'This is going to end badly': GameStop gamers battle risk in fight against Wall Street

Paolo Pasquariello, professor of finance at the University of Michigan, will quickly tell you the endgame for GameStop.

"This is going to end badly for a lot of people," Pasquariello told me Thursday morning shortly after trading began on Wall Street. 

All the talk of how the little guy is making big bucks buying former outcasts — like GameStop, AMC and BlackBerry — after researching the buzz on Reddit's WallStreetBets instead of reading the Wall Street Journal.

All of the talk about how a clever kid in a basement in Ohio can take on the nasty hedge funds in New Jersey.

Somewhere down the line, it all turns into tears and treacherous losses. And we might have seen a preview Thursday of how badly things can go.

GameStop was trading at almost $450 a share at one point Thursday after the video game retailer's stock closed at $347.51 a share on Wednesday — a gain of almost $200 a share or nearly 135% in one day.

But suddenly Thursday, GameStop stumbled. GameStop lost $153.91 a share on Thursday, down 44.22%, to close at $193.60 a share.  

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The David versus Goliath story plays well, especially in political circles, but rich guys often finish rich on Wall Street. The rules of the game can quickly change — and not in David's favor.

"Some are calling this the 'French Revolution of Finance,' " said Sam G. Huszczo, a chartered financial analyst in Southfield. 

"Rumors have it that Reddit's WallStreetBets board users are targeting companies to manipulate prices for profit and targeting hedge fund managers' short positions in an effort to put them out of business," he said.

"Some view this as a redistribution of wealth, others as market manipulation. Either way, I don’t envy the murky waters that the SEC will be forced to navigate ahead." 

Who knew? GameStop? 

Many people hadn't even heard of or thought a minute about GameStop until a few weeks ago.

For many of us, it was just one of those retailers where we used to shop that has been shuttering stores. Many gamers now download online content; they're not typically bugging Mom to drive them to the mall to buy the latest video game. 

GameStop's bullish run last week reportedly got firepower when GameStop added Chewy Inc. cofounder Ryan Cohen and two former executives to the GameStop board. The objective is to boost digital sales. 

Cohen cofounded the online pet food and supplies company, which has built quite a following, particularly among millennials. 

Pasquariello admits that he first learned about the investing buzz about GameStop from his 16-year-old son Nico.

His son has followed trending news on Reddit about such topics as the presidential election, white supremacist hate groups, and now he's watching the stock market. 

"When my teenage son knows more than me about financial markets, then something is not good," Pasquariello said. 

I can relate, as my 22-year-old son Matt Burr, who is working from home, rushed out of his back bedroom office a week ago to tell me that GameStop stock had soared more than 70% in trading on Jan. 22 and trading was halted. 

The young man knows numbers and news, so I rushed to write a column late Friday afternoon. 

GameStop closed at $65.01 a share Jan. 22, up $21.98 a share or 51.08%.

Now, no one can stop talking about GameStop

Big news last week, of course, was followed by even bigger news this past week. GameStop stock gained $282.50 in three days of trading through Wednesday's close — up nearly 435%.

Did I mention that GameStop stock closed at $4.01 a share on July 31? 

What is going on here? 

The populist story line is that nonstop chatter on social media about once downtrodden stocks, such as GameStop, put power back into the pocketbooks of the people. A lot of barstool bragging goes on in these online forums about taking on the establishment. 

So the hedge funds want to bet that a company's going to fail? And that its stock price is set to tumble?

We'll show you, say the angry traders, we'll drive up the stock prices of the unpopular stocks, like GameStop, as Wall Street figures like Andrew Left are selling short. (The Wall Street Journal noted Thursday that short sellers aren't really the Wall Street establishment; they're more like "fringe players who go after companies and institutions the rest of the financial word is largely backing." No matter.) 

Of course, things went very well, exceptionally well for early players in this financial version of Fortnite.

It doesn't hurt that some people have time and money on their hands to play the game. 

The physical-distancing measures in place during the pandemic mean that we're spending far less money going out to dinner, buying tickets to big sporting events or attending concerts and traveling. If you've held onto a job — or live at home with Mom and Dad — well, you may have some extra change. 

If you're not spending $100 on a weekend thrill, you can take a chance on stocks.

"For some people, the pandemic has brought excessive disposable income," Pasquariello said.

Apps like Robinhood make it very easy for those with limited cash flow to invest. Robinhood, for example, allows you to buy a partial or fractional share in a stock. You can spend just a few bucks to purchase a fractional share in a stock that's priced at $200 a share.

Robinhood says its mission is to "democratize finance for all." 

Maybe the mission changed some Thursday. Robinhood turned off the tap and shut down the buying feature on its app for certain hot stocks, preventing people from buying more GameStop, BlackBerry and other stocks, which probably contributed to the fall-off in price. 

The list of stocks that you could no longer buy on Robinhood isn't short. It included: GameStop, American Airlines Group, AMC Entertainment, BlackBerry, Bed Bath & Beyond, Castor Maritime, Express, Koss Corp., Naked Brand Group, Nokia, Sundial Growers, Tootsie Roll and Trivago. 

Traders on Robinhood could no longer buy those shares; only sell them. And how well do you think that worked out? 

Pasquariello and his son Nico just bought BlackBerry at around $20 a share Wednesday. Early Thursday, things looked fine, as the stock edged a bit higher.

Pasquariello said his son wanted to take part in the frenzy after he saw the chatter on WallStreetBets. His son wanted to buy BlackBerry.

Nico could not explain any of the business fundamentals for why he wanted to buy a share in BlackBerry. But that's not the point really of momentum investing or following the market mob mentality.

Google searches, after all, include questions like: Is BlackBerry dead? Is BlackBerry still in business in 2020? Does anyone still use BlackBerry? How did BlackBerry die? And yes, there's a search for: Is BlackBerry making a comeback? 

Pasquariello said he doesn't see anything that's really revolutionary or all that different about the Reddit rallies. 

He makes comparisons to the internet bubble some 20 years ago. Back then, the joke was that experts knew we were in a stock market bubble when they heard some people talk about getting stock tips from their cab drivers in New York. The thinking then was that the drivers heard about the next hot dot-com stock as they drove the well-off traders to their jobs on Wall Street. 

When the dot-com bubble burst, plenty of people lost their jobs and money. 

Many young people today, Pasquariello said, think stock prices can only go up and do not understand the financial destruction that took place as the tech bubble burst in the early 2000s and again when the financial crisis hit in 2007-08.  

Driving a stock price up by getting large groups of people to buy — say through over-rated ratings by analysts, zealous pump-and-dump schemes or crazy talk in chat rooms — isn't new.

"Momentum trading is really bread-and-butter on Wall Street," Pasquariello said. 

Part of the issue now, Pasquariello said, is that it is far easier for financial professionals to bet against a company than it is for everyday consumers to make a similar bet. Short selling is risky and there are many limitations for individuals who want to play that game.

How any of the latest game-playing, though, will hurt the overall economy and everyday 401(k) investors is unknown. 

"When financial markets are not working well," Pasquariello said, "Main Street suffers."

For that reason, the Securities and Exchange Commission and other regulators are monitoring this activity. 

Everyone else is watching, too. 

Pasquariello and his son had their eye on that BlackBerry stock Thursday. 

Early on Thursday morning, BlackBerry stock was headed up. The father was disappointed that it looked like it could take some time for the son to learn his lesson. And the son was texting the father from the other room asking if they could buy more stock, as the stock climbed higher.

And then Robinhood stopped the buying and, as traders argue, stole from the newly rich. 

BlackBerry lost $10.45 a share on Thursday, down 41.63%, to close at $14.65 a share. 

Pasquariello said his son wasn't phased much and wondered if somehow they could try to buy on the dip on another market platform that hasn't blocked the stock purchases in BlackBerry. 

"I convinced him otherwise," Pasquariello said.

His son thought the Robinhood move was a way that Wall Street was getting back at the Reddit people. 

"I mentioned to him that markets do have circuit breakers for excessive or deemed unreasonable market moves," he said.

"And it may not be in Robinhood's long-term best interest to allow price manipulators to use its trading platform; it may invite further regulation and scrutiny of its operations," Pasquariello said.

ContactSusan Tompor via stompor@freepress.com. Follow her on Twitter@tompor.