MANCHESTER, NH – Recently, GameStop and other companies involved in a battle between Wall Street firms and people on Reddit became the focal point in a nation-wide financial conversation about the ethics of short sales and inequity within the stock market. New Hampshire is no different, as a few financially-attuned Granite Staters have shared concerns over the developments.
The battle began when members of the Wall Street Bets Subreddit page looked at several stocks involved in short sales by large hedge fund companies. In a short sale, stockbrokers borrow a stock from another broker to sell with a promise to purchase it back at a later date and return it to the broker, with the assumption that the stock will be at a lower price at that date. With the Redditors disagreeing with such tactics and the philosophies of the hedge funds in general, they purchased those stocks en masse to raise the price of the stocks and force a loss on the hedge funds.
Mellissa LaRoche-Michalides, a hairstylist at Hot Heads Salon in Manchester almost bought shares of AMC Theaters (NYSE:AMC), one of the companies that saw a substantial stock price increase due to efforts from Wall Street Bets.
LaRoche-Michalides is unsure how to feel toward those on Reddit, and understands why some stock-trading companies like Robin Hood paused purchases of stocks related to the Reddit effort. Ultimately though, she hopes that the silver lining from all of this can be more regulation.
“I think it’s a very grey area. The Redditors are saying, ‘the hedge funds have been doing this to us and it’s only fair we do it to them,’ but at the same time someone is going to have to cover those shorts and regular people are going to lose billions of dollars,” she said. “I don’t think it’s right, I truly don’t. I say good for them, they got their money. But morally I couldn’t do the same.”
“Everyone is thinking they’re sticking it to the man and this is payback for the ’08 recession, but this is hurting everybody,” she added. “It’s hurting firefighter retirements, union-member retirements, retirements for nurses, really everybody.”
Gary Hoffman of Nashua has been an amateur stockbroker for 20 years and also hopes that this incident can result in more regulation, with the regulation primarily focused on the Redditors.
For Hoffman, the decision to short sell GameStop, a company significantly harmed by the COVID-19 pandemic as well as reliance on an outdated business model, is logical rather than vindictive.
Instead, he believes that the Redditors ultimately performed something comparable to a “pump and dump,” an illegal scheme that misrepresents the true value of a stock as undervalued in the hopes of raising its price, only to sell it once that misrepresentation puts the price at an unnatural high.
While that definition doesn’t fit neatly into this circumstance since profiting off the increased stock value was secondary to many of the Redditors, Hoffman believes that what they’ve done is dangerous to the market’s ability to function.
“Ideally, you want the stock market to work somewhat off fundamentals, that companies are rewarded for good earnings and revenue, having cash reserves and being able to service their debts. You don’t want companies to be rewarded simply because there’s a meme on Reddit. That would really mess up things, because then what incentives would companies have to properly run their businesses?” he said.
Hoffman added that he supported the decision of Robinhood and other brokerages to halt new purchases of stocks related to the Reddit movement, in part to concerns raised by LaRoche-Michalides and related concerns over the impact of instability toward commodity markets, which could lead to increased food prices. He also noted over the use of margin investing in the targeted companies, believing it could put the brokerages themselves at substantial risk.
“You have to be careful, because the system we have right now. If we’re going to change it, it has to be careful and planned and not from some chat room,” he said. “(Change) needs to come from the federal government. Wall Street does need more (Securites and Exchange Commission) regulation, there are illegal things going on that you can see through trading patterns. But that needs to come from government because if it’s through investor activism, it’s going to hurt a lot of people in the end.”
Elizabeth Salas Evans, president of Cayena Capital Management in Weare, agrees with Hoffman on multiple points. She believes that brokerages should expect equity requirements from traders and that increased regulation from the government is needed in the financial services sector.
Evans thinks that individual investors shouldn’t invest in GameStop and the other companies involved in the Redditors’ efforts with money they may one need one day for emergencies. However, she also believes that this moment has brought concerns she’s held regarding brokerages and consumer rights to the forefront.
Evans hopes that any reforms can give people more control over the investment of their own money and more people gain a broader understanding of how their money is being invested by third parties.
“With GameStop, I think the fascinating thing is the consumer-retail investor momentum is amazing,” Evans said. “There needs to be more open discussion over about what the definition is of a public market. A public market means that the money that’s rotating around the market globally, this is money that belongs to individuals that have put it aside and put trust in institutions for when they need it for something like retirement or the pandemic. I think Reddit and social media has become another space where more people can share their voices.”
Thomas Stephen, Director of Planning at Glenwood Investments on Elm Street in Manchester, echoes many of the sentiments from Evans, LaRoche-Michalides and Hoffman, adding that it is a good reminder for investors to understand underlying factors before they invest, whether it’s in a company like GameStop or anything else.
“It’s important to understand, on a personal level, the risk you take regard to investments and that there are also many different types of risks in the market,” he said. “When looking at your personal investments, you need to ask if you’re in the right place when it comes to a particular investment and reflect on your own investment portfolio.”