </span></em></p>Now that Gen Z has got a taste for financial trading, the whole game has changed.Mohammad Rajjaque, Program Director, Accounting and Financial Management Division, University of SheffieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1543102021-01-29T17:50:17Z2021-01-29T17:50:17ZGameStop: Wall Street short sellers are not villains but Reddit traders should be totally free to attack them<figure><img src="https://images.theconversation.com/files/381405/original/file-20210129-20398-11bkk6c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Let the games continue. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/portland-usa-jan-27-2021-mobile-1903528705">Tada Images</a></span></figcaption></figure><p>In the battle between the army of renegade Reddit retail traders and Wall Street’s hedge funds over unloved stocks like the Texan computer games retail chain GameStop, there has been a serious case of mistaken accusations on both sides. They are both being wrongly accused of manipulating the markets, but they are not. </p>
<p>Let me start with the hedge funds. The reason why they were targeted by the 5 million-plus traders who follow r/WallStreetBets (of which I am one, by the way) is because their strategy of short-selling stocks is seen as damaging. </p>
<p>Hedge funds and institutional traders sell a stock short when they have a negative view about a company. In essence, this involves borrowing the stock in the securities lending market and selling it, with the commitment to return the loaned stock later. </p>
<p>Such a strategy tends to be self-fulfilling: when the stock is sold, it puts downward pressure on the price (especially if many investors do the same). Then, when the time comes to return the borrowed stock, the hedge fund buys it back at a much lower price, thereby pocketing a hefty profit.</p>
<p>In the view of the angry retail traders who have driven up the price of GameStop and other stocks <a href="https://t3n.de/news/nokia-kurs-dreht-durch-stampede-1352566/">like Nokia</a> in recent days, this is manipulation. Their attack, using cheap and easy trading apps like <a href="https://robinhood.com/us/en/">Robinhood</a>, was based on the simple premise that if short sellers make prices go down, buyers make prices go up (assuming they have market power). </p>
<p>If buyers dominate, it creates what is known as a “short squeeze” as prices go up and the short sellers have to rush to buy fast in order to lose as little money as possible. In some cases, the rising prices will trigger “margin calls” by their lenders, which requires the short sellers to immediately cover their costs. This has inflicted billions of dollars of losses on hedge funds like Melvin Capital. </p>
<p>Meanwhile, the rush to buy stocks back pushes prices even higher, and some short sellers are pushed out of the market because the stock is too expensive for them to buy. In such cases, they are usually penalised by the exchange regulator for “failing to deliver” the stock back to the lenders that they borrowed it from. </p>
<h2>In defence of short sellers</h2>
<p>The debate about short sales and their impact on stock markets goes back to the beginning of the 20th century. It was highlighted during the 2008 financial crisis, and I was already among the few that <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2007.01230.x">advocated for short sales</a> as a way to increase market efficiency, together with my colleagues professors William Goetzmann and Ning Zhu. </p>
<p>However, most saw the fall of Lehman Brothers, AIG and other financial institutions in 2008 as <a href="https://www.wsj.com/articles/SB121868231109839673">caused by short sellers</a> artificially betting on their stocks plummeting. Many jurisdictions, from the US to Japan, implemented short sale restrictions and market halts. </p>
<p>In some European markets, it has actually been quite common for the market authorities to prohibit short sales for certain periods. Remember: regulators want stock prices to go up, not down. The extreme case is the Pakistani regulator, which in 2008 <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2330765">imposed a regulation</a> that basically prohibited selling (not short selling but <em>any</em> selling).</p>
<h2>In defence of renegade traders</h2>
<p>As for the Reddit traders, Robinhood and certain other platforms suspended buying (but not selling) of targeted stocks like GameStop in the midst of the excitement. This earned them much vilification on social media, and one trader <a href="https://edition.cnn.com/2021/01/28/investing/lawsuit-robinhood-gamestop-wallstreetbets/index.html">filed a lawsuit</a> against Robinhood.</p>
<p>Shares in GameStop and other stocks quickly tumbled, but they rose again a few hours later when the platform signalled that the suspension would be temporary. Robinhood <a href="https://www.ft.com/content/9a1b24e6-0433-462a-a860-c2504ea565e4">explained soon after</a> that it had taken this “tough decision” to ensure that it could meet its capital obligations with US regulator the SEC. </p>
<p>It could presumably have breached these requirements if the prices of stocks had suddenly fallen because so many traders would have borrowed heavily to maximise what they could buy, and Robinhood would have had to pick up the tab if they couldn’t pay. </p>
<p>The platform <a href="https://www.ft.com/content/6777351d-d6c3-3be1-b10d-0635ca0540e6">quickly raised</a> an additional US$1 billion from its backers to cover such eventualities, and then reopened trading a few hours later. The prices of the targeted stocks then shot up again, though it soon emerged that there were still <a href="https://www.ft.com/content/c5a85213-ca41-438d-9087-ff78791eabff">heavy restrictions</a> on how many shares traders could buy in GameStop and certain other companies. </p>
<p>Now the controversy is whether regulators should go after Robinhood on the basis that it has been facilitating stock manipulation. In my view, the retail traders are no more manipulators than the short sellers. Manipulation requires both false information and intent to profit. Neither side falls into this category. </p>
<p>Markets are to finance what democracy is to our political systems: we need to allow people to vote according with their preferences and information. In the case of GameStop, it is equally as acceptable that sophisticated investors use market mechanisms to benefit from pessimistic beliefs, and that uninformed, well organised investors push stock prices up in order to harm the Wall Street institutions. </p>
<p>It should be the role of market regulators to increase transparency of markets so that trading is not driven by misinformation. They should also educate potential investors about the risks involved in equity trading (in fact, the potential losses for Reddit members in the GameStop episode could yet end up being enormous). </p>
<p>Finally, it is a regulator’s responsibility to facilitate market entry to all, whether they are sophisticated or uninformed, whether they are rich or poor, whether they are tall or short. Markets are an amazing invention of humankind, but they are risky.</p><img src="https://counter.theconversation.com/content/154310/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Arturo Bris follows r/WallStreetBets.</span></em></p>There was outrage after Robinhood and other trading apps temporarily suspended buying of the stocks being targeted by the Reddit traders.Arturo Bris, Professor of Finance, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1542552021-01-29T02:18:33Z2021-01-29T02:18:33ZWhy GameStop shares stopped trading: 5 questions answered<figure><img src="https://images.theconversation.com/files/381248/original/file-20210129-23-9r03rc.jpg?ixlib=rb-1.1.0&rect=7%2C0%2C4779%2C2928&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">GameStop shares soared after some retail investors teamed up to jack up the price.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/GameStopStockSurge/e8c6707c9a4846b48b7db2034e05258f/photo?Query=gamestop%20AND%20stock&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=19&currentItemNo=8">AP Photo/John Minchillo</a></span></figcaption></figure><p><em>Editor’s note: <a href="https://www.bloomberg.com/news/articles/2021-01-29/day-trader-favorites-rally-back-as-robinhood-eases-trading-ban?srnd=premium&sref=Hjm5biAW">GameStop stock resumed its dramatic ascent</a> after a popular no-fee online broker said it would lift restrictions on trading its shares. In recent days, frenzied activity in the video game retailer’s stock led the New York Stock Exchange to <a href="https://www.nyse.com/trade-halt-curren">briefly halt trading multiple times</a>, while <a href="https://www.cbsnews.com/news/robinhood-block-trading-of-gamestop-stock">Robinhood and other brokers</a> restricted purchases of GameStop. That <a href="https://www.marketwatch.com/story/mark-cuban-dave-portnoy-aoc-and-others-react-to-robinhood-restricting-trades-on-gamestop-and-amc-11611855658">prompted outrage</a> among some lawmakers and investors, leading to calls for investigations in Washington. <a href="https://scholar.google.com/citations?user=y_ViJ7oAAAAJ&hl=en&oi=ao">Jena Martin</a>, a law professor who studies securities regulation, explains what’s going on, why trading is sometimes restricted and how to tell if it’s a sign of any funny business.</em></p>
<h2>1. What prompts trading in a stock to be halted?</h2>
<p>Typically, there are two reasons that an exchange <a href="https://www.finra.org/investors/alerts/when-trading-stops-what-you-need-know-about-halts-suspensions-and-other-interruptions">might stop trading in a stock</a>. The first occurs when an exchange – often at a company’s request – halts trading in that stock for a big announcement, such as a merger or a product recall. This gives investors time to absorb the news before trading resumes. </p>
<p>A second reason is when trading in a stock becomes exceptionally volatile – that is, it moves higher or lower quickly and unpredictably, especially when there is no news coming from the company that would explain the change. This halt usually happens automatically, such as if a stock jumps or plunges by a certain percentage within five minutes. That’s why shares of the Grapevine, Texas-based company GameStop <a href="https://www.marketwatch.com/story/gamestop-amc-halted-after-a-minute-of-trading-as-shares-retreat-from-massive-gains-11611844823">stopped trading several times</a> on Jan. 27 and 28, but the halts lasted only a few minutes at a time. </p>
<p>The more controversial issue <a href="https://www.cnbc.com/2021/01/28/robinhood-interactive-brokers-restrict-trading-in-gamestop-s.html">came after several brokers</a>, including Robinhood, Ameritrade and Charles Schwab, restricted trading of GameStop and a few other stocks on their platforms, whether by halting trading entirely or <a href="https://www.businesswire.com/news/home/20210129005408/en/Schwab-Issues-Statement-About-Recent-Trading-Activity">imposing more stringent margin requirements</a>. They said they had to do this to <a href="https://www.bloomberg.com/news/articles/2021-01-28/robinhood-is-said-to-draw-on-credit-lines-from-banks-amid-tumult?srnd=premium&sref=Hjm5biAW">reduce their risk</a>. Brokerages are required by the Securities and Exchange Commission to have enough cash on hand to cover a certain percentage of trades on their platform. When stock volatility is high, it drives up how much capital they need. </p>
<h2>2. How common are these types of trade restrictions?</h2>
<p>Trading halts by stock exchanges happen <a href="https://www.finra.org/investors/alerts/when-trading-stops-what-you-need-know-about-halts-suspensions-and-other-interruptions">fairly regularly</a>, but they’re rarely a big deal. The last time a NYSE trading halt of a specific stock garnered this much attention came when <a href="https://www.reuters.com/article/sppage012-n17385634-oisbn/nyse-suspends-trading-in-lehman-brothers-shares-idUSN1738563420080917">Lehman Brothers</a> went bankrupt in 2008. </p>
<p>It’s very rare, however, for brokers to suspend trading in a specific stock. I can’t remember that ever happening, and I’ve been closely following the market for 20 years – including five at the SEC. </p>
<h2>3. Does a halt in trading mean something fishy is going on?</h2>
<p>Sometimes. </p>
<p>Extreme volatility in a stock is seen as a sign of suspicious activity in the market, and may trigger an SEC investigation. </p>
<p>In the case of GameStop, the saga started when a band of retail investors on the <a href="https://www.reddit.com/r/wallstreetbets/">WallStreetBets Reddit forum</a> decided to gang up on the institutional investors they see as having too much power over the market. They noticed that hedge funds and other professional traders were betting that shares of GameStop would go down – known as shorting a stock – and so they teamed up to drive its share price higher. <a href="https://www.theguardian.com/business/2021/jan/28/sending-a-message-gamestop-investors-on-why-they-bought-shares">This “short squeeze”</a> helped drive GameStop’s share price <a href="https://finance.yahoo.com/quote/GME/">up as much as 2,000% in a matter of weeks</a>, causing some professional investors to lose <a href="https://markets.businessinsider.com/news/stocks/gamestop-short-sellers-squeezed-losses-reddit-traders-army-cohen-palihapitiya-2021-1-1030006226">billions of dollars</a>. </p>
<p>This type of trading – both the shorting and the squeezing – is often known as speculation, because it has nothing to do with the fundamental value of a company. Speculation is legal – <a href="https://www.marketwatch.com/story/how-you-could-lose-everything-by-short-selling-stocks-whether-its-betting-against-gamestop-or-tesla-2021-01-26">although very risky</a> – but it can cross the line into illegal behavior if there’s evidence of actual market manipulation. </p>
<h2>4. All right then, what’s market manipulation?</h2>
<p>According to the <a href="https://www.law.cornell.edu/uscode/text/15/78i">laws that govern the stock market</a>, market manipulation happens when someone tries to create excitement and activity in a particular stock specifically to entice people to buy that stock and drive up the price.</p>
<p>If those same initial investors then sell the stock at the heightened price, regulators get suspicious. They become concerned that said investors were just trying to create a frenzy in the market to artificially inflate the value of the stock so they can sell it at its new high price. The SEC <a href="https://www.sec.gov/news/press/2011/2011-214.htm">accused a unit of Citigroup</a> of doing this during the financial crisis when it hyped the price of a financial product tied to the housing market in an effort to unload it at an inflated price. </p>
<p>This is known as a “<a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/pump-and-dump-schemes">pump-and-dump</a>” scheme, and some allege <a href="https://www.cnbc.com/2021/01/28/gamestop-now-called-a-pump-and-dump-scheme-what-you-need-to-know.html">this is exactly what the Redditor investors were doing</a>. </p>
<p>[<em>Insight, in your inbox each day.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=insight">You can get it with The Conversation’s email newsletter</a>.]</p>
<p>We don’t know yet if the SEC is looking into whether that’s what’s happening here, though the regulator has indicated it’s “<a href="https://finance.yahoo.com/news/yellen-monitoring-gamestop-market-activity-183420988.html">monitoring” the situation closely</a>. The SEC, as the primary regulator of the stock market, is responsible for enforcing securities laws. </p>
<p>To determine whether GameStop investors were involved in a pump-and-dump scheme, SEC investigators would check into their trading activity and collect other evidence to try to figure whether these investors were “<a href="https://www.law.cornell.edu/uscode/text/15/78i">trying to create a false or misleading appearance of active trading</a>.” In addition, any evidence that individuals had made false statements to help drive the stock price up <a href="https://www.fbi.gov/stats-services/publications/securities-fraud">would be considered fraud</a>. This would be particularly damning. </p>
<h2>5. What’s next?</h2>
<p>Robinhood and a few other brokers said <a href="https://www.nytimes.com/2021/01/28/business/robinhood-gamestop-restrictions.html">they will resume allowing “limited” buying</a> of GameStop after lawmakers including U.S. Rep. Alexandria Ocasio-Cortez and Sen. Ted Cruz <a href="https://www.cnbc.com/2021/01/28/gamestop-cruz-ocasio-cortez-blast-robinhood-over-trade-freeze.html">attacked them</a> for restricting trades. </p>
<p>U.S. Rep. Maxine Waters and Sen. Sherrod Brown <a href="https://techcrunch.com/2021/01/28/gamestop-hearings-congress-waters-robinhood/">announced hearings</a> into the stock market turmoil and the “predatory” conduct of hedge funds.</p>
<p>But some officials – such as the <a href="https://www.cnbc.com/2021/01/27/gamestop-speculation-is-danger-to-whole-market-massachusetts-regulator.html">top securities regulator in Massachusetts</a> – are worried the frenzied trading in GameStop represents a broader risk to the U.S. equities market and are urging the SEC to step in and halt trading for as long as a month. The SEC does have the power to halt trading, but that is a nuclear option that the SEC uses only if it’s concerned about issues within the company itself. Were it to do that, it would be pretty clear <a href="https://www.nytimes.com/2002/03/19/business/sec-forces-new-york-stock-exchange-to-end-trading-of-a-company.html">it thinks some funny business</a> is going on.</p><img src="https://counter.theconversation.com/content/154255/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jena Martin does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The easy answer as to why trading was halted relates to the stock’s ‘volatility’ after its dramatic climb in recent weeks. But it could also mean something fishy is going on.Jena Martin, Professor of Law, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.